internal_revenue_service number release date index number ---------------------------------------------------- ------------------------------------------ ----------------------------- -------------------------------------- ------------------------ department of the treasury washington dc third party communication private firm date of communication date person to contact ------------------ id no ------------- telephone number --------------------- refer reply to cc psi b04 plr-153599-07 date march re ------------------------------------- re ------------------------------------- legend decedent ------------------------ son ----------------------------------- daughter ------------------------------ daughter ------------------------------------- spouse ------------------------------------- spouse --------------------------------------------------- grandchild --------------------------------------------------- grandchild --------------------------------------------- grandchild ----------------------------------- grandchild ----------------------------------------- grantor -------------- grantor’s spouse -------------- trust ----------------------------------------------------------------- trustee ------------- year ------- date ------------------- date ------------------- date --------------------- a --- b ----- c --- state -------- state statute ---------------------------------------------- plr-153599-07 dear ------------------------------------------ this is in response to a letter dated date from your authorized representative in which you request rulings with respect to certain proposed disclaimers facts in year grantor and grantor's spouse created the trust for the benefit of decedent year is prior to date the instrument states that grantor and grantor's spouse are the parents of decedent and it is the desire and purpose of the said grantor and grantor's spouse to create an irrevocable_trust known as the decedent trust estate for the use and benefit of decedent article iii sec_1 provides that no beneficiary can require distribution of trust corpus or partition or termination of the trust article iii sec_2 and state as follows sec_2 the death insolvency or bankruptcy of the beneficiary hereunder or the transfer of her interest in any manner or by descent or otherwise during the continuance of this trust shall not operate as a dissolution of nor terminate the trust nor shall it have any effect whatever upon said trust estate its operation or mode of business nor shall it entitle her heirs or assigns or representatives to take any_action in the courts of law or equity against the estate its trustees or property or its business operations of any kind all of which shall remain intact and undisturbed thereby but they shall succeed only to the rights of the original beneficiary as herein set forth sec_3 at the time of the death of beneficiary her equitable interest in said trust estate unless disposed of otherwise by said beneficiary shall pass to and vest in her heirs in accordance with the laws of descent and distribution then in force applicable to the equitable interest of such beneficiary in said trust the term 'beneficiary' applies not only to decedent but to all her successors to beneficial interests under this trust article iv sec_3 provides that the trust will terminate years after decedent's death when the trustee will distribute the trust corpus among the then existing beneficiaries article iv sec_4 provides that the beneficiary may receive from time to time a portion of the net profits accruing from time to time to the trust as the trustee acting with the advice and consent of the advisory board may see fit to pay over and deliver to the beneficiary no duty is imposed upon the trustee to distribute net profits but the power is conferred upon the trustee acting with advice and consent of the advisory plr-153599-07 board to do so and in exercising this discretion the trustee and advisory board must give full consideration to the interest of both the beneficiary and the trust estate decedent died on date survived by son daughter and daughter pursuant to article vi sec_3 the trust will terminate on date pursuant to article iii and article iv of the trust each beneficiary has three separate interests in the trust which passed to him or her on the decedent’s death the right to receive net profits in the discretion of the trustee and the advisory board the income_interest the right to dispose_of his or her share of the trust if the beneficiary dies before the trust terminates on date the power_of_appointment and the right to receive his or her share of the trust if living on date the termination interest daughter is currently married to spouse spouse was previously married to daughter if daughter disclaims any interests in or power over the trust grandchild grandchild grandchild and grandchild would be entitled as an heir of daughter under state laws of descent and distribution to receive part of daughter 2’s income_interest termination interest and power_of_appointment spouse is the father of grandchild and grandchild spouse is the father of grandchild and grandchild therefore spouse and spouse are potential heirs under certain circumstances as used herein daughter grandchild grandchild grandchild grandchild spouse and spouse are collectively referred to as the beneficiaries the following disclaimers are proposed daughter proposes to disclaim the following a of her income_interest her termination interest and her power_of_appointment in the trust b of any additional income_interest termination interest and power_of_appointment that daughter would otherwise receive as a result of a disclaimer made by another beneficiary of the trust if the disclaimer giving rise to such interest is effective on or before date and any other right or power that daughter has to appoint or divest the disposition of any interest or power disclaimed above spouse and spouse each propose to disclaim b of his future_interest and b of any other interests in or powers over the trust including any right or power that he has to appoint or divest the disposition of any of his future interests grandchild grandchild grandchild and grandchild each propose to disclaim c of daughter 2’s termination interest b of any additional income_interest termination interest and power_of_appointment that he or she would otherwise receive as a result of a disclaimer made by another beneficiary of the trust if the disclaimer giving rise to such interests is effective on or before date and any other right or power that he or she has to appoint or divest the disposition of any interest or power disclaimed above plr-153599-07 each disclaimant represents that he or she has not exercised dominion or control_over any interest in the trust nor have they received or accepted any rights titles power or interests in or benefits under the trust under state statute acceptance by a beneficiary of an interest in a_trust is presumed a beneficiary of a_trust may disclaim an interest in the trust in whole or in part the disclaimer must be in writing evidencing the disclaimant’s irrevocable and unqualified refusal to accept the interest and delivered to the trustee no later than nine months after the later of the day on which the transfer creating the interest in the beneficiary is made the day on which the beneficiary attains age or in the case of a future_interest the date of the event that causes the taker of the interest to be finally ascertained and the interest to be indefeasibly vested under state statute a disclaimer is effective as of the date of the transfer of the interest involved and relates back for all purposes to the date of the transfer and is not subject_to the claims of any creditor of the disclaimant unless the terms of the trust provide otherwise the interest that is the subject of the disclaimer passes as if the person disclaiming had predeceased the transfer and a future_interest that would otherwise take effect in possession or enjoyment after the termination of the estate or interest that is disclaimed takes effect as if the disclaiming beneficiary had predeceased the transfer you have represented that there have been no additions to the trust after date the following rulings have been requested the decedent had a general_power_of_appointment created before date with respect to the trust the release or lapse of which is nontaxable for federal estate and gift_tax purposes with respect to the decedent the decedent’s power lapsed at her death on date and thus the trust is not included in decedent’s gross_estate in addition each beneficiary’s power_of_appointment over his or her respective share of the trust is a general_power_of_appointment created on or before date the proposed disclaimers of interests in the trust a will be qualified disclaimers and will not result in a taxable gift_for federal gift_tax purposes by any of the beneficiaries b will not subject any portion of the trust to federal estate_tax in the gross_estate of any beneficiary and c will not result in a loss of gst tax effective date exempt status with respect to any portion of the trust law and analysis ruling_request sec_2041 provides that the value of the gross_estate shall include the value of all property to the extent of any property with respect to which a general power plr-153599-07 of appointment created on or before date is exercised by the decedent a by will or b by a disposition which is of such nature that if it were a transfer of property owned by the decedent such property would be includible in the decedent's gross_estate under sec_2035 to inclusive but the failure to exercise such a power or the complete release of such a power shall not be deemed an exercise thereof sec_2041 defines the term general_power_of_appointment as a power exercisable in favor of the decedent the decedent's_estate the decedent's creditors or creditors of the decedent's_estate sec_20_2041-1 of the estate_tax regulations states that a power_of_appointment includes all powers that are in substance and effect powers of appointment regardless of the nomenclature used in creating the power sec_20_2041-2 provides that a failure to exercise a general_power_of_appointment created before date or a complete release of the power is not an exercise of the power the phrase a complete release means a release of all powers over all or part of the property subject_to the power_of_appointment as distinguished from the reduction of a power_of_appointment to a lesser power thus if the decedent completely relinquished all powers over one-half of the property subject_to a power_of_appointment the power is completely released as to that one-half sec_2514 provides that an exercise of a general_power_of_appointment created on or before date shall be deemed a transfer of property by the individual possessing such power but the failure to exercise such a power or the complete release of such a power shall not be deemed an exercise thereof sec_25_2514-2 of the gift_tax regulations provides that a failure to exercise a general_power_of_appointment created on or before date or a complete release of such a power is not considered to be an exercise of a general_power_of_appointment the phrase a complete release means a release of all powers over all or a portion of the property subject_to a power_of_appointment as distinguished from the reduction of a power_of_appointment to a lesser power thus if the possessor completely relinquished all powers over one-half of the property subject_to a power_of_appointment the power is completely released as to that one-half the trust was created in year prior to date during her life decedent was the sole beneficiary of the trust under sec_3 of article iii decedent was granted a general power to appoint the income and corpus of the trust if decedent did not exercise this power the power would lapse at her death and decedent’s heirs under the laws of descent and distribution would as takers in default of her exercise of the power succeed her as beneficiaries of the trust decedent did not exercise her power therefore under article iii sec_3 of the trust decedent’s heirs under state law succeed her as beneficiaries of the trust based on the facts submitted and the representations made we conclude that decedent possessed a general_power_of_appointment created before date because decedent did not exercise her general_power_of_appointment the power plr-153599-07 lapsed on decedent’s death a lapse of a power created prior to date is not an exercise of that power therefore the value of the corpus in the trust is not included in decedent’s gross_estate for federal estate_tax purposes in addition as discussed above under sec_3 of article iii each beneficiary of the trust was granted a general power to appoint the income and corpus of the trust if a beneficiary did not exercise this power the power would lapse at his or her death and the beneficiary’s heirs under the laws of descent and distribution would as takers in default of his or her exercise of the power succeed her as beneficiaries of the trust sec_3 specifically states that the term beneficiary applies not only to decedent but to all her successors to beneficial interests under the trust therefore based on the facts submitted and the representations made we also conclude that each beneficiary’s power_of_appointment over his or her respective share of the trust is a general_power_of_appointment created before date ruling_request sec_2046 provides that for estate_tax purposes disclaimers of property interests passing upon death are treated as provided in sec_2518 sec_2518 provides that if a person makes a qualified_disclaimer with respect to any interest in property then for purposes of the estate and gift_tax the disclaimed interest is treated as if it never passed to that person sec_2518 defines a qualified_disclaimer as an irrevocable and unqualified refusal by a person to accept an interest in property but only if -- the refusal is in writing the writing is received by the transferor of the interest the transferor’s legal_representative or the holder of the legal_title to the property to which the interest relates not later than the date that is months after the later of -- a the date on which the transfer creating the interest in the person is made or b the day on which the person attains age the person disclaiming the interest has not accepted the interest or any of its benefits and as a result of such refusal the interest passes without any direction on the part of the person making the disclaimer and passes either - a to the spouse of the decedent or b to a person other than the person making the disclaimer sec_2518 provides that a disclaimer with respect to an undivided portion of an interest which meets the requirements of sec_2518 shall be treated as a qualified_disclaimer of such portion of the interest plr-153599-07 under sec_25_2518-1 if a qualified_disclaimer is made the property is treated for federal gift estate and generation-skipping_transfer_tax purposes as passing directly from the transferor and not from the disclaimant to the person entitled to receive the property as a result of the disclaimer thus the disclaimant is not treated as making a gift sec_25_2518-3 provides that if the requirements of the section are satisfied the disclaimer of all or an undivided portion of any separate interest in property may be a qualified_disclaimer even if the disclaimant has another interest in the same property sec_25_2518-3 provides that a power_of_appointment with respect to property is treated as a separate interest in such property and such power_of_appointment with respect to all or an undivided portion of such property may be disclaimed independently from any other interests separately created by the transferor in the property further a disclaimer of a power_of_appointment with respect to property is a qualified_disclaimer only if any right to direct the beneficial_enjoyment of the property which is retained by the disclaimant is limited by an ascertainable_standard sec_25_2518-3 provides that the disclaimer of an undivided portion of a separate interest in property which meets the other requirements of a qualified_disclaimer under sec_2518 and the corresponding regulations is a qualified_disclaimer an undivided portion of a disclaimant's separate interest in property must consist of a fraction or percentage of each and every substantial interest or right owned by the disclaimant in such property and must extend over the entire term of the disclaimant's interest in such property see sec_25_2518-3 example regarding the disclaimer of a fractional share of a residuary bequest sec_25_2518-2 provides that for purposes of the time limitation the month period from making a disclaimer generally is to be determined with reference to the taxable transfer creating the interest in the disclaimant in the case of a general_power_of_appointment the holder of the power has a 9-month period after the creation of the power in which to disclaim a person to whom any interest in property passes by reason of the exercise or lapse of a general power may disclaim such interest within a 9-month period after the exercise or lapse in the present case daughter grandchild grandchild grandchld grandchild spouse and spouse each propose to disclaim the above-described interests in the trust each disclaimer will be in writing each disclaimant represents that he or she has not accepted any benefits in the property subject_to the disclaimers and that the disclaimers are valid under state law the disclaimed interests will pass without any direction on the part of any disclaimant as discussed above decedent’s power_of_appointment under trust was created before date and is a general_power_of_appointment described in sec_2041 and sec_2514 decedent did not exercise her power and therefore under sec_25_2518-2 the period for making the disclaimer is measured from the date of decedent’s death the date when the interest is deemed created plr-153599-07 based on the facts and representations if the proposed disclaimers by daughter spouse spouse grandchild grandchild grandchild and grandchild are delivered to trustee within nine months of decedent’s death and provided the disclaimers are valid under state law the disclaimers will be qualified disclaimers for purposes sec_2518 therefore the disclaimers will not result in a taxable gift_for federal gift_tax purposes by the beneficiaries will not subject any portion of the value of the corpus of trust to federal estate_tax in the gross_estate of any beneficiary and will not result in a loss of gst tax effective date exempt status with respect to any portion of the trust it should be noted however that a recipient of a disclaimed interest under the above-proposed disclaimers must disclaim that interest within months of date see sec_25_2518-2 the rulings contained in this letter are based upon information submitted and representations made by the taxpayers and accompanied by a penalty of perjury statement executed by the appropriate parties while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination this ruling is directed only to the taxpayers requesting it sec_6110 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 representatives sincerely james f hogan senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter cc


t c memo united_states tax_court david w chiu petitioner v commissioner of internal revenue respondent docket no filed date david w chiu pro_se jason m silver for respondent memorandum findings_of_fact and opinion gale judge respondent determined a deficiency in petitioner's federal income taxes in the amount of dollar_figure and additions to tax under sec_6651 a and 1unless otherwise noted section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure sec_6654 in the amounts of dollar_figure and dollar_figure respectively after concessions the issues for decision are as follows whether funds withdrawn by petitioner from a qualified_individual retirement account ira are includable in his gross_income and if so whether petitioner is subject_to a 10-percent additional tax on early distributions under sec_72 we hold that the funds are includable and that petitioner is subject_to the 10-percent additional tax under sec_72 whether petitioner is allowed deductions for moving_expenses real_estate_taxes home mortgage interest charitable_contributions and trade_or_business expenditures we hold that petitioner has substantiated the deduction for home mortgage interest in the amount of dollar_figure we hold that the remainder of the aforementioned deductions are not allowed whether petitioner is liable for an addition_to_tax for failure to timely file his federal_income_tax return under sec_6651 we hold that he is whether petitioner is liable for an addition_to_tax for failure to pay estimated income_tax under sec_6654 we hold that he is findings_of_fact some of the facts have been stipulated and are so found we incorporate by this reference the stipulation of facts and attached exhibits at the time of filing the petition petitioner resided in san gabriel california petitioner was born in china in and came to the united_states in petitioner received a bachelor of science degree in engineering in the united_states and after graduation took graduate courses in business and corporate finance in petitioner commenced employment with varian associates inc varian in palo alto california petitioner's federal_income_tax return correctly lists his w-2 wage income for the taxable_year from varian as dollar_figure from which amounts were withheld for federal_income_tax purposes in the fall of petitioner moved from san francisco to los angeles where he remained for approximately weeks before moving to hong kong petitioner arrived in hong kong on date petitioner did not move to hong kong in connection with a job transfer or to accept new employment and did not become an employee of any business while in hong kong at the time petitioner moved to hong kong he intended to start a business of his own although he did not have specific plans to start any particular business on his federal_income_tax return petitioner claimed a deduction for moving_expenses in connection with the moves to los angeles and to hong kong in the amount of dollar_figure of which dollar_figure was estimated as the cost of his move to los angeles on date petitioner withdrew dollar_figure from a u s bank representing money from an ira established on his behalf by varian varian ira on date petitioner transferred dollar_figure from the bank of america to an account at a branch of the hong kong shanghai banking corp located in hong kong while in hong kong petitioner undertook steps to develop a computer_software package designed to handle currency exchange transactions petitioner intended to market the software package once developed on schedule c of his federal_income_tax return petitioner claimed a deduction of dollar_figure consisting of expenses for advertising bad_debts commissions and fees depreciation and or sec_179 expenses and meals and entertainment petitioner returned to the united_states for approximately month in in order to purchase a computer system for use in the development of the software package petitioner returned to the united_states on a permanent basis in october of petitioner signed his federal_income_tax return on date and the return was stamped received at the internal_revenue_service center in fresno california on date on his federal_income_tax return petitioner reported his filing_status as single and claimed schedule a deductions in the amount of dollar_figure for state_and_local_income_taxes dollar_figure for real_estate_taxes dollar_figure for home mortgage interest and dollar_figure for charitable_contributions in addition to the previously outlined schedule c deductions totaling dollar_figure and the deduction for moving_expenses in the amount of dollar_figure opinion there are two evidentiary matters we must address at the outset first are the objections raised by respondent in paragraph sec_4 and of the stipulation of facts to the admission of joint exhibits 3-c and 4-d joint exhibit 3-c consists of a copy of a statement of assetvantage account from the hong kong shanghai banking corp dated date bearing petitioner's name and an account number assetvantage account joint exhibit 4-d consists of a copy of a transfer payment order dated date from the bank of america to the hong kong shanghai banking corp showing a transferred amount of dollar_figure listing david w chiu as remitter and david woon chiu as beneficiary to the benefit of an account number identical to that shown on the assetvantage account respondent objects to the admissibility of the handwritten marks on exhibit 3-c on the grounds of relevance authenticity completeness and hearsay respondent also objects to the admissibility of the entire document comprising exhibit 3-c on the ground of hearsay respondent objects to the admissibility of exhibit 4-d on the grounds of relevance and hearsay we hereby overrule respondent's objections except as to the handwritten marks on joint exhibit 3-c and admit joint exhibit 3-c excluding the handwritten marks thereon and joint exhibit 4-d the second evidentiary matter is the admissibility of the following evidence offered by petitioner in his post-trial request to reopen the record a document denominated marine midland bank and corporate data listing the address and certain financial information for marine midland bank marked as petitioner's exhibit a document denominated annual_statement of account for and substitute form listing the recipient's lender's name as bank of america and the payer's borrower's name as david woon chiu or shere-ling yau and showing an account number marked as petitioner's exhibit and copies of receipts bearing the logo of goodwill industries and dated within the calendar_year with the names of david chiu or david chiu and shere yau listed and a description of various items marked as petitioner's exhibit respondent objects to the admission of the foregoing on the grounds of relevance authentication hearsay and completeness we conclude that respondent is not prejudiced by the reopening of the record for the admission of the exhibits we overrule 2we note that admission of these exhibits does not in any event enable petitioner to prevail on the issue to which they relate 3reopening the record for submission of additional proof is within the discretion of the court 401_us_321 respondent's objections regarding exhibit and sustain respondent's objections regarding exhibits and ira the first issue we must decide is whether the dollar_figure petitioner withdrew from the varian ira is includable in gross_income and if so whether petitioner is subject_to the percent additional tax on early distributions under sec_72 the parties do not dispute that petitioner withdrew dollar_figure on date from a qualified ira petitioner testified that he transferred the entire amount on date to an account at the hong kong shanghai banking corp which he argues should qualify him to exclude the withdrawn amounts from income as a rollover_contribution respondent first disputes whether such a transfer has been demonstrated by the evidence but more importantly contends that a valid rollover did not occur in any event because the transfer was to a foreign bank 4the substitute form_1098 marked as exhibit bears the same account number as that written on six of petitioner's checks offered by him at trial to substantiate his mortgage interest payments and received into evidence without objection by respondent 5respondent's hearsay objections to exhibits and are well taken and there was no advance notice of the evidence to respondent as required for the invocation of the hearsay exception under rule of the federal rules of evidence the documentary_evidence regarding the transfer does not entirely corroborate petitioner's testimony a copy of a statement of assetvantage account appended to the parties' stipulation indicates that petitioner was the holder of such an account located at the hong kong office branch and gives the account number and other account information as of date also appended to the stipulation is a copy of a bank of america transfer payment order showing a transfer on date of dollar_figure by petitioner to the account number in petitioner's name at the hong kong branch office of the hong kong shanghai banking corp described as an assetvantage account thus we conclude that petitioner had such an account located at the hong kong branch of the bank and made a transfer to it of dollar_figure on date petitioner did not explain the difference between the ira withdrawal of dollar_figure and the subsequent transfer of dollar_figure even if we were to assume that the dollar_figure transfer consisted in part of the varian ira proceeds petitioner has nonetheless failed to show that the transfer was made to another qualified ira as required for the withdrawn amounts to qualify as a rollover_contribution sec_408 sec_408 defines an ira as a_trust created or organized in the united_states for the exclusive benefit of an individual or his beneficiaries emphasis added which meets certain other requirements set forth in that section regulations under sec_408 further clarify that such a_trust must be maintained at all times as a domestic_trust in the united_states sec_1_408-2 income_tax regs petitioner maintains that the amounts withdrawn from his varian ira were transferred to an account at the hong kong shanghai banking corp located in hong kong even if we were to assume that the account at the hong kong bank was set up as a_trust or a custodial account8 and petitioner has provided no evidence in that regard petitioner's rollover claim would fail because he has not shown that the transfer was to a domestic entity the situs of a_trust is generally defined to be the place of performance of the active duties of the trustee and where the settlor selects a bank as the trustee the location of the bank has been held to be the situs of the trust c j s trusts sec b pincite thus the available evidence strongly suggests that the situs of any trust to which the varian ira proceeds were transferred is the hong kong branch office of sec_408 further provides that a custodial_account may be treated as a_trust for purposes of sec_408 but such custodial_account must also be maintained in the united_states 7in certain circumstances a tax-free_rollover from an ira may also be made into a qualified_pension or profit-sharing_plan see sec_408 however a qualified_plan likewise denotes a_trust created or organized in the united_states sec_401 8see supra note the hong kong shanghai banking corp petitioner argued that the hong kong shanghai banking corp owns midland bank a u s bank but this factor does not affect our conclusion regarding the probable situs of any trust created in connection with the ira funds transfer on this record we conclude that petitioner has failed to show that the dollar_figure that he withdrew from the varian ira was paid into a_trust or custodial_account created and maintained in the united_states as required by sec_408 and d a i and sec_1_408-2 income_tax regs and therefore such amount is includable in his gross_income amounts paid or distributed out of an ira must be included in gross_income in the manner provided under sec_72 sec_408 a 10-percent tax on early distributions generally applies where a taxpayer receives a distribution from a qualified_retirement_plan which is includable in his gross_income sec_72 for purposes of the 10-percent tax a qualified_retirement_plan includes an ira described under sec_408 sec_4974 although sec_72 sets forth certain exceptions to the 10-percent tax on early distributions petitioner has presented no evidence to suggest he fits within any of these exceptions therefore we find that petitioner is liable for the 10-percent additional tax under sec_72 moving_expenses petitioner claimed dollar_figure for moving_expenses associated with moves to los angeles and to hong kong of which dollar_figure is estimated to relate to his move to los angeles respondent disputes whether petitioner has substantiated payment of the claimed expenditures and whether petitioner has met the requirements for deductibility under sec_217 respondent's position regarding the failure to substantiate these expenses is well taken other than the bare numbers claimed on the form 3903f attached to his return petitioner provided no evidence that would substantiate these amounts or offer a basis on which the court could make an estimate under the cohan10 rule notwithstanding the fact that the court left the record open an additional days after the trial for petitioner to submit such evidence and indeed reopened the record for receipt of evidence on other matters moreover with respect to the evidence that petitioner did provide such evidence either demonstrates that the requirements of sec_217 were not met in the case of certain pre-move househunting expenses claimed on the return or is insufficient to show that the requirements of 9some portion of the expenses claimed was for pre-move househunting expenses and temporary quarters but the exact amount cannot be ascertained because of the haphazard placement of figures on the form 3903f submitted with petitioner's return 1039_f2d_540 2d cir sec_217 have been satisfied in the case of all remaining moving_expenses claimed with respect to the pre-move househunting expenses claimed such expenses are deductible only if incurred after the taxpayer has obtained employment at the new location if the new work is self-employment the taxpayer is treated for this purpose as having obtained new employment when substantial arrangements to commence such work have been made sec_217 f for these purposes the new principal_place_of_work for petitioner would be hong kong in light of petitioner's testimony that at the time of his move to hong kong he had no specific plans to begin any particular business we conclude that petitioner had not made substantial arrangements within the meaning of sec_217 at the time of the move and consequently he has failed to show his entitlement to a deduction for any pre-move househunting expenses as for petitioner's claimed deduction for expenses of temporary quarters the record is devoid of any substantiation of the actual expenditures_for such quarters or of any evidence from which the court could determine the point in time after arrival when substantial arrangements to commence work had been made so that the expenditures might be eligible for deduction sec_217 f thus petitioner has failed to show his entitlement to a deduction for temporary quarters expenses with respect to the remaining amounts claimed on the return as moving_expenses since petitioner claims his move to hong kong was in connection with the commencement of self employment sec_217 would require that petitioner perform services as a self-employed_individual on a full-time basis in the general location of hong kong for at least weeks of the 24-month period following his arrival there of which at least weeks must occur during the first months although petitioner was present in hong kong for a sufficient period to meet the week requirement the evidence falls far short of establishing that he was working full time for weeks during the first months petitioner testified that he returned to the united_states sometime in for approximately month to purchase a computer system and that he started his business shortly after his return to hong kong on this evidence it follows that petitioner necessarily failed the 39-week test if his return to the united_states was much later than late date in any event the evidence presented by petitioner either at trial or in the opportunities presented to him post-trial fails to demonstrate that he met the requirements of sec_217 accordingly petitioner is not entitled to any deduction for moving_expenses because of both a failure to substantiate actual expenditures and a failure to demonstrate that he met the requirements of section dollar_figure real_estate_taxes petitioner claimed real_estate_taxes of dollar_figure on schedule a of his return which respondent disallowed for failure to substantiate sec_164 allows a deduction for state and local real_property_taxes paid_or_accrued within the taxable_year petitioner has failed to produce any evidence to show that he paid the real_property_taxes claimed on his return in fact petitioner indicated in his testimony that he was uncertain whether and to what extent he or his ex-wife paid the real_estate_taxes we conclude that petitioner has failed to substantiate the payment of real_estate_taxes in and is therefore not entitled to any deduction for them mortgage interest petitioner claimed a deduction for mortgage interest on schedule a of his return which respondent challenges on the grounds that petitioner has failed to substantiate the payment of any mortgage interest or to provide sufficient evidence from which a reasonable estimate could be made 11with respect to the dollar_figure in expenses claimed with respect to the move from san francisco to los angeles petitioner has not shown that he commenced new employment in los angeles or that such employment continued for the minimum periods required under sec_217 the amount of mortgage interest claimed by petitioner as a deduction on the return was dollar_figure as substantiation petitioner offered into evidence and respondent did not object to six canceled checks that petitioner testified were written to make payments on his home mortgage to bank of america the checks had only petitioner's name printed on them were signed by petitioner and were made payable to the bank of america the six checks bore the following dates and amounts date date date date date date dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure pursuant to a post-trial order to reopen the record petitioner's exhibit a document entitled annual_statement of account for from the bank of america as lender was received into evidencedollar_figure the statement contains an account number matching the last seven digits of the number handwritten on the top of each check admitted into evidence and lists petitioner and another individual presumably petitioner's wife as borrowers the statement further indicates it is a 12although petitioner's trial memorandum listed the claimed mortgage interest_deduction as dollar_figure we believe this figure resulted from a clerical_error petitioner's return claimed a deduction for state and local income and real_estate_taxes of dollar_figure and a deduction for mortgage interest of dollar_figure the trial memorandum mistakenly reversed these figures 13see discussion supra p substitute form we accordingly conclude that the document is a form_1098 covering petitioner's mortgage loan account activity in the form_1098 lists the amount of each monthly mortgage payment paid in and a breakdown of each payment into principal versus interest the form_1098 also shows that no amounts were escrowed for any purpose the form_1098 thus provides evidence as to the amount of interest_paid each month on this record we are satisfied that petitioner is entitled to a deduction for some mortgage interest according to petitioner's testimony he was uncertain regarding the extent to which his wife may have made mortgage payments he testified that he thought she paid half but was uncertain on this point he also testified that he and his wife sometimes split up payment of the mortgage and real_estate taxesdollar_figure given that the form_1098 contains the name of another individual presumably petitioner's wife we conclude on this record that petitioner is not entitled to deduct half of the mortgage interest shown on the form_1098 as he now contends on brief but instead is entitled to a deduction for mortgage 14we conclude elsewhere that petitioner is not entitled to any deduction for real_estate_taxes due to a lack of substantiation see supra p 15petitioner claimed dollar_figure in mortgage interest on his return see supra note petitioner then offered six checks continued interest in an amount that we can estimate under the cohan_rule based upon the six checks drawn on petitioner's own account and the form_1098 received into evidence based upon the record we conclude that petitioner has provided adequate proof of mortgage payments for the months covered by the checks there is insufficient proof for the remaining months petitioner's checks when compared to the total monthly payments listed on the form_1098 indicate that he paid varying portions of the total mortgage payments ranging from percent to just under percent as follows payment due_date feb apr date date date aug total_payment dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure payment by petitioner dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure petitioner's percentage continued into evidence totaling dollar_figure which he testified represented payments on his mortgage respondent did not object to the admission of the checks into evidence respondent now contends on brief that the amount of mortgage interest at issue is limited to the amount claimed in petitioner's trial memorandum under rule b issues not raised by the pleadings which are nonetheless tried by express or implied consent of the parties shall be treated in all respects as if they had been raised in the pleadings the issue as to the amount of the mortgage interest_paid by petitioner was raised at trial upon petitioner's offer into evidence of six checks totaling dollar_figure that petitioner testified were payments for his mortgage the admission of such checks into evidence without limitation or objection by respondent placed the amount in issue by implied consent and we treat the higher amount as if raised in the pleadings pursuant to rule b the form_1098 also indicates the amount of each monthly payment attributable to interest therefore by multiplying the percentage of each mortgage payment paid_by petitioner times the interest component of the payment one can derive the amount of interest appropriately treated as paid_by petitioner as follows payment due_date feb apr may june date date interest component of payment dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure petitioner's percentage petitioner's interest payment dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure therefore using our discretion under the cohan_rule we find that petitioner made total interest payments of dollar_figure in petitioner is entitled to a deduction in that amount charitable_contributions the next issue for decision concerns petitioner's claimed deduction for charitable_contributions which respondent disallowed for lack of substantiation on his return petitioner claimed a deduction for gifts to charity in the amount of dollar_figure of which dollar_figure was listed under contributions by cash or check and dollar_figure was listed under contributions by other than cash or check to substantiate the deduction petitioner testified that the claimed contributions were donations to church and goodwill stuff like that when questioned how he arrived at the figure of dollar_figure petitioner testified that he based it on amounts claimed on his federal_income_tax returns for prior years we accordingly disregard the dollar_figure figure in deciding the amount of any charitable deduction to which petitioner may be entitled sec_170 provides that a charitable deduction is allowed only if verified under regulations prescribed by the secretary for contributions by cash or check the regulations require the taxpayer maintain for each contribution one of the following i a canceled check ii a receipt letter or other communication from the donee showing the name of the donee the date of the contribution and the amount of the contribution or iii other reliable written records showing the name of the donee the date of the contribution and the amount of the contribution sec_1_170a-13 income_tax regs petitioner did not produce any evidence beyond his vague and incomplete testimony to substantiate the dollar_figure for claimed contributions of money accordingly he has failed to substantiate the claimed money contribution and is not entitled to a deduction therefor for contributions of property other than money the regulations require that the taxpayer maintain a receipt from the donee showing the name of the donee the date and location of the contribution and a description of the contributed_property in sufficient detail based upon the circumstances sec_1 170a- b income_tax regs the receipts submitted after trial by petitioner to substantiate the dollar_figure for claimed contributions are inadmissable hearsaydollar_figure fed r evid therefore based upon the record petitioner has failed to substantiate his claimed deduction for contributions of property and the deduction is accordingly denied schedule c expenses petitioner claimed a deduction totaling dollar_figure for expenses listed on schedule c of his return in columns17 denominated advertising bad_debts commissions and fees depreciation and sec_179 expense deduction and meals and entertainment at trial petitioner testified that these expenses were basically all r_and_d incurred for a lot of research that petitioner undertook in an effort to develop a computer_software package petitioner also testified that the schedule c expenses were incurred in connection with a market survey undertaken shortly after his arrival in hong kong respondent proposes to disallow any deduction for the schedule c expenses on the grounds that petitioner has failed either to substantiate that the expenses were paid_or_incurred or to demonstrate that they were paid_or_incurred in carrying_on_a_trade_or_business as required by sec_162 16see supra note 17certain dollar figures on the schedule c were typed too far from any column category to permit a determination of the category under which petitioner meant to classify the expense other than the schedule c prepared over years after the period in question petitioner offered no documentary_evidence to corroborate his testimony that the claimed expenses were paid petitioner offered no testimony that would connect several of the expense categories such as bad_debts commissions and fees depreciation and sec_179 expense and meals and entertainment to the research activities he claimed were being undertaken and which provided the rationale for claiming expense treatment on the schedule c on this record we conclude that petitioner has failed to substantiate that the claimed expenses were paid_or_incurred in addition petitioner offered no evidence beyond his self- serving testimony that these expenses were paid in carrying_on_a_trade_or_business within the meaning of sec_162 petitioner reported no gross_receipts on the schedule c and offered no documentary_evidence whatsoever of the conduct of a business petitioner testified that he did not have plans to start a specific business when he arrived in hong kong and given that the parties have stipulated that his arrival occurred in date the available evidence suggests that it was unlikely that petitioner was actually engaged in carrying on any trade_or_business for purposes of sec_162 within the taxable_year cf 480_us_23 on this record we conclude that petitioner has failed to demonstrate that the claimed schedule c expenses were paid_or_incurred in carrying on any trade_or_business within the meaning of sec_162 although neither party argued the point on brief we believe that petitioner's claim that these expenses were for research_and_development warrants our consideration whether the expenses may be deductible under sec_174 as research_and_experimental_expenditures expenditures deductible under sec_174 need only be paid_or_incurred in connection with the taxpayer's trade_or_business whereas expenses deductible under sec_162 must be paid_or_incurred in carrying on such trade_or_business the sec_174 requirement is less strict see 416_us_500 92_tc_423 affd 930_f2d_372 4th cir 83_tc_667 thus sec_174 might require a lesser showing than sec_162 of the trade_or_business activities actually conducted by petitioner in nonetheless we conclude that sec_174 does not help petitioner because the record in this case does not support the conclusion that the claimed expenses constitute sec_174 expenditures research_and_experimental_expenditures generally refer to research_and_development costs in the experimental or laboratory sense sec_1_174-2 income_tax regs the term includes generally all costs associated with the actual development of a new product but not expenses for efficiency surveys management studies consumer surveys advertising or promotions id thus the expenses claimed by petitioner for advertising and a market survey on their face do not qualify as research_and_experimental_expenditures under sec_174 as to the remaining expenses--for bad_debts commissions and fees depreciation and sec_179 expense and meals and entertainment--petitioner offered no evidence to show how any of his expenditures of this nature was connected with the research_and_development of a computer_software package accordingly we conclude on this record that petitioner has failed to show eligibility for a deduction under sec_174 failure_to_file respondent also determined that petitioner is liable for an addition_to_tax under sec_6651 for failure_to_file his return by its due_date the parties have stipulated that the return was signed by petitioner on date and stamped as received by respondent on date therefore petitioner is liable for the addition unless he can show that the failure to timely file was due to reasonable_cause and not to willful neglect and he bears the burden of proving both 469_us_241 a showing of reasonable_cause requires that the taxpayer demonstrate that he exercised ordinary business care and prudence but nevertheless was unable to file the return within the prescribed time sec_301_6651-1 proced admin regs see also united_states v boyle supra pincite petitioner relies on two arguments to establish reasonable_cause first petitioner claims that he based his decision not to file on brochures he acquired before leaving the united_states petitioner described one of the brochures as covering u s citizens living abroad and advising of an exemption from filing for such citizens making less than dollar_figure per year petitioner has not produced the brochure we take judicial_notice of internal revenue publication entitled tax guide for u s citizens and resident aliens abroad publication states clearly that an individual must file a return in order to claim a dollar_figure exemption available under section and also that the exemption applies only to foreign_earned_income without more we conclude that petitioner's testimony regarding the brochure fails to establish reasonable_cause second petitioner claims that he based his decision not to file on advice he received from the u s consulate in hong kong that a return was not required if his income was less than 18subject to certain limitations and restrictions sec_911 allows a citizen or resident_of_the_united_states living abroad to exclude from gross_income up to dollar_figure in foreign_earned_income sec_911 b a dollar_figure however petitioner admits that he did not disclose the fact that he had wage income from varian in which was earned in the united_states in light of this fact it would not have been reasonable for petitioner to rely on the advice received at the u s consulate 74_tc_1086 affd without published opinion 673_f2d_1300 3d cir on this record we cannot conclude that petitioner a college-educated individual who had filed returns for the previou sec_2 years undertook a reasonable and sufficient inquiry as to his obligation to file in given that he earned significant wage income in the united_states during which was subject_to_withholding and resided in the united_states for over months of that year we do not believe that petitioner had a reasonable basis for concluding that no income_tax return was due therefore because petitioner has failed to establish reasonable_cause for his failure to timely file his return he is liable for the addition_to_tax under sec_6651 failure to pay estimated_tax respondent also determined an addition_to_tax for failure to pay estimated income_tax under sec_6654 the addition_to_tax under sec_6654 is mandatory unless petitioner can show that he comes within one of the exceptions of sec_6654 103_tc_90 affd without published opinion 71_f3d_877 5th cir petitioner bears the burden_of_proof on this issue 84_tc_859 and the record contains no evidence to suggest that petitioner falls within one of these exceptions therefore he is liable for an addition_to_tax under sec_6654 to reflect the foregoing and concessions decision will be entered under rule


internal_revenue_service number release date index number ------------------------------------------------------------ ---------------------------------- ----------------------------------- ---------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc fip b04 plr-118732-05 date date ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ -------------------------------------------------------------------------- ------------------------------------------------------------------ ------------------------------------------ -- ------------------------ ------------- -------------------------------- ------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ legend legend taxpayer --------------------------------------------------------------------------------------------------------------- industry state unit operator statute --------------------------------------------------------------------------------------------------------- statute --------------------------------------------------------------------------------------------------------- statute statute fund number a dear ---------------------- insurance_company other than a life_insurance_company pursuant to sec_831 of the internal_revenue_code facts unit to procure services unit then refers the contract to an operator operator performs the specified services for the customer operator collects from customer the fee for the specified services and operator remits less its allocable portion the payment to unit the operators are classified as independent contractors not as industry operates within state in the following manner a customer contracts with this responds to your date request for a ruling that you are taxable as an plr-118732-05 employees of unit the operators face the possibility of injury while performing the specified services however because the operators are not employees they are not covered by workers’ compensation laws in order to provide workers’ compensation benefits for operators state revised its workers’ compensation laws and created taxpayer as a not-for-profit corporation to administer and pay workers’ compensation benefits to operators each unit doing business as such within state is required to be a member of taxpayer though as such each unit can participate in governing taxpayer no profit earned by taxpayer can be distributed to or inure to the benefit of any unit statute statute taxpayer determines the amount needed to fund its activities this amount is converted to a surcharge added to the fee for specified services unit collects the surcharge and remits it to taxpayer for purposes of workers’ compensation only operators are deemed employees of taxpayer while performing the specified services statute statute as allowed by law taxpayer satisfies its obligation to administer and pay workers’ compensation benefits to operators through a policy issued by fund several hundred units are a member of taxpayer and more than that number of individual operators are covered by taxpayer number a of its total from its investments requested ruling a life_insurance_company under sec_831 of the internal_revenue_code law and analysi sec_1_801-3 of the income_tax regulations 344_fsupp_870 d s c aff’d per curiam 481_f2d_609 4th cir for taxable years beginning after date the definition of an insurance_company other than a life_insurance_company is found in sec_831 which defines an insurance_company by reference to sec_816 sec_816 defines an insurance_company as any company more than half the business of which during the taxable_year is the issuing of insurance or annuity_contracts or the reinsuring of risks underwritten by insurance_companies taxpayer requests a ruling that it is taxable as an insurance_company other than qualification as an insurance_company must be satisfied annually section besides the surcharges remitted by units taxpayer receives de_minimis revenue neither the code nor the regulations define the terms insurance or reinsurance the united_states supreme court however has explained that for an arrangement to constitute insurance for federal_income_tax purposes both risk shifting and risk_distribution must be present 312_us_531 the risk plr-118732-05 transferred must be risk of economic loss 572_f2d_1190 7th cir cert_denied 439_us_835 the risk must contemplate the fortuitous occurrence of a stated contingency 183_f2d_288 2d cir and must not be merely an investment or business risk legierse u s pincite revrul_89_96 1989_2_cb_114 risk shifting occurs if a person facing the possibility of an economic loss resulting while a taxpayer’s name charter powers and state regulation help to indicate from the occurrence of an insurance risk transfers some or all of the financial consequences of the potential loss to the insurer the effect of such a transfer is that a loss by the insured will not affect the insured because the loss is offset by the insurance payment risk_distribution incorporates the law of large numbers to allow the insurer to reduce the possibility that a single costly claim will exceed the amount available to the insurer for the payment of such a claim 811_f2d_1297 9th cir risk_distribution necessarily entails a pooling of premiums so that a potential insured is not in significant part paying for its own risks see 881_f2d_247 6th cir see also 40_fedclaims_42 the activities in which it may properly engage whether the taxpayer qualifies as an insurance_company for tax purposes depends on its actual activities during the year 56_tc_497 aff’d per curiam 469_f2d_697 9th cir taxpayer whose predominant source_of_income was from investments did not qualify as an insurance_company see also 285_us_182 to qualify as an insurance_company a taxpayer must use its capital and efforts primarily in earning income from the issuance of contracts of insurance indus life ins co pincite all of the relevant facts will be considered including but not limited to the size and activities of any staff whether the company engages in other trades_or_businesses and its sources of income see generally 285_us_191 where insurance and charges incident thereto were more than of company’s income u ndeniably insurance was its principal business lawyers mortgage co pincite indus life ins co pincite 300_fsupp_387 n d tex rev’d on other grounds 425_f2d_1328 5th cir 189_fsupp_282 d neb aff’d on other grounds 293_f2d_72 8th cir inter-american life ins co pincite nat’l capital ins co of the dist of columbia v commissioner 28_bta_1079 however a company engaged solely in reinsurance may have a very sparse operation see alinco life ins co v united_states ct_cl that reinsurance company had extremely simple operation with very little general operating expense did not preclude conclusion that it was a life_insurance_company under sec_801 plr-118732-05 the business of an insurance_company necessarily includes substantial the underlying predicate for workers’ compensation is the employer’s potential investment activities both life and nonlife insurance_companies routinely invest their capital and the amounts they receive as premiums the investment earnings are then used to pay claims support writing more business or to fund distributions to the company’s owners the presence of investment earnings does not in itself suggest that an entity does not qualify as an insurance_company workers’ compensation is a statutorily created mechanism to effect a practicable and consistent remedial regime for on-the-job injuries prior to the enactment of workers’ compensation traditional tort law applied to injuries suffered by an employee in the course of performing a job workers’ compensation is in effect a bargain between the employee and the employer whereby the employer is deemed strictly liable for workplace injuries and the employee is entitled to a certain though potentially smaller amount as compensation see am jur 2d workers’ compensation sec_1 jack b hood et al workers’ compensation and employee protection laws independent contractors generally are not covered by workers’ compensation provisions hood supra pincite liability - an economic risk of loss - to the employee this potential liability is viewed as the risk of the employer for purposes of insurance qualification see revrul_83_172 1983_2_cb_107 40_fedclaims_42 independent contractors of units but for the revision to state’s workers’ compensation laws operators would have no recourse against units or taxpayer to remedy injuries suffered while performing the specified duties accordingly the risk of loss involved here is the operators’ not units’ or taxpayer’s this risk of loss is an insurance risk for the consideration of the surcharge this risk is shifted from operators to taxpayer2 and distributed across the many similarly situated operators this arrangement constitutes insurance for federal_income_tax purposes and taxpayer will be an insurance_company within the meaning of sec_831 for each taxable_year that this arrangement is more than half of its business caveats except as expressly provided herein no opinion is expressed concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter no ruling has been requested and no opinion is expressed concerning the here the underlying predicate is not present operators are classified a sec_1 while operators may have had some recourse against units the statute deems operators to be employees of taxpayer not units units serve as a vehicle to collect the surcharge plr-118732-05 treatment by operators and units of the surcharge paid to taxpayer and the treatment by operators of amounts received from taxpayer sincerely yours donald j drees senior technician reviewer 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 psi b03 plr-107251-18 date july legend x --------------------------------------------------- ------------------------------------ state1 state2 date1 date2 date3 date4 date5 year ----------- ----------------- --------------------------- ---------------------- -------------------- -------------------- ------------------------ ------- dear ---------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x by x’s authorized representative requesting a ruling under sec_1362 of the internal_revenue_code code plr-107251-18 facts the information submitted states that x was formed under the laws of state1 on date1 as a limited_liability_company and elected to be classified as an association_taxable_as_a_corporation and also elected to be an s_corporation effective on date2 at the time of formation the members of x adopted an operating_agreement that included a provision providing for an order of priority for distributing the assets of x upon liquidation liquidation provision according to the submission the liquidation provision provided for the distribution of liquidation proceeds in accordance with capital accounts whereby distributions made by x potentially would not be made to the shareholders of x in accordance with their respective ownership percentages as a result the outstanding shares of stock of x did not possess identical rights to distribution and liquidation proceeds accordingly x represents that x did not meet the requirement that it have one class of stock under sec_1361 on the effective date of its s election on date2 the submission further indicates that x was initially formed with the intention that x would be treated as a partnership for federal tax purposes and therefore the liquidation provision did not present any_tax issues at that time on date3 the shareholders of x adopted an amended operating_agreement whereby x admitted new shareholders and changed from a member-managed limited_liability_company to a manager-managed limited_liability_company the amended operating_agreement also contained the liquidation provision on date4 the shareholders of x adopted a second amended operating_agreement whereby x admitted new shareholders among other things although the distribution of proceeds upon the liquidation of x was slightly modified in the second amended operating_agreement the agreement still contained the liquidation provision on date5 x filed articles of conversion whereby x converted from a state1 limited_liability_company to a state2 limited_liability_company the plan of conversion provided that all ownership interests in x would remain the same as those prior to the conversion when x’s owners became aware of the second class of stock issue in year they sought tax counsel to assist with amending x’s operating_agreement to modify the liquidation provision to provide that upon liquidation of x distributions be made in accordance with the ownership percentages in x not capital accounts x represents that x and x’s shareholders have filed tax returns consistent with x being an s_corporation since date2 x further represents that the circumstances resulting in the ineffectiveness of x’s s_corporation_election were inadvertent and were not motivated by tax_avoidance or retroactive tax planning x and each person who was or is a shareholder of x at any time since date2 agree to make any adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary with respect to such period x further represents x has taken all of the plr-107251-18 necessary corrective steps to rectify the ineffectiveness of x’s s_corporation_election specifically x represents that x has amended its operating_agreement to remove all provisions that could create a second class of stock law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 defines a small_business_corporation as a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock sec_1_1361-1 of the income_tax regulations provides in part that a corporation is generally treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds sec_1_1361-1 provides that the determination of whether all outstanding shares of stock confer identical rights to distribution and liquidation proceeds is made based on the corporate charter articles of incorporation bylaws applicable state laws and binding agreements relating to distribution and liquidation proceeds collectively the governing provisions sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation a termination of an s_corporation_election under sec_1362 is effective on or after the date of cessation sec_1362 provides that if an election under sec_1362 or sec_1361 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or or sec_1361 the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no plr-107251-18 later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination steps were taken a so that the corporation for which the election was made or the termination occurred is a small_business corporationor a qualified_subchapter_s_subsidiary as the case may be or b to acquire the required shareholder consents and the corporation for which the election was made or the termination occurred and each person who was a shareholder in such corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of such corporation as an s_corporation or a qualified_subchapter_s_subsidiary as the case may be as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such ineffectiveness or termination such corporation shall be treated as an s_corporation or a qualified_subchapter_s_subsidiary as the case may be during the period specified by the secretary conclusion based solely on the facts submitted and the representations made we conclude that x’s s_corporation_election was ineffective on date2 as a result of the second class of stock due to the liquidation provision contained in x’s operating_agreement we conclude that this ineffectiveness was inadvertent within the meaning of sec_1362 pursuant to the provisions of sec_1362 x will be treated as an s_corporation beginning on date2 and continuing thereafter unless x’s s_corporation_election otherwise terminated under sec_1362 for other reasons except as expressly provided herein no opinion is expressed or implied concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed or implied regarding x’s eligibility to be an s_corporation the ruling contained in this letter is 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 a ruling it is subject_to verification on examination 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-107251-18 in accordance with the power_of_attorney on file with this office copies of this letter are being sent to your authorized representatives sincerely caroline e hay assistant to the branch chief office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number 468a - ------------------------------------ ---------------------------- ------------------------ ----------------------------- - department of the treasury washington dc person to contact ------------------------------------------------ telephone number --------------------- refer reply to cc psi b06 - plr-169702-03 date date re -------------------------------------------------- ----------------------------------------------------------------- legend taxpayer parent plant location method commission fund dear ------------- ----------------------------------------------------- ------------------------------------------- ----------------------- ------------------------ ----------------------------------------------------------------- --------------------------------------- --------------------------------------------------------- ------------------------------------------------- ------------------------------------------- this letter responds to your request on behalf of taxpayer dated -------------------- -------- for a revised schedule of ruling amounts pursuant to ' 468a-3 i of the income_tax regulations taxpayer was previously granted revised schedules of ruling amounts on ------------------------- and -------------------------- information was submitted pursuant to ' 468a-3 h taxpayer now seeks an elective review of the prior revised schedule of ruling amounts taxpayer represents the facts and information relating to its request for a revised schedule of ruling amounts as follows plr-169702-03 taxpayer is a subsidiary of parent taxpayer has a direct ownership_interest in the plant of ----percent as a tenant in common the plant is situated at location plant s operating license expires in ------ the estimated base cost for decommissioning plant is based on an independent study and the proposed method of decommissioning the plant is method taxpayer is subject_to the jurisdiction of commission in decision -------------- effective ---------------------- commission modifying a prior order authorized nuclear decommissioning costs to be included in the taxpayer s cost of service for ratemaking purposes for plant in the amount of dollar_figure--------------for ------- and dollar_figure--------------for ------- through ------ the commission estimated an after-tax rate of return on the assets of ----- -------percent through ---------------percent for ---------------percent for --------------------------- -----------------------------------------------------------------------------------------------percent for ------ ---------------percent for ------- and -------for ------- and later commission estimated the total cost on a system basis of decommissioning taxpayer s interest in plant to be dollar_figure----- -------------------in ------- dollars this base cost of decommissioning plant is escalated using rates determined by an economic forecasting company and adopted by the commission for labor contract labor materials and other costs and an escalation rate determined by the commission of -----percent for --------------------------------------------------- ---------using these factors the total future cost of decommissioning taxpayer’s interest in plant is estimated to be dollar_figure--------------------in ------- dollars the funding_period for the plant extends from ------- through ------- and the level_funding limitation period for the plant extends from ------- through ------- the estimated period for which the fund will be in effect is --- years ------- through ------- the estimated_useful_life of the plant is ----years ------- through ------- thus the taxpayer has calculated its qualifying percentage to be --------percent sec_468a provides that a taxpayer may elect to deduct the amount of there are no proceedings pending before commission that may result in a change to the amount of decommissioning costs for the plant to be included in the taxpayer s cost of service for ratemaking purposes payments made to a qualified decommissioning fund however ' 468a b limits the amount_paid into such fund for any taxable_year to the lesser_of the amount of nuclear decommissioning costs allocable to this fund which is included in the taxpayer's cost of service for ratemaking purposes for the tax_year or the ruling_amount applicable to this year sec_468a provides that no deduction shall be allowed for any payment to the nuclear decommissioning fund unless the taxpayer requests and receives from the secretary a schedule of ruling amounts the ruling_amount for any_tax year is plr-169702-03 defined under ' 468a d as the amount which the secretary determines to be necessary to fund that portion of nuclear decommissioning costs which bears the same ratio to the total nuclear decommissioning costs with respect to the nuclear power plant as the period for which the nuclear decommissioning fund is in effect bears to the estimated_useful_life of the plant this term is further defined to include the amount necessary to prevent excessive funding of nuclear decommissioning costs or funding of these costs at a rate more rapid than level_funding taking into account such discount rates as the secretary deems appropriate sec_468a provides that a taxpayer shall be deemed to have made a payment to the nuclear decommissioning fund on the last day of a taxable_year if the payment is made on account of such taxable_year and is made within months after the close of the tax_year sec_1_468a-1 provides that an eligible_taxpayer may elect to deduct nuclear decommissioning costs under sec_468a of the code an eligible_taxpayer as defined under ' 468a-1 b of the regulations is a taxpayer that has a qualifying interest in among other things a direct ownership_interest sec_1_468a-1 provides that the term qualifying interest means a leasehold interest in any portion of a nuclear power plant if a the holder of the leasehold interest is subject_to the jurisdiction of a public_utility commission with respect to such portion of the nuclear power plant b the holder of the leasehold interest is primarily liable under federal or state law for decommissioning such portion of the nuclear power plant and c no other person establishes a nuclear decommissioning fund with respect to such portion of the nuclear power plant sec_1_468a-2 provides that the maximum amount of cash payments made or deemed made to a nuclear decommissioning fund during any_tax year shall not exceed the lesser_of the cost of service amount applicable to the nuclear decommissioning fund for such tax_year or the ruling_amount applicable to the nuclear decommissioning fund for such tax_year sec_1_468a-3 provides that in general a schedule of ruling amounts for a nuclear decommissioning fund is a ruling specifying annual payments that over the tax years remaining in the funding_period as of the date the schedule first applies will result in a projected balance of the nuclear decommissioning fund as of the last day of the funding_period equal to and in no event more than the amount of decommissioning costs allocable to the fund sec_1_468a-3 provides that to the extent consistent with the principles and provisions of this section each schedule of ruling amounts shall be based on the reasonable assumptions and determinations used by the applicable public_utility plr-169702-03 commission in establishing or approving the amount of decommissioning costs to be included in the cost of service for ratemaking purposes under ' 468a-3 a the internal_revenue_service shall provide a schedule of ruling amounts identical to the schedule proposed by the taxpayer but no such schedule shall be provided by the service unless the taxpayer's proposed schedule is consistent with the principles and provisions of that section sec_1_468a-3 provides that in general the amount for any_tax year in the level_funding limitation period shall not be less than the ruling_amount for any earlier tax_year under ' 468a-3 b the level_funding limitation period begins on the first day of the first tax_year for which a deductible payment is made to the nuclear decommissioning fund and ends on the last day on which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes sec_1_468a-3 provides that the amount of decommissioning costs allocable to a nuclear decommissioning fund is the taxpayer's share of the total estimated cost of decommissioning the nuclear power plant multiplied by the qualifying percentage sec_1_468a-3 provides that in general the total estimated cost of decommissioning a nuclear power plant is the reasonably estimated cost of decommissioning used by the applicable public_utility commission in establishing or approving the amount of these costs to be included in cost of service for ratemaking purposes sec_1_468a-3 provides that a taxpayer's share of the total estimated cost of decommissioning a nuclear power plant equals the total estimated cost of decommissioning such plant multiplied by the taxpayer's qualifying interest in the plant under ' 468a-3 d the qualifying percentage for any nuclear decommissioning fund is equal to a fraction the numerator of which is the number of tax years in the estimated period for which the nuclear decommissioning fund is to be in effect and the denominator of which is the number of tax years in the estimated_useful_life of the applicable plant sec_1_468a-3 provides that the estimated period for which a nuclear decommissioning fund is to be in effect begins on the later of the first day of the first taxable_year for which a deductible payment is made to the nuclear decommissioning fund or deemed made or the first day of the taxable_year that includes the date that the nuclear power plant begins commercial operations as determined by the applicable public_utility commission at the time the plant was first included in the taxpayer's rate base and ends on the last day of the taxable_year that includes the estimated date on which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes according to ' 468a-3 e the plr-169702-03 estimated date on which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes is determined under the ratemaking assumptions used by the applicable public_utility commission in establishing or approving rates during the first ratemaking proceeding in which the nuclear power plant was included in the taxpayer's rate base sec_1_468a-3 provides that the estimated_useful_life of a nuclear power plant begins on the first day of the taxable_year that includes the date that the plant begins commercial operations as determined by the applicable public_utility commission at the time the plant was first included in the taxpayer's rate base and ends on the last day of the taxable_year that includes the estimated date on which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes according to ' 468a-3 e the estimated date on which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes is determined under the ratemaking assumptions used by the applicable public_utility commission in establishing or approving rates during the first ratemaking proceeding in which the nuclear power plant was included in the taxpayer's rate base sec_1_468a-3 provides that the internal_revenue_service shall not provide a taxpayer with a schedule of ruling amounts for any nuclear decommissioning fund unless the public_utility commission that establishes or approves the rates for electric energy generated by the plant has determined the amount of decommissioning costs to be included in the taxpayer's cost of service for ratemaking purposes and has disclosed the after-tax rate of return and any other assumptions and determinations used in establishing or approving the amount sec_1_468a-3 enumerates the information required to be contained in a request for a schedule of ruling amounts filed by a taxpayer in order to receive a ruling_amount for any taxable_year sec_1_468a-3 provides that any taxpayer that has previously obtained a schedule of ruling amounts can request a revised schedule of ruling amounts such a request must be made in accordance with the rules of ' 468a-3 h the internal_revenue_service shall not provide a revised schedule of ruling amounts applicable to a taxable_year in response to a request for a schedule of ruling amounts that is filed after the deemed payment deadline date for such taxable_year sections a and c of the energy act of eliminated for taxable years after date the investment restrictions contained in ' 468a e c sections b and c of the energy act of revised ' 468a e by lowering the tax_rate applicable to a nuclear decommissioning fund for taxable years beginning after date plr-169702-03 we have examined the representations and information submitted by the taxpayer in relation to the requirements set forth in ' 468a and the regulations thereunder based solely upon these representations of the facts we reach the following conclusions taxpayer has a qualifying interest in the plant and is therefore an eligible_taxpayer under ' 468a-1 b of the regulations commission has determined the amount of decommissioning costs to be included in the taxpayer's cost of service for ratemaking purposes as required by ' 468a-3 g of the regulations taxpayer as owner of the plant has calculated its share of the total decommissioning costs under ' 468a-3 d of the regulations taxpayer has determined that pursuant to ' 468a-3 d of the regulations the qualifying percentage is --------percent taxpayer has proposed a schedule of ruling amounts which meets the requirements of 468a-3 a and of the regulations the annual payments specified in the proposed schedule of ruling amounts are based on the reasonable assumptions and determinations used by commission and will result in a projected fund balance at the end of the funding_period equal to or less than the amount of decommissioning costs allocable to the fund the maximum amount of cash payments made or deemed made to the fund during any_tax year is restricted to the lesser amount of the decommissioning costs applicable to the fund or the ruling applicable to the fund as set forth under ' 468a- b of the regulations taxpayer has calculated its share of the total decommissioning costs as required by ' 468a- f of the regulations based solely on the determinations above we conclude that the taxpayer's proposed schedule of ruling amounts satisfies the requirements of ' 468a of the code plr-169702-03 approved schedule of ruling amounts for taxable years ------- year ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- through ------- amount --------------------- --------------------- --------------------- --------------------- --------------------- --------------------- --------------------- --------------------- --------------------- --------------------- --------------------- approval of the schedule of ruling amounts is contingent on there being no change in the facts and circumstances known or assumed at the time the current ruling is issued if any of the events described in ' 468a-3 i iii occur in future years the taxpayer must request a review and revision of the schedule of ruling amounts generally the taxpayer is required to file such a request on or before the deemed payment deadline date for the first taxable_year in which the rates reflecting such action became effective when no such event occurs the taxpayer must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline of the tenth taxable_year following the close of the tax_year in which the most recent schedule of ruling amounts was received except as specifically determined above no opinion is expressed or implied concerning the federal_income_tax consequences of the transaction described above the approved schedule of ruling amounts is relevant only to those payments made to the fund payments allocable to any funds other than the fund cannot qualify for purposes of the deduction under the provisions of ' 468a of the code payments made to such fund can qualify only to the extent that they do not exceed the lesser_of the decommissioning costs applicable to such fund or the ruling amounts applicable to this fund in the tax_year this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides 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 the plr-169702-03 taxpayer we are also sending a copy of this letter_ruling to the industry director natural_resources and construction lm nrc pursuant to ' 468a-7 a a copy of this letter must be attached with the required election statement to the taxpayer's federal_income_tax return for each tax_year in which the taxpayer claims a deduction for payments made to the fund sincerely yours cc ---------------------- --------------------------------- ------------------------------------------------------------ ----------------------------- ----------------------------- peter c friedman senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries


internal_revenue_service number release date index number ------------------ ------------------- --------------------------- --------------------------- ------------- ---------------------------------- - - department of the treasury washington dc person to contact ---------------------- id no --------------- telephone number --------------------- refer reply to cc intl plr-155048-06 date date -------------------------------------------------- ---------------------------------- ----------------------------------------------- ----------------------------------------------------- --------------------------- ------- taxpayer ------------------------------------------------------------------------------ entity entity entity entity year year year year year year country a cpa firm cpa firm ------------ ------- ------- ------- ------- ------- ---------------------------- -------------------------- in re plr-155048-06 cpa firm dear ------------- this is in response to a letter date requesting an extension of time under sec_301_9100-3 to file elections under sec_1_1503-2t g i and annual certifications under sec_1_1503-2 or sec_1_1503-2t g vi b as applicable with respect to dual consolidated losses attributable to the taxpayer’s interest in entitie sec_1 through for year sec_1 through the information submitted for consideration is substantially as set forth below the ruling contained in this letter is predicated 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 a part of the audit process for year sec_1 through taxpayer’s u s corporate tax department prepared and filed the form_1120 u s_corporation income_tax return for taxpayer’s u s consolidated_group cpa firm reviewed and signed taxpayer’s year return but failed to advise taxpayer of the need to file an annual certification with respect to the dual_consolidated_loss incurred by entity in year cpa firm reviewed and signed taxpayer’s year return but failed to advise taxpayer of the need to file and annual certification with respect to the dual consolidated losses_incurred by entity in year sec_1 and cpa firm reviewed and signed taxpayer’s year and year return but failed to advise taxpayer of the need to file annual certifications for the dual consolidated losses_incurred by entity in year sec_1 through and annual certifications for the dual consolidated losses_incurred by entity in year sec_3 and cpa firm also failed to advise taxpayer of the need to file elections and agreements with respect to the dual consolidated losses_incurred by entity and in year taxpayer’s interests in entitie sec_1 through are hybrid_entity separate units as described in sec_1_1503-2 the income_tax laws of country a do not deny the use of losses expenses or deductions of entity to offset income of another person because entity is also subject_to income_taxation by another country on its worldwide income or on a residence basis the income_tax laws of country a do not deny the use of losses expenses or deductions of entity to offset income of another person because entity is also in re plr-155048-06 subject_to income_taxation by another country on its worldwide income or on a residence basis the income_tax laws of country a do not deny the use of losses expenses or deductions of entity to offset income of another person because entity is also subject_to income_taxation by another country on its worldwide income or on a residence basis sec_301 -1 b provides that an election includes an application_for relief in respect of tax and defines a regulatory election as an election whose due_date is prescribed by a regulation a revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 provides that the commissioner has discretion to grant a taxpayer a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government in the present situation the filings described in sec_1_1503-2 and sec_1_1503-2t g are regulatory elections as defined in sec_301 b therefore the commissioner has discretionary authority under sec_301_9100-1 to grant taxpayer an extension of time provided that taxpayer satisfies the rules set forth in sec_301_9100-3 based on the facts and information submitted we conclude that taxpayer satisfies sec_301_9100-3 accordingly taxpayer is granted an extension of time of days from the date of this ruling letter to file the following the annual certifications required under sec_1_1503-2 or sec_1_1503-2t g vi b as applicable with its tax_return for year sec_2 through with respect to the losses_incurred in year sec_1 through that are attributable to taxpayer’s interest in entity the annual certifications required under sec_1_1503-2 or sec_1_1503-2t g vi b as applicable with its tax_return for in re plr-155048-06 year sec_4 and with respect to the losses_incurred in year sec_3 and that are attributable to taxpayer’s interest in entity with its tax_return for year with respect to the loss attributable to taxpayer’s interest in entity for year the election and agreement required under sec_1_1503-2t g i the election and agreement required under sec_1_1503-2t g i with its tax_return for year with respect to the loss attributable to taxpayer’s interest in entity for year the granting of an extension of time is not a determination that taxpayer is otherwise eligible to file the annual certifications sec_301_9100-1 for example a taxpayer that is subject_to mirror legislation enacted by a foreign_country may be ineligible to file election agreements pursuant to sec_1_1503-2 a copy of this ruling letter should be associated with the elections and the annual certifications that are the subject of this ruling this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent no ruling has been requested and none is expressed as to the application of any other section of the code or regulations to the facts presented pursuant to a power_of_attorney on file in this office a copy of this ruling letter is being furnished to taxpayer’s authorized representatives enclosure copy for purposes _______________ jeffrey l dorfman branch chief cc intl br5 sincerely