internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom fi p 2-plr-118643-99 date date legend company spe state a state b statute transition bonds a b c d e dear this letter is in reply to your letter dated date asking the internal_revenue_service to rule on the transaction described below facts company a calendar_year taxpayer that uses the accrual_method of accounting operates an electric utility in state a company generates transmits and distributes electricity to residential commercial and industrial customers within a designated territory company has the right to sell electricity at retail within its territory and is regulated by state a’s public_utility commission puc and to a limited extent the federal energy regulatory commission state a is deregulating its electric industry as a result company’s customers will be allowed to contract directly with alternative suppliers of electricity and company will compete with other parties to sell electricity to facilitate deregulation state a enacted statute which allows utilities in state a to impose special charges on their customers to recover the utilities’ regulatory assets plr-118643-99 and certain stranded costs regulatory assets are assets of a utility for financial_accounting purposes they reflect costs incurred by the utility in prior periods that the utility expects to recover through regulated rates in the future with deregulation the statute allows the generation-related regulatory assets to be recovered through the special charges stranded costs are the uneconomic portions of a utility’s prudently incurred costs of generation-related assets and obligations in general stranded costs reflect the difference between the book_value and the market_value of these assets as with regulatory assets the statute allows the utility to impose the special charges to recover these costs under statute a utility may apply to puc for a financing order permitting it to recover a specified amount of the costs described above the special charges authorized by the financing order are called transition charges tcs and are imposed on substantially_all of a utility’s customers in the utility’s service area the tcs are nonbypassable and generally cannot be avoided even if a customer buys electricity from another source the tcs are based in part on the amount of electricity purchased by or made available to the consumer whether from the utility or from an alternative supplier the utility also may request the puc to approve the issuance of securities called transition bonds that are secured_by the utility’s rights to the tcs the amount of transition bonds approved in the financing order may include the amount of the regulatory assets and or stranded costs that can be recovered plus the costs of issuing the transition bonds and using the proceeds to retire existing debt and equity of the utility under the financing order the tcs to be collected by a utility generally will be based on the amount of electricity provided to or made available to each customer actual collections of the tcs will vary from expected collections due to a number of factors including power usage and delinquencies the financing order will require the adjustment of the tcs at least annually under statute when the right to collect tcs and the other rights under the financing order are assigned by the utility to another entity the rights become a separate_property right that is called transition property proposed transaction company has applied to puc for a financing order authorizing company to recover regulatory assets in the amount of dollar_figurea and to issue transition bonds in an aggregate principal_amount of approximately dollar_figureb the actual principal_amount will be determined when the bonds are issued based on the costs incurred in the proposed transaction these costs relate to credit enhancement servicing fees and other expenses relating to the issuance and sale of the transition bonds and the cost incurred by the puc for professional advisors to assist it in evaluating the proposed transaction the financing order will authorize tcs in an amount needed to service the transition plr-118643-99 bonds pay transaction costs and provide for credit enhancement the financing order also will provide that the right to collect the tcs may be assigned to a special purpose entity at which point the right becomes transition property company will form spe under state b law as a bankruptcy remote limited_liability_company solely for the purpose of effectuating the proposed transaction company will be the sole member of spe spe will not elect to be treated as an association_taxable_as_a_corporation under sec_301_7701-3 of the procedure and administration regulations company will contribute as equity to spe cash at least equal to c percent of the issue_price of the transition bonds pursuant to the financing order company will transfer the rights that will become the transition property to spe and spe will issue and sell transition bonds to investors the proceeds from the sale of the transition bonds net of issuance costs will be transferred to company in consideration for the transition property spe will initially issue one series of transition bonds which may be comprised of one or more classes each having a different final maturity_date the transition bonds will have final maturities of no more than d years and expected maturities to be determined when the bonds are issued of less than d years the expected maturity is the date when all of the principal and interest on a class of transition bonds is expected to be paid the final maturity_date is the date on which nonpayment is a default interest on the transition bonds will be payable quarterly or semi-annually at rates that are based on yields that are commensurate with similarly rated debt obligations with comparable weighted average maturities the transition bonds are expected to be sold at or near their stated principal amounts principal payments will be scheduled to be made quarterly or semi-annually principal will be applied in sequential order to each class until the outstanding principal balance of the class is reduced to zero in general the transition bonds will be payable solely out of the transition property and other assets of spe however the transition bonds may be subject_to an optional clean-up call when the outstanding principal declines to less than e percent of the original issue_price because the classes will be allocated principal in sequential order the clean-up call will apply only to the class or classes with the longest maturities initially company will act as servicer of the transition property as servicer company will bill and collect tcs from customers remit amounts collected to spe and retain all books_and_records with respect to the tcs remittances of tcs must be made within two business days unless company attains a specified credit rating or meets other specified requirements in which case it will be permitted to make remittances monthly any investment_income earned on the tcs prior to remittance will be retained by company with certain restrictions company may be replaced as plr-118643-99 servicer company will receive a fee as servicer that will be paid quarterly after customer choice is implemented in state a third-party retail electric providers reps generally will bill and collect payments including tcs from customers in that event company as servicer will bill the rep for the tcs reps may be required to take additional steps to ensure that timely payments will be made including providing cash deposits of estimated collections nonetheless in all events the amounts paid will be based on the amount of electricity provided or made available to the customer the tcs will be set to provide for the recovery_of the costs associated with billing and collecting the tcs as well as for an overcollateralization amount that will eventually reach at least c percent of the original principal_amount of the transition bonds the overcollateralization amount will be collected approximately ratably over the expected term of the transition bonds a collection account will be established as credit enhancement for the transition bonds the collection account will consist of four subaccounts entitled general overcollateralization capital and reserve the general subaccount will hold all funds in the collection account not held in any of the other subaccounts the servicer will remit all tc collections to the general subaccount and the trustee will use the amounts in the general subaccount to make payments in the following order of priority certain fees and expenses of spe interest on the transition bonds specified amounts of principal on the transition bonds other expenses amounts needed to replenish certain collection account subaccounts and amounts needed to fund or replenish the overcollateralization subaccount investment_income earned on the collection account also will be available to make these payments on each payment_date however if funds remain after payment of interest principal and expenses an amount equal to the earnings on the capital subaccount will be released to spe for distribution to company any remaining amounts will be allocated to the reserve subaccount to the extent that the general subaccount in any period is insufficient to make the required_payments the trustee will draw upon the reserve subaccount the overcollateralization subaccount and finally the capital subaccount to make these payments to the extent that amounts in the capital subaccount or the overcollateralization subaccount are used to make payments of interest principal and expenses future tcs will be adjusted to replenish those subaccounts the transition bonds will provide for the following events of default a default in the payment of interest that is not cured within five business days a default in the payment of outstanding principal on the final maturity_date a default in the payment of the redemption price on a redemption date certain breaches of covenants representations or warranties by spe that go unremedied for days and certain plr-118643-99 events of bankruptcy or insolvency of spe in the event of a payment default the trustee or holders of a majority in principal_amount of the transition bonds then outstanding may declare the transition bonds to be immediately due and payable the transition bonds will be nonrecourse to company and will be secured only by and generally payable solely out of spe’s assets which will include the transition property the servicing agreement the collection account and the rights to obtain adjustments to the tcs company expects the transition bonds to obtain the highest rating from two or more nationally recognized credit rating agencies issues does the issuance of the financing order and the transfer of the rights under the financing order to spe result in gross_income to company does the issuance of the transition bonds and the transfer of the proceeds to company result in gross_income to company are the transition bonds obligations of company law sec_61 of the internal_revenue_code generally defines gross_income as income from whatever source derived except as otherwise provided by law gross_income includes income realized in any form whether in money property or services sec_1_61-1 of the income_tax regulations this definition encompasses all accessions to wealth clearly realized and over which the taxpayers have complete dominion 348_us_426 1955_1_cb_207 the right to collect the tcs is of significant value in producing income for company moreover state a’s action in making the tc rights transferable has enhanced that value generally the granting of a transferable right by the government does not cause the realization of income revrul_92_16 1992_1_cb_15 allocation of air emission rights by the environmental protection agency does not cause a utility to realize gross_income revrul_67_135 1967_1_cb_20 fair_market_value of an oil_and_gas lease obtained from the government through a lottery is not includable in income the economic_substance of a transaction generally governs its federal tax consequences 293_us_465 xiv-1 c b affixing a label to an undertaking does not determine its character revrul_97_3 1997_1_cb_9 an instrument secured_by property may be an obligation of the taxpayer or plr-118643-99 alternatively may be a disposition of the underlying property by the taxpayer cf id the small_business administration is the primary obligor of certain guaranteed_payment rights that are created under its participating security program conclusions based on the facts as represented we rule as follows the issuance of the financing order and the transfer of the rights under the financing order to spe will not result in gross_income to company the issuance of the transition bonds and the transfer of the proceeds to company will not result in gross_income to company the transition bonds will be obligations of company except as specifically ruled on above no opinion is expressed or implied regarding the federal tax aspects of the transaction this ruling is directed only to company under sec_6110 of the code this ruling may not be used or cited as precedent a copy of this letter should be attached to the federal_income_tax return of company for the taxable years that include the transaction described in this letter sincerely yours assistant chief_counsel financial institutions products by marshall feiring senior technician reviewer branch


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 s name t name u name v name w state z dollars amount dear also awards made under these procedures are scholarship or fellowship grants and are not taxable to the recipients if they use them for qualified_tuition_and_related_expenses subject_to the limitations provided in code sec_117 you asked for advance approval of your scholarship 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 you requested approval of your scholarship program to fund the education of certain qualifying students our determination we approved your procedures for awarding scholarships based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding scholarships meet the requirements of code sec_4945 as a result expenditures you make under these procedures won't be taxable description of your request your letter indicates that you will operate an educational grant program called s the purpose of s is to award scholarships to high school seniors graduating from t u and v in w to assist with their educational and related expenses for their first academic year after the conclusion of high school letter catalog number 58263t grants may only be used for tuition and fees required for the enrollment or attendance of the student at a qualifying institution as well as fees books supplies and equipment required for courses of instruction at the educational_institution no part of the scholarship grant can be used as payment for teaching research or other services by the student required as a condition for receiving the scholarship you will ask each of the three schools in the manner of their choosing to advertise s to all seniors you anticipate that every year one recipient will be selected from each of the three schools_for a grant amount of z dollars a change in the value of your investments or your choice of where to donate your assets could cause you to increase or decrease the grant amount to be eligible applicants must be entering a college university vocational school trade school or other educational institutional as described in code sec_170 for a year of post-high school education all applicants must complete your application form as well as provide documentation of regular community service and charitable acts and or a detailed letter of recommendation from a person supervising or having knowledge of the performance of their community service and charitable acts in addition all applicants must provide complete high school transcripts their sat and or act scores evidence of financial hardship a copy of their acceptance letter from the post-high school educational_institution which they plan on attending as well as the completed authorization at the bottom of the application finally all applicants must submit an essay requesting the scholarship grant to be given to them as well as the reasons why it should be awarded to them the selection committee consisting of individuals appointed by you will evaluate the applications based on academic performance financial need community service performance of charitable deeds the recommendation of the principal their character their motivation the essay and their potential for success you will require that every member of any selection committee must disclose any personal knowledge of and any relationship to any potential grantee under consideration any member of any selection committee may not directly or indirectly derive a private benefit from the selection of any potential grantee no scholarship grant may be awarded to any member of any selection committee or to any family no scholarship grant may be awarded to any disqualified_person initially your selection committee will consist of your founder and her husband you will pay scholarship proceeds directly to the recipient’s educational_institution for the benefit of the recipient the educational_institution must agree to use the grant funds to defray the recipient’s expenses or to pay grant funds or a portion thereof to the recipient each recipient will be eligible to renew the scholarship for up to three consecutive academic years and must apply for scholarship renewal annually all renewal applications must be approved letter catalog number 58263t only if the recipient is enrolled at such educational_institution and their standing is consistent with the purposes and conditions of the grant if for any reason a scholarship grant is paid to a person other than the educational_institution or if the scholarship grant is used for expenses other than qualified_tuition_and_related_expenses you must receive a report on the progress of the recipient this report must be verified by the educational_institution obtained at least once per year and include the grantee’s courses taken if any and grades received if any in each academic period upon completion of a grantee’s study at an educational_institution a final report must also be obtained you represent that you will investigate any indication of a scholarship grant not being used in furtherance of the grant’s purposes withhold payments to the extent possible while conducting your investigation take all reasonable and appropriate steps to recover funds or ensure restoration of diverted funds not used in furtherance of grant purposes and withhold further payments for recipients until you receive assurances that future diversions shall not occur as well as the precautions taken to prevent future diversions you represent that you will maintain all records related to information obtained to evaluate grantees the identification of grantees including names and addresses of recipients and any relationship of any recipient to you sufficient to make them a disqualified_person the purpose and amount of each grant and any additional information you obtain in complying with your grant administrative procedures you will maintain information pertaining to both successful and unsuccessful applicants 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 the following requirements of code sec_4945 is not a taxable_expenditure e 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 a scholarship or fellowship subject_to the provisions of code sec_117 the grant is to be used for study at an educational_organization described in code sec_170 other conditions that apply to this determination e this determination only covers 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 e this determination applies only to you it may not be cited as a precedent letter catalog number 58263t e e e e you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you must report any significant changes to your program to the cincinnati office of exempt_organizations at internal_revenue_service exempt_organizations determinations p o box cincinnati oh you cannot award 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 further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 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 questions please contact the person listed at the top of this letter sincerely stephen a martin director exempt_organizations rulings and agreements letter catalog number 58263t


t c memo united_states tax_court joyce m and thomas j hamm petitioners v commissioner of internal revenue respondent docket no filed date joyce m hamm and thomas j hamm pro sese amy a campbell for respondent memorandum opinion wells judge this case is before the court on respondent's motion for summary_judgment pursuant to rule a unless otherwise indicated all section references are to the internal_revenue_code in effect for the taxable years at issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency in petitioners' federal_income_tax in the amount of dollar_figure and an addition_to_tax pursuant to sec_6651 in the amount of dollar_figure in support of respondent's motion for summary_judgment respondent filed an affidavit along with exhibits petitioners filed a written response and submitted an affidavit and an exhibit opposing respondent's motion after a concession the issue to be decided is whether petitioners may exclude from income pursuant to sec_104 a payment that petitioner thomas j hamm petitioner received from his employer in exchange for signing a general release and covenant not to sue a motion for summary_judgment is appropriate if the pleadings answers to interrogatories depositions admissions and any other acceptable materials together with the affidavits if any show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law rule b o'neal v commissi102_tc_666 citing 98_tc_383 the moving party bears the burden of establishing that these requirements are met o'neal v commissioner supra pincite and petitioners have not contested respondent's determination that petitioners are liable for the sec_6651 addition_to_tax in the amount of dollar_figure accordingly we consider petitioners to have conceded the issue 91_tc_524 cases cited thereat the factual materials and the inferences to be drawn from them must be viewed in the light most favorable to the party opposing the motion 94_tc_491 the opposing party cannot rest upon mere allegations or denials set forth in that party's pleadings o'neal v commissioner supra pincite and must make a showing sufficient to establish the existence of each element essential to that party's case and on which that party will bear the burden_of_proof at trial 477_us_317 interpreting fed r civ p c on which rule b is based in deciding the instant motion we set forth a summary of the facts relevant to our discussion rule b 98_tc_518 affd 17_f3d_965 7th cir the facts presented below are based on the parties' pleadings and moving papers and other relevant materials in the record and are viewed in terms most favorable to petitioners blanton v commissioner supra pincite background at the time they filed their petition in the instant case petitioners resided in marietta georgia during at least january through date petitioner was employed by international business machines corp ibm on date petitioner was informed by his manager catherine f allman that the project to which he was assigned would no longer be funded after date and that he should find another position within ibm or sign up for the ibm modified and extended individual transition option program the ito ii program the ito ii program provided a lump-sum cash payment and other_benefits in exchange for signing a general release and covenant not to sue the release on date after days of unsuccessfully seeking another position within ibm petitioner signed up for the ito ii program and executed the release which provided in relevant part if you feel that you are being coerced to sign this release or that your signing would for any reason not be voluntary or you believe the process by which you have been offered this release or the payment in exchange for this release is discriminatory you are encouraged to discuss this with your management or personnel before signing this release in exchange for the sums and benefits which you will receive pursuant to the terms of the ito ii program thomas j hamm hereinafter you agrees to release ibm from all claims demands actions or liabilities you may have against ibm of whatever kind including but not limited to those which are related to your employment with ibm or the termination of that employment you agree that this also releases from liability ibm's agents directors officers employees representatives successors and assigns hereinafter those associated with ibm you also agree that this release covers but is not limited to claims arising from the age discrimination in employment act of as amended title vii of the civil rights act of as amended and any other federal or state law dealing with discrimination in employment on the basis of sex race national origin the name thomas j hamm was typed into a space provided in the release religion disability or age you also agree that this release includes claims based on theories of contract or tort whether based on common_law or otherwise this release does not include your vested rights if any in the ibm retirement_plan which survive unaffected by this release this release does not waive any claims that you may have which arise after the date you sign this release in the event of rehire by ibm or any of its subsidiaries as a regular employee you understand that ibm reserves the right to require repayment of a prorated portion of the ito ii program payment the amount of repayment will be based on the number of weeks off the ibm payroll compared with the number of weeks' salary used to calculate your payment the pre-retirement leave of absence agreement provides your leave will begin and will end based on your committed plan to retire immediately following your leave your effective date of retirement will be once your leave begins the committed retirement date may not be changed to a later one however an earlier date upon which you are retirement eligible will be allowed in exchange for participating in the ito ii program petitioner received a payment of dollar_figure the ito payment according to respondent's motion as of the date of the motion petitioner had not filed any tort-type claims against ibm for calendar_year petitioner received a form_w-2 from ibm showing wages of dollar_figure and federal_income_tax withheld of dollar_figure and a form_w-2 from management recruiters the dates were either typed or handwritten in the space provided in the pre-retirement leave of absence agreement international inc showing wages of dollar_figure and no federal_income_tax withheld for that year on their joint federal_income_tax return petitioners reported dollar_figure as wage income line petitioners attached to their return a form_8275 disclosure statement asserting that the ito payment in the amount of dollar_figure was excludable from their gross_income pursuant to sec_104 as a payment received in exchange for the release and settlement of tort-type rights as part of ibm corp 's ito ii program respondent determined that petitioners did not establish that any amount was excludable from their gross_income pursuant to sec_104 consequently respondent increased petitioners' gross_income by dollar_figure to conform to the amounts reported on petitioner's forms w-2 additionally respondent disallowed itemized_deductions in the amount of dollar_figure as an automatic_adjustment resulting from the increase in petitioners' gross_income discussion the instant case is another among many in this court where we have been presented with the issue of whether proceeds received pursuant to ibm's ito ii program are excludable from the recipient's gross_income pursuant to sec_104 see eg gajda v commissioner tcmemo_1997_345 lubart v commissioner tcmemo_1997_343 thorpe v commissioner tcmemo_1997_342 phillips v commissioner tcmemo_1997_336 brennan v commissioner tcmemo_1997_317 morabito v commissioner tcmemo_1997_315 keel v commissioner tcmemo_1997_278 webb v commissioner tcmemo_1996_50 in deciding the instant motion for summary_judgment we must examine whether respondent has established that as a matter of law petitioners are not entitled to exclude the ito payment from gross_income pursuant to sec_104 except as otherwise provided gross_income includes income from all sources sec_61 348_us_426 although sec_61 is to be broadly construed statutory exclusions from income must be narrowly construed 515_us_323 sec_104 provides that gross_income does not include the amount of any damages received whether by suit or agreement and whether as lump sums or as periodic_payments on account of personal injuries or sickness the regulations provide that the term 'damages received whether by suit or agreement ' means an amount received through prosecution of a legal suit or action based upon tort or tort type rights or through a settlement agreement entered into in lieu of such prosecution sec_1_104-1 income_tax regs accordingly to exclude damages received by settlement agreement from gross_income pursuant to sec_104 the taxpayer must establish that the cause of action giving rise to the recovery is based upon tort or tort type rights and the damages were received on account of personal injuries or sickness sec_104 commissioner v schleier supra pincite where amounts are received pursuant to a settlement agreement the nature of the claim that was the actual basis for settlement controls whether such amounts are excludable from gross_income pursuant to sec_104 504_us_229 the critical question is in lieu of what were damages awarded or paid 87_tc_236 affd 835_f2d_67 3d cir see 105_tc_396 consideration of the nature of the claim is a factual inquiry 102_tc_116 affd in part revd in part and remanded 70_f3d_34 5th cir if the settlement agreement lacks express language stating the purpose for which the settlement proceeds were paid then the most important factor in deciding whether the sec_104 exclusion applies is the intent of the payor as to the purpose in making the payment 98_tc_1 and cases cited therein if the payor's intent cannot be clearly discerned from the settlement agreement we examine all of the facts and circumstances in the case robinson v commissioner supra pincite in the instant case respondent contends that petitioner's failure_to_file a claim prior to signing the release precludes petitioners' exclusion of the ito payment from gross_income pursuant to sec_104 respondent cites 35_f3d_93 2d cir where the court concluded after noting that no claims or threats of litigation existed that the settlement payment did not constitute a 'settlement agreement entered into in lieu of a legal suit or action based upon tort or tort type rights ' the court expressly stated that because no prosecution of a suit for personal injuries preceded the settlement the taxpayer's right to exclude the settlement proceeds from gross_income depends upon whether the settlement agreement constituted a 'settlement agreement in lieu of such prosecution ' id pincite accordingly the court examined whether the settlement proceeds were attributable to a bona_fide dispute based upon tort or tort type rights contrary to respondent's interpretation of taggi we view the court's statement that no claims or threats of litigation existed as merely supporting the court's conclusion that the settlement proceeds were not attributable to a bona_fide dispute based upon tort or tort type rights not a statement of law that the failure_to_file a claim before signing a settlement agreement precludes exclusion of the settlement proceeds from gross_income pursuant to sec_104 as stated supra pursuant to sec_104 and the regulations thereunder the exclusion_from_gross_income applies to damages received by suit or by settlement agreement in lieu of such a suit respondent has not cited and we have not found any authority for the proposition that the taxpayer must file a claim prior to the settlement agreement in order for the settlement proceeds to qualify for the exclusion accordingly we reject respondent's argument that the failure_to_file a claim prior to signing the release precludes exclusion of the ito payment from gross_income pursuant to sec_104 we do note however that the failure_to_file such a claim may be taken into account in deciding whether the taxpayer released a tort or tort type claim see webb v commissioner tcmemo_1996_50 additionally we have specifically stated that a claim need not have been previously asserted against the employer although the absence of any knowledge of the claim on the part of the employer-payor has a negative impact in concluding whether the employer-payor had the requisite intent of making the payment on account of a personal injury keel v commissioner tcmemo_1997_278 sodoma v commissioner tcmemo_1996_275 based on our review of the facts and circumstances in the instant record we conclude that the ito payment was severance_pay to petitioner and not settlement proceeds for the release of tort or tort type claims several considerations support our conclusion on date petitioner was informed that the project to which he was assigned would no longer be funded after date and that he should find another position within ibm or sign up for the ito ii program on date after days of unsuccessfully seeking another position within ibm petitioner signed up for the ito ii program and executed the release and the pre-retirement leave of absence agreement the foregoing sequence of events supports our conclusion that the ito payment was severance_pay to petitioner additionally we find support in the ito ii program document sec_5 for our conclusion that the ito payment was severance_pay paragraph of the release provides the terms for repaying the ito payment in case of rehire by ibm and states the amount of repayment will be based on the number of weeks off the ibm payroll compared with the number of weeks' salary used to calculate your payment emphasis added the fact that the number of weeks of petitioner's salary was used in calculating petitioner's ito payment makes the ito payment appear to be severance_pay and not damages for personal injuries moreover the pre-retirement leave of absence agreement provides your leave will begin and will end based on your committed plan to retire immediately following your leave your effective date of retirement will be once your leave begins the committed retirement date may not be changed to a the ito ii program documents in the instant case include an apparently complete set of documents related to the ito ii program with an unsigned release and unsigned pre-retirement leave of absence agreement that was submitted by petitioners with their trial memorandum and the executed release and executed pre-retirement leave of absence agreement that were submitted by respondent in the affidavit supporting the instant motion later one the fact that the ito ii program provided for a leave of absence which ultimately determined the effective date of petitioner's retirement further supports our conclusion that the ito payment was severance_pay related to retirement our conclusion is further supported by the fact that the ito ii program was implemented to reduce the number of employees and to help ibm become more competitive and efficient the first page of the ito ii program documents includes a summary_plan_description that states due to staffing dynamics and ibm's need to become more competitive and efficient ibm intends to reduce the number of employees in eligible skill families at various locations the program is intended to help ibm become more competitive and efficient by reducing its workforce while retaining essential skills and to assist employees who choose to participate in the program in making the transition into a new career or retirement the ito ii program is voluntary however if we do not have sufficient volunteers for the ito ii program ibm will continue to take involuntary actions in the near future the fact that eligibility for participation in the ito ii program was determined in part by whether the employee's position fell within certain functional skill families also supports our conclusion eligibility for participation in the ito ii program was determined as follows the ito ii project office will establish 'functions' within ibm within each function the project office will group similar skills together into 'families' creating functional skill families based on these business decisions management will decide which functional skill families are eligible to participate in the program furthermore the method used by ibm in calculating the ito payment supports our conclusion the ito payment was calculated as follows employees who are approved for and comply with the terms of the ito ii program will receive the greater of eight weeks pay or one week's pay for each six months of service fully or partially completed up to a maximum of weeks' pay the payment will be made in a lump sum and be based on the employee's regular salary and years_of_service as of the day he or she leaves active employment this payment is in lieu of any other form of separation pay or exit incentive program to which the employee is may or might have become entitled it is ibm's intent to pay only one incentive separation type payment to an employee indeed in making the ito payment which was to be in lieu of any other form of separation pay or exit incentive program ibm's intent appears to be to pay only one incentive separation type payment to an employee emphasis added accordingly based on our review of the facts and circumstances in the instant record we conclude that the ito payment was paid_by ibm to petitioner as severance_pay not to release a tort or tort type claim as respondent has made a prima facie case that the requirements of the sec_104 exclusion are not met petitioners cannot rest upon mere allegations or denials but must set forth specific facts showing that there is a genuine issue for trial celotex corp v catrett u s pincite o'neal v commissioner t c pincite petitioners contend that they are entitled to exclude the ito payment from gross_income pursuant to sec_104 because the ito ii program was designed to avoid prosecution of a legal suit or action based upon tort or tort-type rights petitioners allege that because employees who filed claims within days of signing the ito ii agreement had to return any settlement payments the settlement payment was made to avoid tort type litigation alternatively petitioners contend that ms allman caused injury to petitioners by coercing petitioner to sign up for the ito ii program and to terminate from ibm additionally petitioners allege that as a result of having to sign up for the ito ii program and to terminate employment with ibm through coercion and duress petitioner had to accept a minimum-wage position to start a new career suffered periods of unemployment assumed debts totaling dollar_figure and experienced great personal and family stress as a final alternative petitioners contend that they would have suffered even greater injury by filing a claim against ibm instead of accepting the ito ii settlement petitioners' allegations are merely conclusions and not specific allegations of fact that if true would support a finding that the ito payment was for personal_injury_or_sickness as required by sec_104 for purposes of the instant additionally we note that in their petition petitioners contested the deficiency on the grounds that the ito payment was made under taxpayer duress as consideration to the taxpayer for release of employer for any claim the taxpayer may have against employer for age discrimination and other potential tort claims motion we accept as true that petitioner suffered injury when ms allman coerced petitioner to sign up for the ito ii program and to terminate from ibm that petitioner experienced great personal and family stress as a result of his having to sign up for the ito ii program and to terminate employment with ibm through coercion and duress and that petitioners would have suffered even greater injury by filing a suit against ibm instead of accepting the ito payment petitioners however have alleged no specific facts showing that the injuries they cited were the basis for a tort or tort type claim against ibm that petitioner released when he signed the ito ii program release and the basis on account of which ibm made the ito payment even if the injuries cited by petitioners could form the basis for some tort or tort type claim against ibm and we do not so find in this opinion such a claim would not be a basis for concluding that the ito payment was made by ibm on account of such injuries in sum petitioners have alleged no specific facts showing that petitioner had a tort or tort type claim7 against ibm that he released in exchange for the ito payment additionally as we discussed supra to exclude a settlement payment pursuant to sec_104 the taxpayer need not file a claim however the taxpayer must have a claim that is bona_fide but not necessarily valid ie sustainable 102_tc_116 affd in part revd in part and remanded 70_f3d_34 5th cir 98_tc_1 petitioners have alleged no specific facts showing that the ito payment was allocable to tort or tort type damages for personal injuries or sickness viewing the facts in a light most favorable to petitioners blanton v commissioner t c pincite we conclude that respondent has made a prima facie case that petitioner did not release any tort or tort type claim in exchange for the ito payment petitioners have failed to offer countervailing assertions having sufficient specificity to cause us to conclude that there is any genuine issue of material fact which requires a trial we have considered all of the parties' remaining arguments and find them to be without merit under these circumstances respondent is entitled to summary_judgment as a matter of law rule d 78_tc_154 as petitioners' gross_income is increased in the amount of dollar_figure we sustain respondent's disallowance of itemized_deductions in the amount of dollar_figure as an automatic_adjustment to reflect the foregoing respondent's motion for summary_judgment will be granted and decision will be entered for respondent


internal_revenue_service number release date index number ------------------------ ------------------------------------------------- -------------------------------------- ------------------ ------------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------------ ---------------------------------------------------- telephone number --------------------- refer reply to cc intl bo3 plr-121623-11 date july ------------------------------------------------------------- ---------------- taxpayer state x taxable_year ------------------------------------------------------ year industry x ------- -------------------------------- dear ------------------------ this is in response to a letter you submitted dated date requesting a ruling that taxpayer be permitted to change to the tax_book_value_method of asset valuation for purposes of apportioning interest_expense for the taxable_year 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_ruling it is subject_to verification on examination taxpayer is a domestic_corporation organized under the laws of state x taxpayer uses the accrual_method as its overall_method_of_accounting and its annual_accounting_period ends december taxpayer through its wholly owned subsidiaries owns and operates businesses in industry x taxpayer must allocate and apportion its deductions including its deduction for interest_expense for all purposes of the internal_revenue_code pursuant to sec_1_861-8 through and temp sec_1_861-8t through 861-14t sec_864 provides that all allocations and apportionments of interest_expense shall be made on the basis of assets rather than gross_income sec_1_861-9 through and temp sec_1_861-9t through temp treas reg plr-121623-11 sec_1_861-13t set forth the rules specific to the allocation and apportionment of interest_expense temp sec_1_861-9t provides that a taxpayer may elect to determine the value of its assets on the basis of either the tax book_value or the fair_market_value of its assets temp sec_1 861-8t c provides that once a taxpayer uses the fair_market_value_method the taxpayer and all related_persons must continue to use such method unless expressly authorized by the commissioner to change methods taxpayer is the common parent of a group of affiliated corporations that file a consolidated u s federal_income_tax return starting with year taxpayer and its affiliates have determined the value of their assets on a fair_market_value basis pursuant to the authority granted under temp sec_1_861-9t since year taxpayer has continued to use the fair_market_value_method as required under temp sec_1 861-8t c and 861-9t g ii taxpayer requests pursuant to temp sec_1_861-8t and sec_1 9t g ii that it be permitted to change to the tax_book_value_method of asset valuation for the taxable_year based solely on the information submitted the representations made and the reasons given for this request taxpayer may change from the fair_market_value_method to the tax_book_value_method of asset valuation for purposes of apportioning interest_expense pursuant to temp sec_1_861-8t and sec_1_861-9t for the taxable_year and for future years except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item described or referenced in this letter this ruling is directed only to taxpayer sec_6110 of the code provides that it may not be used or cited as precedent plr-121623-11 a copy of this letter must be attached to any income_tax return to which it is relevant in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely richard l chewning senior counsel branch office of associate chief_counsel international cc


department of the treasury internal_revenue_service washington d c uil number release date date memorandum for regional_counsel region from judith c dunn associate chief_counsel domestic subject - request for designation this is in response to your memorandum dated date wherein you requested that we determine that the above-captioned case be designated for litigation and then seek the concurrence of the national director of appeals to such designation first we compliment you and your staff for a well-presented written submission and oral presentation in the meeting we held date i am convinced that the issue here is of substantial importance to the fair administration to the internal revenue laws and that the claims of the taxpayer are not consistent with the intent of congress in enacting the excise_taxes at issue here secondly we agree that the state of the law in this area is muddled and is deserving of the office’s attention to clarify or reform so that it can be correctly and efficiently applied by both taxpayers and examining agents the interpretation of the court of federal claims in u e c equipment co v united_states u s t c big_number cl_ct and utilicorp united inc v united_states big_number cl_ct as to the mobile_machinery exception in sec_48_4061_a_-1 while arguably fact specific and non-precedential has spawned confusion and a fair number of undeserving claims by several industries the problem is that the second and third regulatory tests ie the specially designed and substantial structural modification tests have been interpreted by some people as permitting readily mobile trucks to qualify for the exception so long as they carry any special equipment such as cranes lifts or derricks many of these trucks use the highways daily sustain speeds of normal traffic and function equally to transport employees and their tools and equipment to short-term job sites they also function to regularly deliver property to be permanently erected at the job sites these other uses and functions at least in the aggregate do not seem compatible with the requirements that the chassis be specially designed to serve only as a mobile carriage and mount as required by sec_48_4061_a_-1 the trucks in fact are regularly used for other functions which seem to be specifically contemplated in the design of the truck chassis nevertheless because of policy and tactical considerations discussed below we decline to designate this case for litigation and refer the case back to be settled or litigated pursuant to normal administrative and judicial processes policy and tactical consideration sec_1 as you know current procedures provide that a case under the jurisdiction of appeals may only be designated with the concurrence of the national director of appeals ccdm provides in this regard that a recommendation for designation in a nondocketed_case should generally be made before settlement consideration commences in appeals this does not mean that a litigation vehicle is never nominated while in appeals jurisdiction but it does mean that such a designation should be rare and must be considered and coordinated in light of appeals mission although no discussion of this precise issue has taken place between the appeals_office and the taxpayer here a number of discussions as to other issues have taken place and the instant issue is ripe for appeals consideration further this issue has been considered by appeals in earlier cycles with this taxpayer and the issue has been settled by mutual agreement while this office has not formally requested that the national director of appeals consider this case we have a general understanding from past cases and discussions that he is reluctant to designate cases that are in appeals’ jurisdiction in light of the appeals mission the policy stated above and the expectations of taxpayers that they would be permitted to amicably settle cases that have gone into appeals while this understanding would not prevent this office from urging designation in a compelling case we do not believe that the facts and circumstances of this case present the rare case where that would be appropriate conclusion we conclude that this case should not be designated for litigation and therefore it is not designated for litigation it should be returned to the appeals_division for consideration of settlement on its merits and failing that litigation in the normal course and under normal procedures cc special counsel m sp district_counsel district district_director district regional_director_of_appeals region national director of appeals assistant chief_counsel field service


internal_revenue_service department of the treasury index number 468b washington dc vem on person to contact telephone number refer reply to cc dom it a 1-plr-114961-98 date i908 legend bankruptcy court trust parent subsidiary n i b date state city dear t i this responds to your request dated date in which you request rulings on behalf of parent and subsidiary specifically you request the following rulings the trust will constitute a qualified_settlement_fund within the meaning of sec_1_468b-1 of the income_tax regulations the trust will be taxed on its modified gross_income under sec_1_468b-2 of the regulations and the transfer to the trust of certain assets by or on behaif of parent and subsidiary will not be includible in the modified gross_income of the trust pursuant to sec_1_468b-2 of the regulations facts subsidiary is a wholly-owned subsidiary of parent and is a member of the affiliated_group_of_corporations of which parent is the common parent subsidiary previously installed a materials containing b exposure to which has been known to cause disease thousands of b-related personal injury claims have been filed against subsidiary although parent was never involved in the a business personal injury claims have also been filed against it in an effort to resolve the personal injury claims subsidiary filed on date a petition for bankruptcy under chapter of the united_states bankruptcy code the plan_of_reorganization provides for the establishment of the trust which will assume all liabilities and obligations of subsidiary and parent relating to b claims and will provide for the partial payment of these claims by virtue of certain injunctions issued under the united_states bankruptcy code all b-related claims against parent subsidiary and their insurance carriers can be asserted only against the trust and no such claims can be directly asserted or pursued against parent subsidiary or their insurance carriers parent and subsidiary have insurance coverage for the b-related claims the extent of subsidiary's coverage is in litigation parent subsidiary and their liability insurance carriers will transfer to the trust the following assets common_stock of subsidiary as reorganized under the bankruptcy plan cash insurance proceeds the right to receive insurance proceeds proceeds from the lease sale_or_other_disposition of certain real_estate located in city and the right to receive such proceeds the trust will be subject_to the continuing jurisdiction of the bankruptcy court and will be a_trust under state law applicable law sec_468b of the internal_revenue_code code provides that nothing in any provision of law will be construed as providing that an escrow account settlement fund or similar fund is not subject_to current income_tax pursuant to the authority of sec_468b the secretary has published sec_1_468b-1 through 468b-5 of the regulations regarding qualified settlement funds sec_1_468b-1 of the regulations provides in part that a fund account or trust is a qualified_settlement_fund if- it is established pursuant to an order of or is approved by a court of law or other governmental authority and is subject_to the continuing jurisdiction of such authority it is established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event or related series of events that has occurred and that has given rise to at least one claim asserting liability arising out of tort breach of contract or violation of law and the fund account or trust is a_trust under applicable state law or its assets are otherwise segregated from other assets of the transferor and related parties sec_1_468b-2 provides that a qualified_settlement_fund is subject_to tax on its modified gross_income for any taxable_year at a rate equal to the maximum rate in effect for that taxable_year under sec_1 sec_1_468b-2 provides that the term modified gross_income means gross_income as defined in sec_61 computed with certain modifications under séction 468b-2 b amounts transferred to a qualified_settlement_fund by or on behalf of a transferor to resolve or satisfy a liability for which the fund is established are generally excluded from gross_income of the qualified_settlement_fund however dividends on stock of a transferor or related_person interest on debt of a transferor or related_person and payments in compensation_for late or delayed transfers are not excluded from the gross_income of the qualified_settlement_fund analysis and conclusion based on the information provided and the representations made we conclude as follows the trust will constitute a qualified_settlement_fund under sec_1_468b-1 of the regulations since the three requirements for a qualified_settlement_fund will be satisfied first the trust will be established pursuant to an order of the bankruptcy court and will be subject_to that court's continuing jurisdiction second the trust will be established to resolve or satisfy one or more claims that have resulted from an event or related series of events that has occurred the installation of materials containing b and that has given rise to at least one claim asserting tort liability third the trust will be a_trust under state law the trust is subject_to tax on its modified gross_income as provided by sec_1_468b-2 of the regulations the transfers to the trust of the assets described above will not be includible in the modified gross_income of the trust pursuant to sec_1 -468b-2 b of the regulations except as set forth above no opinion is expressed regarding the federal tax treatment of this transaction under any other provision of the code specifically no opinion is expressed with respect to the tax treatment of subsidiary and parent as a result of the transactions referred to above this ruling is directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file the original of this letter is being sent to your representative and a copy to you sincerely yours assistant chief_counsel income_tax accounting chief branch


internal_revenue_service oct number info release date uilc cc psi 1-cor-120321-00 we are responding to correspondence submitted on your behalf by c p a requesting relief in order to establish date as the effective date for your s_corporation_election it appears that you are seeking late s_corporation status pursuant to the automatic relief provided by revproc_98_55 because the internal_revenue_service failed to receive a timely election for your corporation however in revproc_98_55 the service provides late s_corporation relief to taxpayers who meet certain eligibility requirements the window period for automatic relief relating to the taxable_year expired on date which was the original due_date for your tax_return excluding extensions because your request was made past the extended due dated provided by revproc_98_55 you are ineligible for automatic relief and must follow the general_rule for requesting relief described below announcement copy enclosed provides guidance on seeking relief for late s_corporation elections and inadvertent invalid s_corporation elections generally to request relief for a late or invalid s_corporation_election you must request a private_letter_ruling from the national_office the procedures for requesting a private_letter_ruling are set out in revproc_2000_1 copy enclosed in addition revproc_2000_1 requires taxpayers to submit a user_fee along with their ruling_request the standard user_fee for a private_letter_ruling is dollar_figure however taxpayers with gross_income of less than dollar_figure million on their last-filed tax_return qualify for a reduced user_fee in the amount of dollar_figure if you are eligible to use the reduced fee provision you must include the statement described in b b of appendix a with your request please review appendix b for a sample format for requesting a private_letter_ruling if you decide to submit a formal request for a private_letter_ruling please include the proper user_fee if applying under the reduced fee provisions send a statement certifying gross_income and refer your request to our office by adding the following to the address attn cc p a p o box ben franklin station washington dc direct to cc psi room please keep this letter with your tax records and feel free to provide a copy of it to your authorized representative we hope that the above information proves helpful sincerely yours s dianna k miosi dianna k miosi chief branch associate chief_counsel passthroughs and special industries enclosures announcement revproc_2000_1


t c memo united_states tax_court lowell alan baisden et al petitioners v commissioner of internal revenue respondent docket nos filed date lowell alan baisden pro_se mindy s meigs for respondent memorandum findings_of_fact and opinion swift judge respondent determined deficiencies in petitioners’ federal income taxes additions to tax and fraud penalties as follows 1cases of the following petitioners are consolidated herewith lowell a baisden docket no and lowell a baisden and theresa a mawson docket no year deficiency dollar_figure big_number big_number additions to tax penalties sec_6651 sec_6663 --- dollar_figure big_number dollar_figure big_number big_number after a settlement largely in respondent’s favor of the income and expense adjustments determined in respondent’s notices of deficiency the issue for decision in these consolidated cases is whether lowell alan baisden petitioner is liable for the fraud_penalty under sec_6663 or alternatively for the negligence_penalty under sec_6662 all section references are to the internal_revenue_code and all rule references are to the tax_court rules_of_practice and procedure findings_of_fact facts stipulated by the parties are so found at the time the petition was filed petitioners resided in california in petitioner graduated with a bachelor’s degree from the university of southern california with an emphasis in accounting since petitioner has been a licensed certified_public_accountant in california and in utah for over years including and through his accounting firm petitioner has been engaged as a sole_proprietor in providing accounting and tax_return preparation services for clients petitioner typically charged clients monthly retainer fees ranging from dollar_figure to dollar_figure for preparing detailed trial balances and quarterly financial statements and for providing internal_revenue_service audit representation petitioner charged clients fees ranging from dollar_figure to dollar_figure for preparation of federal_income_tax returns petitioner and his wife theresa mawson were married in mrs mawson has worked as an interior designer but never for petitioner petitioner’s books_and_records for and were not properly maintained in a ledger which petitioner maintained petitioner intermingled business_expenses with personal and family_expenses such as payments relating to his children’s education and to a housekeeper petitioner’s books_and_records apparently reflected all fees received from clients each year but the books_and_records also showed zero net_income for the accounting firm for each year in issue in an effort to explain his bookkeeping and accounting methods petitioner explained that since approximately he had developed for his use and for_the_use_of his clients a novel and insightful tax strategy that may be described generally as follows booked sole_proprietorship income would be totally or almost totally offset by the payment by the sole_proprietorship of royalties to the owner of the business the so-called royalties would not be paid directly to the owner but rather would consist of payments by the sole_proprietorship of the owner’s personal and family_expenses the royalty payments would be treated as fully deductible by the sole_proprietorship and they would reduce the booked net_income of the sole_proprietorship to zero and the owner would report royalties paid with regard to personal and family_expenses as other income not subject_to employment_taxes the primary savings were apparently intended to be derived from petitioner’s tax strategy through the conversion of sole_proprietorship business income subject_to self-employment taxes into royalties not subject_to self-employment taxes petitioner had no written royalty agreement with his accounting firm petitioner maintained different bank accounts--8 in his own name and joint accounts with his wife for the years in issue total deposits into petitioner’s bank accounts were as follows year total deposits dollar_figure big_number big_number in petitioner purchased a lexus ls400 in petitioner purchased a new lexus sc430 in petitioner purchased a new family residence for dollar_figure on the joint federal_income_tax returns that petitioner and his wife timely filed for and untimely filed for and on his individual federal_income_tax return that petitioner untimely filed for each of which petitioner prepared petitioner did not include a schedule c net profit from business relating to his sole_proprietorship accounting firm and petitioner did not otherwise report more than a fraction of the so-called royalty income his accounting firm paid on his behalf rather petitioner used the above-described royalty strategy for each year to offset to zero or to almost zero the substantial booked income for his accounting firm petitioner filed with his federal_income_tax return for each year no schedule c and petitioner reported zero income relating to his accounting practice additionally on each of his federal_income_tax returns petitioner reported only a portion of the so-called royalty payments his accounting firm purportedly paid on his behalf for personal and family_expenses namely dollar_figure for dollar_figure for and dollar_figure for also on the federal_income_tax return for each year because petitioner reported no net_income from his accounting practice petitioner reported no self-employment_tax liability even though petitioner’s wife did not sign the federal_income_tax return and even though petitioner’s wife had no business of her own and performed no paid services for petitioner the federal_income_tax return shows petitioner’s wife as a joint filer and petitioner attached a schedule c for his wife showing her as engaged in an accounting practice and as receiving dollar_figure from petitioner for contract services the above and federal_income_tax returns reported the following tax_liabilities credits and overpayments year total reported tax_liability dollar_figure -0- big_number payments or credits claimed tax overpayment claimed dollar_figure dollar_figure --- --- big_number for and petitioners received refunds of the claimed overpayments in date respondent initiated an audit of petitioner and his wife’s joint federal_income_tax returns for and and of petitioner’s individual federal_income_tax return for during respondent’s audit petitioner often was unresponsive to respondent’s requests for financial information for petitioner did not give respondent records of his business_expenses and petitioner refused to extend the period of limitations on assessment for all years petitioner provided incomplete records and those records respondent did obtain were largely received from third parties to redetermine petitioner’s income respondent generally used the bank_deposits method of proof and respondent determined that petitioner had unreported gross_receipts from his accounting practice of dollar_figure dollar_figure and dollar_figure for and respectively respondent determined the failure to timely file addition_to_tax under sec_6651 against petitioner for and against petitioner and his wife for respondent mailed three separate notices of deficiency with respect to the years at issue for and respondent mailed joint notices of deficiency to petitioner and his wife for respondent mailed a notice_of_deficiency only to petitioner with regard to the so-called royalties paid_by his accounting firm petitioner offered respondent’s agent a number of inconsistent explanations in conversations with respondent’s agent petitioner explained that because corporations are allowed deductions for certain employee education expenses an individual taxpayer sole_proprietor also was entitled to deduct children’s school expenses on his her individual federal_income_tax returns petitioner claimed he was entitled to business_expense deductions for and in the amounts of dollar_figure dollar_figure and dollar_figure respectively on the basis of substantiation provided respondent allowed petitioner business_expense deductions of zero for because no records were provided dollar_figure for and dollar_figure for respondent charged petitioner with self-employment_tax on petitioner’s redetermined schedule c income in an effort to delay respondent’s audit petitioner filed a spurious complaint with the taxpayer advocate’s office in his answer to petitioner’s complaint respondent charged petitioner with the fraud_penalty under sec_6663 and alternatively with the negligence_penalty under sec_6662 for and the parties have now stipulated and agreed that for the years in issue petitioner’s sole_proprietorship accounting practice had the following total schedule c gross_receipts allowable business_expense deductions and net_income dollar_figure schedule c gross_receipts business_expense deductions big_number total schedule c net_income big_number dollar_figure big_number big_number dollar_figure big_number big_number as part of the settlement petitioner has agreed that he is liable for the sec_6651 late filing addition_to_tax for and and respondent concedes that petitioner’s wife is entitled to relief from joint liability under sec_6015 with regard to any_tax deficiency and additions to tax we sustain herein for opinion under sec_6663 if it is established that any part of an underpayment_of_tax required to be shown on a return is due to fraud there is added to the tax a penalty equal to percent of the portion of the underpayment that is attributable to fraud fraudulent intent is defined as ‘actual intentional wrongdoing and the intent required is the specific purpose to evade a tax believed to be owing ’ 67_tc_143 quoting 118_f2d_308 5th cir revg 40_bta_424 to prove a taxpayer’s tax_fraud the commissioner must establish by clear_and_convincing evidence the existence of an underpayment_of_tax and the taxpayer’s fraudulent intent 767_f2d_618 9th cir affg tcmemo_1983_249 94_tc_654 whether petitioner’s fraudulent intent has been established is to be analyzed on the basis of all of the facts and circumstances in evidence see 54_tc_255 fraud is never to be imputed or presumed however its proof may depend to some extent upon circumstantial evidence and may rest upon reasonable inferences properly drawn from the evidence of record 56_tc_213 see also 80_tc_1111 79_tc_995 affd 748_f2d_331 6th cir courts have developed several objective badges_of_fraud including understatements of income the absence of records implausible or inconsistent explanations of behavior asset concealment cash dealings and lack of cooperation with tax authorities 796_f2d_303 9th cir affg tcmemo_1984_601 paschal v commissioner tcmemo_1994_380 affd without published opinion aftr 2d ustc par big_number 3d cir a taxpayer’s experience and education may also be considered 99_tc_202 75_tc_1 consistent substantial understatements of income over several years are highly persuasive evidence of intent to defraud the government particularly when combined with other indicia of fraud as the u s court_of_appeals for the ninth circuit has stated repeated understatements in successive years when coupled with other circumstances showing an intent to conceal or misstate taxable_income present a basis on which the tax_court may properly infer fraud 262_f2d_727 9th cir citing 250_f2d_242 5th cir affg in part and remanding t c memo affg in part and remanding in part 29_tc_279 the evidence supports imposition against petitioner of the fraud penalties for each year petitioner’s use of so-called royalty payments to pay personal expenses and to offset or reduce business income is patently improper and nothing more than a fantasy creation of petitioner in an effort to evade the payment of taxes due and owing in spite of petitioner’s education training and experience as an accountant on the and federal_income_tax returns in issue petitioner failed to report substantial income from his business activities and claimed obvious personal expenses as deductible business_expenses further petitioner failed to otherwise report as royalty income substantial business income petitioner’s books_and_records intermingled business and personal items petitioner provided ridiculous explanations for his tax_return treatment of income and expenses and petitioner did not cooperate with respondent’s audit petitioner’s use of so-called royalty expenses to offset business gross_receipts and to eliminate or minimize reported income income taxes and self-employment taxes is unfounded and improper petitioner’s liability for the fraud penalties determined by respondent is sustained and the fraud_penalty for each year applies to the entire tax_deficiency for each year for the reasons stated we sustain respondent’s imposition on petitioner of the fraud_penalty for each of the years in issue decisions will be entered under rule


department of the treasury internal_revenue_service washington d c date number release date uil cc dom fs proc tl-n-5679-99 memorandum for district_counsel boston cc ner ned bos from subject assistant chief_counsel field service cc dom fs proc significant service_center advice - asfr statutory notices of deficiency this significant service_center advice arose as a result of your discovery of discrepancies between statutory notices originally printed off the automated substitute for return asfr system and mailed to taxpayers and reprints of the same notices generated by the andover service_center for inclusion in the administrative file after taxpayers petition the tax_court disclosure statement unless specifically marked acknowledged significant advice may be disseminated above this memorandum is not to be circulated or disseminated except as provided in ccdm d and e this document may contain confidential information subject_to the attorney-client and deliberative_process privileges therefore this document shall not be disclosed beyond the office or individual s who originated the question discussed herein and are working the matter with the requisite need to know in no event shall it be disclosed to taxpayers or their representatives issue whether service centers should print a duplicate of the original notice_of_deficiency at the time the original notice is printed off the asfr system conclusion service centers should print a duplicate of the original notice_of_deficiency at the time the original notice printed off the asfr system discussion as we understand the facts your office met with employees of the andover customer service_center to discuss discrepancies found between statutory notices originally printed off the asfr system and mailed to the taxpayer and reprints of the same notices generated by the andover service_center for inclusion in the administrative file after a taxpayer files a petition with the tax_court in certain instances you discovered problems where there was information missing from the second reprinted notice from that shown on the first notice and where there was different information on the second reprinted notice from that shown on the first notice a properly completed application_for registration or certification postal service form_3877 reflects compliance with established procedures by the internal_revenue_service service for timely mailing deficiency notices 853_f2d_1209 5th cir where the existence of the notice_of_deficiency is not disputed a properly completed form_3877 by itself is sufficient absent evidence to the contrary to establish that the notice was properly mailed to a taxpayer 20_f3d_222 6th cir keado v united_states f 2d pincite 724_f2d_808 9th cir cert_denied 469_us_830 530_f2d_781 8th cir 60_tc_522 aff’d 499_f2d_550 2d cir per curiam however if a taxpayer offers contrary evidence then a copy of the statutory_notice_of_deficiency should be submitted as evidence of the existence of the notice_of_deficiency and proof that it was timely mailed to the taxpayer in 92_tc_729 aff’d 935_f2d_1282 3d cir the tax_court held that any presumption of regularity from the postal service form_3877 standing alone to indicate a mailing on a particular date of a notice_of_deficiency to particular taxpayers for a specific year had been rebutted successfully by the taxpayers as a result of the various confusing and nonresponsive service answers to their inquiries about the collection notices coupled with the service’s failure to present adequate evidence in regard to its various administrative operations in this matter the court noted that respondent failed to present any evidence that the notice_of_deficiency was typed signed and dated or issued a duplicate copy of the notice_of_deficiency was the missing evidence that respondent needed to present to satisfy its burden_of_proof under the dictates of pietanza a duplicate copy of the notice will be needed to support a presumption of regularity to prove the existence of the notice and to indicate the mailing date of a notice_of_deficiency to particular taxpayers for a specific year thus service centers should print a duplicate of the original notice_of_deficiency at the time the original notice is printed off the asfr system and retain it in the administrative file nancy b romano senior technician reviewer procedural branch


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 corp b04 plr-149609-10 date date legend parent former parent ------------------------------------------------ ------------------------------- ------------------------ ------------------------------ ------------------------------- ------------------------ subsidiary ---------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------- ------------------------------- ------------------------- subsidiary date a date b date c -------------------------------------------------- ------------------------------- ------------------------- ----------------------- ---------------- -------------------------- plr-149609-10 company official tax professsional -------------------- ------------------------------ ------------------------------------------------ ---------------------- ------------------------------ --------------------------- dear ---------------- this letter responds to a letter dated date submitted on behalf of parent requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election the extension is being requested for parent and its subsidiaries to make an election to file a consolidated federal_income_tax return with parent as the common parent under sec_1_1502-75 of the income_tax regulations hereinafter referred to as the election effective for the taxable_year ending date c additional information was received in a letter dated date the material information is summarized below former parent wholly owns subsidiary and subsidiary prior to date b former parent was the common parent of an affiliated_group consisting of itself subsidiary and subsidiary the former parent group which filed consolidated federal_income_tax returns parent is an inactive holding_company that was incorporated on date a on date b parent acquired all of the stock of former parent in a transaction the taxpayer represents is not a reverse_acquisition within the meaning of sec_1_1502-75 as a result of the acquisition on date b the former parent group terminated pursuant to sec_1_1502-75 parent and its subsidiaries constituted a new affiliated_group defined in sec_1504 with parent as the common parent the parent group nevertheless the former parent group filed a consolidated federal_income_tax return for its taxable_year ending date c as if the former parent group did not terminate the election was due on the last day prescribed by law including extensions of time for filing parent’s return however for various reasons a valid election was not filed after the due_date for the election it was discovered that the election had not been filed subsequently this request was submitted under sec_301_9100-3 for an extension of time to file the election the period of limitations on assessment under sec_6501 has not expired for parent’s former parent’s subsidiary 1’s or subsidiary 2’s taxable years ending date b if any date c or any subsequent year plr-149609-10 sec_1_1502-75 provides that a group which did not file a consolidated_return for the immediately preceding_taxable_year may file a consolidated_return in lieu of separate returns for the taxable_year provided that each corporation which has been a member of the group during any part of the taxable_year for which the consolidated_return is to be filed consents to the regulations under sec_1502 if a group wishes to exercise its privilege of filing a consolidated_return such consolidated_return must be filed not later than the last day prescribed by law including extensions of time for filing the common parent’s return under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections 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 sec_301_9100-3 in this case the time for filing the election is fixed by the regulations ie sec_1_1502-75 therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time for parent and its subsidiaries to file the election provided parent shows that it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and that granting relief will not prejudice the interests of the government information affidavits and representations submitted by parent company official and tax professional explain the circumstances that resulted in the failure to timely file a valid election the information establishes that the request for relief was filed before the failure to make the election was discovered by the internal_revenue_service and that parent reasonably relied on a qualified_tax professional who failed to make or advise parent to make the election see sec_301_9100-3 and v based on the facts and information submitted including the representations made we conclude that parent has shown that it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly provided the parent group qualifies substantively to file a consolidated_return for the applicable tax_year an extension of time is granted under sec_301_9100-3 until days from the date on this letter for parent to file the election by filing a consolidated_return with parent as the common parent and attaching a form_1122 for each of former parent subsidiary plr-149609-10 and subsidiary for the taxable_year ending date c the parent group must attach a copy of this letter to such return or if the parent group files the return electronically a statement may be attached to the return that provides the date and control number of this ruling the above extension of time is conditioned on the parent group's tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the parent group’s tax_liability for the year involved a determination thereof will be made by the applicable director's office upon audit of the federal_income_tax returns involved we express no opinion with respect to whether in fact the parent group qualifies substantively to file a consolidated_return in addition we express no opinion as to the tax effects or consequences of filing the return or the election late under the provisions of any other section of the code or regulations or as to the tax treatment of any conditions existing at the time of or effects resulting from filing the return or the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-3 we relied on certain statements and representations made by parent company official and tax professional however all essential facts must be verified in addition notwithstanding that an extension is granted under sec_301_9100-3 to file the election penalties and interest that would otherwise be applicable if any continue to apply this ruling is directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely __________________ ken cohen senior technician reviewer branch office of associate chief_counsel corporate


t c memo united_states tax_court mark and valorie kruse petitioners v commissioner of internal revenue respondent docket no filed date steven j chase john w west iii cheryl l gordon and dale s davidson for petitioners randall b pooler and randall p andreozzi for respondent memorandum opinion panuthos chief special_trial_judge this matter is before the court on respondent's motion for summary_judgment pursuant to rule the issue for decision is whether there is a genuine all rule references are to the tax_court rules_of_practice and procedure all section references are to the continued - - issue as to any material fact and whether a decision may be rendered as a matter of law as to whether petitioners have paid_or_incurred litigation costs within the meaning of sec_7430 and c b petitioners have filed a response objecting to the granting of this motion based on the record herein we conclude a hearing and oral argument is not necessary for the resolution of the pending motion background petitioners are husband and wife petitioner mark kruse is the president and sole shareholder of mark a kruse d c p c d b a kruse chiropractic clinic hereinafter kruse p c on date respondent issued a notice_of_deficiency determining deficiencies in petitioners' income_tax for the and tax years the notice_of_deficiency determined adjustments as to payments made by kruse p c as a participating employer in the supplemental employers' benefit association seba employers' benefit plan of america and the seba employers benefit trust of america hereinafter collectively referred to as the seba plan for the and tax years the notice_of_deficiency determined that the payments were includable in petitioners' gross_income for those years under sec_402 and the matter involved the issue of whether the seba plan is a t scontinued internal_revenue_code as amended nonqualified_deferred_compensation_plan subject_to sec_404 or a welfare_benefit_fund under sec_419 another adjustment set forth in the notice_of_deficiency pertained to whether the kruse p c money_purchase_pension_plan and trust is a qualified_pension plan exempt from tax under sec_501 on date petitioners filed a timely petition in this case subsegquently lawyers of the law firm of abel band russell collier pitchford gordon the law firm were retained to represent petitioners in this matter petitioners submitted affidavits which state in part we retained the law firm through the seba employers plan and trust to represent us in connection with this action although we executed no letter of representation this affidavit will serve to acknowledge that we were and still remain liable to pay the law firm all costs and fees incurred with regard to their representation of ourselves in this proceeding we have paid dollar_figure' of these fees directly through the assessment of our seba employers plan and trust fund in order to fund this action in the event that the seba plan and trust did not or does not pay the law firm all reasonable fees and costs incurred in relation to the above referenced tax_court case we hereby certify that we were and do remain liable for this amount william gable is the president of the seba plan all invoices for services rendered by the law firm in this case have this amount was amended to dollar_figure in subsequent affidavits q4e- been addressed to mr gable as of date the law firm billed a total of dollar_figure for services rendered and mr gable paid dollar_figure of that amount with assets of the seba plan mr gable also provided an affidavit stating the seba plan is funding the case and petitioners are liable for any amounts if any not paid_by the plan the parties settled all the adjustments determined in the notice_of_deficiency on date a stipulation of settlement was filed wherein the parties agreed that there are no deficiencies in income taxes owed by petitioners nor overpayment due to petitioners and that there are no penalties due from petitioners under sec_6662 for taxable years and on the same date petitioners filed a motion for award of reasonable_litigation_costs under sec_7430 and rule seeking to recover costs in the amount of dollar_figure plus attorney's_fees incurred during the prosecution of the motion respondent objected to the granting of the motion petitioners requested a hearing on the motion which was scheduled to be held at a trial session in tampa florida the parties estimated that the hearing would reguire or more days since the issue whether respondent was substantially justified would require the presentation of substantial evidence in lieu of the hearing on petitioners’ motion for litigation costs the parties entered into a stipulation to be bound whereby the - parties agreed to stay the proceedings on the motion for litigation costs for the shorter of a months or b such time as either petitioners or another participant in the seba plan or any of the seba plan's controlled affiliates or subsidiaries whom both parties agree to be similarly situated to petitioners files a petition and ultimately resolves on the merits in this court the substantive issues of the case in the event the 12-month_period elapses before such a case is resolved in this court the parties shall confer with the court to determine whether this matter will be set for hearing settled or stayed for an additional period of time the parties will cooperate in resolving the issue of whether and to what extent petitioners have paid_or_incurred reasonable_litigation_costs under sec_7430 the parties will cooperate in resolving any disputed fact to permit the execution of a written stipulation of all facts relevant to the issue of whether and to what extent petitioners have paid_or_incurred reasonable_litigation_costs under sec_7430 and toa timetable in which respondent will file a motion for summary_judgment on the issue of whether petitioners have paid_or_incurred reasonable_litigation_costs under sec_7430 if he elects to do so discussion the parties were unable to resolve the issue of whether petitioners have paid_or_incurred reasonable_litigation_costs under sec_7430 as a result respondent filed a motion for summary_judgment on the above issue petitioners filed an objection to respondent's motion summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trials see 90_tc_678 we believe that summary_judgment is an appropriate vehicle in the particular circumstances of this case to resolve a limited issue in the pending motion for litigation costs since it may assist in forgoing a needless expensive and time-consuming evidentiary hearing anticipated by the parties sec_7430 provides that in the case of any court proceedings brought by or against the united_states in connection with the determination collection_or_refund_of_any_tax interest or penalty the prevailing_party may be awarded a judgment for reasonable_litigation_costs incurred reasonable_litigation_costs include reasonable fees paid_or_incurred for the services of attorneys in connection with the court_proceeding sec_7430 b in the case presently before us petitioners contend they have paid_or_incurred litigation costs within the meaning of sec_7430 c b - j- because they were and remain legally obligated to pay any and all litigation costs and expenses not paid_by the seba plan by virtue of the requirement that attorney's_fees have been incurred by the party sec_7430 differs from some other fee-shifting statutes unlike the civil rights attorneys fees awards act which provides for allowance of a reasonable attorney's fee as part of the costs or the foia provision which permits payment of other litigation costs reasonably incurred sec_7430 is more narrowly drawn the plain language of the statute controls here the common meaning of the word incur is to become liable or subject_to bring down upon oneself 87_tc_838 the simple truth is that the plain language of sec_7430 x is limited to actual expenditures id pincite in analogous circumstances it has been held that fees are incurred when there is a legal_obligation to pay them 856_f2d_56 8th cir applying sec_304 of the uniform relocation assistance and real_property acquisition policies act of publaw_91_646 84_stat_1906 u s c a attorney's_fees were not actually incurred because the party claiming them had no legal_obligation to pay them accord 908_f2d_1407 8th cir construing to a similar effect the equal_access_to_justice_act codified pincite u s c sec_504 and sec_28 u s c sec see also republic plaza properties partnership v commissioner tcmemo_1997_239 - petitioners contend that based on the definition of incurred set out above they have incurred the full attorney's_fees and costs in this matter we disagree petitioners’ liability for fees and costs in this matter is contingent because petitioners are liable for reasonable fees and costs if any not paid to the law firm by the seba plan if the liability to pay the item of expense is contingent upon the happening of a subsequent event the item cannot be regarded as incurred until the year in which the occurrence of the event causes the contingent_liability to become an absolute one see 195_f2d_475 3d cir revg 16_tc_1020 any liability petitioners have for fees and costs is contingent on the subsequent event of the nonpayment of fees and costs by the seba plan to the law firm as of date the seba plan paid dollar_figure of the dollar_figure billed in this matter as of that date petitioners' contingent_liability was in the amount of dollar_figure the difference between the amount billed by the law firm and the amount_paid by the seba plan this liability is not incurred until the subsequent event of nonpayment by the seba plan petitioners assert in their affidavits that they retained the law firm through the seba plan to represent them the fact that petitioners may have retained and were represented by --- - attorneys in this matter is not sufficient to meet the requirements of sec_7430 see thompson v commissioner tcmemo_1996_468 petitioners assert in their affidavits that they have paid dollar_figure of the fees and costs through a direct assessment of their share of funds in the seba plan to the extent that petitioners paid fees and costs through direct assessment of their share of the seba plan we would agree that they would have paid and incurred litigation costs however the amount of dollar_figure paid_by the seba plan as of date less the dollar_figure allegedly paid_by petitioners through direct assessment of their share of the funds in the seba plan was not paid_or_incurred by petitioners since this amount has been paid_by the seba plan petitioners are not liable for payment of that amount nor is there some subsequent event which would cause petitioners to become liable in addition the amount of petitioners' contingent_liability has not yet been incurred as explained above for the aforementioned reasons we grant respondent's motion for summary_judgment to the extent of the dollar_figure billed and paid in this matter except to the extent petitioners have asserted that dollar_figure in payments were made by them through direct assessment of petitioners' share of funds in the seba plan with respect to the dollar_figure in legal fees that may have been paid -- - through direct assessment of their funds in the seba plan petitioners should have an opportunity to establish this amount was paid_by them and proceed with their case for reasonable_litigation_costs pursuant to sec_7430 to reflect the foregoing an appropriate order will be issued