t c memo united_states tax_court ronald d weeldreyer and suzanne weeldreyer petitioners v commissioner of internal revenue respondent dreyer farms inc petitioner v commissioner of internal revenue respondent docket nos filed date douglas bleeker for petitioners douglas polsky and charles berlau for respondent memorandum findings_of_fact and opinion jacobs judge these cases have been consolidated for trial briefing and opinion in separate notices of deficiency respondent determined deficiencies in petitioners’ federal_income_tax and accuracy-related_penalties under section for and as follows ronald suzanne weeldreyer docket no year deficiency dollar_figure big_number big_number penalty sec_6662 -- -- -- dreyer farms inc docket no year ended deficiency penalty sec_6662 dollar_figure big_number big_number dollar_figure dollar_figure dollar_figure the issues for decision are whether amounts paid_by dreyer farms inc dreyer farms or the corporation to provide medical_care food and lodging to its shareholders ronald d weeldreyer mr weeldreyer and suzanne weeldreyer mrs weeldreyer collectively the weeldreyers and their children are a constructive dividends as respondent maintains or b employee medical_care expenses and or reimbursed employee_expenses that are excluded from the weeldreyers’ gross_income and deductible by dreyer farms as ordinary and necessary business_expenses as petitioners maintain and 1all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure whether dreyer farms is liable for the accuracy-related_penalty under sec_6662 for the taxable years ended date and 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 when the petitions were filed in these cases the residence of the weeldreyers as well as the principal_place_of_business of dreyer farms was in bridgewater south dakota a the weeldreyers the weeldreyers are husband and wife they have two sons between date and date the weeldreyers acquired three contiguous tracts of land--two 80-acre tracts one of which included a house2 the farmhouse and a 160-acre tract the three tracts are referred to collectively as the weeldreyer farm the weeldreyers raise corn and soybeans on the weeldreyer farm their farming activities entail the planting cultivation harvesting drying storage and sale of corn and soybeans 2the weeldreyers have resided in the farmhouse since b dreyer farms on date dreyer farms was incorporated under the laws of the state of south dakota dreyer farms was organized primarily to buy distribute sell lease and deal in all kinds of farmland and real_estate and to carry on the_business_of_farming on date the weeldreyers conveyed to dreyer farms the weeldreyer farm including the farmhouse dreyer farms thereafter assumed the mortgage on the property after the conveyance the weeldreyers no longer individually owned any farmland the weeldreyers have been the sole shareholders officers and directors of dreyer farms since its incorporation mr weeldreyer has been president treasurer and a director and mrs weeldreyer has been secretary and a director of dreyer farms the first meeting of the shareholders of dreyer farms was held on date at that meeting the shareholders adopted corporate bylaws article iv section of the bylaws provides section repayment of disallowed expenses any expense paid_by the corporation which is finally determined as a personal_expense of any officer or 3douglas bleeker counsel for petitioners prepared the articles of incorporation bylaws minutes of meetings and other corporate documents for dreyer farms employee and disallowed as corporation expense shall be repaid by the officer_or_employee to the corporation within twenty-four months of the final_determination by the internal_revenue_service with interest at three below the new york prime rate on the date of final_determination a similar repayment obligation was set forth in a resolution adopted by the board_of directors of dreyer farms at the directors’ first meeting held on date at that meeting the directors also adopted the following resolution resolved that the corporation sic officers and employees shall be required to live at the worksite of the corporation to ensure security for the corporation property and operations the officers and employees shall be required to live on the worksite to supervise the care and feeding of the livestock of the corporation the corporation shall supply said officers and employees all of their food and lodging while living at said worksite that all officers and employees shall be considered on duty when at the worksite and therefore entitled to such benefits in addition at their first meeting the directors adopted a medical reimbursement plan covering all employees and officers executing management responsibilities and their spouses and dependents the medical reimbursement plan provides for the payment of all medical_expenses deductible on form_1040 including expenses for drugs doctor hospital and eyeglasses to the extent not compensated by insurance or otherwise under the plan each participant is entitled to a maximum reimbursement of dollar_figure per year dreyer farms also paid the premiums on a health insurance_policy covering the weeldreyers and their children the health insurance_policy had been in effect before dreyer farms was incorporated mrs weeldreyer was the named insured mr weeldreyer and the children were insured as her dependents dreyer farms paid the insurance premiums directly to the insurance_company and paid the medical_expenses directly to the medical providers c farm lease sec_1 weeldreyer farm during and dreyer farms leased the weeldreyer farm to the weeldreyers under a share-crop arrangement pursuant to that arrangement the gross_proceeds from the sale of all crops grown on the farm as well as all payments received under federal conservation programs or any other federal state or local governmental programs were to be divided percent to dreyer farms and percent to the weeldreyers dreyer farms was to retain title and possession of all crops grown on its land until the division had been made dreyer farms and mr weeldreyer agreed that on a respective basis each would supply the fertilizer chemicals and seed the weeldreyers agreed to farm the land to provide all labor and other 4the insurance_company issued policies to the oldest person in the household mrs weeldreyer was named the insured because she is a few months older than mr weeldreyer 5the farm leases dated date and erroneously named the weeldreyers as the lessor and dreyer farms as the lessee items required in producing harvesting and marketing the crops to furnish all tools farm implements machinery and hired help necessary to cultivate and manage the farm to protect the crops from injury and waste to till the land after harvesting the crops and to rotate the crops from year to year dreyer farms agreed to furnish all necessary materials and the weeldreyers agreed to supply all necessary labor to maintain all fences and other improvements on the farm bleeker enterprises inc and alfred tammen leases during and dreyer farms leased farmland from bleeker enterprises inc bleeker enterprises on a share-crop basis pursuant to these farm leases dreyer farms received percent and bleeker enterprises received percent of the crop mr weeldreyer as an employee of dreyer farms did the actual farming of the bleeker enterprises farm the bleeker enterprises farm was located approximately miles from the weeldreyer farm in addition to leasing the bleeker enterprises farm dreyer farms leased farmland from alfred tammen the tammen farm on a cash-rent basis 6bleeker enterprises inc is owned by petitioners’ counsel douglas bleeker and his family 7mr tammen is mr weeldreyer’s cousin d mr weeldreyer’s separate farming activity during the years at issue mr weeldreyer individually and not as an employee of dreyer farms farmed at least three additional properties one of these farms was located across the road from the weeldreyer farm the other farms were located to miles away the grain from these other farms was stored on the weeldreyer farm and commingled with the grain belonging to dreyer farms e compensation and payment of food lodging and medical_expenses mr weeldreyer was the sole employee of dreyer farms dreyer farms paid mr weeldreyer as an officer employee dollar_figure in and and dollar_figure in following the transfer of the weeldreyer farm to dreyer farms the weeldreyers continued to use the farmhouse as their residence dreyer farms paid for the food consumed by the weeldreyers and their children the utilities property_tax insurance remodeling landscaping and repairs and maintenance for the farmhouse and the telephone used by the weeldreyers in addition dreyer farms paid for all the medical_care expenses of the weeldreyers and their children 8in addition in mr weeldreyer did custom hire work for which he received dollar_figure 9although the weeldreyers’ two sons were not employees of dreyer farms they helped with the farming chores dreyer farms did not pay dividends for fiscal years ended date and f income_tax returns mr bleeker petitioners’ counsel prepared the weeldreyers’ joint form sec_1040 u s individual_income_tax_return and dreyer farms’ forms u s_corporation income_tax return for the years at issue dreyer farms dreyer farms filed timely its forms for the taxable years ended date and on these returns dreyer farms reported total income and total deductions as follows total income dollar_figure dollar_figure dollar_figure total deductions big_number big_number big_number taxable_income big_number big_number big_number included in the total expenses deducted by dreyer farms were the following items for food lodging and medical_expenses provided to the weeldreyers dollar_figure big_number big_number big_number big_number -- -- big_number big_number -- -- -- big_number dollar_figure big_number big_number big_number big_number -- -- big_number big_number -- big_number -- big_number dollar_figure big_number big_number big_number big_number -- -- -- big_number big_number -- big_number -- big_number food lodging property tax--house property insurance--house food for employees utilities--house depreciation--house landscaping remodeling costs repairs and maintenance telephone food lodging_expenses medical health insurance medical_expenses medical doctor dental prescriptions medical cost sec_2 the weeldreyers the weeldreyers timely filed their joint income_tax returns for and on these returns the weeldreyers reported mr weeldreyer’s wages from dreyer farms they reported farming income including their 60-percent share of the weeldreyer farm crop as self-employment_income they did not report any income attributable to their food lodging-related and medical_expenses paid_by dreyer farms on schedules f profit or loss from farming the weeldreyers reported gross_income total expenses and net profit from their separate farming activities for and as follows gross_income dollar_figure dollar_figure dollar_figure total expenses big_number big_number big_number net profit big_number big_number big_number g notices of deficiency on date respondent timely mailed to the weeldreyers a statutory_notice_of_deficiency for and the weeldreyer notice_of_deficiency also on date respondent timely mailed to dreyer farms a statutory_notice_of_deficiency for its fiscal years ended date and the dreyer farms notice_of_deficiency in the dreyer farms notice_of_deficiency respondent disallowed the food lodging and medical_expenses deducted by dreyer farms totaling dollar_figure for dollar_figure for and dollar_figure for respondent determined that dreyer farms failed to establish that the food and lodging_expenses were ordinary and necessary business_expenses under sec_162 and those items are the weeldreyers’ personal expenses respondent further determined that dreyer farms was liable for the accuracy-related_penalty under sec_6662 in the weeldreyer notice_of_deficiency respondent determined that payments by dreyer farms of the weeldreyers’ food lodging and medical_expenses resulted in constructive dividends as follows food lodging1 medical total dividends dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure big_number big_number 1the record does not explain why the amounts of dividends for food and lodging_expenses included in the weeldreyers’ income exceed the amounts disallowed as deductions to dreyer farms opinion issue expenses_incurred by dreyer farms to provide medical benefits food and housing to the weeldreyers in and a positions of the parties10 respondent disallowed deductions taken by dreyer farms for medical costs health insurance premiums and other medical_care expenses food lodging including property insurance property taxes remodeling landscaping maintenance and repair telephone and utilities for the farmhouse and depreciation of the farmhouse respondent asserts that the medical costs food 10under certain circumstances sec_7491 places the burden_of_proof or production on the commissioner sec_7491 applies to court proceedings arising in connection with tax examinations beginning after date internal_revenue_service restructuring and reform act of publaw_105_206 sec a 112_stat_726 petitioners timely filed their returns for the years at issue hence all of the returns were filed on or before date the record does not disclose when the examination of petitioners’ tax returns began and it is possible that the examination began before date petitioners do not contend that sec_7491 applies in these cases and they have not otherwise asserted that respondent has the burden_of_proof or production with respect to any issue presented in these cases we therefore conclude that sec_7491 does not apply and petitioners have the burden_of_proof and production and lodging_expenses are the weeldreyers’ personal family and living_expenses and that payments of these expenses by dreyer farms constitute constructive dividends to the weeldreyers on the other hand petitioners assert that all the expenditures are reasonable and necessary business_expenses deductible by dreyer farms and excluded from the weeldreyers’ income petitioners contend that the medical costs are employee_benefits deductible by the employer and excludable from the employee’s income under sec_105 and or petitioners further maintain that dreyer farms provided food and lodging to mr weeldreyer in his capacity as an employee and that such was done for the convenience of dreyer farms consequently petitioners assert that the food and lodging_expenses are employer-provided meals_and_lodging the costs for which are excluded from the weeldreyers’ income under sec_119 and deductible by dreyer farms petitioners further assert that as owner and lessor of the farmhouse dreyer farms is entitled to deduct the expenditures_for insurance remodeling landscaping and repairs and maintenance as reasonable and necessary business_expenses under sec_162 the property taxes under either sec_162 or sec_164 and the depreciation of the farmhouse under sec_167 petitioners posit that these latter expenses are not the weeldreyers’ personal expenses because they are not the owners of the property b medical_expenses we first shall decide whether the payments by dreyer farms of the medical_expenses are excludable from the weeldreyers’ gross_income under sec_105 and sec_106 and deductible by the corporation as ordinary and necessary business_expenses under sec_162 under sec_106 an employee’s gross_income does not include employer-provided coverage eg accident_and_health_insurance premiums under an accident_and_health_plan 100_tc_531 the employer may provide coverage under an accident_or_health_plan by paying the premium or a portion of the premium on an accident_or_health_insurance policy covering one or more employees or by contributing to a separate trust or fund sec_1_106-1 income_tax regs under the general_rule of sec_105 amounts received by an employee through accident_and_health_insurance for personal_injury_or_sickness to the extent attributable to nontaxed employer contributions are includable in the employee’s gross_income amounts received under an accident_or_health_plan for employees are treated as amounts received through accident_or_health_insurance sec_105 an exception to the general_rule allows an employee to exclude from gross_income amounts received to reimburse the employee for expenses_incurred by the employee for the medical_care as defined in sec_213 d of the employee and the employee’s spouse and dependents sec_105 for the reasons set forth below we agree with petitioners that pursuant to sec_105 and or payments by dreyer farms for medical expense reimbursements and health insurance premiums need not be included in the weeldreyers’ gross_income for and sec_105 requires first that the benefits be received under a plan and second that the plan be for employees rather than for some other class of persons such as shareholders and their relatives 48_tc_629 affd 394_f2d_494 1st cir after giving due consideration to the record before us we conclude that dreyer farms’ medical plan payment of health insurance premiums and medical expense reimbursements satisfies both the plan and for employees requirements of sec_105 sec_1_105-5 income_tax regs provides guidelines as to what constitutes an accident_or_health_plan a plan may cover one or more employees and different plans may be established for different employees or classes of employees id the regulations do not require that there be a written plan or that there be enforceable employee rights under the plan so long a sec_11sec d d includes amounts paid for medical insurance in the definition of medical_care the participant has notice or knowledge of the plan wigutow v commissioner tcmemo_1983_620 in the instant cases a plan as defined in sec_1_105-5 income_tax regs existed dreyer farms adopted a written medical reimbursement plan identifying who was eligible to participate what expenses would be reimbursed and how participants were to make claims for reimbursement the plan was adopted at the first meeting of the board_of directors mr weeldreyer had knowledge of the medical reimbursement plan as well as the health insurance_policy moreover there is no doubt that the medical reimbursements provided under the written plan were intended to complement benefits provided by health insurance thus the corporation’s medical plan included health insurance as well as the medical reimbursements and finally we are satisfied that the corporation’s medical plan was for mr weeldreyer’s benefit as an employee of dreyer farms and not for his benefit as one of the corporation’s shareholders plans limited to employees who are also shareholders are not per se disqualified under sec_105 larkin v commissioner supra pincite n in this regard we have sustained plans for corporate officers who were also shareholders because those officers had central management roles in conducting the business of the corporation wigutow v commissioner supra epstein v commissioner tcmemo_1972_53 seidel v commissioner tcmemo_1971_238 smith v commissioner tcmemo_1970_243 bogene inc v commissioner tcmemo_1968_147 respondent has stipulated that during the years at issue mr weeldreyer was an employee of dreyer farms indeed mr weeldreyer was the corporation’s only employee and without mr weeldreyer’s involvement dreyer farms could not have conducted its farming operations mr weeldreyer’s compensation_for services rendered to dreyer farms was his salary and employee_benefits respondent does not contend that mr weeldreyer received excessive_compensation indeed respondent contends that mr weeldreyer was undercompensated for his services although mrs weeldreyer did not work for dreyer farms payment of her medical_expenses was based on her status as mr weeldreyer’s spouse likewise payment of the medical_expenses for the weeldreyers’ children was based on their status as mr weeldreyer’s dependents the derivative participation of mr weeldreyer’s spouse and dependents is plainly contemplated both by the medical plan and by sec_105 on the basis of the record before us we conclude that medical payments made for the benefit of the weeldreyers and their children were made under a plan for employees and not for shareholders accordingly during the years at issue the medical payments made by dreyer farms pursuant to its medical plan the insurance premiums and other medical_care expenditures are excludable from the weeldreyers’ gross_income under sec_105 sec_162 permits a taxpayer to deduct all ordinary and necessary expenses_incurred during the taxable_year in carrying on the taxpayer’s trade_or_business an expense is ordinary if it is customary or usual within a particular trade business or industry or relates to a transaction of common or frequent occurrence in the type of business involved 308_us_488 an expense is necessary if it is appropriate and helpful for the development of the business see 320_us_467 when payments for medical_care are properly excludable from an employee’s income because they are made under a plan for employees they are deductible by the employer as ordinary and necessary business_expenses under sec_162 sec_1_162-10 income_tax regs consequently dreyer farms is entitled to deduct the insurance premiums and medical reimbursement payments under sec_162 c food property insurance property taxes remodeling landscaping maintenance and repair utilities telephone and depreciation sec_119 employer-provided meals_and_lodging we next decide whether the food and lodging_expenses are employer-provided meals_and_lodging expenses excludable from the weeldreyers’ income under sec_119 and deductible by dreyer farms under sec_162 meals_and_lodging furnished to an employee by his employer are excluded from the employee’s gross_income under sec_119 if the meals_and_lodging are provided for the convenience_of_the_employer on the premises of the employer in the case of lodging the employee must be required to accept the lodging on the business_premises of his employer as a condition_of_employment meals_and_lodging are furnished for the convenience_of_the_employer if there is a direct nexus between the meals_and_lodging furnished and the asserted business interests of the employer served thereby 66_tc_223 petitioners assert that mr weeldreyer as the corporation’s sole employee was required to be available for duty hours a day dreyer farms leased the weeldreyer farm to the weeldreyers dreyer farms contracted with mr weeldreyer as a tenant not as its employee to perform all necessary work it is well settled that ordinarily taxpayers are bound by the form of the transaction they have chosen taxpayers may not in hindsight recast the transaction as one that they might have made in order to obtain tax advantages 118_tc_32 citing 875_f2d_420 4th cir affg 90_tc_206 and 248_f3d_572 7th cir affg t c memo here inasmuch as mr weeldreyer farmed the weeldreyer farm as a tenant and not as an employee of dreyer farms the food and lodging in question were not furnished to mr weeldreyer as a corporate employee for the convenience of his employer thus the food and lodging_expenses at issue are not sec_119 meals_and_lodging expenses deductibility of expenses related to the leasing of the weeldreyer farm during the years at issue dreyer farms’ business activities included leasing the weeldreyer farm it leased the farm including the farmhouse to the weeldreyers and received rent in the form of percent of the crops grown on the farm therefore we look to the terms of the farm leases to determine whether expenses for maintenance and repair remodeling landscaping insurance telephone utilities depreciation and taxes are the expenses of dreyer farms or the weeldreyers a maintenance and repair remodeling and landscaping necessary expenses_incurred to maintain property used in a trade_or_business in efficient operating condition ordinarily are deductible sec_162 jacks v commissioner tcmemo_1988_237 gilles frozen custard inc v commissioner tcmemo_1970_73 likewise the cost of repairs which neither materially add to the value of the property nor appreciably prolong its life but keep it in an ordinarily efficient operating condition may be deducted as an expense sec_1_162-4 income_tax regs also under appropriate circumstances landscaping expenses may be deductible when the expenses legitimately are connected with the taxpayer’s trade_or_business and the requirements for deductibility otherwise are met hefti v commissioner tcmemo_1988_22 affd 894_f2d_1340 8th cir rhoads v commissioner tcmemo_1987_335 dreyer farms deducted repair and maintenance_expenses of dollar_figure in remodeling expenses of dollar_figure in and landscaping expenses of dollar_figure in and dollar_figure in petitioners have not described or explained the maintenance and repair the landscaping or the remodeling dreyer farms treated the remodeling as a repair by deducting the cost rather than capitalizing it and we shall do likewise the farmhouse is an improvement on the leased property under the terms of the farm leases dreyer farms agreed to furnish all necessary materials to maintain all improvements on the property and the weeldreyers agreed to supply all necessary labor petitioners have offered no evidence to show that the expenditures_for maintenance and repair the landscaping or the remodeling were costs for materials dreyer farms’ obligation as opposed to costs for labor the weeldreyers’ obligation although that portion of these expenditures allocable to materials would be the corporation’s obligation and would be deductible by it under sec_162 from the record before us we are unable to reasonably apportion the expenditures between the costs of labor and materials while it is within the purview of this court to estimate the amount of allowable deductions where there is evidence that deductible expenses were incurred 39_f2d_540 2d cir we must have some basis upon which to make the estimate 245_f2d_559 5th cir because we have no such evidence we hold that the deductions taken for repair and maintenance remodeling and landscaping are not allowable b property insurance dreyer farms deducted dollar_figure in dollar_figure in and dollar_figure in for property insurance certain business-related insurance expenses unquestionably are deductible under sec_162 116_tc_211 citing sec_1_162-1 income_tax regs the farm leases do not require the weeldreyers to provide property insurance covering the farmhouse or other improvements on the property the property insurance is an ordinary and necessary business_expense of dreyer farms the owner of the property and not a personal family or living expense of the weeldreyers we hold therefore dreyer farms is entitled to deduct the insurance expenses as claimed in each of the years at issue c utilities and telephone dreyer farms deducted utilities expenses of dollar_figure in dollar_figure in and dollar_figure in and telephone expenses of dollar_figure in utilities and telephone expenses may be deductible under sec_162 if the expenses_incurred are ordinary and necessary in carrying_on_a_trade_or_business 85_tc_731 sengpiehl v commissioner tcmemo_1998_23 green v commissioner tcmemo_1989_599 here the farm leases did not contain any provisions regarding the utilities or telephone for the farmhouse petitioners did not produce any utility or telephone bills canceled checks or testimony to identify that if any portion of the utility and telephone expenses related to the corporation’s business we have no basis for making any allocation of the expenses thus petitioners have failed to establish that dreyer farms is entitled to any deduction for utilities or telephone expenses d depreciation dreyer farms deducted dollar_figure in dollar_figure in and dollar_figure in for depreciation of the farmhouse sec_167 allows a depreciation deduction from gross_income for property used in the taxpayer’s trade_or_business or held_for_the_production_of_income ordinarily depreciation or amortization is available to an owner of an asset with respect to the owner’s basis in the asset dreyer farms owned the weeldreyer farm including the farmhouse one of the business activities of dreyer farms was the leasing of the weeldreyer farm including the farmhouse thus the farmhouse is property used in the corporation’s trade_or_business we hold that dreyer farms is entitled to a deduction for depreciation of the farmhouse for each of the years at issue as claimed e taxes dreyer farms deducted property taxes of dollar_figure in dollar_figure in and dollar_figure in attributable to the farmhouse dreyer farms owned the weeldreyer farm sec_164 allows the owner of property a deduction for real_property_taxes we hold therefore that dreyer farms may deduct property taxes as claimed in the years at issue f summary of food and lodging_expenses to summarize dreyer farms may deduct the following expenses for the years at issue property tax--house property insurance--house depreciation--house total dollar_figure big_number big_number dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number dreyer farms may not deduct the following food and lodging_expenses food for employees utilities--house landscaping remodeling costs repairs and maintenance telephone total dollar_figure big_number big_number -- -- big_number dollar_figure big_number -- -- big_number dollar_figure big_number -- -- -- big_number inclusion of payments in the weeldreyers’ gross_income when a corporation makes an expenditure that primarily benefits the corporation’s shareholders the amount of the expenditure may be taxed to the shareholders as a constructive_dividend 115_tc_172 73_tc_980 am insulation corp v commissioner tcmemo_1985_436 we have found that expenses for food repair and maintenance remodeling landscaping utilities and telephone paid_by dreyer farms are the weeldreyers’ expenses petitioners contend that the payments are not constructive dividends because mr weeldreyer was required to repay any amounts that dreyer farms could not deduct for federal_income_tax purposes petitioners cite cepeda v commissioner tcmemo_1993_477 to support their position cepeda however is inapposite in that case the taxpayers claimed that advances made by the corporation were loans rather than employee compensation or constructive dividends petitioners do not contend that the corporate payments of mr weeldreyer’s expenses were loans for federal_income_tax purposes a transaction will be characterized as a loan if there was an unconditional obligation on the part of the transferee to repay the money and an unconditional intention on the part of the transferor to secure repayment 88_tc_604 affd without published opinion 855_f2d_855 8th cir in the instant cases when the payments were made there was no unconditional obligation on the part of mr weeldreyer to repay a specific dollar amount to the corporation his obligation to repay any of the payments was in general terms the amount of repayment could not be determined when the payments were made any obligation to repay any amount could not arise before respondent disallowed the deduction for the expenses i e when the dreyer farms notice_of_deficiency was issued in date thus the payments were not loans since the payments when made by dreyer farms did not constitute business_expenses of the corporation or loans to the weeldreyers the conclusion is inescapable that the payments constituted distributions by dreyer farms to the weeldreyers in n am oil consol v burnett 286_us_417 the supreme court stated if a taxpayer receives earnings under a claim of right and without restriction as to its disposition he has received income which he is required to return even though it may still be claimed that he is not entitled to retain the money and even though he may still be adjudged liable to restore its equivalent it is clear therefore under the claim_of_right_doctrine the amounts paid_by dreyer farms in and were taxable to the weeldreyers in those years see 67_tc_286 if a taxpayer is required to repay income recognized under the claim_of_right_doctrine in an earlier tax_year sec_1341 permits the taxpayer in effect to elect to compute his taxes for the year of repayment in a manner that gives the taxpayer the equivalent of a refund without interest of tax for the earlier year specifically sec_1341 permits the tax for the year of repayment to be reduced by the amount of the tax paid for the year of receipt that was attributable to the inclusion of the repaid amount in that year’s gross_income 394_us_678 sec_1341 however requires actual repayment restoration or restitution 149_f3d_805 8th cir 437_f2d_1222 3d cir 110_tc_12 although the bylaws of dreyer farms require mr weeldreyer to repay amounts for which the corporation is disallowed a deduction mr weeldreyer does not claim that he has repaid the disallowed amounts indeed there is no evidence in the record to show that he did therefore sec_1341 does not apply we hold that dreyer farms’ payment of the weeldreyers’ food repair and maintenance remodeling landscaping utilities and telephone expenses constitutes income to the weeldreyers petitioners argue that the expenses are meals_and_lodging expenses excludable under sec_119 we have found to the contrary further although the repair and maintenance remodeling and landscaping expenses were incurred by the weeldreyers as tenants under the farm lease those expenses relate to the use of the farmhouse not to the raising of the crops thus those expenses as well as the food utilities and telephone expenses are the weeldreyers’ personal living_expenses personal family or living_expenses are not deductible except as otherwise expressly permitted sec_262 a taxpayer’s expenses for his or her own meals_and_lodging are personal because they would have been incurred whether or not the taxpayer had engaged in any business activity 841_f2d_809 8th cir 80_tc_1073 affd 758_f2d_211 7th cir in order for personal living_expenses to qualify as a deductible business_expense under sec_162 the taxpayer must demonstrate that the expenses were different from or in excess of what he would have spent for personal purposes 21_tc_170 petitioners did not produce any bills canceled checks or testimony to substantiate any portion of the expenses that relates to mr weeldreyer’s separate farming_business thus petitioners have failed to establish that the weeldreyers are entitled to a deduction for any portion of the expenses under section dollar_figure rental value of residence the weeldreyers leased the weeldreyer farm including the farmhouse from dreyer farms dreyer farms received rent in the form of percent of the crops grown on the farm the 12except as otherwise provided an individual is not allowed a deduction with respect to the use of a dwelling_unit that is used by the individual as a residence sec_280a the individual may however deduct expenses allocable to portions of the dwelling that are exclusively used for business purposes sec_280a the weeldreyers did not argue that their housing_expenses are deductible under sec_280a therefore we do not address the question of whether certain portions of their housing_expenses may be deductible under that section we note however that the weeldreyers have made no showing that the farmhouse or any portion thereof was used exclusively for business purposes weeldreyers included only their percent of the crop revenues in their income they excluded the entire percent paid to dreyer farms as rent including the portion attributable to the farmhouse in effect they deducted the portion of the rent paid for the farmhouse the rent of the farmhouse is their personal_expense and is not deductible see sec_262 the farm leases do not specify that portion of the rent to be paid for use of the farmhouse nor have the weeldreyers provided any evidence to show that portion of the rent properly attributable to the farmhouse the amount of the constructive dividends respondent determined in the weeldreyer notice_of_deficiency exceeds the amount_of_deductions disallowed in the dreyer farms notice_of_deficiency the record does not explain that excess moreover since the depreciation respondent disallowed as a deduction to dreyer farms was not an expenditure we assume that adjustments in the weeldreyer notice_of_deficiency did not include the depreciation we have computed the fair rental value of the farmhouse that was included in respondent’s adjustment to the weeldreyers’ income as follows dreyer farms notice_of_deficiency disallowed food lodging deductions less depreciation on residence food lodging expenditure sec_11 dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure big_number big_number weeldreyer notice_of_deficiency adjustment for food lodging provided by dreyer farms food lodging expenditures adjustment for rental value of residence dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure big_number big_number the weeldreyers have not shown that the portion of the rent attributable to the farmhouse is less than the amounts for the years at issue as computed above we therefore hold that those amounts are properly included in the weeldreyers’ income for the years at issue summary of adjustments to weeldreyers’ income the weeldreyers’ income from farming is increased by dollar_figure in dollar_figure in and dollar_figure in to reflect the disallowance of deductions for the rental value of the farmhouse in addition the following personal expenses paid_by dreyer farms are included in the weeldreyers’ income as constructive dividends for the years at issue food utilities landscaping remodeling costs repairs and maintenance telephone total dollar_figure big_number big_number -- -- big_number dollar_figure big_number -- -- big_number dollar_figure big_number -- -- -- big_number issue accuracy-related_penalty under sec_6662 respondent determined that dreyer farms is liable for the accuracy-related_penalty under sec_6662 as pertinent here sec_6662 imposes a 20-percent penalty on the portion of an underpayment attributable to negligence or disregard of rules or regulations sec_6662 negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code sec_6662 sec_1_6662-3 income_tax regs the penalty under sec_6662 does not apply to any portion of an understatement_of_tax if it is shown that there was reasonable_cause for the taxpayer’s position and that the taxpayer acted in good_faith with respect to that portion sec_6664 the determination of whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all the pertinent facts and circumstances sec_1_6664-4 income_tax regs the most important factor is the extent of the taxpayer’s effort to assess his her proper tax_liability for the year id the good_faith reliance on the advice of an independent competent professional as to the tax treatment of an item may meet this requirement sec_1_6664-4 income_tax regs despite the fact that petitioners have the burden_of_proof see supra note petitioners have made no showing that they made an attempt to comply with the tax rules and regulations with regard to those deductions taken by dreyer farms for the years at issue which have been disallowed hence with respect to those deductions petitioners have failed to show that dreyer farms was not negligent nor have petitioners showed that they acted in good_faith with respect to or that there was reasonable_cause for the position they took further petitioners do not claim that they relied on mr bleeker or any other professional as to the tax treatment of the expenses for food and lodgingdollar_figure petitioners simply assert that the accuracy-related_penalty does not apply because dreyer farms properly claimed the deductions under sec_162 and the weeldreyers properly excluded the payments under sec_119 we have found to the contrary under these circumstances we are compelled to hold that dreyer farms is liable for the accuracy-related_penalty for the years at issue to reflect the foregoing decisions will be entered under rule 13before the trial in these cases respondent filed a motion to disqualify mr bleeker from his representation of petitioners respondent’s motion was based in part on the premise that if petitioners contend that they reasonably relied on mr bleeker’s advice with respect to the proper tax treatment of the payments at issue then mr bleeker would be required to testify as a witness in the trial of these cases the court held a telephone conference call with mr bleeker and counsel for respondent to discuss respondent’s motion during that call mr bleeker informed the court that petitioners did not intend to raise reasonable reliance on a tax professional as a defense to the accuracy-related_penalties


internal_revenue_service department of the treasury number release date index number legend washington dc person to contact telephone number refer reply to cc psi plr-144851-02 date date company shareholders state a b dear this letter responds to a letter from company dated date as well as subsequent correspondence requesting a ruling under sec_1362 of the internal_revenue_code that company's late election under sec_1362 to be a s_corporation will be treated as timely made facts company was incorporated in state on a shareholders intended company to be an s_corporation from inception however form_2553 election by a small_business_corporation was not timely filed with the internal_revenue_service company filed form_1120s u s income_tax return for an s_corporation for its b tax_year plr-144851-02 law and analysis sec_1362 provides in general that an election by a small_business_corporation under sec_1362 to be an s_corporation may be made for any_tax year- a at any time during the preceding tax_year or b at any time during the tax_year and on or before the 15th day of the 3d month of the tax_year sec_1362 provides that if-- a a small_business_corporation makes an election under sec_1362 for any_tax year and b that election is made after the 15th day of the 3d month of the tax_year and on or before the 15th day of the 3d month of the following tax_year then that election shall be treated as made for the following tax_year sec_1362 provides that if-- a an election under sec_1362 is made for any_tax year determined without regard to sec_1362 after the date prescribed by this subsection for making the election for that tax_year or no such election is made for any_tax year and b the secretary determines that there was reasonable_cause for the failure to timely make the election the secretary may treat such election as timely made for that tax_year and sec_1362 shall not apply conclusion based on the facts submitted and representations made we conclude that there was reasonable_cause for company’s failure to make a timely s_corporation_election therefore company's late election under sec_1362 is to be treated under sec_1362 as filed timely for its tax_year beginning a this ruling is contingent on company filing form_2553 to be effective on a with the appropriate service_center no later than days from the date of this letter a copy of this letter should be attached to the form_2553 plr-144851-02 except for the specific ruling above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code specifically we express or imply no opinion on whether company otherwise is eligible to be an s_corporation under a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative this ruling is directed only to the taxpayer who requested it according to sec_6110 this ruling may not be used or cited as precedent sincerely s mary beth collins senior technician reviewer branch office of associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service index nos number release date cc dom it a - plr-109164-99 attn date ein dear this is in reference to a form_1128 application to adopt change or retain a tax_year submitted on behalf of the above- named taxpayer requesting permission to change its accounting_period for federal_income_tax purposes from a taxable_year ending to a taxable_year ending effective the taxpayer has requested that the form_1128 be considered timely filed under the authority contained in sec_301_9100-3 of the procedure and administration regulations the taxpayer’s form_1128 requesting a change in accounting_period to a tax_year ending was due on or before information furnished indicates that due to an error or misunderstanding the form was not timely filed however the form was filed within days of the due_date the taxpayer acted reasonably and in good_faith and granting the extension will not prejudice the interests of the government sec_301_9100-3 provides that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 automatic extensions such as the instant case must be made under the rules of sec_301_9100-3 requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government based on the facts and information submitted and the representations made it is held that the taxpayer has acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government accordingly the requirements of the regulations for the granting of relief have been satisfied in this case and taxpayer's late filed form_1128 requesting permission to change to a tax_year ending effective for the tax_year beginning is considered timely filed pursuant to appendix a of revproc_99_1 1999_1_irb_6 an additional user_fee is required in order to process the form_1128 the user_fee will be requested in a separate correspondence we will begin processing the taxpayer’s application after the user_fee is received the ruling contained in this letter is based upon facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling verification of the factual information representations and other data may be required as part of an examination process this ruling addresses the granting of sec_301_9100-3 relief only no opinion is expressed regarding the tax treatment of the instant transaction under the provisions of any other sections of the code or regulations that may be applicable thereto or regarding the tax treatment of any conditions existing at the time of or effects resulting from the instant transaction specifically no opinion is expressed as to whether the taxpayer is permitted under the code and applicable regulations to change to the tax_year requested in the subject form_1128 in accordance with the provisions of a power_of_attorney currently on file we are sending a copy of this letter_ruling to the taxpayer's authorized representative this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent sincerely yours assistant chief_counsel income_tax and accounting s thomas luxner by _______________________ thomas luxner acting deputy assistant chief_counsel


t c memo united_states tax_court norma neiman petitioner v commissioner of internal revenue respondent docket no filed date james c neiman specially recognized for petitioner matthew j fritz for respondent the court was advised that petitioner norma neiman who is elderly and lives in florida would not appear at trial this matter had been continued on one prior occasion based on petitioner's request the court permitted petitioner's son james c neiman to appear specially for the submission of documents that were not objected to by respondent memorandum opinion panuthos chief special_trial_judge this case was heard pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_182 respondent determined a deficiency in the amount of dollar_figure in petitioner's federal_income_tax for the taxable_year the issues for decision are whether petitioner and her husband jacob b neiman failed to report income received by jacob b neiman and whether said income is subject_to self-employment_tax at the time of filing the petition herein petitioner resided at cincinnati ohio while no formal stipulation was filed the parties agreed to a number of exhibits which were made part of this record there was no testimony and accordingly all section references are to the internal_revenue_code in effect for the tax_year at issue all rule references are to the tax_court rules_of_practice and procedure jacob b neiman died in date prior to the filing of the petition herein a notice_of_deficiency was issued to petitioner norma neiman and jacob b neiman deceased the petition was captioned in both names by order dated date respondent's motion to dismiss for lack of jurisdiction as to the estate of jacob b neiman deceased and to change caption was granted since norma neiman failed to establish that she had authority to represent her deceased husband the caption of this case was changed to read norma neiman petitioner v commissioner of internal revenue respondent issues of omitted interest and dividend income were not contested by petitioner our findings are based on the pleadings and documents submitted at trial jacob b neiman petitioner's husband was an insurance agent for many years during he did business with the irv and bob kemp agency kemp during jacob b neiman was paid dollar_figure in first year commissions he was also paid dollar_figure in renewal_commissions in kemp sent mr neiman forms with respect to these two payments kemp also advanced mr neiman dollar_figure in mr neiman agreed to repay the advance by offsetting the payment against future commissions the advance was repaid sometime in no form_1099 was issued to mr neiman with respect to the dollar_figure advance made in nor was the amount included as income on the return on schedule c of the jointly filed federal_income_tax return for petitioner and her husband reported the dollar_figure payment and the dollar_figure payment petitioner then subtracted the dollar_figure advance from the commission income reported on the return in the notice_of_deficiency respondent determined that commission income was understated by dollar_figure petitioner acknowledges that the dollar_figure was erroneously deducted from commission income received and therefore the income on the return was understated by dollar_figure petitioner argues that she should be excused from liability for tax on the rounded to nearest whole dollar understatement because she suffers from physical emotional and financial difficulties respondent's determination in the notice_of_deficiency is presumptively correct and petitioner bears the burden of proving error rule a 503_us_79 290_us_111 there is no question that commissions are includable as taxable_income sec_61 petitioner does not seriously dispute that the advance was erroneously deducted from commission income received respondent is thus sustained on this issue sec_1401 imposes a tax on self-employment_income sec_1402 defines net_earnings_from_self-employment as gross_income derived from a trade_or_business less certain deductions commission income from kemp was reported on a schedule c petitioner does not seriously dispute that the commission income is not subject_to self-employment_tax respondent is sustained on this issue petitioner makes a vague reference to the statute_of_limitations suggesting that the time has expired for assessment of the tax the short answer to petitioner's argument is that the return was filed on date the notice_of_deficiency was mailed on date a timely petition was filed with this court the period of limitations has not run sec_6501 sec_6503 sec_6213 petitioner asks this court to consider her difficult physical emotional and financial circumstances as we indicated at the conclusion of the trial of this case our jurisdiction as defined by congress is limited to a determination of the correct_tax liability we again recommend that petitioner communicate with appropriate persons within the internal_revenue_service to seek advice and assistance with respect to payment of the tax_liability 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 psi b02 plr-134684-13 date date ---------------------------------------------------- ----------------------------------------------------------------------------- grantor distribution committee -------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ trust state trustees ---------------------------------------------- ---------- ------------------------------------------------------ ---------------------- this responds to a letter dated date and subsequent correspondence requesting rulings under sec_671 sec_2501 and sec_2514 of the internal_revenue_code the information submitted states that grantor proposes to create an irrevocable_trust trust for the benefit of grantor’s self grantor’s parents siblings and issue which grantor intends to execute upon receipt of a favorable private_letter_ruling from the internal_revenue_service two independent trustees are the trustees trustees of trust during grantor’s lifetime the beneficiaries of trust are grantor and grantor’s siblings however if grantor’s siblings are not living the class of permissible beneficiaries will include grantor’s parents trustees must make distributions of income and principal as directed by distribution committee and or grantor as follows at any time trustees pursuant to the direction of a majority of distribution committee with the written consent of grantor shall distribute to grantor or the beneficiaries such amounts of the net_income or principal as directed by distribution committee grantor’s consent power plr-134684-13 at any time trustees pursuant to the direction of all distribution committee members other than grantor shall distribute to the beneficiaries such amounts of the net_income or principal as directed by distribution committee unanimous member power and at any time grantor in a nonfiduciary capacity may but shall not be required to distribute to any one or more of the beneficiaries other than himself such amounts of the principal including the whole thereof as grantor deems advisable to provide for the health maintenance support and education of grantor’s issue grantor’s sole power the distribution committee may direct that distributions be made equally or unequally and to or for the benefit of any one or more of the beneficiaries of trust to the exclusion of others any net_income not distributed by trustee will be accumulated and added to principal distribution committee will be initially composed of grantor grantor’s children and grantor’s siblings and will cease to exist upon grantor’s death trust provides that at all times the distribution committee must consist of at least two adults other than grantor either who are members of the class of persons eligible to receive distributions of income or principal under trust or if there are not two adult members of such class who are willing and able to serve who are the parent or guardian of a member of such class of eligible distributes eligible individuals if at any time fewer than two eligible individuals are members the distribution committee shall be deemed not to exist a vacancy on distribution committee must be filled in the following order the oldest of the grantor’s adult issue who willing to serve and is not already serving as a member of distribution committee the oldest of the adult issue of grantor’s parents who is willing to serve and who is not already serving as a member of distribution committee the legal guardian if any or the parent of the oldest of the grantor’s minor issue who is not already serving as a member of distribution committee the legal guardian if any or the parent of the oldest minor issue of grantor’s parents who is willing to serve and is not already serving as a member of distribution committee grantor’s father or grantor’s mother if at any time distribution committee does not include at least two members distribution committee shall be deemed not to exist the distribution committee will cease to exist upon grantor’s death upon grantor’s death the trustee will dispose_of the then-remaining principal and undistributed_income of trust as grantor directs by a will specifically referring to this power_of_appointment the testamentary power provided that no such appointment may be made to grantor’s estate grantor’s creditors or the creditors of grantor’s estate grantor’s power includes the power to appoint outright or in trust and to create new powers in default of the exercise of grantor’s testamentary power the balance of trust will be distributed per stirpes to grantor’s then living issue in further trust if none plr-134684-13 of grantor’s issue is then living but any descendant of grantor’s parents is then living trustees are to allocate income and principal per stirpes among grantor’s parents issue in further trust if no descendant of grantor’s parents is then living trustees are to distribute the remaining income and principal pursuant to state law as if grantor had died intestate and unmarried you have requested the following rulings during the period distribution committee is serving no portion of the items of income deductions and credits against tax of the trust will be included in computing the taxable_income deductions and credits of the grantor under sec_671 the contribution of property to trust by grantor will not be a completed_gift subject_to federal gift_tax any distribution_of_property by the distribution committee from trust to grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee any distribution_of_property by distribution committee from trust to any beneficiary of trust other than grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee other than grantor ruling sec_671 provides that where it is specified in subpart e of part i of subchapter_j that the grantor or another person shall be treated as the owner of any portion of a_trust there shall then be included in computing the taxable_income and credits of the grantor or the other person those items of income deductions and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under chapter in computing taxable_income or credits against the tax of an individual sec_672 provides that for purposes of subpart e the term adverse_party means any person having a substantial_beneficial_interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he possesses respecting the trust sec_673 through specify the circumstances under which the grantor is treated as the owner of a portion of a_trust sec_673 provides that the grantor shall be treated as the owner of any portion of a_trust in which the grantor has a reversionary_interest in either the corpus or the income therefrom if as of the inception of that portion of the trust the value of such plr-134684-13 interest exceed sec_5 percent of the value of such portion sec_674 provides in general that the grantor shall be treated as the owner of any portion of a_trust in respect of which the beneficial_enjoyment of the corpus or the income therefrom is subject_to a power of disposition exercisable by the grantor or a nonadverse_party or both without the approval or consent of any adverse_party sec_674 provides that sec_674 shall not apply to the power in sec_674 regardless of by whom held sec_674 describes a power to distribute corpus to or for a beneficiary provided that the power is limited by a reasonably_definite_standard which is set forth in the trust instrument sec_674 provides that sec_674 shall not apply to a power exercisable only by will other than a power in the grantor to appoint by will the income of the trust where the income is accumulated for such disposition by the grantor or may be so accumulated in the discretion of the grantor or a nonadverse_party or both without the approval or consent of any adverse_party under sec_675 and applicable regulations the grantor is treated as the owner of any portion of a_trust if under the terms of the trust agreement or circumstances attendant to its operation administrative control is exercisable primarily for the benefit of the grantor rather than the beneficiary of the trust sec_676 provides that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such owner under any other provision of part i subchapter_j chapter where at any time the power to re-vest in the grantor title to such portion is exercisable by the grantor or a nonadverse_party or both sec_677 provides in general that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such owner under sec_674 whose income without the approval or consent of any adverse_party is or in the discretion of the grantor or a nonadverse_party or both may be distributed to the grantor or the grantor’s spouse held or accumulated for future distribution to the grantor or the grantor’s spouse or applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor’s spouse sec_678 provides that a person other than the grantor shall be treated as the owner of any portion of a_trust with respect to which such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself or such person has previously partially released or otherwise modified such a power and after the release or modification retains such control as would within the principles of inclusive subject a grantor of a_trust to treatment as the owner thereof based solely on the facts submitted and representations made we conclude an plr-134684-13 examination of trust reveals none of the circumstances that would cause grantor to be treated as the owner of any portion of trust under sec_673 sec_674 sec_676 or sec_677 because none of the other distribution committee members has a power exercisable solely by himself to vest trust income or corpus in himself none shall be treated as the owner of any portion of the trust under sec_678 we further conclude that an examination of trust reveals none of the circumstances that would cause administrative controls to be considered exercisable primarily for the benefit of grantor under sec_675 thus the circumstances attendant on the operation of trust will determine whether grantor will be treated as the owner of any portion of trust under sec_675 this is a question of fact the determination of which must be deferred until the federal_income_tax returns of the parties involved have been examined by the office with responsibility for such examination ruling sec_2 and sec_2501 provides that a tax is imposed for each calendar_year on the transfer of property by gift during such calendar_year by any individual resident or nonresident sec_2511 provides that the tax imposed by sec_2501 applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-2 of the gift_tax regulations provides that a gift is complete as to any property or part thereof or interest therein of which the donor has so parted with dominion and control as to leave in the donor no power to change its disposition whether for the donor’s own benefit or for the benefit of another but if upon a transfer of property whether in trust or otherwise the donor reserves any power over its disposition the gift may be wholly incomplete or may be partially complete and partially incomplete depending upon all the facts in the particular case accordingly in every case of a transfer of property subject_to a reserved power the terms of the power must be examined and its scope determined sec_25_2511-2 also provides an example where the donor transfers property to another in trust to pay the income to the donor or accumulate it in the discretion of the trustee and the donor retains a testamentary power to appoint the remainder among the donor’s descendants the regulation concludes that no portion of the transfer is a completed_gift however if the donor had not retained a testamentary_power_of_appointment but instead provided that the remainder should go to x or his heirs the entire transfer would be a completed_gift sec_25_2511-2 provides that a gift is incomplete in every instance in which a donor reserves the power to re-vest the beneficial title in himself or herself a gift is also incomplete if and to the extent that a reserved power gives the donor the power to name plr-134684-13 new beneficiaries or to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed_or_ascertainable_standard sec_25_2511-2 provides that a donor is considered as himself having a power if it is exercisable by him in conjunction with any person not having a substantial adverse_interest in the disposition of the transferred property or the income therefrom sec_25_2511-2 provides that the relinquishment or termination of a power to change the beneficiaries of transferred property occurring otherwise than by death of the donor is regarded as the event which completes the gift and causes the gift_tax to apply sec_25_2511-2 provides that if a donor transfers property to himself as trustee or to himself and some other person not possessing a substantial adverse_interest as trustees and retains no beneficial_interest in the trust property and no power over it except fiduciary powers the exercise or nonexercise of which is limited by a fixed_or_ascertainable_standard to change the beneficiaries of the transferred property the donor has made a completed_gift and the entire value of the transferred property is subject_to the gift_tax sec_25_2511-2 does not define substantial adverse_interest sec_25_2514-3 provides in part that a taker in default of appointment under a power has an interest that is adverse to an exercise of the power sec_25_2514-3 also provides that a coholder of a power is considered as having an adverse_interest where he may possess the power after the possessor’s death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate in 308_us_39 the taxpayer created a_trust for the benefit of named beneficiaries and reserved the power_to_revoke the trust in whole or in part and to designate new beneficiaries other than himself six years later in the taxpayer relinquished the power_to_revoke the trust but retained the right to change the beneficiaries in the taxpayer relinquished the right to change the beneficiaries the court stated that the taxpayer’s gift is not complete for purposes of the gift_tax when the donor has reserved the power to determine those others who would ultimately receive the property accordingly the court held that the taxpayer’s gift was complete in when he relinquished his right to change the beneficiaries of the trust a grantor’s retention of a power to change the beneficial interests in a_trust causes the transfer to the trust to be incomplete for gift_tax purposes even though the power may be defeated by the actions of third parties 37_tc_897 see also 51_tc_352 in this case grantor retained the grantor’s consent power over the income and principal of trust under sec_25_2511-2 a donor is considered as himself having a power if it is exercisable by him in conjunction with any person not having a substantial plr-134684-13 adverse_interest in the disposition of the transferred property or the income therefrom the distribution committee members are not takers in default for purposes of sec_25_2514-3 they are merely co-holders of the power the distribution committee ceases to exist upon the death of grantor under sec_25_2514-3 a co- holder of a power is only considered as having an adverse_interest where he may possess the power after the possessor’s death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate in this case the distribution committee ceases to exist upon grantor’s death accordingly the distribution committee members do not have interests adverse to grantor under sec_25_2514-3 and for purposes of sec_25_2511-2 therefore grantor is considered as possessing the power to distribute income and principal to any beneficiary himself because he retained the grantor’s consent power the retention of this power causes the transfer of property to trust to be wholly incomplete for federal gift_tax purposes grantor also retained the grantor’s sole power over the principal of trust under sec_25_2511-2 a gift is incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries in this case grantor’s sole power gives grantor the power to change the interests of the beneficiaries accordingly the retention of the grantor’s sole power causes the transfer of property to trust to be wholly incomplete for federal gift_tax purposes further grantor retained grantor’s testamentary power to appoint the property in trust to anyone including trusts other than grantor’s estate grantor’s creditors or the creditors of grantor’s estate under sec_25_2511-2 the retention of a testamentary power to appoint the remainder of a_trust is considered a retention of dominion and control_over the remainder accordingly the retention of this power causes the transfer of property to trust to be incomplete with respect to the remainder in trust for federal gift_tax purposes finally the distribution committee possesses the unanimous member power over income and principal this power is not a condition_precedent to grantor’s powers grantor’s powers over the income and principal are presently exercisable and not subject_to a condition_precedent grantor retains dominion and control_over the income and principal of trust until the distribution committee members exercise their unanimous member power accordingly this power does not cause the transfer of property to be complete for federal gift_tax purposes see 37_tc_897 51_tc_352 accordingly based on the facts submitted and the representations made we conclude that the contribution of property to trust by grantor is not a completed_gift subject_to federal gift_tax any distribution from trust to grantor is merely a return of grantor’s property therefore we conclude that any distribution_of_property by the distribution committee from trust to grantor will not be a completed_gift subject_to plr-134684-13 federal gift_tax by any member of the distribution committee further upon grantor’s death the fair_market_value of the property in trust is includible in grantor’s gross_estate for federal estate_tax purposes ruling sec_2514 provides that the exercise or release of a general_power_of_appointment created after date shall be deemed a transfer of property by the individual possessing such power sec_2514 provides that the term general_power_of_appointment means a power which is exercisable in favor of the individual possessing the power possessor the possessor’s estate the possessor’s creditors or the creditors of the individual’s estate sec_25_2514-1 provides in part that a power_of_appointment is not a general power if by its terms it is exercisable only in favor of one or more designated persons or classes other than the possessor or his creditors or the possessor’s estate or the creditors of the estate sec_2514 provides that in the case of a power_of_appointment created after date if the power is exercisable by the possessor only in conjunction with the creator of the power such power is not deemed a general_power_of_appointment sec_2514 provides that in the case of a power_of_appointment created after date if the power is not exercisable by the possessor except in conjunction with a person having a substantial interest in the property subject_to the power which is adverse to the exercise of the power in favor of the possessor such power shall not be deemed a general_power_of_appointment for purposes of sec_2514 a person who after the death of the possessor may be possessed of a power_of_appointment with respect to the property subject_to the possessor’s power which he may exercise in his own favor shall be deemed as having an interest in the property and such interest shall be deemed adverse to such exercise of the possessor’s power sec_25_2514-3 provides in part that a co-holder of a power has no adverse_interest merely because of his joint possession of the power nor merely because he is a permissible appointee under a power however a co-holder of a power is considered as having an adverse_interest where he may possess the power after the possessor’s death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate thus for example if x y and z held a power jointly to appoint among a group of persons which includes themselves and if on the death of x the power will pass to y and z jointly then y and z are considered to have plr-134684-13 interests adverse to the exercise of the power in favor of x similarly if on y’s death the power will pass to z z is considered to have an interest adverse to the exercise of the power in favor of y the powers held by the distribution committee members under the grantor’s consent power are powers that are exercisable only in conjunction with the creator grantor accordingly under sec_2514 the distribution committee members do not possess general powers of appointment by virtue of possessing this power further the powers held by the distribution committee members under the unanimous member powers are not general powers of appointment as in the example in sec_25_2514-3 the distribution committee members have substantial adverse interests in the property subject_to this power accordingly any distribution made from trust to a beneficiary other than grantor pursuant to the exercise of these powers the grantor’s consent power and the unanimous member powers are not gifts by the distribution committee members instead such distributions are gifts by grantor based upon the facts submitted and representations made we conclude that any distribution_of_property by the distribution committee from trust to any beneficiary of trust other than grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee further we conclude that any distribution_of_property from trust to a beneficiary other than grantor will be a completed_gift by grantor except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code specifically we express no opinion on the trust provisions permitting trustee to distribute income or principal to trustees of other qualified trusts decanting plr-134684-13 this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file a copy of this letter is being sent to x’s authorized representative sincerely bradford r poston senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


t c summary opinion united_states tax_court robert h martin petitioner v commissioner of internal revenue respondent docket no 5908-05s filed date robert h martin pro_se mary ann waters for respondent couvillion special_trial_judge this case was heard pursuant to sec_7463 of the internal_revenue_code in effect at the time the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any 1unless otherwise indicated all subsequent section references are to the internal_revenue_code in effect for the year at issue all rule references are to the tax_court rules_of_practice and procedure other court and this opinion should not be treated as precedent for any other case respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax for the year the issues for decision are whether petitioner is entitled to dependency_exemption deductions for two children under sec_151 and a child_tax_credit under sec_24 some of the facts were stipulated and are so found the stipulation of facts and the annexed exhibits are incorporated herein by reference at the time the petition was filed petitioner resided at glen allen virginia petitioner filed his federal_income_tax return for as a head-of-household under sec_2 and claimed three dependency_exemption deductions under sec_151 and a child_tax_credit under sec_24 in the notice_of_deficiency respondent disallowed the three dependency_exemption deductions and the child_tax_credit respondent further determined that petitioner’s filing_status was single petitioner was previously married to olivia l martin they were divorced in the year olivia l martin thereafter married forrest c nuckols petitioner and mrs nuckols had eight children for the year at issue five were adults and three others were dependents petitioner claimed the three dependents on his federal_income_tax return for and mrs nuckols his former spouse also claimed the same three children on the joint federal_income_tax return she filed with her spouse at trial respondent conceded that petitioner was entitled to the dependency_exemption deduction for one of the children based on the fact that the child lived with petitioner during the year at issue respondent also conceded that petitioner was entitled to head-of-household filing_status and the child_tax_credit with respect to that child the remaining issues are whether petitioner is entitled to the dependency_exemption deductions for the two other children and the child_tax_credit as to them the two other children a son and a daughter lived with their mother mrs nuckols during the year at issue petitioner paid to his former spouse during that year dollar_figure per month for their support in addition petitioner paid health insurance premiums and medical_expenses for the two children and had the children with him for a 1-week vacation during the year in florida no evidence was presented as to the support provided the two children by petitioner’s former spouse during the year at issue or the total monetary amount provided by petitioner other than the aforementioned monthly cash payments petitioner contends that on these facts he is entitled to the dependency_exemption deductions for the two children and the related child_tax_credit sec_151 allows taxpayers an annual exemption_amount for each dependent as defined in sec_152 under sec_152 the term dependent means certain individuals such as a son daughter stepson or stepdaughter over half of whose support for the calendar_year in which the taxable_year of the taxpayer begins was received from the taxpayer or is treated under subsection c or e as received from the taxpayer sec_152 provides a special support_test in the case of divorced parents or parents who have never been married with respect to the dependency_exemption deductions for such children see 121_tc_245 absent exceptions not applicable here if both parents together provide over half of the support of a child the parent having custody of the child for the greater portion of the taxable_year is entitled to the dependency_exemption for such child sec_152 with respect to the two children in this case the court is satisfied that petitioner and the children’s mother provided over half their support during the year at issue because the two children resided with petitioner’s former spouse who had custody 2this case is decided on the record without regard to the burden_of_proof giving due consideration to sec_7491 of the children for the greater portion of the year the court holds that petitioner is not entitled to the dependency_exemption deductions for the two children the dependency_exemption deduction goes to mrs nuckols who had custody of them for the greater portion of the year under sec_152 respondent therefore is sustained on this issue with regard to the child_tax_credit under sec_24 that credit is allowed to a taxpayer with a qualifying_child who is entitled to the dependency_exemption deduction for such child since petitioner is not entitled to the dependency_exemption deduction for the two children it follows that he is not entitled to the child_tax_credit as to those children decision will be entered under rule


department of the treasury internal_revenue_service washington d c contact person identification_number telephone number employer_identification_number tax_exempt_and_government_entities_division number release date date date xxxxxxxx xxxxxxxxk xxxxxxxx xxxxxxxkx uniform issue list legend association date dear xkxxxxxkx this is in response to your request for a ruling dated date submitted on behalf of association concerning association’s continued status as a voluntary employees’ beneficiary association veba under sec_501 of the internal_revenue_code code facts based on the information submitted we understand the relevant facts to be as follows association received an exemption_letter on date from the internal_revenue_service stating that it is tax exempt as a voluntary employees’ beneficiary association veba described in sec_501 of the code xxxxxx mxxxxx xxxxxx association is a qualified carrier under the federal employees health benefit program fehbp pursuant to the federal employees health benefit act of u s c section et seq which is administered by the united_states office of personnel management opm association currently provides health dental life and disability benefits to federal employees annuitants and their dependents pursuant to sec_409 of the indian health care improvement act ihcia association wishes to add common_law employees of entitled indian tribes tribal organizations and urban indian organizations itgs to its membership sec_409 of the ihcia entitles itgs to purchase health coverage for their employees under the provisions applicable to the fehbp all itg employees who are considered common_law employees using the internal revenue service’s standard described in revrul_87_41 1987_1_cb_296 and who meet the fehbp requirements will be eligible to enroll in fehbp and select association as their coverage option opm generally oversees all of association's operations including the implementation of the itg employees’ inclusion in the fehbp ruling requested association requests a ruling that the inclusion of itg employees and their dependents pursuant to sec_409 of the ihcia as incorporated and amended by section of the patient protection and affordable_care_act aca will not adversely impact association’s exempt status as a veba under sec_501 of the code law sec_501 of the code provides that the organizations exempt from income_tax under sec_501 of the code include a veba providing for the payment of life sick accident or other_benefits to the members of such association or their dependents or designated beneficiaries if no part of the net_earnings of such association inures other than through such payments to the benefit of any private_shareholder_or_individual sec_1_501_c_9_-1 of the regulations provides that for an organization to be described in sec_501 of the code it must be an employees' association membership in the association must be voluntary the organization must provide for the payment of life sick accident or other_benefits to its members or their dependents and substantially_all of its operations must be in furtherance of providing such benefits and no part of the net_earnings of the organization can inure other than by payment of permitted benefits to the benefit of any private_shareholder_or_individual sec_1_501_c_9_-2 provides that the membership of an organization described in sec_501 must consist of individuals who become entitled to participate by reason of their being employees and whose eligibly for membership is defined by reference to objective standards that constitute an employment-related common bond among such individuals xxxxxx xxxxxx xxxxxx sec_1_501_c_9_-2 provides generally that to be described in sec_501 there must be an entity such as a corporation or trust established under applicable local law having an existence independent of the member-employees or their employer sec_1 c -2 c provides that generally membership in an association is voluntary if an affirmative act is required on the part of an employee to become a member rather than the designation as a member due to employee status however an association shall be considered voluntary although membership is required of all employees provided that the employees do not incur a detriment as a result of membership in the association sec_1_501_c_9_-2 provides that a veba must be controlled by its membership by independent_trustee s or by trustees or other fiduciaries at least some of whom are designated by or on behalf of the membership sec_1_501_c_9_-3 provides that the life sick accident or other_benefits provided by a veba must be payable to its members their dependents or their designated beneficiaries sec_1_501_c_9_-3 through g detail the types of benefits that a tax-exempt veba may provide and who is eligible to receive the benefits sec_1_501_c_9_-3 provides that the term sick_and_accident_benefits means amounts furnished to or on behalf of a member or a member’s dependents in the event of illness or personal injury to a member or dependent sec_1_501_c_9_-4 provides that no part of the net_earnings of an employees’ association may inure to the benefit of any private_shareholder_or_individual other than through the payment of benefits permitted by sec_1 c -3 sec_1_501_c_9_-5 provides that in addition to such other records which may be required for example by sec_512 and the regulations thereunder every organization described in sec_501 must maintain records indicating the amount contributed by each member and contributing employer and the amount and type of benefits paid_by the organization to or on behalf of each member section of the patient protection and affordable_care_act publaw_111_148 124_stat_119 enacted on date added sec_409 to the ihcia codified a sec_25 u s c 1647b which provides that notwithstanding the provisions of title united_states_code executive_order or administrative regulation an indian_tribe or tribal_organization carrying out programs under the indian self-determination and education assistance act u s c et seq or an urban indian organization carrying out certain programs under title v of this act shall be entitled to purchase coverage rights and benefits for the employees of such indian_tribe or tribal_organization or urban indian organization under chapter of title united_states_code and chapter of such title if necessary employee deductions and agency contributions in payment for the coverage rights and benefits for the period of employment with such indian_tribe or tribal_organization or urban indian organization are currently deposited in the applicable employee’s fund under such title xxxxxx xkxxxx xxxxxx analysis sec_409 of the ihcia as enacted by congress evidences a legislative intent for the employees covered by that legislation to be able to participate with all the rights and privileges of other participants in the fehbp including the ability to select association as their coverage option accardingly based on sec_409 of the ihcia the addition of itg employees to association's membership will not cause association to fail to be described in sec_501 of the code if association is part of the fehbp and otherwise meets the requirements of sec_501 of the code ruling based on the information submitted representations made and the authorities cited above we conclude association may maintain its tax-exempt status under sec_501 of the code if it adds itg employees to its membership for benefits under the fehbp pursuant to sec_409 of the ihcia this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice with our proposed deletions you should follow the instructions in notice if you disagree this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent this ruling is based on facts as they were presented and on the understanding that there will be no material changes to these facts this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described because it could help resolve questions concerning your federal_income_tax status this ruling should be kept in your permanent records if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter in accordance with the power_of_attorney currently on file with the service we are sending a copy of this letter to your authorized representative sincerely lois lerner director exempt_organizations enclosure notice


internal_revenue_service number release date index number ------------------------------------- ---------------------------- ----------------------------------------- -------------------------------------- ---------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc psi plr-125129-09 date ----------------------------- x -------------------------------------------------- country date --------------- -------------------------- dear ------------- this responds to a letter dated date submitted on behalf of x requesting that the service grant x an extension of time under sec_301_9100-3 of the procedure and administration regulations to make an entity classification election the information submitted states that x was formed under the laws of country x represents that x is a foreign_entity eligible to be treated as a disregarded_entity but that it failed to timely file form_8832 entity classification election sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes a business_entity is any entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the internal_revenue_code sec_301_7701-3 provides guidance on the classification of a foreign_entity for federal_income_tax purposes generally a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise if the foreign eligible_entity has only one owner it may elect to be treated as a disregarded_entity pursuant to the rules in sec_301_7701-3 sec_301_7701-3 provides that to elect to be classified other than as provided in sec_301_7701-3 an eligible_entity must file form_8832 with the designated plr-125129-09 service_center and that an entity classification election must be filed on form_8832 and can be effective up to seventy-five days prior to the date the form is filed or up to twelve months after the date on which the form is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government based solely on the information submitted and representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center and elect to be treated as a disregarded_entity effective date a copy of this letter should be attached to the form_8832 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 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-125129-09 in accordance with a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representatives sincerely curt g wilson associate chief_counsel office_of_chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes