t c memo united_states tax_court michael w and caroline p huber et al petitioners v commissioner of internal revenue respondent docket nos filed date arthur d sederbaum walter luers stephen p younger and catherine g schmidt for petitioners joseph boylan for respondent 1cases of the following petitioners are consolidated herewith tabitha a huber docket no hans a huber and laurel d huber docket no michael w and caroline p huber docket no memorandum findings_of_fact and opinion goeke judge this case concerns the proper amounts of gift_tax that petitioners michael w and caroline p huber tabitha a huber and hans a and laurel d huber should pay under section on gifts of stock in the j m huber corp huber that they reported on their form sec_709 united_states gift_tax_return during the period through huber stock was not publicly traded and petitioners valued their gifts on the basis of the prices huber used for shareholder stock transactions these prices were determined by an independent_appraiser and used in various transactions involving huber stock the controversy stems from disagreement over whether these sales constitute arm’s-length transactions we hold that the transactions in question are evidence of an arm’s-length price and support the values petitioners set on their gifts findings_of_fact petitioners resided in new jersey at the time of filing their petitions huber corp huber was founded in by joseph maria huber j m huber who emigrated from germany to new york city and started a printing business huber is headquartered in edison new jersey 2unless otherwise indicated all section references are to the internal_revenue_code as amended huber operates a diversified business with annual sales in excess of dollar_figure million during the years in question huber is a privately held corporation but its governance structure strives to emulate public companies by maintaining a high level of communications with its shareholders during the relevant taxable years there were approximately shareholders who were generally huber family members as permitted by huber’s bylaws there were also big_number to big_number employees most of whom were not related to the huber family huber is governed by its board_of directors the board the majority of whom are not members of the huber family huber’s ceo president and chairman peter francis was one of petitioners’ principal witnesses mr francis has been president of huber since and chairman since he is the great-grandson of j m huber pursuant to huber’s bylaws there is no public market for huber shares since huber has retained ernst young e y to annually appraise the huber shares however shareholders may seek waivers from the board to transfer huber stock to nonprofit_organizations which are then allowed to hold the shares or sell them to permitted shareholders under huber’s bylaws the shares of huber are held by members of the huber family the huber foundation a nonprofit charitable_organization and various independent nonprofit_organizations including universities although huber has no formal stock buy-back program its bylaws authorize it to redeem stock from huber shareholders the board is empowered to authorize redemptions and set the price at which such redemptions are offered during the years to the board authorized redemptions in huber bought back shares at the e y value for redemptions in the years to the redemptions were at the e y price le sec_5 percent these redemptions were from huber family shareholders who wished to liquidate their shares and from nonprofit_organizations that have received donations of shares which include the massachusetts institute of technology dartmouth college hitchcock medical hamilton college the nature conservancy and the family planning organization each of these transactions used the e y value to determine the redemption price huber’s bylaws provide the corporation the right_of_first_refusal to purchase shares offered outside the huber family at a price specified in the bylaws the bylaws provide that if any shareholder attempts to sell his shares to a buyer not authorized by the bylaws huber has the irrevocable option to purchase the shares at the lower_of the offer price the book_value or the formula price set by the bylaws the bylaws authorize sale of huber shares to huber family members including lineal 3the formula prices set by huber’s bylaws was dollar_figure dollar_figure dollar_figure and dollar_figure per share for the taxable years to respectively descendants of j m huber their spouses their children trusts whose beneficiaries are such persons and the huber foundation the bylaws also authorize shareholders to sell to independent nonprofit_organizations after obtaining a waiver from the board e y report since huber has retained e y to prepare a valuation of huber and its determination is reviewed each year by the chair of huber’s audit committee e y does not perform any other auditing functions for huber e y has used a consistent methodology for valuing huber shares which is comparing huber to comparable publicly traded companies e y applies a 50-percent lack of marketability discount from the freely traded value of the shares although shareholders are not generally sent copies of the e y reports the reports are available for inspection by huber shareholders the e y reports were used for the following valuation purposes by huber and its shareholders valuing gifts of huber shares made to nonprofit_organizations valuing both the grant and exercise of stock_options issued to huber’s ceo fixing the compensation of huber’s board members evaluating the performance of huber as a whole and valuing shares that are bought back by huber from its shareholders no one at huber ever indicated what value or discount was wanted before e y completed the reports mr francis did not receive draft reports in advance transactions between shareholders from to there have been approximately transactions of huber shares between shareholders the shareholders are not obligated to use the e y value to sell their shares the relationships between buyers and sellers varied some were as close as between parents and children or grandparents and grandchildren others were as distant as between a_trust and a spouse of a second cousin other transactions involved nonprofit_organizations which sold shares to huber family members each of these sales occurred at the e y value petitioners timely filed their form sec_709 for the taxable years to reflecting gifts of huber shares from petitioners to their lineal_descendants petitioners based the values assigned to the shares on the valuation reports prepared by e y at trial petitioners relied principally on two sets of transactions as representative examples of the sales the brown estate transactions brown estate and the anne foster trust transactions foster trust the brown estate transactions ellen mertens brown a third-generation descendant of j m huber died in at her death mrs brown owned over big_number huber shares mrs brown’s son bruce seely and her stepson george brown were named as coexecutors of the brown estate the coexecutors intended to sell some of mrs brown’s shares of huber in order to pay the estate_tax since the value of the shares had not been finally determined for federal estate_tax purposes the coexecutors obtained from the internal_revenue_service irs a series of five 1-year extensions to pay the estate_tax in mid-1997 the coexecutors settled the estate_tax issues with the irs and agreed upon the payment_date of date for the estate_tax liability in the fall of mr seely who was also a huber family_member sought to raise the necessary funds to satisfy the estate_tax liability by selling the brown estate shares held in huber mr seely understood that he owed fiduciary duties to the brown estate’s beneficiaries of whom he was one to get the best price for the estate’s huber shares mr seely was familiar with e y’s valuation and received an overview of its report annually in addition mr seely attended huber’s annual shareholder meetings served as a nonvoting director and received huber’s quarterly reports operating plan and budget in date mr seely and mr brown as coexecutors of mrs brown’s estate sold big_number huber shares to a total of purchasers many of whom included distant relatives or trustees acting in their fiduciary capacities two of the buyers w anthony brooke and peter s brock testified at trial mr brooke is the husband of mr seely’s second cousin mr brooke holds an m b a from stanford and currently runs a private equity firm called jmh capital mr brooke regularly received and reviewed huber’s 5-year plan yearly budgets monthly financial reports and annual reports mr brock is mr seely’s first cousin but sees him only occasionally mr brock is an architect with a b a from princeton university and a master’s in architecture from the university of california mr brock served on huber’s board for years and on several other committees all of the purchasers of huber shares from the brown estate paid the e y value foster trust transactions anne h foster a third-generation huber family_member died in after the death of her surviving_spouse raymond foster the beneficiaries of ms foster’s trust were her four children and three nonprofit_organizations in eric goetz became cotrustee of the foster trust together with one of ms foster’s daughters lynn zinn mr goetz and ms zinn were also coexecutors of ms foster’s estate at that time the foster trust held approximately big_number shares of huber stock mr goetz is not a member of the huber family and does not own any huber stock individually in the foster trust needed dollar_figure to satisfy trust expenses including legal and accounting fees and reimbursement for the estate_taxes paid_by the raymond foster estate mr goetz and ms zinn as cotrustees raised this cash through several methods one was a sale of shares to several other family members and to a nonprofit organization at the e y value the cotrustees raised approximately dollar_figure from these sales erika dade one of ms foster’s children and a beneficiary of the foster trust as well as a purchaser of huber shares from the foster trust testified she attends huber’s annual meetings and receives and reviews huber’s quarterly reports and communications from its divisions regarding the performances of their business sectors she has served as a nonvoting huber board member and sat on huber’s audit committee she regularly speaks with huber’s ceo mr francis who also is her brother about the corporation further she is knowledgeable about the e y valuation and comfortable with the e y value she understands the methodology that e y used to her knowledge no one has ever complained about the e y valuation ms dade is aware that other shareholders were buying and selling at the e y price and that the board was using the e y value to determine their compensation and to measure the performance of huber notices of deficiency respondent issued separate notices of deficiency to petitioners petitioners thereafter timely filed petitions with this court objecting to the notices of deficiency respondent agreed with e y’s freely traded values of huber shares however respondent took issue with the appropriate discount for lack of marketability because of a report by respondent’s expert appraisal economics inc while e y has always applied a 50-percent discount since its employment with huber in respondent’s expert applied a 30-percent discount for a 25-percent discount for a 45-percent discount for and a 30-percent discount for the discrepancies in valuation of the shares are as follows year petitioners’ value dollar_figure dollar_figure dollar_figure dollar_figure respondent’s value dollar_figure dollar_figure dollar_figure dollar_figure respondent also rejected the e y values because he determined the sales at these values were not arm’s-length transactions the threshold issue at trial was whether there 4respondent issued separate notices of deficiency determining deficiencies in the gift_tax of petitioners michael a and caroline p huber for the tax years and tabitha a huber for the tax years and and hans a and laurel d huber for the tax_year were arm’s-length sales of huber shares that could be used to determine the values of the gifts made by petitioners i burden_of_proof opinion respondent argues that under sec_7491 the burden_of_proof does not shift to respondent but remains with petitioners we do not reach this issue because we find that the outcome of this case is determined on the preponderance_of_the_evidence and is unaffected by sec_7491 see 124_tc_95 citing 394_f3d_1030 8th cir affg t c memo estate of stone v commissioner t c memo ii arm’s-length quality of huber stock sales sec_2501 imposes a tax on the transfer of property by gift during the taxable_year this tax is imposed whether the transfer is in trust or otherwise and whether the gift is direct or indirect sec_2511 a gift of property is valued as of the date of the transfer sec_2512 the gift is measured by the value of the property passing from the donor rather than by the value of the property received by the donee or upon the measure of enrichment to the donee see sec_25_2511-2 gift_tax regs the fair_market_value of the transferred property is the price at which such property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts sec_25_2512-1 gift_tax regs where property is transferred for less than adequate_and_full_consideration in money or money’s worth the amount_of_the_gift is the amount by which the value of the property transferred exceeds the value of the property received see sec_2512 in determining the value of unlisted stocks actual arm’s-length sales of the stock in the normal course of business within a reasonable_time before or after the valuation_date are the best criteria of market_value 87_tc_78 citing 73_tc_266 the parties dispute whether sales of huber stock at the value set by e y qualified as arm’s-length sales petitioners cite 243_f3d_1145 9th cir revg estate of kaufman v commissioner tcmemo_1999_119 to support the proposition that the transactions at issue qualify as arm’s-length sales in morrissey a family-owned_corporation retained merrill lynch to appraise a minority interest on the basis of the report two shareholders sold their shares to the second largest shareholder at the price set by merrill lynch each seller testified that the price was fair and that the sale had been under no compulsion the court_of_appeals for the ninth circuit found that these two transactions satisfied the requirements of an arm’s-length sale because family connections were not particularly close sellers were under no compulsion to sell sellers had no reason to doubt an independent valuation of the shares by a reputable firm and there was evidence that there was no intention to make a gift to the buyer petitioners cite each of these factors in support of their position while respondent contests each factor’s application to this case we declined to extend morrissey in 120_tc_358 appeal docketed no 5th cir however mccord is distinguishable because the taxpayers based the valuation of the stock on an assignment of a portion of a partnership transferred by gift instead of on a previous sale of the stock the taxpayers who were husband and wife assigned their partnership interests to their children and two nonprofit_organizations the assignees pursuant to the assignment agreement executed a confirmation agreement to divide the interest amongst themselves the interest was valued by an appraiser retained by the children the taxpayers citing morrissey argued that the confirmation agreement was conclusive proof of the value_of_the_gift interest because the agreement was an arm’s-length transaction that was the functional equivalent of an actual arm’s-length sale id pincite n we disagreed stating that it is against the economic_interest of a charitable_organization to look a gift horse in the mouth id the facts in this case are not analogous to those of mccord because here actual sales took place the nonprofit_organizations that acquired huber shares without compulsion to sell sold them for the price that the e y appraisal suggested unlike mccord this is not a situation where having been designated to receive a gift the charity would have taken whatever it could get therefore mccord is distinguishable on its facts the parties’ analytical framework corresponds to the factors discussed in morrissey the parties base their conclusions about the arm’s-length nature of the sales on their view of the huber family relationships the presence or lack of compulsion on the part of the seller the reasonableness of the shareholders’ reliance on the e y value and the intent of the parties with respect to the sales we shall therefore generally follow this framework and address any collateral arguments that the parties raise iii relationship of shareholders in huber respondent brings to our attention that this court has consistently closely scrutinized purported transactions between related parties such as family members and often concluded that they were not arm’s-length transactions see 371_f3d_257 5th cir estate of bongard v commissioner t c pincite we find respondent’s characterization of the issue to be too narrow and in addition it ignores facts that we find critical to the outcome of this case respondent focuses on isolated sales that took place between closely related family members as if they were the only sales there were over transactions that took place between and by huber shareholders involving an amalgam of relationships between immediate relatives between more distant relatives and between shareholders of huber and independent nonprofit_organizations each of these sales took place at the e y value respondent also suggests that there was a taint of 5respondent frames his arguments in this case around the premise that there were only two sales of huber stock--the brown estate and the foster trust--that provide the basis for determining whether the sale of huber stock was at arm’s length although the foster trust and brown estate sales were the most factually developed in the record and the center of the testimony the record also shows that there were a total of sales between huber shareholders since these sales included transactions between distant relatives and trusts independent nonprofit_organizations and huber and huber family members and independent nonprofit_organizations respondent maintains that these transactions were not in the record however the ceo of huber and one of the former members of the board credibly testified as to their personal knowledge of these transactions therefore we are not basing our conclusions solely on the foster trust and brown estate sales even though some of the transactions in those sales included parties that were not closely related impropriety in the brown estate transaction because mr seely and his children were beneficiaries of trusts that purchased a portion of the shares however mr seely credibly testified that he had no knowledge that there were shares being purchased for these trusts since his contact was with the trustee who was also the trustee of various other trusts and who did not identify the particular trust for which he was buying the shares in addition those particular transactions make up just big_number shares of the over big_number shares of the brown estate shares that were sold at the e y price we have already indicated that many of those sales took place between parties who had no reason to accept a price that was artificially low in the case of the brown estate mr seely also sold shares to the husband of his second cousin at the e y price mr seely testified that he rarely saw the distantly related buyer and was not particularly close to him therefore mr seely had no reason to offer the shares to anyone at a bargain price indeed mr seely had every reason to sell the stock at a fair price because as coexecutor of the estate he had a fiduciary duty to the estate’s beneficiaries to do so similarly mr goetz testified that he absolutely understood that he was acting as a fiduciary of the foster trust in selling the shares we therefore conclude that the existence of close family relationships between parties of some of the sales transactions in the record is neutralized by the fact that many of the transactions took place between parties that were hardly related or unrelated and who had fiduciary obligations to obtain the best price we view the variety of relationships among the shareholders in huber as a positive indicator of the existence of arm’s-length sales iv compulsion respondent argues that the sales of the shares from the brown estate and the foster trust were under compulsion and thus not representative of arm’s-length sales respondent relies on 6_bta_1065 however in acme mills the court found that the taxpayers were under very decided pressure from their creditors to sell the property in order to settle creditor claims id pincite there was no such pressure here the brown estate sold its shares to pay the estate_tax there was no immediate time constraint the executors had been planning for a number of years to sell the shares and were waiting for their tax obligations to be resolved so that they knew how much money was needed once a valuation of the estate was agreed upon with the irs the estate had months to pay the liability the estate was able to sell the shares in just month mr seely testified that he felt no pressure to sell the estate’s shares and that he raised the necessary funds to pay the estate_tax within a matter of weeks we fail to see compulsion similar to that in acme mills similarly in the case of the foster trust mr goetz testified that he was under no pressure to sell the huber shares the sales were made to pay budgeted obligations of the trust and selling huber shares was just one of the ways to raise the money mr goetz had other options to raise the money v e y report the value set by e y was used to set the board’s compensation and measure the financial performance of huber huber has retained e y since to prepare an independent valuation for the different situations that require a valuation of huber shares respondent attempts to demonstrate that the e y reports were not reliable by attacking the e y reports from several angles in order to persuade us that the parties were not reasonably informed about huber’s worth and thus not motivated to realize fair_market_value for the stock first respondent notes that the e y reports were months old at the time of the brown estate transactions and months old at the time of the foster trust transactions respondent cites subsequent valuation reports by e y indicating that the price per share was increased by dollar_figure and dollar_figure respectively because of the time lapse respondent argues that the sellers lost out on some increased profit respondent’s argument ignores the evidence none of the parties who testified believed that there had been a significant change in huber’s finances since the last valuation and those parties demonstrated their independent knowledge of huber’s worth further we do not find the time lapse in this case to be unreasonable see hooker indus v commissioner tcmemo_1982_357 crediting a single sale of stock as best criteria of market_value even though it relied on an appraisal that was months old respondent argues that the parties were not reasonably informed because they did not see a copy of the e y report this narrow argument fails to address that the shareholders of huber including the ones who testified regularly received reports from huber discussed the company with its ceo attended shareholder meetings and participated on huber’s board_of directors and its committees further one of the buyers of the stock from the brown estate mr brooke testified that he did see the e y report whether the shareholders actually saw the report does not influence our conclusion that the parties were well informed because the modus operandi of huber gave plenty of opportunity for shareholders to educate themselves about the company and the e y methodology and the evidence shows that many of the parties to the sales at issue in fact did just that contrary to another argument raised by respondent we do not find donative_intent in the transactions using the e y price to buy and sell huber stock there is no evidence to support this assertion and much evidence that is inconsistent with it for example the ceo’s acceptance of an artificially low e y value for huber stock would be against both his own economic interests and those of huber and its shareholders the success of this centenarian company and the vast acceptance of the e y price by it sec_250 shareholders strongly suggest that the sellers of e y stock had every reason to believe that they were obtaining a fair price for their shares respondent argues that the lack of negotiation in the transactions at issue connotes the lack of an intent to realize the best price for the value of the shares respondent fails to cite any caselaw that holds that negotiation is a necessary element of an arm’s-length transaction in fact the weight of authority is to the contrary see eg kimbell v united_states f 3d pincite absence of negotiations over price or terms is not a compelling factor in the determination as to whether a sale is bona_fide particularly when the exchange value is set by objective factors hooker indus v commissioner supra stock sale deemed best evidence of value where there was no price negotiation and parties accepted a third-party’s valuation respondent offers a final reason we should not consider the sales of huber stock to be at arm’s length he argues that the huber shareholders by not offering their shares for sale to the public failed to obtain the optimum price which respondent assumes is higher than the e y value respondent suggests that it is not unreasonable to assume that an unrelated individual or corporation would be willing to pay a premium in excess of the value huber corporation sets to invest in the company respondent corroborates this argument by suggesting that the bylaws of huber provide a right-of-first-refusal provision whereby shares offered to nonfamily members could be purchased by the corporation at a price generally higher than the value that e y computes we disagree we reject the notion that huber must take itself public in order to sell its shares at a fair price courts have long recognized the rights of shareholders in closely held companies to remain private 92_tc_312 in addition the ceo mr francis provided in his testimony bona_fide business purposes for staying private he testified that keeping huber private would allow the company to advance key values and have a long-term view of its business respondent takes his argument a step further by postulating that the bona_fide business_purpose of maintaining family control should be set_aside if it serves as a device to pass an interest to the natural objects of one’s bounty or to convey that interest for less than full and adequate_consideration see estate of true v commissioner tcmemo_2001_167 affd 390_f3d_1210 10th cir bommer revocable_trust v commissioner tcmemo_1997_380 this is another instance where respondent narrowly focuses on some of the transactions at issue without taking into account that the e y value of the stock was used in many instances for example in the case of a charitable donation a higher value would be preferable because that would result in a larger deduction we reject respondent’s suggestion that almost shareholders would harmoniously accept an artificially low valuation of the huber stock so that a few people who may or may not be related to them can pay less estate_tax further respondent’s assumption that offering a stock to the public would have garnered a higher price is purely hypothetical the only evidence respondent offers is a mischaracterization of the huber bylaws respondent maintains that the buyback provisions provide a price that is higher than the e y value according to respondent’s logic if the stock were offered to a third party and huber exercised its right_of_first_refusal it would buy the shares back at a price higher than the e y price this is incorrect while the formula price set in the bylaws may be higher than the e y value respondent ignores the fact that any buyback would be at the lower end of the formula price book_value or price offered by a third party there is no basis to suggest that there was a market available wherein a potential buyer would purchase huber shares at a price higher than the e y value vi conclusion not only have petitioners prevailed on all of the factors listed in morissey v commissioner 243_f3d_1145 9th cir but several other facts already discussed make their case stronger than that of the taxpayers in morissey we conclude that the sales of huber stock established in the record are arm’s-length sales that demonstrate the best reference for the valuation of huber shares on petitioners’ gift_tax returns to reflect the foregoing decisions will be entered for petitioners in docket nos and


department of the treasury employer_identification_number contact person - id number contact telephone number uil internal_revenue_service p o box cincinnati oh release number release date date date legend b foundation c llc d grant program e religion f dollar amount g dollar amount h dollar amount j dollar amount k dollar amount m dollar amount dear you asked for advance approval of your educational grant procedures under internal_revenue_code sec_4945 this approval is required because you are a private_foundation that is exempt from federal_income_tax our determination we approved your procedures for awarding educational grants based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding educational grants meet the requirements of code sec_4945 as a result expenditures you make under these procedures won't be taxable description of your request b a foundation and the sole member of c operates an educational grant program called d the purpuse of d is to deepen and enrich the e educational learning opportunities of students and where relevant or desired their families by offering grants to organizations for use in such programs while b will primarily fund d b may request that other donors enter into their original grant agreement with the recipient in providing additional funding you plan on operating in connection with b to become an additional donor party to the grant agreement in doing so you will provide grants to the original recipient and funds would be administered and monitored under the procedures established by b described below the duration and amounts of the grants awarded to educational organizations will vary but most are expected to be in the form of three year grants in amounts ranging between f and g dollars per annum you will fund each grantee’s program in the first year thereafter grantee organizations are expected to obtain increasing amounts of donor commitments to cover the costs of their programs you expect to mail informational materials to individual educators who are working at organizations that provide e educational programming to students in grades kindergarten through twelfth grade and college the educators who have received or will receive the solicitation materials and application package have been or will be pre-selected by nominators engaged by you to identify and recruit potential applicant organizations with outstanding educators at their organizations since you do not have educational staff with e educational experience you developed relationships with individual consultants who have experience with formal and informal programming to help identify an appropriate applicant pool and to ensure high quality among the applicant pool you have engaged individuals to serve as nominators in connection with d you requested that the nominators identify a group of outstanding innovative educators working with educational organizations who you could invite to apply for funding nominators were asked to identify individuals with a reputation for implementing high quality programming and a proven track record for achieving educational results additionally you requested that nominators identify educators who the nominators believe can propose new programs that could be implemented by the educational organizations where such educators are employed that would deepen and enrich the knowledge and identity of the students of such organizations and educators and if relevant the families of these students while the objective is to have innovative educators design d programs you will also consider the nature of the organization where the educator is employed as the organization will be responsible for supporting sustaining and implementing the educational programming if the organization is awarded a d grant the class of eligible grantees is limited to educational organizations at which educators identified by the nominators are employed although the invitations are intended to be non-transferable and personal to the identified educators you are committed to building educational programming at the grantee organization under the supervision of either the nominated educator or another qualified educator at the organization that is selected by the grantee organization in making their initial nominations the nominators will take into account the experience of the organization in implementing high quality educational programming letter catalog number 58222y you will review the submitted applications based upon a number of criteria including experience and track record of the applicant organization in executing effective e educational programming the clarity of the plan and budget readiness of the organization to implement the proposed project and goals of the proposal and the probability of the organization achieving the stated goals of the proposal you expect to commit funds to d in grantee organizations to begin developing programs with the nominated educators thereafter the extent to which you will commit to funding programs and new grantees will be determined after an assessment regarding the success of the first grantees’ programs and available_resources its first year sufficient to enable between ten to twenty each grantee may request a different amount for each of the three years as it builds its program in the first year grantees may request between f and g dollars in the second year grantees may request between f and h dollars in the third year grantees may request between f and j dollars in years two and three the grantee organization is expected to also raise program funds from other sources during the third year of the grant you will evaluate the impact of the program and effectiveness of grantee organizations for achieving proposal objectives based upon implementation feedback such as increases in the program participants or quantity of time participants spend engaged in programming supported by d or increased depth or measure of learning as determined by valid educational measures you will invite a number of grantees to apply for an additional two years of grant funding if awarded an extension grant each grantee organization would be eligible to receive a maximum of k dollars in year four and m dollars in year five as with the standard three year grants such extension grant will be made with the expectation that the grantees secure increasing amounts of donor commitments to offset program_costs you will fund each grant in installments with an initial payment up front to fund the first eight months of programming in year one thereafter each grantee organization would submit a report to you every six months upon receipt of a report which evidences the satisfactory continued implementation of the program supervised by an adequately qualified educator whether the initial nominated educator or a replacement selected by the educational_organization you will fund the subsequent payments in years one two and three and if extended years four and five if the nominated educator leaves the educational_organization after you enter into the grant agreement the educational_organization would be responsible for selecting an adequately qualified educator to continue implementing the program grantees will submit written reports to you every six months reports will include a narrative description of the implementation of the educational programming and will be accompanied by a financial report on the use of granted funds compared against the budget a program coordinator or other c representative will regularly communicate with each recipient organization to receive feedback on the funded program and how the grant monies are being spent in connection to such programming letter catalog number 58222y each grant recipient must keep and maintain such financial records and in such a manner so as to adequately reflect and account for_the_use_of the organization grant funds and to furnish originals or authentic copies to the program coordinator upon request c in its sole discretion may take any and all such reasonable and appropriate steps including possibly legal action to compel compliance of use of funds for their intended purpose including requiring the return of all or any portion of funds remitted and the withholding of funds not previously remitted the awarding of d is a multi-faceted process which begins with the initial identification of educational organizations at which nominated educators are then employed nominated educators are then sent informational materials and grant applications which they are encouraged to complete with the appropriate stakeholders at their respective educational organizations applications must be submitted by educational organizations completed applications submitted by those educational organizations are then received by you and evaluated by your selection committee each completed application will be reviewed by one or more members of your staff and a nominator other than the nominator who originally nominated the educator who was the architect for the related proposal each member will rate the application in connection with following parameters e e e e e the internal logic educational strength and process of implementing the educational proposal described in the application the evidence and probability that the proposed educational programming will significantly deepen and enrich the educational growth of the program participants the track record of the organization in implementing educational programming and in successfully implementing new educational programming the readiness of the organization and commitment of the organization to expand and offer the new programming the level of involvement and supervision which the selected educator will assume in guiding the project the selection committee will also be responsible for identifying any relationships between potential grant applicants and disqualified persons and ensure that organizations with any such relationship s are not awarded grants your selection committee consists of one or more members of your staff and a nominator other than the nominator who originally nominated the educator who was the architect for the related proposal if any member of the senior staff or management of a potential grant recipient is either related to whether by blood or through marriage or has any direct or indirect affiliation with the d program coordinator or any director officer_or_employee of you or c they will be ineligible to participate in the program letter catalog number 58222y no director officer_or_employee of you or c or any other person who is involved in the process of selecting applicants for the program will be in a position to derive a private benefit directly or indirectly if certain potential grantees are selected over others basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that meets all of the following requirements of code sec_4945 is not a taxable_expenditure e e e the foundation awards the grant on an objective and nondiscriminatory basis the irs approves in advance the procedure for awarding the grant the grant is - - - ascholarship or fellowship subject_to sec_117 and is to be used for study at an educational_organization described in sec_170 or aprize or award subject_to the provisions of sec_74 if the recipient of the prize or award is selected from the general_public or to achieve a specific objective produce a report or similar product or improve or enhance a literary artistic musical scientific teaching or other similar skill or talent of the recipient to receive approval of its educational grant procedures sec_53_4945-4 requires that a private_foundation show e e e the grant procedure includes an objective and nondiscriminatory selection process the grant procedure results in the recipients performing the activities the grants were intended to finance the foundation plans to obtain reports to determine whether the recipients have performed the activities that the grants were intended to finance other conditions that apply to this determination e e e this determination covers only the grant program described above this approval will apply to succeeding grant programs only if their standards and procedures don't differ significantly from those described in your original request this determination applies only to you it may not be cited as precedent you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you must report any significant changes in your program to the cincinnati office of exempt_organizations at letter catalog number 58222y internal_revenue_service exempt_organizations determinations p o box cincinnati oh e e e you cannot make grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives all funds distributed to individuals must be made on a charitable basis and must further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 b you should keep adequate_records and case histories so that you can substantiate your grant distributions with the irs if necessary we've sent a copy of this letter to your representative as indicated in your power_of_attorney please keep a copy of this letter in your records if you have any questions please contact the person listed at the top of this letter sincerely director exempt_organizations letter catalog number 58222y


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 ita b01 plr-109230-14 date date ------------------------------------------------ ------- -------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- --------------------------------------------------------------------------- --------------------------------------------------------------------------- -------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- ---------- ---------------------- -------------------------------------------------------------------------------------- --------------------------------------------------------- -------------------------------------------------------------- ------------------------------------------------------------------------- taxpayer taxable_year x sub sub target date advisor firm investor investor dear ------------ this letter responds to your letter dated date submitted on behalf of taxpayer requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to make the election described in sec_4 of revproc_2011_29 2011_18_irb_746 which includes attaching statements to taxpayer’s original federal_income_tax return for taxable_year facts taxpayer is the common parent of an affiliated_group engaged in the business of x taxpayer is a holding_company that does not have any operating activities and for federal_income_tax purposes uses the accrual_method of accounting and has a calendar_year end plr-109230-14 target is in the trade_or_business of x on date taxpayer acquired target in a transaction that taxpayer asserts qualifies as a reorganization under sec_368 and sec_368 of the internal_revenue_code target survived a merger with sub sub was formed by sub sub is disregarded for federal_income_tax purposes pursuant to the terms of the agreement and plan of merger the shareholders of taxpayer investor and investor acquired all of target’s outstanding_stock redeemed all of target’s series a preferred_stock and provided refinancing to target’s credit facilities in connection with the acquisition taxpayer incurred a success-based_fee payable to firm an investment banking firm pursuant to a formal engagement letter firm earned a success-based_fee based on the value of the acquisition and due only when and if the acquisition closed successfully firm earned a success-based_fee upon the successful closing of the acquisition during the taxable_year on taxpayer’s original federal_income_tax return for taxable_year prepared by advisor taxpayer capitalized under sec_263 of the internal_revenue_code percent of the success-based_fee related to the acquisition and treated the remaining percent of the success-based_fee as a start-up_expenditure under sec_195 consistent with taxpayer’s intent to make the election provided in revproc_2011_29 however in reliance on advisor taxpayer failed to attach the mandatory statements identifying the transaction and setting forth this allocation as required by sec_4 of revproc_2011_29 law sec_263 of the internal_revenue_code and sec_1_263_a_-2 of the income_tax regulations provide that no deduction shall be allowed for any amount_paid out for property having a useful_life substantially beyond the taxable_year in the case of an acquisition or reorganization of a business_entity costs that are incurred in the process of acquisition and that produce significant long-term benefits must be capitalized 503_us_79 112_sct_1039 117_led_226 397_us_572 90_sct_1302 25_led_577 under sec_1_263_a_-5 a taxpayer must capitalize an amount_paid to facilitate abusiness acquisition or reorganization transaction described in sec_1_263_a_-5 in general an amount is paid to facilitate a transaction described in sec_1_263_a_-5 if the amount is paid in the process of investigating or otherwise pursuing the transaction whether an amount is paid in the process of investigating or otherwise pursuing the transaction is determined based on all of the facts and circumstances see sec_1 a - b plr-109230-14 sec_1_263_a_-5 provides that an amount_paid that is contingent on the successful closing of a transaction described in sec_1 a - a ie a success-based_fee is presumed to facilitate the transaction a taxpayer may rebut this presumption by maintaining sufficient documentation to establish that a portion of the fee is allocable to activities that do not facilitate the transaction section dollar_figure of revproc_2011_29 provides a safe_harbor election for taxpayers that pay or incur success-based fees for services performed in the process of investigating or otherwise pursuing a covered transaction described in sec_1 a - e in lieu of maintaining the documentation required by sec_1_263_a_-5 a taxpayer may elect to allocate a success-based_fee between activities that facilitate the transaction and activities that do not facilitate the transaction and by treating percent of the amount of the success-based_fee as an amount that does not facilitate the transaction and by capitalizing the remaining percent as an amount that does facilitate the transaction in addition the taxpayer must attach a statement to its original federal_income_tax return for the taxable_year the success-based_fee is paid_or_incurred stating that the taxpayer is electing the safe_harbor identifying the transaction and stating the success-based_fee amounts that are deducted and capitalized sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make certain regulatory elections sec_301_9100-1 defines a regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government see also sec_301_9100-3 and c conclusion based solely on the facts and representations submitted we conclude that taxpayer acted reasonably and in good_faith and granting relief will not prejudice the plr-109230-14 interests of the government accordingly the requirements of sec_301_9100-1 and sec_301_9100-3 have been met taxpayer is granted an extension of days from the date of this ruling to file its mandatory statements as required by section dollar_figure of revproc_2011_29 stating that it is electing the safe_harbor for success-based fees identifying the transaction and stating the success-based_fee amount that is deducted and capitalized the ruling contained in this letter is based upon information and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter including whether taxpayer properly included the correct costs as a success-based_fee subject_to the retroactive election or whether taxpayer’s transaction was within the scope of revproc_2011_29 moreover this ruling does not express or imply any opinion whether taxpayer’s acquisition is within the scope of revrul_90_95 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 a copy of this ruling should be attached to taxpayer’s federal tax returns for the tax years affected alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling in accordance with the provisions of the power_of_attorney currently on file with this office a copy of this letter is being sent to your authorized representative sincerely lewis k brickates chief branch office of associate chief_counsel income_tax accounting


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 intl b02 plr-145374-08 date date ty ------- legend taxpayer fc parent fc year year year firm q firm r -------------------- ------------------- -------------------------------------------------- ----------------- ------------------------------------------ ----------------- ------- ------- ------- --------------------- ---------------------------- dear -------------------------- this is in response to letters dated date and date and subsequent correspondence submitted by taxpayer’s authorized representative that requested the consent of the commissioner of the internal_revenue_service commissioner for taxpayer to make a retroactive qualified_electing_fund qef election under section plr-145374-08 b of the internal_revenue_code code and sec_1_1295-3 with respect to taxpayer’s investment in fc the ruling contained in this letter is based upon information and representations submitted on behalf of taxpayer by his authorized representative and accompanied by a penalties of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of this request_for_ruling such material is subject_to verification on examination the information submitted in the request is substantially as set forth below facts taxpayer is a former u s citizen who owns an interest in parent fc which is the owner of fc fc and parent fc are both foreign_corporations constituting pfics within the meaning of sec_1297 taxpayer was a u s citizen in year when fc was formed fc continued to qualify as a pfic through its year tax_year when taxpayer ceased to be a u s citizen for year through year taxpayer engaged firm q for preparation of his individual u s tax_return firm q employs experienced tax professionals to provide tax_advice on a wide variety of tax matters including international tax firm q advised taxpayer with regard to u s federal_income_tax matters including taxpayer’s ownership of fc taxpayer relied on firm q to provide advice with respect to filing and reporting requirements in general as well as any elections or statements that would be necessary to elect specific tax treatment in year parent fc engaged firm r to provide tax services in connection with the u s tax implication of various related investments in the course of this evaluation firm r determined that fc might qualify as a pfic under sec_1297 beginning in year with respect to taxpayer based on firm r’s determination regarding the potential pfic status of fc and parent fc taxpayer requested firm r to submit a private_letter_ruling request to make a retroactive qef election with respect to fc under sec_1_1295-3 retroactive to year and effective for all subsequent years taxpayer has submitted an affidavit under penalties of perjury describing the events that led to his failure to make the qef election by the election due_date including the roles of firm q and firm r taxpayer represents that he provided information regarding the ownership and financial data of fc to firm q taxpayer represents that in the relevant years fc was not identified as a pfic and taxpayer did not receive any advice regarding the availability of a qef election with respect to fc taxpayer has paid an amount sufficient to eliminate any prejudice to the united_states government as a consequence of his inability to file amended returns in accordance with a signed closing_agreement between taxpayer and the commissioner further plr-145374-08 taxpayer has agreed to file an amended_return for each of his subsequent taxable years affected by the retroactive election if any taxpayer represents that as of the date of this request_for_ruling the pfic status of fc has not been raised by the irs on audit for any of the taxable years at issue ruling requested taxpayer requests the consent of the commissioner to make a retroactive qef election with respect to fc under sec_1_1295-3 retroactive to year law sec_1295 provides that a pfic will be treated as a qef with respect to a taxpayer if an election by the taxpayer under sec_1295 applies to such pfic for the taxable_year and the pfic complies with such requirements as the secretary may prescribe for purposes of determining the ordinary_earnings and net capital_gains of such company under sec_1295 a qef election may be made for any taxable_year at any time on or before the due_date determined with regard to extensions for filing the return for such taxable_year to the extent provided in regulations such an election may be made after such due_date if the taxpayer failed to make an election by the due_date because the taxpayer reasonably believed the company was not a pfic under sec_1_1295-3 a shareholder may request the consent of the commissioner to make a retroactive qef election for a taxable_year if the shareholder reasonably relied on a qualified_tax professional within the meaning of sec_1_1295-3 granting consent will not prejudice the interests of the united state sec_3 government as provided in sec_1_1295-3 the request is made before a representative of the internal_revenue_service raises upon audit the pfic status of the corporation for any taxable_year of the shareholder and the shareholder satisfies the procedural requirements of sec_1 f the procedural requirements include filing a request for consent to make a retroactive election with and submitting a user_fee to the office of the associate chief_counsel international sec_1_1295-3 additionally affidavits signed under penalties of perjury must be submitted that describe plr-145374-08 the events that led to the failure to make a qef election by the election due_date the discovery of such failure the engagement and responsibilities of the qualified_tax professional and the extent to which the shareholder relied on such professional sec_1_1295-3 and iii conclusion based on the information submitted and representations made with taxpayer’s ruling_request we conclude that taxpayer has satisfied sec_1_1295-3 accordingly consent is granted to taxpayer to make a retroactive qef election with respect to fc for year provided that taxpayer complies with the rules under sec_1_1295-3 regarding the time and manner for making the retroactive qef election we have accordingly approved a closing_agreement with the taxpayer with respect to those issues affecting his tax_liability on the basis set forth above pursuant to our practice with respect to such agreements the agreement contains a stipulation to the effect that any change or modification of applicable statutes enacted subsequent to the date of this agreement and made applicable to the taxable_period involved will render the agreement ineffective to the extent that it is dependent upon such statutes except as specifically set forth above no opinion is expressed or implied concerning the u s federal tax consequences of the facts described above under any other provision of the code this private_letter_ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter_ruling must be attached to any federal_income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling plr-145374-08 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely barbara e rasch senior technical reviewer branch international


t c memo united_states tax_court robert k and dawn e lowry petitioners v commissioner of internal revenue respondent docket no filed date ps realized a sec_1231 i r c gain when a partnership of which p husband was a 50-percent owner conveyed rental property to the holder of a security deed on the property in satisfaction of the loan obligation ps assert that the gain should be recognized in because the lender issued a form 1099-a indicating that the lender had acquired the property on date the partnership executed a grant deed and the lender executed a covenant not to sue both dated date in the same month the partnership and the lender issued escrow instructions to a title company under which the grant deed and covenant not to sue were delivered in escrow pending a subsequent closing of title title closed in ps did not disclose the gain on either their or federal_income_tax returns held ps’ sec_1231 i r c gain must be recognized in held further ps are liable for the sec_6662 i r c accuracy-related_penalty on grounds of failure to prove that they acted with reasonable_cause and good_faith with respect to their substantial_understatement_of_income_tax for and daniel c ertel for petitioners lydia a branche for respondent memorandum opinion nims judge respondent determined the following deficiencies and penalties with respect to petitioners’ federal income taxes for the taxable years and year deficiency penalties sec_6662 dollar_figure big_number dollar_figure big_number unless otherwise indicated all section references are to sections of the internal_revenue_code in effect for the years in issue after concessions by petitioners the issues remaining for decision are whether a sec_1231 gain in the amount of dollar_figure was realized and should be recognized alternatively in or and whether petitioners are liable for sec_6662 penalties in and the parties stipulated that respondent’s adjustments resulted in passive_activity_losses in the amount of dollar_figure and capital losses of dollar_figure being fully absorbed in and therefore those amounts that were carried forward to petitioners’ tax_return were adjusted and taxable_income and penalty were increased by dollar_figure and dollar_figure respectively the parties also stipulated that the period of limitations for the assessment of a deficiency has expired for the taxable_year pursuant to sec_6501 background this case was submitted fully stipulated and the facts are so found the stipulations of the parties with accompanying exhibits are incorporated herein by this reference petitioners resided in santa ana california when they filed their petition the fitch property transaction at all relevant times petitioner robert k lowry petitioner was a 50-percent partner in lowry wells investments the partnership which owned the fitch property located in irvine california the other 50-percent partner was george wells the fitch property was encumbered by a deed_of_trust and security_agreement deed_of_trust dated date reflecting a loan made by aid association for lutherans aal to the partnership in the amount of dollar_figure million the deed_of_trust secured a promissory note note signed by both partnership partners the loan under the deed_of_trust was recourse in that it was personally guaranteed by george wells and petitioner as of date the loan was in default and aal began the process of foreclosure of the deed_of_trust on date aal notified the partnership that all of the legal and equitable interest in the rents issues and profits of the fitch property is vested in aal aal is exercising its rights under the deed_of_trust at some point aal and the partnership negotiated a settlement agreement which is not in the record in lieu of foreclosure whereby the partnership would convey the fitch property to aal in full settlement of the outstanding indebtedness on date escrow instructions on behalf of aal and the partnership were issued to first american title insurance_company the title company the escrow instructions include the following provisions borrower has tendered to you in escrow the grant deed the deed from borrower to lender your acceptance of these escrow instructions constitutes your acknowledgment that i you have received and reviewed an executed copy of the settlement agreement and the documents executed by the parties thereto pursuant to the terms thereof ii all requirements precedent to issuance of the pro forma owner’s title policy the owner’s policy attached hereto have been satisfied and that you are prepared to issue the owner’s policy iii you have confirmed that the deed has been properly executed and witnessed iv the deed is in proper recordable form and v the correct property description has been appended consented to lowry wells investments a california partnership by george h wells name general_partner on date the partners executed a grant deed which would convey the fitch property to aal the grant deed provided among other things that it is the intention of the grantor and the grantee that the lien created by the deed_of_trust will not merge into the fee title acquired by the grantee pursuant to this grant deed no such merger will occur until such time as the grantee executes a written instrument specifically effecting such merger and duly records the same also on date aal executed a covenant not to sue the partnership and its general and limited partners as to any matter arising from the loans made by aal to the partnership and secured_by the deed_of_trust the covenant was conditioned upon a release by the partnership to aal the conveyance of the fitch property to aal and other good and valuable consideration necessary steps continued until date so that the title company could remove certain exceptions raised by the title report and provide title insurance as required by the escrow instructions as of date the title company had determined that it could issue the title policy without the exceptions so the escrow closed and the grant deed was recorded on that date at some point aal issued to the partnership a form 1099-a undated acquisition or abandonment of secured_property indicating that the partnership had an outstanding debt in the amount of dollar_figure secured_by the fitch property that the date_of_acquisition or abandonment was date and that the fitch property had an appraised value of dollar_figure on date the partnership filed an amended form_1065 u s partnership return of income for taxable_year which included the following statement regarding erroneous reporting of abandoned secured_property the partnership lowry wells investments received a form 1099-a for indicating an abandonment of real_property on date this reporting is wholly inaccurate a deed in lieu of foreclosure was delivered on date the lender aid association for lutherans erred in reporting the transaction s in a copy of an escrow statement issued by first american title insurance_company has been attached which indicates the transfer of title factually occurred on date the subject property has previously been transferred to lowry wells limited_liability_company pursuant to a tax-free partnership division under sec_708 lowry wells limited_liability_company will correctly report this event on a return and realize and recognize any gains or losses as is appropriate in that filing there is nothing in the record to indicate that any property was ever transferred to lowry wells limited_liability_company llc petitioners were advised by rob lambert in a memorandum dated date to file the amended tax_return with the expectation that the llc would hopefully be treated as having corporate entity characteristics but would preserve the passthrough attributes of a traditional partnership this was based on the assumption that at the time of delivery of the deed by the llc the llc would be insolvent for purposes of sec_108 so that most of the gain realized on the fitch property transaction would be treated as cancellation_of_indebtedness_income and therefore not taxable at the time this advice was given the fitch property transaction had already closed on date and the certificate of limited_liability_company for llc had yet to be filed which in fact took place on date the fitch property was conveyed to aal by the partnership not by the llc petitioners did not report the sec_1231 gain on their tax_return the record does not contain their tax_return by letter dated date bruce stuart lowry wells’s attorney with the consent of david crist attorney for aal requested that the grant deed in escrow be recorded on or after date so that the closing would occur in tax_year the partnership realized a sec_1231 gain of dollar_figure on the conveyance of the fitch property to aal petitioners’ proportionate share of the gain is dollar_figure discussion i year of recognition of gain under sec_1231 petitioners contend that the partnership conveyance of the fitch property to aal and the cancellation of the partnership indebtedness occurred on date respondent contends that the conveyance of the fitch property by the partnership to aal occurred in and that petitioners were required to recognize sec_1231 gains in that year since we agree with respondent that the sec_1231 gain must be recognized in we need not address his additional argument that petitioners are estopped by the rule_of consistency from claiming that the sec_1231 gain should be recognized for tax purposes in petitioners essentially base their argument on the fact that the grant deed and the covenant not to sue agreement are dated date and the fact that aal issued a form 1099-a showing the date of lender’s acquisition of the fitch property to be petitioners argue that all subsequent actions were for the benefit of aal and of no further concern to the partnership past decisions of this court and california law as applied to the facts of this case do not support petitioners’ argument that the transaction was completed in the escrow instructions dated date recite that they were being issued to the title company on behalf of aal and the partnership the instructions were consented to by george h wells signing as a general_partner of lowry wells investments a california partnership also as noted above the grant deed recited that the grantor and grantee intend that the lien created by the deed_of_trust would not merge into the fee title being acquired by the grantee the grant deed further recites that no merger will occur until the grantee executes and records a separate instrument specifically effecting such merger these facts alone repudiate petitioners’ contention that the subsequent actions by aal in obtaining a title policy and recording the deed through ‘their’ escrow agent are not relevant to the question of the date when transfer of ownership was complete in fact subsequent steps taken by all concerned in and and not by aal alone are very relevant to that question a transfer of property by deed in lieu of foreclosure constitutes a sale_or_exchange for federal_income_tax purposes 86_tc_655 affd 856_f2d_1169 8th cir in a given case the test to be applied to determine whether a transaction is a closed one is a practical test and the transaction should be regarded in its entirety 426_f2d_1391 9th cir affg 48_tc_694 although other factors may be considered passage of title is usually conclusive id an exception is illustrated by our decision in 115_tc_605 discussed infra pp it seems beyond dispute that the title to the fitch property passed on date when the title company was ready to issue a title policy acceptable to aal and could file the deed for recordation which it did on that date previously aal and the partnership had negotiated a settlement agreement in lieu of foreclosure whereby the partnership would convey the fitch property to aal as full settlement of the outstanding indebtedness before the settlement agreement had been negotiated aal had begun the process of foreclosure on the deed_of_trust at the time aal agreed to accept a deed to the fitch property in lieu of foreclosure the balance due on the secured note substantially exceeded the fair_market_value of the fitch property so that if foreclosure had proceeded aal could have pursued a deficiency judgment of a substantial amount against the partners who were personally liable on the note see ghirardo v antonioli p 2d cal thus to protect themselves against the possibility of a deficiency judgment the partners required the covenant not to sue notwithstanding petitioners’ assertion that the covenant not to sue became immediately effective on date the day it was signed by its terms the covenant not to sue was conditioned upon among other things the conveyance of the fitch property to aal this could only take place upon satisfaction of the terms of the escrow the escrow instructions dated date refer among other things to a settlement agreement dated date and the fact that borrower the partnership has tendered to you the title company in escrow the grant deed the ‘deed’ from borrower to lender emphasis added reference is also made to the delivery to the title company of an executed copy of the settlement agreement and the documents executed by the parties thereto under california law an escrow involves the deposit of documents and or money with a third party to be delivered on the occurrence of some condition summit fin holdings ltd v contl lawyers title co p 3d cal quoting miller starr cal real_estate sec pp rev in short all of the documents signed in and upon which petitioners predicate their alleged fait accompli are actually documents essential to a closing of title when all conditions precedent thereto had been satisfied and the escrow could be closed on date bruce stuart mr stuart one of the partnership’s attorneys wrote ms darlene longoria of the title company as follows dear ms longoria this letter is to advise you that with the consent of david crist as attorney for the aid association for lutherans we request that the recordation of the deed in the above-referenced escrow occur on or after date so that the closing will occur in tax_year should you have any questions please feel free to contact me in a letter dated date to william holt from mr stuart the latter recapitulated the fitch property transaction as follows dear bill this letter is to review the recent transaction between lowry wells investments and the aids association for lutherans aal aal was the holder of a promissory note secured_by deed_of_trust on the fitch street property owned by lowry wells investments l w in late a settlement was negotiated between aal and l w whereby l w would convey the property to aal together with all leases and tangible_personal_property in return for which aal would agree to accept such conveyance as a full settlement of the then outstanding indebtedness through joint instructions to escrow the parties agreed that the closing would occur subsequent to date and in fact the deed conveying title to the property was recorded date mr holt is identified in a document stipulated by the parties as the predecessor accountant petitioners quote sec_1055 and sec_1056 of the california civil code west in support of their position that title to the fitch property passed on date when the partners executed the warranty deed sec_1055 presumption as to date of delivery date a grant duly executed is presumed to have been delivered at its date sec_1056 delivery necessarily absolute delivery to grantee is necessarily absolute a grant cannot be delivered to the grantee conditionally delivery to him or to his agent as such is necessarily absolute and the instrument takes effect thereupon discharged of any condition on which the delivery was made in quoting the above sections petitioners overlooked cal civ code sec_1057 west which provides sec_1057 delivery in escrow delivery in escrow a grant may be deposited by the grantor with a third person to be delivered on performance of a condition and on delivery by the depositary it will take effect while in the possession of the third person and subject_to condition it is called an escrow in this case the grant deed was jointly delivered by the partnership and aal to the title company with the escrow instructions so under sec_1057 of the california civil code and california case law title to the fitch property did not pass to aal until performance of the conditions in the escrow instructions had been achieved it has long been held in california as elsewhere that delivery of an instrument in escrow conveys no title 35_fsupp_282 s d cal consequently the warranty deed was delivered to aal in when the terms of the escrow were satisfied and the deed was duly recorded and not before petitioners seek to bring their facts within those of 115_tc_605 to show that a title closing is not necessary to establish a closed transaction the facts of keith however are specifically relevant to a form of transaction under georgia law known as a contract_for_deed georgia law normally construes a contract_for_deed as a device for passing equitable ownership leaving the seller with essentially a security_interest id pincite under a contract_for_deed in georgia the buyer obtains a right to possession an obligation to pay taxes assessments and charges against the property a responsibility for insuring the property a duty to maintain the property a right to improve the property without the seller’s consent a bearing of the risk of loss and a right to obtain legal_title at any time by paying the balance of the full purchase_price all of these elements short of transfer of title were held in keith to be sufficient for obtaining equitable ownership the facts in the case before us do not establish that aal obtained equitable ownership before title to the fitch property passed in by virtue of the recordation of the grant deed upon satisfaction of the escrow instructions for the foregoing reasons we hold for respondent on this issue ii sec_6662 accuracy-related_penalty in determining that petitioners are liable for the sec_6662 accuracy-related_penalty respondent determined that all of the underpayment_of_tax for and is due to negligence or disregard of rules or regulations and that petitioners have not established that such underpayment was due to reasonable_cause since the irs examination in this case commenced before date sec_7491 relating to burdens of proof and production is not applicable and petitioners bear the burdens of proof and production with respect to the penalty 58_tc_757 sec_6662 imposes an accuracy-related_penalty in the amount of percent of any underpayment that is attributable to one or more of the following negligence or disregard of rules or regulations any substantial_understatement_of_income_tax any substantial_valuation_misstatement sec_6662 defines substantial_understatement as an amount that exceeds the greater of percent of the tax required to be shown on the return for the taxable_year or dollar_figure sec_6662 provides that an understatement does not include any item on the taxpayer’s return if there existed substantial_authority for the taxpayer’s treatment of that item or if the relevant facts affecting the treatment of that item were adequately disclosed on the taxpayer’s return or an attached statement and there was a reasonable basis for the taxpayer’s treatment of that item sec_6664 provides an exception to the accuracy- related penalty if the taxpayer can show that there was reasonable_cause for the underpayment and that the taxpayer acted in good_faith with respect to the underpayment a taxpayer’s good_faith and reasonable reliance on the advice of an independent professional as to the tax treatment of an item may establish that the taxpayer was not negligent and may satisfy the reasonable_cause exception of sec_6664 sec_1 a income_tax regs petitioners contend that the sec_6662 penalty should not be imposed because they relied on professional advisers for the preparation of their and returns and because the test for adequate_disclosure should properly be applied to the partnership’s return and not to petitioners’ returns the latter argument was raised for the first time in petitioners’ reply brief petitioners argue that they relied upon a c p a for advice as to how the fitch property transaction should be reported and that he was unaware of the existence of the covenant not to sue agreement when he filed the partnership return for all the facts in the record lead to the conclusion that petitioners did not report the transaction on their return which is not in the record neither was the transaction reported on petitioners’ return petitioners contend that the reporting requirement was satisfied by the fact that the reconveyance was reported by the llc a related partnership as a sale_or_exchange of property used in a trade_or_business however since the llc never owned the fitch property any reconveyance reported by the llc was wholly fictitious as part of tax planning advice from rob lambert petitioners and the partnership were advised to report the gain from the sale of the fitch property as cancellation_of_indebtedness_income on their return which is not recognized after the application of sec_108 petitioners simply failed to report the transaction on any_tax return as noted previously the partnership filed an amended tax_return in which it stated that a deed in lieu of foreclosure was delivered on date and that the form 1099-a issued by aal showing that the transaction occurred in was wholly inaccurate and that aal erred in reporting the transaction in it further alleged that the subject property had been previously transferred to the llc pursuant to a tax-free partnership division and that the llc would correctly report the transaction in reliance on the advice received from rob lambert the llc on its form_1065 for reported the sec_1231 gain as cancellation of debt income excluded from gross_income pursuant to sec_108 by applying the insolvency test at the entity level ie the llc was insolvent when the fitch property was conveyed and therefore the gain realized was not taxable nothing in the record supports this fabrication the facts in this case show that the fitch property was conveyed to aal by the partnership not the llc and as noted previously the certificate of limited_liability_company of the llc was not even filed in the office of the secretary of state delaware until date at least months after the fitch property had been conveyed by the partnership to aal we conclude that petitioners have failed to meet their burden of proving that they acted with reasonable_cause and in good_faith furthermore based upon our holding on the first issue in this case and concessions by petitioners petitioners owe taxes for and well in excess of the level constituting a substantial_understatement we therefore sustain respondent’s determination that petitioners are liable for the accuracy-related_penalty in reaching our holdings herein we have considered all arguments made and to the extent not mentioned above we find them to be irrelevant moot or without merit all of petitioners’ objections on the ground of relevancy contained in the stipulation of facts have been considered and are denied decision will be entered for respondent


internal_revenue_service number release date index numbers ---------------------------------------- ------------------------- ----------------------------------------------- ------------------------------------ ------------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------------ ---------------------------------------------------- telephone number ---------------------- refer reply to cc psi plr-120999-17 date date legend x ------------------------------------------------------------- ---------------------------------------- shareholders --------------------------------------------------------------- -------------------- --------------------------------------------------------------- ------------------- --------------------------------------------------------------- ------------------ --------------------------------------------------------------- ------------------- --------------------------------------------------------------- ------------------ --------------------------------------------------------------- --------------------- --------------------------------------------------------------- ----------------------- --------------------------------------------------------------- ------------------- i ------------------ plr-120999-17 agreement new agreement --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- -------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------- state date date date date -------------- ------------------- ------------------- -------------------------- -------------------- dear ---------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x by its authorized representative requesting a ruling under sec_1362 of the internal_revenue_code code facts the information submitted states that x was incorporated under the laws of state on date and elected to be an s_corporation effective date on date x and i entered into an agreement granting equity in x to i although i received equity in x i was not entitled to the same rights to distribution and liquidation proceeds as x’s shareholders because under the agreement i would only receive proceeds upon a sale of x’s assets x represents that the equity granted to i created a second class of stock and as a result x’s s_corporation_election terminated on date once x learned that it had a second class of stock x and i cancelled the agreement and entered into a new agreement on date x represents that it intended to be an s_corporation effective date and continuously thereafter and filed all returns consistent with being an s_corporation since date in addition x and shareholders agree to make any adjustments consistent with the treatment of x as an s_corporation as may be required by the plr-120999-17 commissioner with respect to the period specified by sec_1362 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 the 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_1362 provides than 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 sec_1362 further provides that the termination shall be effective on and after the date of cessation sec_1362 provides in relevant part that if an election under sec_1362 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 the secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent no 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 is a small_business_corporation or b to acquire the shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the ineffectiveness or termination the corporation will be treated as an s_corporation during the period specified by the secretary 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 plr-120999-17 based on the corporate charter articles of incorporation bylaws applicable state law and binding agreements relating to distribution and liquidation proceeds collectively governing provisions conclusion based on the facts submitted and the representations made we conclude that x’s s_corporation_election terminated on date because x had more than one class of stock as a result of its agreement with i we also conclude that such termination was inadvertent within the meaning of sec_1362 thus x will be treated as continuing to be an s_corporation from date and thereafter provided x’s s_corporation_election was otherwise valid and has not otherwise terminated under sec_1362 except as specifically ruled upon above we express or imply no opinion concerning the federal tax consequences of the facts described above under any other provision of the code in particular we express or imply no opinion regarding whether the new agreement creates a second class of stock this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that this ruling may not be used or cited as precedent 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 ruling_request it is subject_to verification on examination pursuant to a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative sincerely _mary beth carchia______________ mary beth carchia senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


significant index number department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division sep se t ep kk a2 re plan no ein plan taxpayer dear this letter constitutes notice that approval has been granted for your request for a 5-year automatic_extension for amortizing the unfunded liabilities as of for the above-named plan which are described in sec_431 and sec_431 of the internal_revenue_code code and sec_304 and sec_304 of the employee_retirement_income_security_act_of_1974 erisa this extension is effective with the plan_year beginning this extension applies to the eligible amortization charge bases as identified in your application submission established as of the extension of the amortization periods of the unfunded liabilities of the plan was granted in accordance with sec_431 of the code sec_431 of the code requires the secretary to extend the period of time required to amortize any unfunded_liability of a plan for a period of time not in excess of years if the plan submits an application meeting the criteria stated in sec_431 the plan has submitted the required information to meet the criteria in sec_431 including a certification from the plan’s actuary that i absent the extension under subparagraph a the plan would have an accumulated_funding_deficiency in the current plan_year or any of the succeeding plan years i the plan_sponsor has adopted a plan to improve the plan's funding status iii the plan is projected to have sufficient assets to timely pay expected benefits and anticipated expenditures over the amortization period as extended and iv the notice required under paragraph a has been provided in granting this ruling it is expected that the plan's assumptions and methods will be reviewed and updated as appropriate so that each prescribed assumption was applied in accordance with applicable law and regulations and each other assumption is reasonable taking into account the experience of the plan and reasonable expectations and such other assumptions in combination offer the best estimate of anticipated experience under the plan in addition we are not expressing any opinion as to the accuracy of any material submitted with your request we have sent a copy of this letter to the manager ep classification in baltimore maryland to the manager ep compliance unit in chicago iilinois and to your authorized representative pursuant to a power_of_attorney on file in this office this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited by others as precedent if you require further assistance in this matter please contact id at sincerely yours cc david m ziegler manager ep actuarial group