tcmemo_2009_5 united_states tax_court estate of eugenia f williams deceased first tennessee bank n a executor petitioner v commissioner of internal revenue respondent docket no filed date sheldon kay joseph depew and william merrit for petitioner martha weber nancy hale and james may for respondent memorandum findings_of_fact and opinion holmes judge eugenia williams was a wealthy woman who lived a long life but had no natural heirs she decided to leave almost her entire estate to four charities with one important exception she bequeathed the stock in a closely held company to the children and grandchildren of her father’s business partner after she died there was hardfought litigation in tennessee state court between the charities acting through her estate and the family of her father’s partner they fought about whether the stock had already been sold about whether the terms of its sale were unfair and about whether some members of the family had abused their positions of trust with williams in numerous and varied ways as she grew older the case was settled we must decide whether the settlement supports an additional charitable deduction to the estate a early history findings_of_fact a little more than a century ago the coca-cola corporation had not yet even been organized but james patrick roddy sr thought that bottling coke would be a profitable enterprise he needed a partner to sweeten his prospects with capital so he approached his friend and doctor david hitt williams dr will- iams joined the venture and in they started the roddy manu- facturing company roddy manufacturing was one of the first coca-cola bottlers in the country and had an exclusive franchise for eastern tennessee and a bit of kentucky roddy proved him- self an exceptional entrepreneur and both roddy manufacturing and its successor roddy coca cola bottling company roddy coke became lucrative enterprises j p roddy sr and dr williams later expanded their business by founding the coca-cola bottling company of johnson city tennessee at trial it was estimated that the david hitt williams trust the williams trust which held dr williams’s stock interests at the time of his death owned just under percent of johnson city coke’s stock although it was roddy and his family who actually ran roddy coke and johnson city coke roddy and dr williams remained friends until dr williams’s death in dr williams made roddy the executor of his will and the families remained close with the roddy children becoming lifelong friends of dr willi- ams’s daughter eugenia but while roddy and his family were fruitful and multiplied the williamses did not eugenia was dr williams’s only child to survive into adult- hood j p roddy sr had two children j p jr and ellen kate roddy ellen kate roddy had no children but j p jr had three j p roddy iii mary ellen roddy mitchell and thomas roddy the third generation roddys we include her husband william mitchell in the third generation roddys the third generation roddys have ten children among them whom we’ll call the fourth generation roddys b dispersal of the stock the shares of roddy coke and johnson city coke began to disperse in with the deaths of both dr williams and j p roddy sr j p roddy jr ’s stock j p roddy jr gave a portion of the stock that he inherited from his father to his own children while he was still alive hoping to avoid the problems that can happen when a family’s block of shares becomes fragment- ed over time the third generation roddys concluded a stockholder agreement at the end of that established a voting_trust the key term was their agreement to vote their roddy coke and johnson city coke stock as a block and they also agreed that if any roddy wanted to sell his stock the other roddys would be granted rights of first refusal on date j p roddy jr withdrew the shares he still owned from the voting_trust in date the men of the third generation roddys--j p roddy iii william jess mitchell and thomas roddy--signed a voting_trust agreement with the fourth generation roddys this further consolidated the third genera- tion roddys’ control of the companies by expanding the vo- ting trust to capture the fourth generation’s partial ownership of the stock it also added one of them joseph hodges mckenzie roddy as a trustee the ellen kate roddy trust ellen kate roddy j p jr ’s sister had no children when she died the shares she inherited from her father were placed in the ellen kate roddy trust the third generation roddys had control_over this trust and it too was a member of the voting_trust the williams stock when dr williams died in hi sec_386 shares of roddy coke stock and shares of johnson city coke stock became the corpus of the williams trust eugenia was the trustee as well as the beneficiary of the williams trust’s income and profits the remainder of the trust was to be divided between the national geographic society and j p roddy jr wealthy families and successful businesses are rarely left unmarked by litigation in eugenia sued j p roddy jr to determine whether she owned her father’s estate outright or sub- ject to the williams trust chandler v roddy s w 2d tenn the answer was that her father’s property including his stock would largely remain subject_to a_trust more litigation erupted when roddy coke declared a stock_dividend national geographic claimed the dividend was corpus rather than profits of the trust natl geographic socy v williams s w 2d tenn ct app if the dividend was corpus it would be distributed to national geogra- phic and the roddys but if it was income eugenia would get it eugenia won that suit and the williams trust distributed additional shares of roddy coke stock to her added to the stock in the williams trust she owned as a trustee she ended up in control of big_number shares these suits brought by national geographic made j p roddy jr and eugenia adversaries in court but didn’t seem to embitter relations between the families at all despite the lawsuits but without a family of her own eugenia relied on the roddy family more deeply as she grew older early in she appointed j p roddy jr to be her attorney-in-fact granting him broad powers to manage all of her affairs that appointment was prompted by the possibility that eugenia might become unable to care for herself as she grew older as it happened within three years she moved to st mary’s medical center in knoxville where she lived--by all accounts well cared for--for the rest of her life j p roddy jr was also becoming quite old and in eugenia’s power_of_attorney was amended to allow william jess mitchell to act on eugenia’s behalf if j p roddy jr became incapacitated this meant that from until her death either j p roddy jr or his son-in-law had the power to control all of eugenia’s affairs including the disposition of her big_number shares of roddy coke stock eugenia it may be remembered had been the trustee of the williams trust since her father’s death in she needed to plan for that trust and in she named j p roddy jr and the third generation roddys as trustees this meant the williams trust would have a trustee but also meant that the roddys in one capacity or another would control nearly all of roddy coke’s stock in date the roddys acting as trustees of the williams trust agreed with the national geographic society to have roddy coke redeem the trust’ sec_386 shares for dollar_figure even though eugenia had an interest in the profits of the trust and the roddys and national geographic held an interest only in the trust’s corpus eugenia was not consulted before the redemp- tion instead the roddys redeemed her shares with william jess mitchell acting as her attorney-in-fact after redemption the voting_trust controlled more than percent of the outstanding roddy coke stock for the first time c the merger during the early 1990s coca-cola decided to integrate its operations by consolidating control_over its franchises what happened after coca-cola reached into eastern tennessee to gain control_over roddy coke and johnson city coke is what eventually led to this case coca-cola was willing to offer nearly dollar_figure million for roddy coke but it did not want to get bogged down in disputes over how to divvy up the money and so the transaction became quite com- plicated in date the third generation roddys and rod- dy coke signed a right-of-first-refusal agreement with coca-cola enterprises the agreement gave coca-cola enterprises a right_of_first_refusal over any roddy coke stock that members of the third generation roddys wanted to sell with certain exceptions for intrafamily transfers the agreement also specified the price coca-cola enterprises would pay for any shares of the bottling companies that fell into the control of the third generation the roddys’ foresight in creating the voting_trust was proved rather than a straight cash-for-shares deal coca-cola enterprises paid the parties to the voting_trust a control premi- um of dollar_figure for their majority ownership of roddy coke and coca-cola enterprises also paid the roddys who managed the bottlers dollar_figure as a special premium in the form of a noncom- petition agreement left outside this flurry of dealmaking were the shares held by j p roddy jr and eugenia the roddy witnesses testified credibly that the family did not want to have j p roddy jr ’s low-basis stock sold for a considerable capital_gain only to have the proceeds taxed again as part of his estate when he died they also testified that from their perspective eugenia was in a similar situation she too was old and she too would be taxed on an enormous capital_gain if she just sold her shares into the merger but we find her position to have been diffe- rent as the roddys knew she had no obvious heirs and her will as they also knew left her estate to charity--except for the roddy coke stock so if the roddys sold her stock all of the proceeds would end up being taxed away as capital_gains or given away to charity if the stock could somehow be kept in her name none of its accumulated value would be taxed away as capi- tal gains and the stock would go to the roddys under the terms of her will under the roddys’ agreement with coca-cola enter- prises that stock would then be sold at a set price the roddys would have to pay any_tax on the capital_gains reduced by the step-up_in_basis and the estate would have to pay any_tax on the stock’s value at the time of eugenia’s death but at least the money would not all go to charity the roddys’ solution to these problems was put in place in date coca-cola enterprises and a subsidiary that it had created to acquire the roddy coke stock agreed with william jess mitchell acting under his power_of_attorney for eugenia to a right_of_first_refusal agreement with coca-cola enterprises this agreement barred j p roddy jr and eugenia from transfer- ring their roddy coke stock--other than by will--without the consent of coca-cola enterprises it set no purchase_price at which coca-cola would buy the shares it allowed for transfers of roddy coke stock to roddys who had signed the right_of_first_refusal agreement with coca-cola enterprises or were parties to related agreements with coca-cola enterprises or its affiliates and it required eugenia’s shares themselves to bear a legend noting that the shares were from that time on subject_to these restrictions but the agreement was not a gratuitous transfer coca-cola enterprises agreed to pay both eugenia and j p roddy jr four percent of the value of their stock holdings each year between and eugenia’s death these payments totaled nearly dollar_figure million and implicitly valued her stock at about dollar_figure million on the same day that it signed this right_of_first_refusal agreement with the elderly roddy coke stockholders coca-cola enterprises and its acquisition subsidiary signed a conditional agreement with the third and fourth generation roddys this conditional agreement included a promise by those roddys that if any of them acquired roddy coke stock they would immediately sell it to coca-cola enterprises at a price per share that was equal to what coke had been willing to pay in its initial offer but with a yearly increase of percent in purchase_price and percent for interest the effect was to give both j p roddy jr and eugenia an income stream for the rest of their lives coca-cola enterprises the right to buy that stock when either of them died and the roddys who stood to inherit that stock a higher sale price when they finally received and sold the stock on date the transaction between roddy coke and coca-cola enterprises closed under the merger agreement roddy coke remained in existence as a corporate subsidiary of coca-cola enterprises in that capacity it began to pay management fees to its new parent for risk management tax management information_technology and other similar services d eugenia’s will and the estate distribution eugenia williams never changed her will after the merger she died on date and bequeathed all of her property except the bottling-company stock to several charities these included bequests of dollar_figure to the old gray cemetery of what happened to the johnson city stock is somewhat un- clear from the record it seems however that nearly half of the johnson city shares were in the williams trust with the rest subject_to the roddy family’s voting_trust and that the stock found its way to coca-cola enterprises in a parallel deal albeit with much lower numbers in any event the johnson city stock because it was entirely subject_to a_trust in which eugenia had no residuary interest never found its way to her estate it doesn’t affect the outcome of this case knoxville more than dollar_figure million to the university of tennessee and the residue in equal shares to four tennessee institutions st mary’s memorial hospital the printing house for the blind vanderbilt university and the east tennessee children’s hospital collectively the charities eugenia had named first tennessee bank as her executor but as early as date the charities began to suspect that the roddys’ handling of eugenia’s financial affairs had prevented them from receiving a larger share of her estate fearful of litigation the bank was hesitant to distribute the stock to the roddys this meant that the roddys could not take possession of the stock and could not sell it under the conditional agreement to coca-cola enterprises the roddys and first tennessee bank began moving toward a solution by executing an estate distribution agreement under this agreement the stock was put in a restricted_fund the roddys were allowed to withdraw the stock to sell it to coca-cola enterprises but with the proceeds going into the restricted_fund the roddys could then withdraw some cash from the fund as long as the fund’s value did not drop below a minimum amount this fund was to be the sole property of the fourth generation roddys because the third generation roddys had all disclaimed any interest in eugenia’s stock they might inherit after receiving the fund the fourth generation roddys entered into a tenants in common agreement under this agree- ment they paid to the bank as executor the amount of the estate_taxes attributable to the roddy coke stock each of the roddy beneficiaries also kept an interest in the restricted_fund equal to his allocable share of the roddy coke stock other require- ments under the tenants in common agreement were that the roddys were each responsible for paying the income taxes attributable to their portions of the fund and that each roddy’s allocable por- tion was alienable with these agreements in place the bank distributed eugen- ia’s stock and the roddys sold the stock to coca-cola enterpri- ses for about dollar_figure million none of these proceeds were returned to the estate the roddys did put dollar_figure million of the proceeds into the restricted_fund the bank then filed the estate’s form_706 valuing the big_number shares of roddy coke at dollar_figure this meant that whether through inheritance or via the agreements they had signed years earlier with coca-cola enterpri- ses the roddys had received the entire value of the roddy coke stock the stock was thus not considered part of the residuary proceeds of eugenia’s estate this resulted in each of the four charities’ receiving a mere dollar_figure much less than each would have received if eugenia had just sold her stock back in and held on to what would have been left after taxes e the charities sue one could predict litigation from the charities’ perspec- tive what the roddys did to eugenia--from the redemption of the williams trust stock giving their voting_trust majority control of roddy coke to the payment to the roddys of a control premium to the right_of_first_refusal agreement that stripped eugenia of the power to sell her stock to anyone but coca-cola enterprises-- all looked like a massive violation of the various duties that various roddys owed eugenia all aimed at getting as much of the roddy coke stock’s value for themselves from the roddys’ per- spective that’s more or less correct--but with the very large reservation that they didn’t think they were violating any duties they owed her instead they were fulfilling what they saw as her desire that the roddy family--not the irs and not the chari- ties--realize the ultimate value of nearly a century’s worth of work that their families had put into roddy coke when she died the charities prepared for war they wanted the much greater profit from the actual sale of the stock rather than what was left of the payments which eugenia had received under the right_of_first_refusal agreement they demanded that the bank as executor of the estate sue on their behalf an administratrix ad litem anna hinds was appointed she then sued william jess mitchell and the roddys demanding that all proceeds from the sale of eugenia’s stock be given to the charities the original suit listed several causes of action an amended complaint added another for constructive_sale defendant william jess mitchell j p roddy iii mary ellen roddy mitchell thomas roddy william jess mitchell j p roddy iii mary ellen roddy mitchell thomas roddy result resolved by the settlement chancery court ruled for the roddys resolved by the settlement cause of action breach of duty as attorney-in-fact for eugenia f williams breach of duty as co-trustees of the david hitt williams trust constructive fraud as eugenia f williams’ attorney- in-fact and as trustees breach of duties as majority shareholders civil conspiracy fraudulent concealment and non- disclosure conspiracy to conceal and non- disclosure intentional interference with inheritance conversion intentional interference with inheritance this is the only action in which the charities themselves were plaintiffs constructive_sale dismissed by chancery court added by an amended complaint then resolved by the settlement william jess mitchell j p roddy iii mary ellen roddy mitchell thomas roddy first tennessee bank the fourth generation roddys added to impose a constructive trust the estate argued that the stock had been constructively sold before eugenia’s death because if the stock had been sold before her death the proceeds would have become a part of eu- genia’s residuary_estate much to the charities’ advantage the administratrix ad litem even moved for partial summary_judgment using this theory the parties argued fervently over the mo- tion’s merits but then settled before the chancery court ruled the settlement left the charities with dollar_figure million all payable from the restricted_fund set up under the estate distribution agreement that the roddy beneficiaries had negotiated with the executor although all the defendants named in the various cau- ses of action received the benefit of the settlement the settle- ment money came only from the restricted_fund f the notice_of_deficiency while the state-court suit was being fought the commission- er began looking at the estate’s tax_return and in date he sent a notice_of_deficiency determining that the estate owed dollar_figure the primary source of the alleged deficiency was an understatement of dollar_figure in the value of the roddy coke stock after litigation got underway the commissioner actually conceded this issue--the parties now agree on a value of dollar_figure million for that stock--but the estate began a counteroffensive by claiming a refund under sec_6512 of the lesser amount of the va- lue of the shares or the settlement proceeds distributed to the charities the estate’s claim arises from the undisputed fact that the charities got more than the roughly dollar_figure million each that the estate reported on the form_706 the estate argues that this additional money is nothing more than a share of the sale price of eugenia’s stock to coca-cola enterprises the commissioner argues that any extra money that the charities got is attribut- able not to the shares but to the settlement of the state-court litigation he argues that any increase in the charitable deduc- tion merely matches the value--which the estate left off its re- turn--of that litigation all section references are to the internal_revenue_code and the rule reference is to the tax_court rules_of_practice and procedure the commissioner also moved to amend his answer before trial in his proposed amendment the commissioner specifically denied that the estate was entitled to any deduction based on the distribution of the hinds v mitchell settlement proceeds and alleged that the value of that litigation may have exceeded the amount of settlement he asserted a revised deficiency of dollar_figure the commissioner later retreated and agreed that he was not seeking to impose an additional tax_liability on the estate based on the value of the litigation asset but only arguing that the estate was not entitled to an overpayment refund because any increased charitable deduction would be neutralized by an in- crease in the value of the gross_estate the commissioner is arguing in other words that the cause of action the estate had against the roddys is not the same thing as the shares of stock that--however encumbered by side agreements--eugenia still owned on the day she died we granted the commissioner’s motion to amend his answer but only as a clarification of his position that the settlement proceeds did not give rise to an increase in the estate’s charitable deduction trial was held in knoxville where eugenia died and the executor has its principal_place_of_business opinion we begin by noting how curious the estate’s argument must look to a nonlawyer its own return listed the stock as a tax- able asset that was to be distributed to the roddys eugenia’s name was at least metaphorically--there’s no indication the stock was held in street_name and it wouldn’t matter if it was on the shares and when the executor distributed the shares to the roddys they sold them to coca-cola enterprises--what could they possibly be selling other than shares of stock so how can the estate possibly argue that the settlement proceeds are somehow legally the same thing as those shares of stock the estate’s argument might appear to be either nearly fri- volous or remarkably subtle its essential point is nonintui- tive--an assertion that the roddys had effectively sold the stock before they actually received it--and that appearances to the contrary eugenia did not as a matter of law own the stock when she died to decide whether this argument is nothing more than fizz requires us to begin with a brief explanation of how courts ana- lyze the taxability of proceeds from settlements of litigation this is a venerable problem--dating back at least to 305_us_188 --and the general_rule may be sim- ply stated if the proceeds of a settlement represent something that would have been taxable such as lost wages then they are taxable id however if the proceeds of a settlement represent something that is not taxable such as a personal-injury award the proceeds are not taxable id the estate’s position becomes more plausible if one ap- proaches it through some simple hypotheticals imagine someone who owns only a pearl of great price which she intends to leave to charity when she dies imagine that she dies and the charity gets the pearl it can sell the pearl or keep it--and if it sells the pearl it keeps the proceeds now imagine that our hypothetical decedent wills the pearl to two charities it’s most likely that the executor would sell the pearl and divide the proceeds between the two charities with the step-up_in_basis at death and since it’s a hypotheti- cal no post mortem increase in value these cash proceeds would be treated by the irs the same way as the distribution of the pearl itself--no income_tax and the charities get the value of the pearl let’s add a complication a third party learns of the pearl and rather than sell all that he has to buy it steals it in- stead the decedent dies her estate sues the thief for conver- sion damages or return of the pearl how should the estate re- port this theft doesn’t grant good title but the thief has the pearl the answer we think is that it doesn’t really matter the estate could list the pearl as the asset then if the law- suit against the thief leads to the pearl’s return the estate can distribute the pearl or if the estate wins damages can distribute those damages to its hypothetical charitable legatees lyeth v hoey teaches us to treat any settlement proceeds as if they were what they are substitutes for--in our hypothetical--the pearl the right to damages would in some sense be the same as the pearl of great price or at the very least not an additional asset of the estate add another twist the thief turns out to be clever in- stead of coming in the night to steal the pearl he comes in the bright light of day with a cleverly designed paste pearl which he substitutes for the real one the decedent dies we can see no reason why the results of the last hypothetical don’t again apply the estate could list the real pearl as an asset but would really have only a right of action against the thief for damages or return of the pearl in the end again the right to damages would be treated the same as the pearl of great price --not as an additional asset of the estate and one last hypothetical the hypothetical decedent’s hypothetical estate doesn’t realize at first that all it had was paste so it lists the pearl on its return as if it were the pearl of great price if our hypothetical decedent left the pearl not to charities but to friends the estate might pay tax on the value of the pearl but then the estate realizes that the pearl of great price is missing the thief has long since sold it the estate would still have only a right of action against the thief for conversion or restitution any damages would again be taxed the same as if the pearl itself were returned but if the estate won only money rather than the return of the pearl the specific_bequest of the pearl would be defeated we return to the real world only to face a complication absent from our hypotheticals--the roddys far from being thieves were the objects of eugenia’s affection she wanted them to receive the stock-of-great-price and said so in her will but the problem here is that the roddys may have so encumbered that stock with restrictions and diminished it in value that eu- genia’s estate might have been left with something that was--if not a paste pearl--not really the same as the stock eugenia had before the roddys’ deal with coca-cola enterprises back in and that is the estate’s argument here it is claiming a refund because it originally paid taxes on the estate’s roddy coke stock as if it all went to the roddys instead of treating it as having been constructively sold years before the estate-law term for this is ademption by extinc- tion defined as the ‘doing of some act with regard to the subject-matter which interferes with the operation of the will ’ university of the south v klank s w 2d tenn quoting am trust banking co v balfour s w tenn the commissioner argues that the stock was never sold till after eugenia died and so the settlement proceeds must instead have been proceeds of an asset--the estate’s tort action against the roddys--that wasn’t listed on the original return if the commissioner is correct the settlement proceeds would still be part of the residual estate and still go to the charities but because the litigation asset was not listed on the return it would not have been accounted for in the original estate_tax paid and the estate would not be entitled to a refund now the parties battle on two fronts the first is the effect of the roddys’ estate distribution agreement with the executor on the characterization of the settlement proceeds the commission- er says the terms of that agreement show that the roddys had such unfettered control_over the stock as to prove that they really owned it the estate argues that the restricted_fund was well restricted--and so proves nothing the second front is how to interpret the settlement agree- ment itself together with the negotiations leading to it and to characterize settlement proceeds for tax purposes we must look to various factors including the allegations in the state court pleadings the evidence adduced at trial a written settlement agreement and the intent of the payer 87_tc_1294 affd 848_f2d_81 6th cir a the estate distribution agreement and restricted_fund the estate distribution agreement was a compromise between the executor and the roddys both the commissioner and the es- tate agree that the restricted_fund that the agreement created was subject_to constraints but it was also a creative solution to another problem it was clear that the estate’s tax_liability would be due before the resolution of any potential claims the charities or the estate had against the roddys a simple distri- bution of the shares to the roddys would have left the bank open to potential liability to the charities but if the bank com- pletely refused to distribute the shares to the roddys it could have been violating its duty to the roddys as beneficiaries under the will and most importantly in our view it would have possibly been stripping off much of the value of the shares-- salable as they were at a high price under the conditional agree- ment between the roddys and coca-cola enterprises the testimony of keith keisling an officer of first tennes- see bank and jim roddy which we specifically find credible on this point as well as the estate distribution agreement itself made clear the parties’ intent keisling testified that the estate distribution agreement was a mechanism for the executor both to ensure that the taxes would be paid and to avoid any liability to the charities which were already expressing con- cerns over the disposition of the stock jim roddy similarly testified that the estate distribution agreement was necessary because we needed to pay estate_taxes on this asset that was going to come to us and we did an agreement with the trustees whereby we would sell the stock into a tenants in common restricted account in the event that the shares didn’t belong to us we would return it back to the estate but at this time you know the determination was that the shares would go to us and we would treat it that way the estate distribution agreement also contains a provision that the restrictions on the restricted fund--and thus the estate distribution agreement itself--would terminate upon the earliest of the release by the executor of any claims on the shares’ va- lue the issuance of a final nonappealable court order regard- ing the disposition of the shares or date this indi- cates that the estate distribution agreement was not an outright distribution to the roddys but something resembling the res in an interpleader it is as if the parties to a dispute about the ownership of a load of bananas reasonably agree between them- selves to sell the fruit before it spoils and continue their fight over the proceeds see also eg u c c sec the commissioner argues that the roddys held sufficient control_over the restricted_fund to make it the roddys’ property many factors support this argument the roddys had discretion-- with the estate’s permission as cosigner--to invest the proceeds in cash or any readily marketable_securities the sole property of the roddy beneficiaries the roddys were allowed to make withdrawals from the fund to pay taxes related to income from the fund if the fund’s income exceeded percent and the roddys ack- nowledged in the agreement that the sale of the stock would re- sult in tax consequences to them the commissioner also argues that if the roddys did own the restricted_fund the settlement payment was made from the roddys’ own property indicating it was actually the settlement of a tort claim we don’t think any of this makes much difference--the estate’s theory is that the roddys’ payment back to the estate was the equivalent of return- ing proceeds from the sale of the stock not additional compensa- tion for other torts committed against eugenia and the source of the funds used for the payment makes no difference to that char- acterization the estate points to the significant restrictions on distri- butions from the restricted_fund as evidence that the sale pro- ceeds never actually accrued to the roddys the estate contends that though meandering the path the money took led to the same destination it would have reached if eugenia had sold the stock and the charities received the money as residuary beneficiaries the estate does highlight one fact about the settlement’s having been paid out of the restricted fund--because the third generation roddys had disclaimed any interest in the shares that payment from the restricted_fund was a direct loss only to the fourth generation roddys and the fourth generation roddys did not have the same duties to eugenia as the third generation roddys we therefore find that the restricted_fund was created as a receptacle for the proceeds of the stock until any legal issues between the roddys and the estate could be resolved and the stock or its proceeds could be properly distributed we hold that its terms do not affect our characterization of the settlement pro- ceeds as either compensation_for torts or other wrongs committed by the roddys or as restitution for a constructive_sale of eu- genia’s stock before she died b characterization of the settlement in hinds v mitchell we next turn to a direct analysis of the settlement proceeds from the state-court litigation the estate urges us to begin and end with the language of the settlement agreement that agreement is quite clear whereas hinds and the residuary beneficia- ries contend in the litigation that the spe- cific bequest of the shares was as a mat- ter of law adeemed and or the said shares were constructively sold and thus the shares or their value actually passed or should have passed to the residuary benefici- aries this was the only cause of action specifically named in the settlement agreement the commissioner argues that we shouldn’t rely on the agree- ment’s text he asserts that the agreement was written in collu- sion between the roddys and the charities once they realized that pinning the settlement proceeds to the constructive-sale theory could lead to a significant refund claim redounding to the bene- fit of the charities as residuary legatees and letting them ease up on the roddys in negotiating the settlement he argues that the parties in hinds v mitchell had every incentive to tailor their settlement in a manner that would minimize ultimate tax_liability and thus maximize their available funds the commis- sioner’s strongest argument is to point out that the parties in hinds v mitchell were adverse to each other only as to the state-law causes of action when it came to the settlement’s tax consequences the parties and their attorneys understood and we so find that any funds kept from the irs would increase the amount they could divide among themselves this is not a new problem in 105_tc_396 affd 121_f3d_393 8th cir we analyzed a settlement between the two parties to a tort action involving tortious interference with present employment tortious interference with future employment libel and invasion of privacy under the settlement the defendant paid dollar_figure million to bagley the plain- tiff to settle all claims id pincite the defendant’s inter- ests were minimizing cost avoiding publicity eliminating the risk of punitive_damages retrieving some corporate documents and obtaining a full release we analyzed the problem of alloca- ting damages in that case by placing the facts in bagley in a range bounded by 102_tc_116 affd in part and revd in part 70_f3d_34 5th cir and 102_tc_465 vacated without pub- lished opinion 84_f3d_433 5th cir we began by acknow- ledging that the allocation of a settlement by the parties is generally binding for tax purposes to the extent that the agree- ment is entered into by the parties in an adversarial context at arm’s length and in good_faith bagley t c pincite in robinson however the allocation didn’t control because it was uncontested non-adversarial and entirely tax-motivated and did not accurately reflect the underlying claims id pincite by contrast in mckay the settlement had been made by hostile par- ties who were in an adversarial position with respect to the al- locations to be made in the settlement id in bagley we reasoned the facts were not like those in mckay where the taxpayer lacked the freedom to structure the settlement on his own whereas in bagley the parties had been jointly participating in the drafting of the agreement id pincite this led us to conclude that the settlement documents were not controlling yet bagley was also unlike robinson because totally tax-motivated collusion was missing too the answer was somewhere in between based on these facts we conclude that some of the dollar_figure million is properly allocable to punitive_damages however we do not agree with the amount the commissioner allocated the parties were negotiating for an amount in lieu of the overall amount petitioner might recover if the case went to trial they were considering the risk of trial as well as items unrelated to the money that petitioner might recover such as the return of the bagley documents and the confidentiality of the settlement id pincite we proceeded to list the various factors important to bagley’s former employer including the avoidance of punitive_damages we begin here with what the witnesses in the present case said their motivations were doris allen an attorney who repre- sented two of the third generation roddys and their families testified with some credibility that from the roddys’ perspec- tive the sole ground for settlement was the constructive-sale theory and they would not have settled on any other theory she also credibly testified that she thought at the time that the strongest legal theory in the litigation was the constructive- sale issue jim roddy a fourth generation roddy testified that the only theory the defendants thought might succeed was the constructive-sale theory two attorneys for the charities also testified and both credibly confirmed that the constructive-sale theory had been at least a factor in the settlement david black who had represen- ted the american printing house for the blind and then the admi- nistratrix ad litem testified that the most straightforward cause of action for the administratrix to prevail on would have been the constructive-sale theory this was due at least in part to the lack of a need for any proof of intent or establishment of bad acts black also testified however that litigation would have been ready to proceed on any of the causes of action listed in the complaint even as the commissioner’s witness black testified on direct examination that the plaintiffs in the hinds case were prepared to go forward on all counts which they believed viable after discovery this would of course have included the constructive-sale theory taking that testimony into account we find that settling the constructive-sale theory was the dominant but not exclusive motivation of the roddys this finding is also supported by the evidence that at an early point in the administration of the estate both the executor and the charities had concerns about the propriety of the transactions and their potential to give rise to both constructive-sale and breach-of-fiduciary-duty causes of action indeed the bank was worried enough to seek legal advice on both these issues and supported the appointment of an administratix ad litem to pursue both we also acknowledge the strength of the commissioner’s argument that the constructive-sale and various breach-of- fiduciary-duty causes of action were intertwined the third generation roddys and especially william jess mitchell owed a number of duties to eugenia in various capacities--as her attorney-in-fact as trustees of the williams trust and as officers and directors of roddy coke and johnson city coke and the estate’s original complaint alleged that the roddys breached these duties in by securing for themselves the ability to sell both their own and eventually eugenia’s stock to coca-cola enterprises while receiving a control premium--a premium so large that it deprived eugenia of full value from the deal but we must also acknowledge that all those involved thought that the constructive-sale theory suffered from far fewer weak- nesses than any of the tort theories proposed finding in the estate’s opening brief states that the executor’s attorneys ad- vised the charities that the executor would not prevail in any such litigation ie the tort litigation and proposed find- ing states in october and date the residuary bene- ficiaries raised concerns to the petitioner’s personal represen- tative executor involving the bequest of the roddy coke stock to the roddy family while the commissioner objects to both of these he does not offer any specific rebuttal and we find them to be proved the most important weakness of the various tort theories was that the roddys had a plausible argument that the transac- tions were fundamentally fair to eugenia in that the right_of_first_refusal payments and the other_payments she received constituted an acceptable alternative to paying a large capital- gains tax and seeing what was left of the proceeds go to the charities they could point to the similar deal they negotiated with the roddy patriarch j p roddy sr eugenia was moreover never formally judged incompetent there was credible testimony that the roddys and their lawyers strongly believed that absent a finding that eugenia was incompe- tent any_action based on a breach-of-duty theory would have been subject_to a statute-of-limitations defense indeed the es- tate’s attorneys originally rejected the idea of pursuing the breach claim in part because of this we also find on the basis of the credible_evidence in the record4 that the parties thought that trial of the fiduciary-duty causes of action might lead to a judgment that the stock or pro- ceeds from its sale must be disgorged see freeman v martin s w 2d tenn this means that even the we use phrases like credible_evidence in discussing state law because our focus in allocating the settlement proceeds is not on what the law is obviously a legal not a factual question but on what the parties and their lawyers thought the law was when agreeing to the settlement settlement value of the tort causes of action had a hefty restitutionary component and finally we note that the economic burden of the settlement fell entirely on the members of the tenants in common agreement--the fourth generation roddys who were named defen- dants only in the amended complaint’s cause of action for con- structive sale we find this very significant because it shows that all the damages paid under the settlement agreement were being paid_by only some of the roddys who presumably had an incentive not to bear the costs of the settlement entirely on their own without good reason nevertheless even the fourth generation roddys were roddys and so if possessed of any filial affection they would benefit at least intangibly from the releases of their elders in the third generation from all the causes of action in which those roddys were the named defendants even j p roddy jr ’s estate was released from any liability and he had had the primary obli- gations to eugenia for some of the years involved weighing these various factors is not something we can do with great precision but persuaded especially by where the economic burden of the settlement lay and the parties’ reason- able estimation of the probabilities of success on the different causes of action we find that percent of the settlement proceeds is allocable to the constructive-sale theory with the remainder allocable to the tort theories or more precisely the damages-other-than-monetary-equivalent-of-the-stock theories thus percent of the settlement proceeds should be considered to be only a return of the value of the stock to the estate and not compensation_for any profits or income to eugenia petitioner having agreed to a refund of the lesser_of this amount or the stipulated value of the shares and to reflect the parties’ various other concessions and stipulations decision will be entered under rule


t c summary opinion united_states tax_court robert glenn mcdougall petitioner v commissioner of internal revenue respondent docket no 23565-13s filed date robert glenn mcdougall pro_se joseph e nagy and bryant w h smith for respondent summary opinion panuthos chief special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not unless otherwise indicated subsequent section references are to the continued reviewable by any other court and this opinion shall not be treated as precedent for any other case in a notice_of_deficiency dated date respondent determined a deficiency of dollar_figure in petitioner’ sec_2010 federal_income_tax a sec_6651 addition_to_tax of dollar_figure for failure to timely file a return and a sec_6651 addition_to_tax of dollar_figure for failure to timely pay tax after concessions the issues for decision are whether petitioner received dollar_figure of additional wage income whether petitioner is liable for an addition_to_tax under sec_6651 for failure to timely file hi sec_2010 federal_income_tax return and whether petitioner is liable for an addition_to_tax under sec_6651 for failure to timely pay tax for continued internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure the notice_of_deficiency included payments reported on forms w-2 wage and tax statement from approximately employers before trial petitioner conceded receipt of all amounts of wage income except for the amounts from two employers dollar_figure from audio visual projection services inc and dollar_figure from swank audio visuals llc background 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 at the time the petition was filed petitioner resided in california during petitioner was a stagehand in california petitioner worked out of a local union hall and did audiovisual work for conventions and business meetings he was hired as a temporary employee by various equipment providers who had the contracts for particular conventions and shows petitioner submitted an hourly timesheet to each of his employers who would then pay him by check petitioner usually deposited checks to his bank account sometimes petitioner would accumulate a few checks before making a deposit petitioner is uncertain whether he received all of the form_w-2 income that respondent determined petitioner was arrested the second week of january of and was incarcerated until date petitioner’s motorhome and van were seized and he lost all of his records after his arrest and incarceration petitioner did not file a timely return for on date the internal_revenue_service irs prepared a substitute for return for under sec_6020 the irs issued a notice_of_deficiency for dated date petitioner timely filed a petition to dispute the determinations in the notice_of_deficiency on date respondent received petitioner’s signed form 1040ez income_tax return for single and joint filers with no dependents this return reported some of the income that respondent had determined in the notice_of_deficiency and included all of the determined withholding petitioner did not assert that he made any federal tax_payments in addition to the withholding and further claims that the withholding exceeds the tax owed resulting in an overpayment_of_tax as indicated petitioner conceded all of the income determined in the notice_of_deficiency with the exception of wage income of dollar_figure from audio visual projection services inc and dollar_figure from swank audio visuals llc these employers issued petitioner forms w-2 for the respective amounts petitioner explained that because all of his records were lost and his employers often paid him late or not at all he does not know whether he was paid for all of the work that he performed in in the notice_of_deficiency respondent also determined an addition_to_tax under sec_6651 for petitioner’s failure to timely file hi sec_2010 federal_income_tax return and an addition_to_tax under sec_6651 for petitioner’s failure to timely pay tax for discussion i unreported income gross_income includes all income from whatever source derived sec_61 in general the commissioner’s determination set forth in a notice_of_deficiency is presumed correct and the taxpayer bears the burden of proving otherwise rule a 290_us_111 pursuant to sec_7491 the burden_of_proof as to factual matters shifts to the commissioner under certain circumstances petitioner did not allege or otherwise show that sec_7491 applies see sec_7491 and b therefore sec_7491 does not shift the burden_of_proof in unreported income cases the commissioner must base the deficiency on some substantive evidence that the taxpayer received the unreported income 181_f3d_1002 9th cir aff’g tcmemo_1997_97 if the commissioner introduces some evidence that the taxpayer received unreported income the burden shifts to the taxpayer id the forms w-2 from audio visual projection services inc and from swank audio visuals llc are sufficient evidence to shift the burden_of_proof to petitioner we also note that sec_6201 provides that in any court_proceeding where a taxpayer asserts a reasonable dispute with respect to any item_of_income reported on an information_return and the taxpayer has fully cooperated with the secretary the secretary has the burden of producing reasonable and probative information concerning the deficiency in addition to the information on the return the key term in the foregoing sentence is a reasonable dispute this court has concluded that a taxpayer does not raise a reasonable dispute for purposes of sec_6201 merely by testifying that he is uncertain cannot remember or does not know see eg agudelo v commissioner tcmemo_2015_124 at parker v commissioner tcmemo_2012_66 petitioner testified that he did not know whether he received the income thus he did not raise a reasonable dispute for purposes of sec_6201 and sec_6201 does not apply accordingly respondent does not have the burden of producing reasonable and probative information concerning the deficiency in addition to the information on the return the forms w-2 from audio visual projection services inc for dollar_figure and from swank audio visuals llc for dollar_figure reflect that these two employers paid wages to petitioner petitioner acknowledges that he performed services for each of the employers petitioner’s uncertainty as to whether he received wages earned from these two employers was no doubt caused in part by his incarceration in early however petitioner’s uncertainty does not satisfy his burden_of_proof we conclude that petitioner has failed to satisfy his burden of proving that he did not receive the omitted income and respondent’s determination is sustained ii sec_6651 additions to tax a failure to timely file addition_to_tax sec_6651 imposes an addition_to_tax for failure_to_file a return on the date prescribed including extensions unless the taxpayer can establish that the failure is due to reasonable_cause and not due to willful neglect respondent has satisfied his burden of production under sec_7491 since the parties stipulated that respondent received petitioner’ sec_2010 tax_return on date therefore petitioner bears the burden of proving that his failure_to_file a return was due to reasonable_cause and not due to willful neglect if the secretary makes a return for the taxpayer under sec_6020 it is disregarded for purposes of determining the amount of the addition_to_tax under sec_6651 but it is treated as a return filed by the taxpayer for purposes of determining the amount of the addition_to_tax under sec_6651 sec_6651 the record does not address whether petitioner requested an extension of time to file his return for petitioner does not assert that he requested an extension the tax_return for would normally have been due on date the latest date to which petitioner could have extended the time for filing hi sec_2010 return was date see sec_1_6081-4 income_tax regs the addition_to_tax under sec_6651 is calculated pincite per month or any part thereof not to exceed of the amount of tax required to be shown on the tax_return petitioner did not file his tax_return until date at least three years after the due_date see 116_tc_438 ruggeri v commissioner tcmemo_2008_300 b failure to timely pay addition_to_tax sec_6651 imposes an addition_to_tax for failure to pay the amount shown as tax on the taxpayer’s return on or before the date prescribed unless the taxpayer can establish that the failure is due to reasonable_cause and not due to willful neglect respondent has satisfied his burden of production under sec_7491 by establishing that petitioner did not pay the tax due for by the due_date of date therefore petitioner bears the burden of proving that his failure to timely pay tax was due to reasonable_cause and not due to willful neglect see higbee v commissioner t c pincite ruggeri v commissioner tcmemo_2008_300 c exceptions to sec_6651 additions to tax reasonable_cause is a defense to the sec_6651 and additions to tax petitioner contends that he was unable to timely file his return and pay his tax because he was incarcerated and his business records were confiscated this the amount of the addition_to_tax under sec_6651 reduces the amount of the addition_to_tax under sec_6651 for any month to which an addition_to_tax applies under both paragraphs sec_6651 court has previously concluded that incarceration at the time the return was due does not constitute reasonable_cause for failure to timely file see eg 121_tc_308 thrower v commissioner tcmemo_2003_139 in cherry v commissioner tcmemo_2013_3 at this court concluded that a taxpayer did not have reasonable_cause for failure_to_file when he was incarcerated and lost his records in kohn v commissioner tcmemo_2009_117 aff’d 377_fedappx_578 8th cir this court concluded that the criminal investigation and incarceration of a taxpayer did not constitute reasonable_cause for either his failure to timely file his return or his failure to timely pay the tax_shown_on_the_return on the basis of the facts in this case we conclude petitioner has not shown his failure to timely file a return or timely pay tax was due to reasonable_cause petitioner is liable for the sec_6651 and additions to tax we have considered all of the parties’ arguments and to the extent not addressed herein we conclude that they are moot irrelevant or without merit to reflect the foregoing decision will be entered for respondent


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc tege eoeg et2-plr-151740-02 date date legend taxpayer former school district state county plan date dear this letter is written in response to the taxpayer's request for a ruling on the application of the continuing employment exception to the hospital insurance portion also known as medicare_tax of the federal_insurance_contributions_act fica tax as set forth in internal_revenue_code code sec_3121 the specific request includes the following rulings the taxpayer is the same employer as the former school district for purposes of code sec_3121 the services of the eleven teachers who were continuously employed prior to date qualify for the exception to medicare_tax as set forth in code sec_3121 which tax is imposed under code sec_3101 and sec_3111 facts prior to the taxpayer was the former school district and provided education for children from kindergarten through the eighth grade the former school district provided no high school classes for children residing within the boundaries of the school district following the passage of a referendum in the former school district plr-151740-02 became unified under state law and established two high schools within the boundaries of the former school district the taxpayer's borders are the same as the former school district's borders the assets and liabilities of the former school district were transferred to the taxpayer upon unification the county in which the taxpayer is located remains responsible for the withholding of all federal income and employment_taxes for the employees of the taxpayer as it was for the employees of the former school district pursuant to a division of the plan that became effective on date employees of the taxpayer who were hired before date were permitted to elect medicare insurance coverage provided that they a were members of the plan b were employed in a position covered by the plan on date c did not have mandatory medicare coverage under the consolidated omnibus reconciliation act of and d were members of the plan or eligible for membership in the plan on the date of the division employees who meet these criteria have the option of being covered under a voluntary agreement pursuant to sec_218 of the social_security act sec_218 agreement for medicare insurance only generally a teacher is employed by the taxpayer for a one-year term that is automatically renewed unless the teacher is terminated except for eleven teachers all employees of the taxpayer were hired after date the eleven teachers who were hired before date were all eligible to elect voluntary medicare insurance coverage and four of the eleven teachers elected to be covered for medicare insurance under the sec_218 agreement seven of the eleven employees remain employed by the taxpayer after the unification with no break_in_service four of the eleven teachers terminated their employment with the taxpayer but were continuously employed with the taxpayer until their termination law and analysis fica_taxes consist of the old-age survivors and disability oasdi portion and the medicare_tax portion and are computed as a percentage of wages paid_by the employer and received by the employee for employment code sec_3101 sec_3111 sec_3121 generally all remuneration paid_by an employer for services performed by an employee is subject_to fica unless the remuneration is specifically excepted from the term wages or the services are specifically excepted from the term employment code sec_3102 sec_3111 sec_3121 service performed by an employee of a state political_subdivision or wholly owned instrumentality not covered by a sec_218 agreement is exempt from employment for purposes of the oasdi portion of fica only if the employee is a member of a retirement_system of such state political_subdivision or wholly owned instrumentality in connection with the employee's employment code sec_3121 service plr-151740-02 performed by an employee of a state political_subdivision or wholly owned instrumentality who is hired after date is considered to be employment for purposes of applying medicare_tax code sec_3121 service covered by a sec_218 agreement is specifically excluded from employment for purposes of medicare_tax as set forth under code sec_3121 but is subject_to medicare_tax under the terms of such sec_218 agreement code sec_3121 the internal_revenue_code however provides a narrow exception for services subject_to medicare_tax pursuant to code sec_3121 known as the continuing employment exception if specific requirements are met code sec_3121 for employment to qualify for the continuing employment exception under code sec_3121 an employee’s service performed for a state political_subdivision or wholly owned instrumentality must meet the following requirements the employee’s service must be excluded from the term employment as determined in code sec_3121 which exclusion applies only to an employee who is a member of a retirement_system of such state political_subdivision or wholly owned instrumentality code sec_3121 cross- reference to subparagraph a of code sec_3121 with cross-reference to code sec_3121 the employee performed substantial and regular service for compensation_for that employer before date the employee was a bona_fide employee of that employer on date the employee’s employment relationship with that employer was not entered into for purposes of meeting the requirements of code sec_3121 the employee’s relationship with that employer has not been terminated after march sec_3121 of the internal_revenue_code provides that a political_subdivision as defined in sec_218 of the social_security act u s c sec_418 includes all agencies and instrumentalities of a political_subdivision and shall be treated as a single employer for purposes of applying the continuing employment exception revrul_86_88 1986_2_cb_172 which provides guidelines for applying the continuing employment exception refers to sec_218 of the social_security act to define the term political_subdivision to include a county city town village or school district the term political_subdivision employer is defined as a political plr-151740-02 subdivision and any agency_or_instrumentality of that political_subdivision that is a separate employer for purposes of withholding reporting and paying the federal income taxes of employees in the instant case we assume that the plan is a retirement_system pursuant to code sec_3121 the employment of the eleven teachers of the former school district consisted of substantial and regular services performed for compensation_for the former school district prior to date such teachers were bona_fide employees of the former school district on date and the teachers' services were not entered into for purposes of avoiding medicare_tax thus the application of the continuing employment exception turns on whether or not the eleven teachers' employment was terminated upon the unification of the former school district as the taxpayer based on the facts presented and assumptions made we conclude that the former school district and the taxpayer are considered to be the same employer for purposes of applying the continuing employment exception to medicare_tax as we understand the facts the former school district expanded in by opening two high schools within district boundaries that did not previously exist this expansion of the former school district did not create a new employer employees of the former school district who subsequently became employees of the taxpayer remained employed by the same employer and therefore such employees’ employment did not terminate for purposes of the continuing employment exception to conclude the continuing employment exception applies to the services of the eleven teachers who were hired before date the continuing employment exception ceased to be applicable with respect to the four teachers who elected voluntary medicare insurance coverage under the sec_218 agreement and therefore application of medicare_tax to their wages as of the effective date of such election the teachers whose employment terminated and who had not previously elected voluntary coverage under the sec_218 agreement ceased to be eligible for the continuing employment exception as of the date of termination this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative plr-151740-02 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely lynne camillo chief employment_tax branch office of assistant chief_counsel exempt_organizations employment_tax government entities cc


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc fip plr date date ty legend company fund fund fund fund fund fund hereinafter funds year year date date date date date date date plr-114626-02 tax_year - secretary of funds vice president of the funds company’s previous accounting firm company’s previous accounting firm’s predecessor company’s present accounting firm outside firm dear this responds to a ruling_request submitted on date on behalf of company requesting an extension of time pursuant to sec_301_9100-3 of the income_tax regulations for funds to make an election under sec_855 and in the case of fund under sec_853 of the internal_revenue_code for tax_year facts funds are a portfolio of company and are regulated_investment_companies rics operating under the investment_company act of as amended u s c sec_80a-1 et seq funds elected to be taxed as rics under subchapter_m part i of chapter of the code funds file their federal_income_tax return on the accrual basis using a december tax_year for tax years prior to year company’s previous accounting firm and previously accounting firm’s predecessor served as tax accountants for the funds and prepared the funds’ annual forms 1120-ric forms beginning in year the company replaced its accounting firm with its present accounting firm accounting firm accounting firm has served as tax accountant for company and has been preparing the funds’ tax returns since year prior to year the funds’ controller and compliance officer cco was primarily responsible for signing and filing all applicable tax returns with the internal_revenue_service irs including the forms for the funds on date the funds’ then cco left the company company did not hire another cco nor did it designate another individual or position as responsible for signing and filing company’s tax returns and forms instead company chose to out source many of the cco’s prior duties to outside firm company’s then vice president of the funds whose office was adjacent to the former cco’s office began signing funds’ forms as prepared and forwarded by company’s accountants on date funds’ vice president left the company since then for reasons unknown to secretary of the funds secretary the forms were sent to her to sign and file with the irs plr-114626-02 on date company’s accounting firm forwarded to secretary the prepared forms for the tax_year to sign and file with the irs having limited experience with the handling of the forms and noticing that the returns were in bound form she assumed that the package contained copies of final returns that had already been filed with the irs as a result she set_aside the package containing the forms for filing with other correspondence from date until the present secretary has been working almost exclusively on an on-going examination that has demanded a great deal of her time on date while filing correspondence secretary discovered that the forms sent by company’s accounting firm on date were not copies of final returns and that the forms should have been signed and filed with the service on date secretary immediately notified company’s appropriate individuals and sought to rectify the situation soon thereafter company’s officers contacted outside counsel for help in the matter in light of counsel’s advice on date secretary signed and filed with the irs the forms for each of the funds noting on each return that the funds intend to file a request for an extension of time pursuant to sec_301_9100-3 of the income_tax regulations to make an election under sec_855 of the internal_revenue_code for tax_year and in the case of fund to file an election under sec_853 of the internal_revenue_code each of the funds otherwise satisfied the requirements for making an election under sec_855 in addition fund otherwise satisfied the requirements for making an election under sec_853 company has taken several steps to ensure that such an oversight does not repeat itself it has formally designated the funds’ treasurer as responsible for signing all forms related to the funds company has also agreed with its accounting firm that in the future company’s accounting firm will send the returns to the treasurer who in turn will sign the forms and returns and return them to accounting firm for filing with the irs company believes this should prevent untimely filing of returns in the future funds make the following representations the request for relief was filed by the funds before the failure to make the regulatory election was discovered by the service granting the relief will not result in the funds having a lower tax_liability than the funds would have had if a timely election had been made taking into account the time_value_of_money the funds did not seek to alter a return position for which an accuracy-related_penalty has been or could have been imposed under sec_6662 of the code at the time the funds requested relief and the new position requires or permits a regulatory election for which relief is requested plr-114626-02 being fully informed of the required regulatory election and related tax consequences the funds did not choose to not file the election law and analysis sec_301_9100-1 of the regulations provides in part that the commissioner has discretion to grant a reasonable extension of time to make a regulatory election defined in section b as an election whose due_date is prescribed by regulations or by a revenue_ruling a revenue_procedure a notice or an announcement published in the internal_revenue_bulletin or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-3 through c i of the regulations sets forth rules that the irs will use to determine whether under the facts and circumstances of each situation the commissioner will grant an extension for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that subject_to paragraphs b i through iii of sec_301_9100-3 when a taxpayer applies for relief under this section before the failure to make the regulatory election is discovered by the service the taxpayer will be deemed to have acted reasonably and in good_faith and sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all tax years to which the regulatory election applies than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money conclusion based upon the facts and representations submitted it is held that the funds have shown good cause for granting a reasonable extension of time to allow them to make an election under sec_855 sec_853 in the case of fund on their federal_income_tax return for the tax_year accordingly the time for filing that election is extended to date this ruling is limited to the timeliness of funds’ sec_855 and sec_853 election as reflected on their federal_income_tax return for tax_year this ruling does not relieve funds from any penalty that they may owe as a result of their failure_to_file their federal_income_tax return for tax_year on time this ruling's application is limited to the facts code sections and regulations cited herein except as specifically ruled upon above no opinion is expressed or implied as to any federal excise or income_tax consequences regarding funds in particular no opinion is expressed as to whether funds’ tax_liability is not lower in the aggregate for all years to which the regulatory election applies than funds’ plr-114626-02 tax_liability would have been if the election had been timely made taking into account the time_value_of_money upon audit of the federal_income_tax returns involved the director's office will determine funds’ tax_liability for the years involved if the director's office determines funds’ liability is lower that office will determine the federal_income_tax effect further no opinion is expressed as to whether funds in fact have satisfied the requirements of sec_853 and sec_855 and the regulations thereunder or whether funds qualifiy as regulated_investment_companies under subchapter_m part i this ruling is directed only to the taxpayers that requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter must be attached to funds’ original form 1120-ric for tax_year cc sincerely william e coppersmith chief branch office of associate chief_counsel financial institutions products


internal_revenue_service number release date index number --------------------------- ---------------------- ----------------------------------------------------------- ----------------------------------- --------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------------ ---------------------------------------------------- telephone number ---------------------- refer reply to cc fip b2 plr-131874-16 date date legend ----------------------------------------------------------- fund ------------------------------------------------------------ ----------------------------------------------------------------------------------- ---------------------------------------------------------- ------------------------------------- dear --------------------- this letter revokes a part of plr plr-146785-08 issued to fund on date and in response to a request from your authorized representative dated date limits the retroactive effect of such revocation pursuant to sec_7805 of the internal_revenue_code in plr the internal_revenue_service the service issued rulings that i income and gain from certain commodity-linked notes constitute qualifying_income under sec_851 the cln ruling and ii subpart_f_income of the subsidiaries attributable to the fund is other income derived from the fund’s businesses of investing in stock securities or currencies and therefore constitutes qualifying_income under sec_851 the subpart_f ruling in a letter dated date the service notified the fund that it was considering revoking the cln ruling on date the fund requested that the service exercise its discretionary authority under sec_7805 to limit the retroactive effect of any revocation since issuing plr the service has determined that having provided a private_letter_ruling on the issue in the cln ruling is not in accord with the current views of the service see revproc_2016_50 2016_43_irb_522 superseded by revproc_2017_3 i r b sec_4 see also reg-123600-16 fed reg date section dollar_figure of revproc_2017_1 2017_1_irb_1 plr-131874-16 provides in part that unless it was part of a closing_agreement a letter_ruling found to be in error or not in accordance with the current views of the service may be revoked or modified accordingly the cln ruling in plr is revoked the subpart_f ruling is not revoked and that portion of plr remains in effect at this time section dollar_figure of revproc_2017_1 also provides that if a letter_ruling is revoked the revocation applies to all years open under the statute_of_limitations on assessment unless the service uses its discretionary authority under sec_7805 to limit the retroactive effect of the revocation in accordance with the fund’s request the service has decided to grant relief under sec_7805 the revocation of the cln ruling in plr will apply prospectively only to commodity-linked notes acquired by the fund after date we are sending a copy of this letter to the appropriate operating division sincerely ------------------------------------------- jason g kurth assistant to the branch chief branch office of associate chief_counsel financial institutions and products cc