internal_revenue_service number release date index number --------------------------------------- --------------------------------------------------- ----------------------------------------- ------------------- ---------------------------- in re -------------------------------- department of the treasury washington dc person to contact -------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b09 - plr-112372-04 date july ----------------------------------------------------- ---------------------------------------------------- ------------------------- ----------------------- ----------- ----------- ------------- legend decedent spouse date date a b c dear ------------- this is in response to your letter dated date and subsequent correspondence requesting an extension of time under ' of the procedure and administration regulations to make a reverse qualified_terminable_interest_property qtip_election under ' a of the internal_revenue_code with respect to a_trust the facts submitted and the representations made are summarized as follows on date decedent died survived by his spouse spouse and children the relevant provisions of decedent’s will provide as follows article v of decedent’s will provides that the marital trust is to be funded with assets equal to the maximum marital_deduction allowable for decedent’s estate reduced by the amount required to increase the taxable_estate to the maximum amount that considering the unified_credit and the state_death_tax_credit will result in no federal estate_tax payable the marital trust is to be divided into two trusts qtip_trust a and qtip_trust b qtip_trust a is to be funded with that portion of the assets equal to decedent’s available generation-skipping_transfer gst_exemption after taking into account all prior transfers and all other provisions of decedent’s will qtip_trust b is to be funded with the remaining assets article vi b provides that during spouse’s lifetime spouse is to receive all of qtip_trust a’s and b’s net_income at least annually net_income not distributed at spouse’s death is to be paid to spouse’s estate in addition trustees have the discretion to pay qtip_trust a’s and b’s principal to spouse to provide for her health education support and maintenance the trustees are directed to make principal distributions to spouse first from qtip_trust b and then from qtip_trust a article vi c provides that upon spouse’s death qtip_trust a’s remaining principal is to be distributed to grandchildren’s trust the terms of which are set forth in article ix of decedent’s will article vi d provides that upon spouse’s death qtip_trust b’s remaining principal is to be distributed to residuary_trust the terms of which are set forth in article x of decedent’s will article ix provides that the grandchildren’s trust is to be funded with an amount equal to decedent’s maximum available gst_exemption but not greater than the greater of either the amount required to make decedent’s taxable_estate the maximum amount that will result in no federal estate_tax payable considering the unified_credit and the state_death_tax_credit allowable or the residue of decedent’s estate article ix a provides that grandchildren’s trust is to be divided into one equal share for each of decedent’s children article ix a provides that during spouse’s lifetime trustees are to pay to any member_of_the_family group consisting of spouse the child for whom the share was established and the child’s descendants income and principal to provide for their health education support and maintenance there is no requirement to equalize distributions among beneficiaries income not distributed is to be added to principal article ix a provides that at spouse’s death each child is to receive the income from his or her share and principal to provide for his or her health education support and maintenance when the child dies his or her share is to be divided into equal shares to provide one share for each of the child’s children grandchildren article ix a provides that with respect to each share established for a grandchild the trustee is to pay any member of the group consisting of the grandchild and his or her descendants income and principal to provide for their health care maintenance education and support there is no requirement to equalize distributions among beneficiaries income not distributed is to be added to principal if a grandchild dies before receiving full distribution of his or her share the remainder of the share is to be distributed per stirpes to his or her descendants if any if none to the then living descendants of the nearest lineal ancestor of the deceased descendant who is also a descendant of decedent and who has then living descendants per stirpes article x provides that residuary_trust is to be funded with the residue of decedent’s estate not effectively disposed of by previous provisions of decedent’s will article x a provides that the residuary_trust is to be divided into one equal share for each of decedent’s children article x a provides that during spouse’s lifetime trustees are to pay to any member_of_the_family group consisting of spouse the child for whom the share was established and the child’s descendants income and principal to provide for their health education support and maintenance there is no requirement to equalize distributions among beneficiaries income not distributed is to be added to principal article x a provides that upon spouse’s death each living child is to receive the balance of his or her share free of trust with respect to a collective share allocated to a deceased child’s living descendants the trustee is to distribute that share per stirpes to the living descendants free of trust the executors retained an attorney to prepare the form_706 united_states estate and generation-skipping_transfer_tax return for decedent’s estate the estate_tax_return was timely filed on date the estate_tax_return reported that grandchildren’s trust was to be funded with dollar_figurea in addition the attorney in preparing the estate_tax_return erroneously reported that there was only one marital trust to be funded with assets equaling the total of dollar_figureb and dollar_figurec instead of two marital trusts qtip_trust a and qtip_trust b to be funded with dollar_figureb and dollar_figurec respectively as required by decedent’s will the qtip_election was made for the marital trust reported on the estate_tax_return the attorney also inadvertently failed to attach a schedule r to the return consequently a reverse_qtip_election was not made under ' a for qtip_trust a and decedent’s gst_exemption was not allocated to qtip_trust a it has been represented that all of decedent’s gst_exemption was available for allocation at his death the executors are requesting an extension of time under ' to make the reverse_qtip_election under ' a for qtip_trust a law and analysis sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2056 provides that for purposes of the tax imposed by ' the value of the taxable_estate is to be determined by deducting from the value of the gross_estate an amount equal to the value of any interest in property that passes or has passed_from_the_decedent to the surviving_spouse sec_2056 provides the general_rule that no deduction shall be allowed for an interest passing to the surviving_spouse if on the lapse of time on the occurrence of an event or contingency or on the failure of an event or contingency to occur the interest will terminate or fail and a an interest in such property passes or has passed for less than adequate_and_full_consideration in money or money s worth from the decedent to any person other than the surviving_spouse or the estate of such spouse and b if by reason of such passing such person or his heirs or assigns may possess or enjoy any part of such property after such termination or failure of the interest so passing to the surviving_spouse sec_2056 provides that in the case of an interest in property passing from the decedent if the surviving_spouse is entitled_for_life to all the income from the entire_interest or all the income from a specific_portion thereof payable annually or at more frequent intervals with power in the surviving_spouse to appoint the entire_interest or such specific_portion exercisable in favor of such surviving_spouse or of the estate of such surviving_spouse or in favor of either whether or not in each case the power is exercisable in favor of others and with no power in any other person to appoint any part of the interest or such specific_portion to any person other than the surviving_spouse - a the interest or such portion thereof so passing shall for purposes of ' a be considered as passing to the surviving_spouse and b no part of the interest so passing shall for purposes of ' b a be considered as passing to any person other than the surviving_spouse this paragraph shall apply only if such power in the surviving_spouse to appoint the entire_interest or such specific_portion thereof whether exercisable by will or during life is exercisable by such spouse alone and in all events sec_2056 provides that in the case of qualified_terminable_interest_property the entire property shall be treated as passing to the surviving_spouse for purposes of ' a and no part of the property shall be treated as passing to any person other than the surviving_spouse for purposes of ' b sec_2056 defines aqualified terminable_interest property as property which passes from the decedent in which the surviving_spouse has a qualifying_income_interest_for_life and to which an election under ' b b v applies sec_2056 provides in part that the surviving_spouse has a qualifying_income_interest_for_life if-- i the surviving_spouse is entitled to all the income from the property payable annually or at more frequent intervals or has a usufruct interest for life in the property and ii no person has a power to appoint any part of the property to any person other than the surviving_spouse sec_2056 provides that an election under ' b with respect to any property shall be made by the executor on the return of tax imposed by ' the election once made is irrevocable sec_2044 provides that the value of the gross_estate shall include the value of any property to which ' applies in which the decedent had a qualifying_income_interest_for_life sec_2044 provides that ' applies to any property if a deduction was allowed with respect to the transfer of such property to the decedent under ' b or ' f and ' relating to dispositions of certain life estates did not apply with respect to a disposition by the decedent of part or all of such property sec_2601 imposes a tax on every generation-skipping_transfer sec_2602 provides that the amount of tax is the taxable_amount multiplied by the applicable_rate sec_2641 defines aapplicable rate as the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer sec_2642 provides the method for determining the inclusion_ratio sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under ' c which may be allocated by such individual or by his or her executor to any property with respect to which such individual is the transferor sec_2631 provides that once an allocation of gst_exemption is made it is irrevocable under ' a the allocation of the gst_exemption may be made at any time on or before the date prescribed for filing the individual s estate_tax_return including extensions sec_2632 provides that in general any portion of an individual s gst_exemption which has not been allocated within the time prescribed by ' a shall be deemed to be allocated as follows-- a first to property which is the subject of a direct_skip occurring at the individual s death and b second to trusts with respect to which the individual is the transferor and from which a taxable_distribution or a taxable_termination might occur at or after the individual s death sec_26_2632-1 of the generation-skipping_transfer_tax regulations provides that a decedent s unused gst_exemption is automatically allocated on the due_date for filing form_706 to the extent not otherwise allocated by the decedent s executor on or before that date the regulation also supplies the method for the automatic allocation of any unused gst_exemption first the exemption is allocated pro_rata to direct skips on the basis of their values for estate_tax purposes the balance is then allocated pro_rata on the basis of estate_tax values to trusts with respect to which a taxable_termination may occur or from which a taxable_distribution may be made no automatic allocation is made to a_trust that will have a new transferor with respect to the entire trust prior to the occurrence of any gst with respect to the trust the automatic allocation is irrevocable sec_2652 provides that in the case of any trust with respect to which a deduction is allowed to the decedent s estate under ' b the estate of the decedent may elect to treat all of the property in the trust for purposes of the gst tax as if the election to be treated as qtip had not been made this election is referred to as the reverse_qtip_election the consequence of a reverse_qtip_election is that the decedent remains for gst tax purposes the transferor of the qtip_trust for which the election is made as a result the decedent s gst_exemption may be allocated to the qtip_trust sec_26_2652-2 provides that the reverse_qtip_election is to be made on the return on which the qtip_election is made under ' c the commissioner may grant a reasonable extension of time under the rules set forth in and to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the 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_9100-2 provides for automatic extensions of time for making certain elections sec_301_9100-3 provides that in general requests for extensions of time for regulatory elections that do not meet the requirements of ' must be made under the rules of ' requests for relief subject_to ' will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election in this case it has been represented that all of decedent’s gst_exemption was available for allocation at his death although no allocation of decedent's gst_exemption was made on decedent’s estate_tax_return as filed pursuant to e and d dollar_figurea of decedent’s gst_exemption was automatically allocated to grandchildren’s trust leaving dollar_figureb of decedent’s gst_exemption unused in addition because a qtip_election was made on the estate_tax_return for the single marital trust and this trust was reported to be funded with all of the assets that are to fund qtip_trust a and qtip_trust b under the terms of decedent’s will both qtip_trust a and qtip_trust b are includible in spouse’s gross_estate under ' consequently spouse is considered the transferor of these trusts for gst tax purposes therefore decedent s remaining gst_exemption of dollar_figureb may not be allocated to either qtip_trust a or qtip_trust b however if a reverse_qtip_election under ' a is made for qtip_trust a decedent will be treated as the transferor of qtip_trust a and the automatic allocation rules of ' e will apply decedent s remaining gst_exemption to the property in that trust based on the information submitted and the representations made we conclude that the requirements of ' have been satisfied therefore an extension of time of days is granted to file a supplemental form_706 with the service to make the reverse_qtip_election with respect to qtip_trust a further on the supplemental form_706 it should be clarified that the qtip_election was made for qtip_trust a and qtip_trust b an extension of time to make the reverse_qtip_election under ' a does not extend the time to make an allocation of any remaining gst_exemption once the reverse_qtip_election is made e and d will operate to allocate decedent’s remaining gst_exemption to qtip_trust a the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed or implied concerning the value of the assets to fund grandchildren’s trust qtip_trust a and qtip_trust b for federal estate_tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-112372-04 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely heather c maloy heather c maloy associate chief_counsel passthroughs and special industries enclosure copy for ' purposes cc copy of letter


t c summary opinion united_states tax_court robert and lisa morganstein petitioners v commissioner of internal revenue respondent docket no 825-01s filed date jerry s goldman for petitioners carol- dinan lynn be moran for respondent special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed the decision to be entered is should not subsequent effect for not reviewable by any other court and this opinion be cited as authority unless otherwise indicated section references are to the internal_revenue_code in the years in issue - - respondent determined deficiencies in petitioners’ federal income taxes of dollar_figure and dollar_figure for the taxable years and the issue for decision is whether certain payments received by bmp entertainment inc an s_corporation wholly owned by petitioner husband are includable in income in the year in which they were received or in the year in which the corresponding services were rendered ’ some of the facts have been stipulated and are so found the stipulations of fact and the attached exhibits are incorporated herein by this reference petitioners resided in huntingdon valley pennsylvania on the date the petition was filed in this case during the years in issue petitioner husband petitioner was the sole shareholder of an s_corporation named bmp entertainment inc bmp bmp’s business consists of providing entertainment for parties in the form of disc jockey and related_services primarily for bar mitzvahs petitioner often would enter into contracts on behalf of bmp for services to be rendered up to several years later the contracts were based upon a standard form contract which provided nearly identical terms for each customer in order to reserve a future date customers were ‘respondent’s adjustment to petitioners’ miscellaneous_itemized_deductions is computational and will be resolved by the court’s holding on the issue in this case required to remit a downpayment at the time the contract was entered into the amount of the required_payment labeled a deposit varied from contract to contract but was always listed as a portion of the total fee being charged for the services to be rendered the standard terms provided that the entire payment would be retained by bmp upon cancellation by the customer unless one of two circumstances occurred upon the occurrence of either of these circumstances bmp would refund all of the payment less a dollar_figure nonrefundable administrative fee a partial refund was available when the customer canceled an event due to death or life-threatening illness or injury of an immediate_family member or the customer canceled with months’ advance written notice provided bmp was able to find a comparable engagement for the same date and time in order to promote his professional reputation petitioner usually would make full refunds to canceling parties despite the contractual terms in bmp received dollar_figure in downpayments for services to be performed in subsequent years in bmp received dollar_figure in payments for such services the payments were put into the same bank account as other business income and the funds were not physically segregated in any manner bmp was not in some cases the amount of the downpayment was less than dollar_figure q4e- required to pay interest on the deposits and the funds were available for general use by bmp at all relevant times bmp used the cash_method_of_accounting prior to the years in issue bmp reported the downpayments received under the contracts as income in the year in which the payments were received beginning in pursuant to advice received from a newly hired accountant bmp began reporting the payments as income in the year in which the contractual services were rendered bmp did not file amended returns for prior years and did not request consent from the secretary for a change in method_of_accounting bmp filed a form_1120s u s income_tax return for an s_corporation in each of the years in issue in bmp reported a loss of dollar_figure in bmp reported income of dollar_figure petitioners filed a joint federal_income_tax return for each of the years in issue in they claimed a loss of dollar_figure for petitioner’s distributive_share percent of bmp’s loss in they reported dollar_figure for petitioner’s distributive_share percent of bmp’sss income in the statutory_notice_of_deficiency respondent determined that petitioners’ income as reported on their returns was understated by dollar_figure in and dollar_figure in 1997--the amounts of the deposits received by bmp but not included in income on its returns - respondent’s primary argument is that bmp must include the disputed amounts in gross_income in the year in which they are received because they are advance_payments rather than deposits gross_income generally includes income from whatever source derived including compensation_for services sec_61 for cash_basis taxpayers payments received in advance of performing services generally are included in income in the year in which the payments are received sec_45l sec_1_451-1 income_tax regs in contrast certain deposits received by taxpayers are not included in income where the taxpayer lacks complete dominion over the deposits 493_us_203 however we need not decide whether the downpayments made by bmp’s customers in this case constitute advance_payments or deposits or a combination of both for the reasons discussed infra instead we turn to respondent’s alternative argument respondent’s alternative argument is that bmp changed its method_of_accounting without prior consent when it began deferring recognition of income until the performance of the related_services subject_to various restrictions a taxpayer generally is entitled to compute taxable_income for federal_income_tax purposes under the method_of_accounting regularly used in keeping his books sec_446 however when a taxpayer changes the method_of_accounting regularly used in keeping his -- - books he generally may not change to a new method_of_accounting to compute taxable_income without the consent of the secretary sec_446 consent must be secured whether or not such method 1s proper or is permitted under the internal_revenue_code or the regulations thereunder sec_1_446-1 income_tax regs a change in the treatment of any material_item in an overall plan of accounting constitutes a change in method_of_accounting sec_1_446-1 a income_tax regs a material_item is defined to include any item which involves the proper time for the inclusion of the item in income id thus an item is a material_item if its change affects only the timing of the recognition of income while leaving lifetime taxable_income unchanged 66_tc_588 affd without published opinion 562_f2d_39 2d cir on the other hand a change in method_of_accounting does not include correction of mathematical or posting errors or errors in the computation of tax_liability sec_1 e bo income_tax regs the customer downpayments in this case clearly constitute a material_item bmp’s change from recognizing the income upon receipt to recognizing the income upon the performance of the services is nothing more than a change in the timing of the recognition of the income bmp’s aggregate lifetime taxable - jj - income is not affected see schuster’s express inc v commissioner supra sec_1_446-1 a income_tax regs petitioners argue that the change in the timing of the income was not a change in method_of_accounting but it rather was a correction in the proper application of the cash_basis method_of_accounting petitioners cite our opinion in evans v commissioner tcmemo_1988_228 for the proposition that a taxpayer may correct an inadvertent mistake in the application of its method_of_accounting without the correction’s constituting a change in method_of_accounting in evans the taxpayers earned yearly bonuses which were authorized by their employer at annual board meetings but paid in each of the years subsequent to each of the meetings the taxpayers historically had been including bonuses in income in the year in which the bonuses were authorized rather than the year in which they were received despite the fact that the taxpayers otherwise used the cash_method_of_accounting the taxpayers had been relying on the forms issued to them by the corporation through its accountant who had no knowledge that the bonuses were received in a year other than the year they were declared we found that by changing the year of inclusion the taxpayers did not consciously adopt a new form of accounting other than their overall cash_method_of_accounting and that the taxpayers were merely correcting inadvertent errors analogous to posting --- - errors because the taxpayers had never adopted any method_of_accounting other than the cash_method there was no change in method_of_accounting requiring prior consent evans is distinguishable from the present case evans involved individual taxpayers who relied on informational returns issued to them by a corporation to complete their tax returns in filling out their returns the taxpayers presumably merely transferred the numbers from one form to the other creating errors analogous to posting errors in the present case bmp historically had consistently included the substantial and recurring downpayments in income in the year in which they were received even if petitioner was not aware that there may have been an issue concerning the proper timing for the inclusion in income he nevertheless consciously included the downpayments in income thereby creating a method_of_accounting with respect to this material_item there is no analogy to a posting error in this case and it cannot be said that bmp never adopted the method_of_accounting at issue a case which is more directly on point is a case decided by the u s court_of_appeals for the third circuit commissioner v this court has stated that a posting error is an error in ‘the act of transferring an original entry to a ledger ’ 93_tc_500 quoting black’s law dictionary 5th ed but for the provisions of sec_7463 the decision in continued qo liquidating corp 292_f2d_225 3d cir revg tcmemo_1960_29 in liquidating corp the taxpayer corporation received annual dividend payments which were attributable to insurance_company surpluses earned in a prior year but which were declared and distributed after the close of that year the taxpayer recorded the dividends in its accounts in the year of the surpluses rather than in the year the dividends were declared and paid both the taxpayer and the commissioner agreed that---- pursuant to the taxpayer’s otherwise applicable accrual_method of accounting---these dividends should have been reported in the year of their declaration and payment the court found however that regardless of the impropriety of this treatment under the taxpayer’s overall accrual_method the taxpayer was required to obtain consent before correcting the error the opinion in qo ligquidating corp is controlling in this case even if bmp was correcting the application of an overall cash_method_of_accounting it was nevertheless a change in its method_of_accounting which reguired the consent of the secretary continued this case would be appealable to the u s court_of_appeals for the third circuit see sec_7482 a this court generally applies the law in a manner consistent with the holdings of the court_of_appeals to which an appeal of its decision lies see 54_tc_742 affd 445_f2d_985 10th cir even in cases subject_to sec_7463 -- - under sec_446 because bmp did not obtain that consent we sustain respondent’s determination in the notice_of_deficiency that bmp must include the disputed amounts in income in the year in which they were received reviewed and adopted as the report of the small_tax_case division to reflect the foregoing decision will be entered for respondent -thus whether the disputed amounts are advance_payments or deposits under commissioner v indianapolis power light co supra is irrelevant because under commissioner v o liquidating corp supra consent would be necessary to change the treatment of the amounts in either case