t c memo united_states tax_court estate of kwang lee deceased anthony j frese executor petitioner v commissioner of internal revenue respondent docket no filed date frank agostino soh-yung erica son michael p mattaliano and barbara l de mare for petitioner lisa m rodriguez for respondent 1barbara l de mare ms de mare entered her appearance on date she was allowed to withdraw her appearance on date because of a conflict of interest frank agostino entered his appearance on date soh-yung erica son and michael p mattaliano entered their appearances on date memorandum findings_of_fact and opinion laro judge respondent determined a dollar_figure deficiency in the federal estate_tax of the estate of kwang lee deceased decedent’s estate a dollar_figure addition to that tax under sec_6651 for untimely filing and a dollar_figure accuracy-related_penalty under sec_6662 for negligence or disregard of rules or regulations or alternatively for a substantial_understatement_of_income_tax in estate of lee v commissioner tcmemo_2007_371 the court decided through partial summary_judgment that decedent’s estate did not qualify for a marital_deduction our decision was predicated on our holding contrary to the argument of petitioner that language included in the wills of kwang lee decedent and his wife kyoung lee ms lee collectively the lees could not change the order of their actual deaths for purposes of determining who was the surviving_spouse within the meaning of sec_2056 see id the only issues remaining in dispute and which we decide herein are whether decedent’s estate is liable for the accuracy-related_penalty and the addition_to_tax following a trial on these issues we hold that decedent’s estate is liable for neither of these items 2unless otherwise noted section references are to the applicable versions of the internal_revenue_code and rule references are to the tax_court rules_of_practice and procedure findings_of_fact i preliminaries the parties filed with the court numerous stipulations of fact accompanied by various exhibits described in the stipulations the court also deemed some facts and exhibits stipulated pursuant to rule f we incorporate herein the stipulated facts and exhibits and we find the stipulated facts accordingly ii decedent decedent was born on date and he later married ms lee the lees had a significant combined wealth that was attributable primarily to life_insurance and stock_options that were decedent’s employee_benefits those benefits were titled in decedent’s name alone a minimal part of the lees’ combined wealth consisted of assets owned jointly by the lees and assets owned by ms lee alone ms lee died testate on date decedent died testate on date the will of each of the lees was dated date iii judge frese anthony j frese judge frese has been a presiding municipal court judge for the last years cases in his court relate primarily to motor_vehicle and parking citations and to minor criminal charges judge frese also is a practicing attorney affiliated with the law firm of nowell amoroso klein bierman p a nowell judge frese practices primarily in the defense of individuals or entities charged with violating liquor laws judge frese does not practice tax law and he has no specialized knowledge of federal tax judge frese has limited experience in estate_planning and in estate administration iv the lees seek the expeditious preparation of their wills judge frese and decedent were neighbors and good friends in the spring of decedent informed judge frese that the lees wanted their wills prepared expeditiously because they were dying of cancer decedent asked judge frese if he would prepare their wills for them judge frese declined because he stated he was unqualified to prepare their wills in the manner they desired v ms de mare judge frese asked henry amoroso a partner at nowell to recommend an estate_planning attorney whom judge frese could recommend to the lees henry amoroso recommended ms de mare henry amoroso told judge frese that estate_planning and will preparation were two of ms de mare’s specialties and that she had been practicing law in those areas for many years ms de mare was a partner at nowell who had specialized in estate_planning estate administration and the preparation of federal estate_tax returns for over years following judge frese’s conversation with henry amoroso judge frese read the section of nowell’s practice brochure that described ms de mare’s education experience and professional affiliations he also met and spoke with her personally judge frese concluded from his review of ms de mare’s qualifications and from his conversations with her and henry amoroso that ms de mare was a qualified estate_planning attorney a qualified estate administrator and a qualified preparer of federal estate_tax returns judge frese advised the lees to retain her to prepare their wills the lees followed that advice vi preparation of wills ms de mare concluded that the lees could minimize federal_estate_taxes payable on their estates if decedent transferred some of his assets to ms lee ms de mare first considered having decedent disclaim or actually transfer some of his employee_benefits to ms lee ms de mare ascertained however that decedent could neither transfer nor disclaim those benefits ms de mare concluded that decedent had to predecease ms lee to cause the desired transfer of assets because ms de mare could not be sure that decedent would actually die first she included a deemed survivorship provision in each of the lees’ wills ms lee’s will states for purposes of this will any person who shall die within six months after my death shall be deemed to have predeceased me decedent’s will states a for purposes of this will any person other than my wife who shall die within six months after my death shall be deemed to have predeceased me b in the event that my wife shall die at the same time as i or under circumstances such as to render it difficult or impossible to determine who died first my wife shall be deemed to have survived me vii judge frese appointed executor of estates judge frese was appointed executor of each of the lees’ estates shortly after they died these appointments were made pursuant to the lees’ wills and were the first two times that judge frese served as an executor judge frese asked ms de mare to help him administer the estates because she was an attorney familiar with the lees’ assets and she had drafted their wills judge frese asked ms de mare to prepare the necessary tax returns for him to sign and to file judge frese understood that he had to file a federal estate_tax_return for decedent’s estate and that the unextended due_date of the return was date judge frese provided ms de mare with all of the information she requested to help him administer decedent’s estate and for her to prepare its federal estate_tax_return judge frese spoke regularly with ms de mare about the administration of decedent’s estate and about her preparation of its estate_tax_return judge frese monitored the extent that ms de mare was working on decedent’s estate through his conversations with her and through his review of the legal bills that she tendered to the estate for payment viii first request for extension on date ms de mare as an attorney for and on behalf of decedent’s estate signed and mailed to the internal_revenue_service a form_4768 application_for extension of time to file a return and or pay u s estate and generation-skipping_transfer taxes she requested through that form an automatic 6-month extension of time to file the estate_tax_return of decedent’s estate she included with the request a check for dollar_figure that check was given to her by judge frese and the amount of the check represented her estimate of a little more than the federal estate_tax that would ultimately be due on decedent’s estate her filing of this form extended the due_date of the estate_tax_return of decedent’s estate to date she provided judge frese with a copy of the form as filed and he was aware of the extended due_date ix second request for extension on date ms de mare went to her office intending to complete the estate_tax_return for decedent’s estate judge frese had told her he would be in his office on that day to sign and to file the return and she believed that only minor portions of the return remained to be completed ms de mare prepared federal estate_tax returns for her clients using a software program on her computer when she tried to access that program on date all of her client’s returns were gone she attempted to retrieve the estate_tax_return of decedent’s estate but to no avail ms de mare concluded late that afternoon that she would be unable to retrieve the return and she informed judge frese of her situation she advised him not to worry because she had everything under control she advised him that she would simply request a second 6-month extension of time to file the return which if denied would give decedent’s estate days after notification of the denial to file the return timely she advised him that decedent’s estate should enclose a dollar_figure check with the request so that it would definitely not owe anything with respect to the return she advised him that the dollar_figure would be refunded to decedent’s estate after its estate_tax_return was filed judge frese questioned ms de mare on her advice and she assured him it was correct judge frese understood from his conversations with ms de mare that decedent’s estate was entitled to request a second extension which would result in either a 6-month extension or at the least the 10-day extension referred to by ms de mare judge frese accepted ms de mare’s advice and authorized her to request a second extension unknown to judge frese at that time ms de mare had never before requested from the internal_revenue_service a second extension of time to file a federal estate_tax_return she also had not researched whether such an extension could be requested or consulted form_4768 or its instructions for guidance as to this matter by letter dated date ms de mare informed the internal_revenue_service that she and nowell were requesting an additional extension of time to file the estate_tax_return of decedent’s estate the letter stated we are still unable to file the estate_tax_return although it is nearly completed as our computerized tax service has self-destructed and we cannot recall the completed portions of the return we are working with our service to retrieve the return and will file it within a few days after retrieval therefore an additional extension of time to file and to pay is requested ms de mare included with the letter a dollar_figure check given to her by judge frese ms de mare provided judge frese with a copy of the letter ms de mare’s letter was received by the internal_revenue_service on date and it was stamped mail rece’ved irs the accompanying dollar_figure check was cashed shortly thereafter the letter with the stamp mark was returned to ms de mare shortly after date the letter as returned did not indicate that the requested second extension was granted denied or even considered in date ms de mare received the canceled dollar_figure check with her monthly bank statement shortly thereafter she advised judge frese that an additional 6-month extension had been granted to decedent’s estate by virtue of the fact that the internal_revenue_service had cashed the dollar_figure check and had not notified her that her second request was denied ms de mare advised judge frese that the due_date for the estate_tax_return was now date judge frese questioned ms de mare as to her advice and she assured him it was correct x filing of estate_tax_return of decedent’s estate on date the internal_revenue_service sent a taxpayer delinquency_notice to decedent’s estate sixteen days later ms de mare finished preparing the estate_tax_return of decedent’s estate one week after that judge frese as executor of decedent’s estate signed and mailed the return to the internal_revenue_service the return contained a copy of the form_4768 mailed to the internal_revenue_service on date and a copy of ms de mare’s letter mailed to the internal_revenue_service on date the estate_tax_return of decedent’s estate was prepared as though decedent had predeceased ms lee and claimed a marital_deduction under sec_2056 of dollar_figure the return also claimed a deduction of dollar_figure for federal and new jersey estate_taxes paid on the estate of ms lee asserting that those taxes were a liability of decedent’s estate because he was considered to have predeceased her the return reported that decedent’s estate had overpaid its federal estate_tax by dollar_figure judge frese reviewed the entire return with ms de mare before filing it he also questioned her at that time on certain aspects of the return including the reversal of the lees’ actual deaths in order to claim a marital_deduction and a deduction for the taxes paid on the estate of ms lee ms de mare assured judge frese that the return was correct and that the claimed deductions were proper judge frese accepted the advice of ms de mare noting to himself that she had prepared the return consistently with her prior advice that decedent’s estate would receive a refund of the dollar_figure paid with the second extension request xi notice_of_deficiency on date respondent issued a notice_of_deficiency to decedent’s estate the notice reflected respondent’s determination that the estate was not entitled to deduct either the dollar_figure or the dollar_figure because ms lee died before decedent judge frese acting in his capacity as executor of decedent’s estate and with a mailing address in hackensack new jersey petitioned the court to redetermine respondent’s determination opinion i accuracy-related_penalty we decide first whether decedent’s estate is liable for the accuracy-related_penalty respondent determined that the accuracy-related_penalty was appropriate because decedent’s estate had improperly claimed the dollar_figure and dollar_figure deductions on the basis of its position that decedent was deemed to have predeceased ms lee we rejected that position in estate of lee v commissioner tcmemo_2007_371 pursuant to sec_7491 respondent must produce sufficient evidence indicating that it is appropriate to impose the accuracy-related_penalty against decedent’s estate see also 116_tc_438 neither party disputes and we discern from the record that respondent has met this burden of production petitioner thus bears the burden of proving that the accuracy-related_penalty does not apply because of reasonable_cause substantial_authority or the like see id petitioner argues that decedent’s estate is not liable for the accuracy-related_penalty because the executor of the estate judge frese was reasonable and acted in good_faith in relying on the advice of ms de mare that decedent’s estate could treat decedent as predeceasing ms lee under sec_6664 an accuracy-related_penalty is not imposed upon any portion of an underpayment as to which a taxpayer acted with reasonable_cause and in good_faith whether the taxpayer satisfies those tests is a factual determination where the taxpayer’s effort to assess the proper tax_liability is a very important consideration see sec_1_6664-4 income_tax regs reliance on the advice of a tax professional may constitute reasonable_cause and good_faith if under all facts and circumstances the reliance is reasonable and the taxpayer acted in good_faith see 115_tc_43 affd 299_f3d_221 3d cir sec_1_6664-4 income_tax regs this court has stated that reasonable_cause and good_faith is present where the record establishes by a preponderance of evidence that the taxpayer reasonably believes that the professional upon whom the reliance is placed is a competent tax adviser who has sufficient expertise to justify reliance the taxpayer provides necessary and accurate information to the adviser and the taxpayer actually relies in good_faith on the adviser’s judgment see neonatology associates p a v commissioner supra pincite we conclude that petitioner has met the reasonable_cause exception to the accuracy-related_penalty because we find judge frese relied reasonably and in good_faith on the advice of ms de mare as to the legitimacy of the deductions judge frese performed an adequate due diligence review of the qualifications of ms de mare before he retained her to prepare the estate_tax_return of decedent’s estate he reasonably concluded from his review that ms de mare was a competent estate_tax attorney upon whom he could rely in this area of tax law in which he had no special knowledge he gave her all of the documents and information that she requested to prepare the return he reviewed the return in detail with her before filing it he questioned her specifically on the legitimacy of the deductions we do not believe that judge frese in the setting at hand was under any further obligation to second-guess or independently research whether ms de mare’s advice was correct we hold that decedent’s estate is not liable for the accuracy-related_penalty ii addition_to_tax we now decide whether decedent’s estate is liable for the addition_to_tax for late filing sec_6651 imposes an addition_to_tax for failure_to_file a return by its due_date unless the taxpayer can establish that such failure is due to reasonable_cause and not due to willful neglect because the 3respondent asserts that judge frese did not reasonably believe ms de mare to be a competent tax professional upon whom he could rely we disagree judge frese is an attorney and a longtime judge he reviewed ms de mare’s qualifications and concluded on the basis of his review that ms de mare was an expert upon whom he could rely as to the propriety and operation of the deemed survivorship provisions included in the lees’ wills he also concluded that ms de mare was an expert upon whom he could rely to prepare correctly the estate_tax_return of decedent’s estate parties’ agree that the estate_tax_return of decedent’s estate was filed untimely petitioner must prove that the untimely filing of the return was due to reasonable_cause see sec_7491 rule a higbee v commissioner supra pincite the untimely filing would be due to reasonable_cause if judge frese the executor of the estate exercised ordinary business care and prudence but nevertheless was unable to file the return timely see sec_301_6651-1 proced admin regs willful neglect denote a conscious intentional failure or reckless indifference 469_us_241 petitioner concedes that decedent’s estate was not entitled to receive a second 6-month extension to file its estate_tax_return and that ms de mare’s advice to the contrary was erroneous petitioner argues that judge frese filed the estate_tax_return late because he relied reasonably on the advice of ms de mare that decedent’s estate had received a second 6-month extension of time to file its return petitioner points the court to various cases where this court has held that a taxpayer’s reliance on the erroneous advice of an attorney as to the due_date of a return may constitute reasonable_cause if the reliance was reasonable see eg 98_tc_294 where the court held that reasonable reliance on erroneous advice that a second extension for the filing of an estate_tax_return could be obtained beyond a 6-month extension already received was reasonable_cause for failing to file the return timely we conclude that decedent’s estate is not liable for the addition_to_tax because we find judge frese relied reasonably upon ms de mare’s advice that a second 6-month extension could be and was received although that advice proved to be erroneous the facts at hand persuade us that judge frese acted diligently as to fulfilling his obligation to file the estate_tax_return timely and that the late filing of the return was attributable to his receipt of the erroneous advice from ms de mare we hold that decedent’s estate is not liable for an addition_to_tax for untimely filing iii conclusion we have considered all arguments respondent has made for contrary holdings and to the extent not discussed we have rejected those arguments as without merit decision will be entered under rule


internal_revenue_service department of the treasury washington dc number info release date person to contact telephone number refer reply to cc dom p si 1-cor-109880-00 date date this responds to your date letter submitted on behalf of one of your clients concerning a late entity classification election shannon cohen of this office left several messages for you regarding this matter but never received a return telephone call as ms cohen indicated in her messages without an executed power_of_attorney we cannot disclose to you any taxpayer_return_information regarding your client however the following general information is provided concerning entity classification elections an election specifying an entity’s classification for federal tax purposes form can take effect no more than days prior to the date the election is filed nor can it take effect later than months after the date on which the election is filed to obtain relief to file a late election a private_letter_ruling request is required a copy of revproc_2000_1 which describes the procedures for submitting a private_letter_ruling request is enclosed please note that sec_301_9100-3 of the procedure and administration regulations governs requests for relief for late filed entity classification elections in addition please note the default classifications detailed in sec_301_7701-3 of the procedure and administration regulations if your client’s desired tax treatment is its default classification no election is required cc dom p si 1-cor-109880-00 if you have any further questions please contact shannon cohen of this office at sincerely s dianna k miosi dianna k miosi chief branch office of the assistant chief_counsel passthroughs and special industries enclosure rev_proc


t c memo united_states tax_court han kook llc i-d han kook llc ii-d chenery capital management inc and chenery management inc partners other than the tax_matters_partner petitioners v commissioner of internal revenue respondent docket no filed date roy e hahn an officer for petitioners trent d usitalo for respondent memorandum opinion laro judge petitioners as partners other than the tax_matters_partner filed a petition_for_readjustment of partnership items under sec_6226 this case is before the court on 1section references are to the applicable version of the continued respondent’s motion to dismiss for lack of jurisdiction on the ground that the petition_for_readjustment was not filed within the time prescribed by sec_6226 or sec_7502 petitioners object to respondent’s motion and counter that the petition in this case was timely filed we will grant respondent’s motion background on date respondent issued a notice of final_partnership_administrative_adjustment fpaa by certified mail to the general unnamed tax_matters_partner of han kook llc i-d for the taxable years ended december and among the adjustments proposed in the fpaa was the disallowance of dollar_figure in losses claimed by han kook llc i-d the fpaa was mailed to an address in san francisco california on date respondent sent a copy of the fpaa to petitioner chenery management inc chenery the fpaa informed chenery that respondent had mailed the fpaa to the tax_matters_partner on date and stated that a petition_for_readjustment filed by a partner other than the tax_matters_partner must be filed on or before the 150th day from the date the fpaa was mailed to the tax_matters_partner the fpaa advised chenery that you may wish to contact the tax matter sec_1 continued internal_revenue_code partner of the partnership to discuss this matter the copy of the fpaa was mailed to chenery at the same address respondent used in mailing the fpaa to the tax_matters_partner petitioners mailed a petition_for_readjustment by private delivery service on date and the court filed that petition on date respondent filed a motion to dismiss this case for lack of jurisdiction on the ground that the petition was not timely filed respondent supports his motion with a postal service form_3877 which indicates that the fpaa was sent to the tax_matters_partner by certified mail on date petitioners filed an objection to respondent’s motion and allege therein that the fpaa was neither delivered to nor received by the tax_matters_partner petitioners do not assert however that the fpaa was not mailed to either the tax matters partner’s or the notice partner’s correct address respondent filed a response to petitioners’ objection discussion our jurisdiction to review adjustments related to an fpaa is limited by sec_6226 see sec_6226 pursuant to sec_6226 the tax_matters_partner ha sec_90 days to file a petition_for_readjustment of partnership items 131_tc_206 where the tax_matters_partner does not timely file such a petition sec_6226 allows any notice_partner and any 5-percent group to file a petition_for_readjustment of partnership items within days after the close of the 90-day period described in sec_6226 sec_6231 generally defines a notice_partner as one who is entitled to notice under sec_6223 that is any partner in a partnership with or fewer partners and a partner with a 1-percent or greater profits interest in a partnership with more than partners 85_tc_900 sec_6231 defines a 5-percent group as a group of partners who for the partnership taxable_year involved had profits interests which aggregated percent or more measured as of the close of the partnership’s taxable_year see sec_301_6231_d_-1 proced admin regs petitioners assert that because the fpaa was allegedly not delivered to nor received by the tax_matters_partner the subsequent 60-day period of sec_6226 did not begin to run until the copy of the fpaa was sent on date though they do not do so explicitly petitioners essentially argue that the fpaa mailed to the tax_matters_partner was invalid we disagree the validity of a properly mailed fpaa is not contingent upon actual receipt by the tax_matters_partner see 102_tc_683 citing 89_tc_806 an fpaa is legally sufficient if in addition to providing adequate notice to the taxpayer that respondent has determined adjustments to the partnership return it is mailed to the address shown on the partnership return or to an address furnished to the secretary by the tax_matters_partner or by any other person in accordance with regulations prescribed by the secretary see sec_6223 95_tc_610 see also sirrine bldg no v commissioner tcmemo_1995_185 the fpaa is to the litigation of partnership items the equivalent of the statutory_notice_of_deficiency in other cases affd without published opinion 117_f3d_1417 5th cir respondent mailed a copy of the fpaa to chenery on date and petitioners do not dispute that they received it the fpaa notified chenery that respondent had mailed the original fpaa to the tax_matters_partner on date it provided detailed instructions on the period within which partners other than the tax_matters_partner could request judicial review of the proposed adjustments it also advised chenery to contact the tax_matters_partner with respect to the proposed adjustments given that the original and the copy of the fpaa were mailed to the same address we find it doubtful that the original fpaa was not received by the tax_matters_partner in that regard respondent submitted a postal service form_3877 as proof that the fpaa was sent to the tax_matters_partner on date that form is prima facie evidence that the fpaa was delivered to the tax_matters_partner see sec_7502 regardless of whether the tax_matters_partner complied with its obligation to inform petitioners of the administrative proceedings see sec_6223 we are satisfied that almost months’ notice within which petitioners could have filed a petition with this court was ample time for petitioners to protect their interests see triangle investors ltd pship v commissioner supra pincite notice_partner received copy of fpaa with ample time to file a timely petition the fpaa was mailed to the tax_matters_partner for han kook llc i-d on date the 90-day period following the mailing of the fpaa within which the tax_matters_partner could file a petition_for_readjustment of partnership items expired on date a sunday and was thus extended day to date see sec_6226 the subsequent 60-day period during which any notice_partner and any 5-percent group could file a petition_for_readjustment of partnership items expired on date see sec_6226 petitioners mailed their petition_for_readjustment on date days after the expiration of the subsequent 60-day period because the petition was not mailed within the prescribed 60-day period sec_7502 is inapplicable see sec_7502 treating a timely mailed document as timely filed only if the postmark date falls within the prescribed period for filing thus we treat the petition as being filed on date days after the fpaa was mailed to the tax_matters_partner and days after the expiration of the subsequent 60-day period petitioners did not mail the petition within the 60-day period prescribed by sec_6226 this court therefore lacks jurisdiction over this partnership-level proceeding and we are required to grant respondent’s motion to dismiss for lack of jurisdiction to reflect the foregoing an appropriate order of dismissal will be entered


ora of ag a ual tax exempt and government entities department of the treasury internal_revenue_service washington d c feb uniform issue list legend taxpayer a amount b company c bank e date f date g plan j dear this is in response to your request dated authorized representative for a waiver of the 60-day rollover requirement contained in sec_402 of the internal_revenue_code the code submitted through your the following facts and representations have been submitted under penalty of perjury in support of the ruling requested representsthat taxpayer a age amount b taxpayer a asserts that -_ failure to accomplish a rollover within the 60-day period prescribed by sec_402 of the code was due to significant family medical hardships and death in taxpayer a’s family which prevented taxpayer a from rolling over amount b within the required 60-day rollover period taxpayer a further represents that amount b has not been used for any other purpose received a distribution from plan j totaling page taxpayer a participated in plan j maintained by company c company c was experiencing financial difficulties and closed operations in date f approximately five months after the closing company c fully funded the retirement accounts of its former employees in order to protect his investment on date g taxpayer a withdrew amount b from plan j and deposited amount b into an existing savings account that _had at bank e with the intention of rolling over amount b into an ira at bank e amount b still is in the savings account during the 60-day rollover period taxpayer a encountered several significant medical hardships provide primary care for also taxpayer a’s assisted in was providing 60-day rollover period passed away due to the full-time care giving taxpayer a stepdaughter who underwent three surgeries for cancer did not focus on the need to rollover amount b within the became seriously ill and taxpayer a and travelled to another state to careuntil family based on the above facts and representations you request that the service waive the 60-day rollover requirement with respect to amount b sec_402 of the code provides that if any portion of the balance_to_the_credit of an employee in a qualified_trust is paid to the employee in an eligible_rollover_distribution and the distributee transfers any portion of the property received in such distribution to an eligible_retirement_plan and in the case of a distribution_of_property other than money the amount so transferred consists of the property distributed then such distribution to the extent transferred shall not be includible in gross_income for the taxable_year in which paid sec_402 of the code requires that an eligible_rollover_distribution from a qualified_retirement_plan must be transferred to an eligible_retirement_plan no later than the day following the day of receipt in order to avoid having to include that distribution in the distributee’s gross_income for that year sec_402 of the code provides that the secretary may waive the 60-day requirement under sec_402 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_402 of the code revproc_2003_16 r b provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_402 of the code the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or page postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented by taxpayer a is consistent with to accomplish a timely rollover was caused by family medical hardships and death in taxpayer a’s family assertion that failure therefore pursuant to sec_402 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount b taxpayer a is granted a period of days from the issuance of this ruling letter to contribute amount b into a rollover ira provided all other requirements of sec_402 of the code except the 60-day requirement are met with respect to such contributions this amount will be considered a rollover_contribution within the meaning of sec_402 of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter has been sent to your authorized representative pursuant to a power_of_attorney on file in this office if you wish to inquire about this ruling please contact at please address all correspondence to sincerely yours s baw piru pe manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose


internal_revenue_service inumber release date index number ---------------------------------------- ------------------------------ -------------------------------------- -------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-150888-07 date date legend x ------------------------------ ---------------------------- state ------------- date --------------------------- dear --------------- this responds to a letter received date and subsequent correspondence submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated on date under the laws of state it was intended for x to be an s_corporation effective date however no form_2553 election by a small_business_corporation was timely filed for x sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation’s taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under sec_1362 however if an s election is made after the first two and one-half months of a plr-150888-07 corporation’s taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed sec_1362 provides that if a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year based solely on the facts submitted and the representations made we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation effective date accordingly provided that x makes an election to be an s_corporation by filing a complete form_2553 effective date along with a copy of this letter with the appropriate service_center within days from the date of this letter then such election will be treated as timely made for date except as expressly provided herein no opinion is expressed or implied concerning the federal_income_tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 of the code this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely bradford r poston senior counsel branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


id office uilc cca_2010062814163457 number release date from ------------------------ sent monday date pm to ---------------------- cc subject form_2848 for a decedent you asked about the ability of a surviving_spouse to authorize the appointment of a representative on form_2848 power_of_attorney and declaration of representative for years in which the spouses filed joint tax returns none of the years include the year of death the spouses held all assets in a joint inter_vivos_trust the decedent’s will nominated the surviving_spouse as the decedent’s personal representative because all assets were held by the trust no probate_estate was established and no court has appointed a personal representative for the estate state law does not provide a surviving_spouse any powers traditionally vested in a personal representative the surviving_spouse has submitted a form_56 notice concerning fiduciary relationship that names himself as fiduciary he signed form_56 as executor personal representative he has also submitted a form_2848 to appoint third parties as representatives he signed form_2848 in his individual capacity and as executor personal representative because the surviving_spouse has not been appointed as the personal representative of the estate form_2848 and form_56 should be rejected unless the surviving_spouse or the purported representatives provide authority under local law that a surviving_spouse has relevant powers to act as a personal representative alternatively in accordance with sec_601_503 and irm the service can accept form_2848 signed by the surviving_spouse in his own name and for his spouse if the surviving_spouse signs form_2848 for his spouse as the surviving_spouse and trustee of the inter_vivos_trust the only legatee the surviving_spouse should also sign form_56 in the same fashion we reach the same conclusion for spouses holding assets in an inter_vivos_trust when one spouse dies intestate see sec_601_503 -------------------------------------------------------------------------------------------------------------------------------------------- ------------------


t c memo united_states tax_court norris o and betty j whitley petitioners v commissioner of internal revenue respondent docket no filed date p commenced a lawsuit in alleging that the defendant was liable to him for breach of contract and conversion as to the conversion claim the jury awarded p actual and punitive_damages p received the punitive_damages in p argues primarily that sec_104 i r c excludes the punitive_damages from his gross_income because he states punitive_damages are awarded under applicable state south carolina law as compensation_for a personal injury p directs the court to numerous cases where the south carolina supreme court has stated that south carolina law allows an award of punitive_damages to vindicate a private right and that this right 1s compensatory in nature held the punitive_damages are not excludable from p's gross_income under sec_104 i r c because punitive_damages are noncompensatory under applicable law although the ultimate effect of a punitive damage award made under south carolina law is compensatory in nature such an award does not have a compensatory purpose in the sense of reimbursing the plaintiff for actual damages james richard cox for petitioners jeanne gramling for respondent memorandum opinion laro judge this case is before the court fully stipulated see rule norris o and betty j whitley petitioned the court to redetermine deficiencies of dollar_figure and dollar_figure in their and federal_income_tax respectively following petitioners’ concessions we must decide whether their gross_income includes dollar_figure in punitive_damages that they received during we hold it does unless otherwise indicated section references are to the internal_revenue_code in effect for rule references are to the tax_court rules_of_practice and procedure although betty j whitley is a copetitioner we hereinafter refer to norris o whitley as the sole petitioner background all facts have been stipulated and are so found the stipulation of facts and exhibits submitted therewith are incorporated herein by this reference petitioner and betty j whitley are husband and wife they filed joint and federal_income_tax returns they resided in sumter south carolina when they petitioned the court petitioner began working as an agent for academy life_insurance_company academy in the late 1970's he worked for it as an independent_contractor under a contract between the two academy fired him in date when it did it was contractually obligated to pay him renewal_commissions on policies that he or an agent under his supervision had sold after his firing academy remitted to him reduced monthly commissions it also stopped sending to him the paperwork documenting his commissions in date petitioner sued academy for breach of contract and conversion praying in his complaint for an award of actual and punitive_damages petitioner alleged that academy was liable to him for an unlawful termination of contracts with resulting failure to pay money due thereunder breach of contract and conversion unfair trade practices also seeking treble_damages and attorney’s fees a termination of resident counselor status a failure to pay commissions and the fraudulent filing of federal tax forms reporting income not paid to him following a jury trial the united_states district_court hearing the case directed a verdict against academy for breach of contract and sent the issues of conversion and resulting damages to the jury the judge instructed the jury as follows with respect to punitive_damages the plaintiffs petitioner and another person not relevant herein are also seeking punitive_damages in their conversion cause of action the law permits the jury under certain circumstances to award punitive_damages in order to punish a wrong-doer for some extraordinary misconduct and to serve as a warning not to engage in such conduct in the future thus if you find that the plaintiffs have shown by a preponderance_of_the_evidence that the defendant converted the plaintiffs' money with malice ill will a conscious indifference to the rights of others ora reckless disregard for the rights of others you may award the plaintiffs punitive_damages if you so find it becomes your right to award punitive_damages in such an amount as you unanimously agree to be proper in light of the character of the wrong committed the punishment which should be applied and the ability of the defendant to pay the jury found against academy on the conversion claim and awarded dollar_figure in actual damages for unpaid commissions and dollar_figure in punitive_damages together with interest and costs that verdict was affirmed upon appeal academy paid dollar_figure in punitive_damages to petitioner in petitioner did not report any of this amount on his federal_income_tax return discussion we must decide whether petitioner received the punitive_damages on account of a personal injury to the extent that he did the funds are excludable from his gross_income see sec_104 to the extent that he did not the funds are includable in his gross_income see sec_61 because respondent determined that the punitive_damages are includable in petitioner's gross_income petitioner must prove otherwise see rule a 290_us_111 petitioner concedes that his gross_income includes the actual damages of dollar_figure which were awarded to him for unpaid commissions as to the punitive_damages petitioner argues that these damages are excludable from his gross_income under sec_104 petitioner asserts that he received the punitive_damages on account of his claim of conversion which he states is a tort under applicable state south carolina law and that he received the punitive_damages on account of a personal injury petitioner asserts that south carolina law provides that punitive_damages are compensatory in nature in that they reimburse a plaintiff for personal injury respondent agrees with petitioner's characterization of conversion as a tort under south carolina law but asserts that the punitive_damages were not paid to petitioner on account of a personal injury respondent asserts that academy paid the punitive_damages to petitioner on account of its reprehensible behavior we agree with respondent that the punitive_damages are not excludable from petitioner's gross_income under sec_104 sec_104 sets forth a narrowly construed provision under which proceeds from a lawsuit are excluded from gross_income to the extent the cause of action underlying the recovery_of the proceeds is based upon tort or tort type rights and the proceeds are received on account of a personal_injury_or_sickness ’ that section is inapplicable when sec_7641 of the omnibus budget reconciliation act of publaw_101_239 103_stat_2106 amended sec_104 to provide that the personal injury exclusion contained therein does not apply where the punitive_damages are received in connection with a case not involving physical injury or physical sickness this amendment does not apply herein id amendment inapplicable to any lawsuit filed before date either requirement is not met see sec_104 515_us_323 504_us_229 sec_1 104-l c income_tax regs in 519_us_79 the supreme court held that sec_104 did not reach punitive_damages which were awarded under kansas law to the taxpayers the husband and two children of a woman who died of toxic shock syndrome the taxpayers had recovered those damages in a tort action filed against the maker of a product that caused the decedent's death the court held that the taxpayers did not receive the punitive_damages on account of personal injury because the damages were not awarded as compensation_for the injury suffered by them or by the decedent but to punish and deter the tortfeasor's reprehensible conduct see id petitioner recognizes the holding in o'gilvie v united_states supra but argues that it is inapplicable first petitioner states south carolina law provides that punitive_damages are compensatory in nature whereas kansas law provides that punitive_damages are entirely punitive second petitioner states the fact that many decisions prior to o'gilvie were inconsistent with the decision there requires that we apply o'gilvie prospectively petitioner makes a similar argument for a prospective application of commissioner v schleier supra and united_states v burke supra we disagree with petitioner's assertion that academy paid him the punitive_damages on account of a personal injury the award of punitive_damages to him was not paid on account of a personal injury to the extent that the damages are noncompensatory in nature see o'gilvie v united_states supra whether the damages are noncompensatory in nature rests on applicable state law see 105_tc_396 affd 121_f3d_393 8th cir which in this case is the law of south carolina under south carolina law an award of punitive_damages is based upon the defendant's wrongdoing rather than the extent of the plaintiff's injury an award of compensatory_damages on the other hand is based upon the extent of the plaintiff's injury rather than the defendant's wrongdoing see south carolina farm bureau mut ins co v love chevrolet inc s e 2d s c a claim for punitive_damages may go to the jury only if the defendant's conduct rises to the level of culpability warranting a punitive damage award laird v nationwide ins co s e 2d s c quoting bowers v charleston w c ry co s e 2d s c compensatory_damages are damages in satisfaction of loss or injury sustained punitive_damages are allowed in the interest of society in the nature of punishment and as a warning and example to deter the wrongdoer and others from committing like offenses in the future see also clark v cantrell s e 2d s c ct app punitive_damages are not compensatory in nature under the law of south carolina citing hubbard felix comparative negligence in south carolina implementing nelson v concrete supply co s c l rev punitive_damages serve under south carolina law to punish the defendant and to deter unacceptable behavior see gamble v stevenson s e 2d s c macmurphy v south carolina s e 2d s c laird v nationwide ins co supra pincite bowers v charleston w c ry supra see also gilbert v duke power co s e 2d s c citing davenport v woodside cotton mills co s e 2d punitive_damages serve to punish a wrongdoer when the plaintiff proves that the wrongdoer violated the plaintiff's rights in a wanton willful or malicious way punitive_damages do not serve under south carolina law to reimburse a victim for actual damages see laird v nationwide ins co supra pincite bowers v charleston w c ry supra cf kewin v massachusetts mut life ins co n w 2d mich in michigan exemplary damages are recoverable as compensation to the plaintiff not as punishment of the defendant doroszka v lavine a conn in this state the purpose of punitive_damages is not to we are mindful that we are bound only by the decisions of the south carolina supreme court in construing the law of that state see 387_us_456 the opinion in clark v cantrell s e 2d s c ct app is helpful to our understanding of south carolina law as construed by the south carolina supreme court punish the defendant for his offense but to compensate the plaintiff for his injuries petitioner observes that the south carolina supreme court has stated repeatedly that punitive_damages may also be awarded to vindicate a private right and that this vindicative quality adds a compensatory purpose see eg harris v burnside s e 2d s c hughey v ausborn s e 2d s c brailsford j concurring hicks v herring s e 2d s c rogers v florence printing co s e 2d s c mock v atlantic c l r co s bh 2d s c davenport v woodside cotton mills co supra pincite hull v seaboard air line ry s e s c beaudrot v southern ry s e s c griffin v southern ry s bk s c watts v south bound r r s e s c by virtue of these statements petitioner concludes punitive_damages are compensatory in nature under south carolina law we disagree we do not understand the south carolina supreme court to have used the verb vindicate to mean compensate see shuler v heitley s e 2d s c see also clark v cantrell supra pincite see generally am jur 2d damages sec_3 different functions of compensatory and punitive_damages as we understand the court's use of the latter verb it describes the ultimate effect of punitive awards as a form of remedy to this end we have found no case where the south carolina supreme court has used the verb vindicate to describe a compensatory purpose for punitive_damages in the sense of reimbursing a victim for an actual loss see clark v cantrell supra pincite as amatter of fact the south carolina supreme court has stated specifically that punitive_damages are not given with a view to compensation but in addition to compensation shuler v heitley supra pincite the court has also stated compensatory_damages relate mainly to the situation of the injured party the plaintiff generally but he should not receive nor should he be entitled to obtain thereby more than sufficient recompense for his injuries- just enough to restore him to his former position a sum only to make him whole he and he alone usually is particularly affected in that regard exemplary damages have relation to the injured party in only one respect to vindicate his right recklessly willfully maliciously or wantonly invaded they relate more to the situation of the wrongdoers the defendants usually one of the chief purposes in awarding damages of this class is to punish the wrongdoer not only to prevent by him a recurrence of the wrongful act but to deter others from conduct of the same or similar kind they are not intended for the sole good of the injured party and not for the improvement of the disposition and character alone of the willful tort-feasor is it that our law has looked with favor upon the assessment of punitive_damages under certain circumstances but the object is to protect every man woman and child from those who consciously disregard the rights of their fellows xk johnson v atlantic coast line r co s e s c according to the south carolina supreme court factors to consider in passing on a punitive damage award under the law of that state include the character of the tort committed including the wrongdoer's degree of recklessness the punishment which should be meted out bearing in mind that punitive_damages are meant to punish the defendant or to deter or stop him or her and others from similar conduct in the future and the ability of the wrongdoer to pay see gamble v stevenson supra pincite hicks v herring supra pincite fennell v littlejohn s e 2d s c the fact that south carolina law measures an award of punitive damage by the financial status of the wrongdoer see south carolina farm bureau mut ins co v love chevrolet inc s e 2d s c mccourt v abernathy s ebe 2d s c gamble v stevenson supra pincite reid v kelly s e 2d hicks v herring supra pincite adds to our belief that a punitive damage award under that law is tied directly to inflicting punishment upon the defendant rather than compensating the plaintiff for his or her loss south carolina law also provides no formula under which punitive_damages are to be measured leaving the amount of a punitive damage award up to the judgment and discretion of the jury subject of course to the power held by a trial judge to change the jury's verdict see gilbert v duke power co s b 2d s c the amount of the award therefore lacks any direct nexus to the extent of the personal injury suffered by the plaintiff on account of the defendant's wrongdoing nor do we agree with petitioner's argument that the trilogy of 519_us_79 515_us_323 and 504_us_229 should be applied only prospectively although petitioner states correctly that one or more courts had adopted positions that were ultimately rejected by the u s supreme court in deciding those cases that does not mean as petitioner asks us to hold that we should apply the prior positions in lieu of the high court's decisions according to a recent mandate of the court on the retroactive effect of its decisions when this court applies a rule_of federal_law to the parties before it that rule is the controlling interpretation of federal_law and must be given full retroactive effect in all cases still open on direct review and as to all events regardless of whether such events predate or postdate our announcement of the rule x 509_us_86 we apply the supreme court's decisions in o'gilvie schleier and burke to hold that petitioner's punitive_damages are includable in his gross_income in so holding we have considered all arguments made by petitioner and to the extent not discussed above find them to be without merit to reflect the foregoing decision will be entered for respondent


t c memo united_states tax_court ludivina madrigal petitioner v commissioner of internal revenue respondent docket no filed date ludivina madrigal pro_se t richard sealy iii for respondent memorandum opinion goldberg special_trial_judge this case was heard pursuant to sec_7443a of the code and rule sec_180 sec_181 and sec_182 of the tax_court rules_of_practice and procedure all section references are to the internal_revenue_code in effect for the years in issue respondent determined deficiencies in petitioner's federal income taxes for the and tax years in the amounts of dollar_figure and dollar_figure respectively the and deficiency amounts represent petitioner's earned_income_credit claimed on her individual income_tax returns for these years on the income_tax examination changes sheet attached to the notice_of_deficiency mailed to petitioner for the taxable_year respondent calculated a deficiency in the amount of dollar_figure as the result of a typographical error the deficiency amount shown on the notice_of_deficiency was transposed to indicate a deficiency amount of dollar_figure the amount of the deficiency in controversy for which petitioner disputes is dollar_figure as set forth in the petition respondent admits this in the answer the issues for decision are whether petitioner is entitled to claim head_of_household filing_status for and and whether petitioner is entitled to an earned_income_credit for the and tax years some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference at the time the petition was filed petitioner resided in alice texas neither petitioner nor her husband victor madrigal is fluent in english and their testimony was given through an interpreter petitioner was married to victor madrigal mr madrigal in mexico in petitioner and mr madrigal came to the united_states in and settled in alice texas petitioner and mr madrigal rented a house in alice and mr madrigal began working in construction petitioner and mr madrigal have six children petitioner and mr madrigal bought a four-bedroom house on beckham street in alice in in petitioner and mr madrigal experienced marital difficulties and mr madrigal left the house on beckham street for a time mr madrigal left alice at different times to work in corpus christi houston and chicago only four of petitioner's children lived with petitioner during the and tax years petitioner worked as a home provider in and as a home provider petitioner worked with senior citizens in their homes when mr madrigal was working he provided support for the children additionally petitioner received food stamps for and petitioner could not recall the amount of support mr madrigal provided or the amount of food stamps she received for the years in issue petitioner permitted mr madrigal to claim one of the children victor jr as a dependent for the tax_year on his individual_income_tax_return because mr madrigal was giving her some money mr madrigal used the beckham street address on his and federal_income_tax returns petitioner used head_of_household filing_status on her federal_income_tax returns for the and tax years respondent determined that petitioner's proper filing_status for and was married filing separate because petitioner did not satisfy the statutory requirements necessary for a married taxpayer to file as head_of_household respondent adjusted petitioner's standard_deduction because of the change in petitioner's filing_status respondent further disallowed petitioner's earned_income_credit for the and tax years because petitioner was married and did not file a joint_return head_of_household filing_status in order to file a return as head_of_household a taxpayer may not be married at the close of the taxable_year sec_2 however a married taxpayer may be treated as an unmarried taxpayer for head_of_household filing purposes if the taxpayer complies with the statutory requirements of sec_7703 sec_2 sec_7703 provides that certain married taxpayers living apart will not be considered as married for head_of_household filing purposes if the taxpayer files a separate tax_return the household is for more than one half of the taxable_year the principal_place_of_abode of the taxpayer's child for whom the taxpayer would be entitled to claim a dependency_exemption the taxpayer pays more than half the cost of maintaining such household for the tax_year and the taxpayer's spouse is not a member_of_the_household during the last months of the tax_year petitioner contends that she is entitled to head_of_household filing_status because mr madrigal did not live with her for the and tax years and because petitioner provided more than half the cost of maintaining her household for the years in issue both petitioner and mr madrigal testified that mr madrigal did not live with petitioner for any part of the and tax years mr madrigal produced a lease and testified that he lived with his aunt emma torres for the years in issue and paid his aunt dollar_figure a month for room and board at her house on seabreeze street during and however apart from his testimony mr madrigal was unable to present any evidence that he actually paid any rent to his aunt or lived in the seabreeze street house at times petitioner's testimony conflicted with the testimony of mr madrigal and mr madrigal's testimony conflicted with the information on his and federal_income_tax returns namely the returns stated his address a sec_316 beckham street while petitioner testified that mr madrigal lived at the seabreeze street house she testified that mr madrigal had difficulty paying rent of even dollar_figure a month and was frequently without work mr madrigal testified that he paid his aunt dollar_figure every month in cash for room and board even though he reported a yearly income of only dollar_figure on his federal_income_tax return further mr madrigal testified that his federal_income_tax return was inaccurate and that he earned more than dollar_figure for the tax_year mr madrigal did not have receipts for the rent he paid we find the testimony in this case to be confusing at best furthermore we do not find the lease to be credible_evidence that mr madrigal lived with his aunt at the house on seabreeze street neither petitioner nor mr madrigal could remember who prepared the lease and both gave conflicting testimony as to rent amounts actually paid absent proof that she and mr madrigal lived apart for the last months of either tax_year petitioner is unable to show her entitlement to claim head_of_household status for filing purposes additionally petitioner has not shown that she provided more than half the cost of maintaining her household for the and tax years as required by sec_7703 petitioner received food stamps for the and tax years mr madrigal also provided support for the children when he was working though petitioner testified that she did not know the amount of monetary support provided by mr madrigal petitioner allowed mr madrigal to claim one of the children victor jr as a dependent for the tax_year because of the support he was providing based on the record we hold that petitioner was not entitled to file as head_of_household for the and tax years and that her correct filing_status for the years in issue is married filing separate respondent is sustained on this issue earned_income_credit sec_32 provides an earned_income_credit for certain eligible individuals sec_32 provides however that a married individual within the meaning of sec_7703 is only eligible for the earned_income_credit if a joint_return is filed for the taxable_year petitioner a married individual within the meaning of sec_7703 did not file a joint_return for either of the and tax years based on the record we hold that petitioner is not entitled to an earned_income_credit for the and tax_year respondent is sustained on this issue to reflect the foregoing decision will be entered for respondent


department of the treasury int ernal revenue service washington d c o f f i c e o f date c h i e f c o u n s e l number release date cc pa cbs br1 gl-152006-01 uilc memorandum for sbse associate area_counsel newark from alan c levine chief branch collection bankruptcy summonses subject sec_2057 federal estate_tax lien on personal_property this memorandum responds to your e-mail request for advice pertaining to the special estate_tax election under sec_2057 this document may not be used or cited as precedent sec_6110 issues for personal_property located in new jersey used to secure the sec_2057 lien what would be the proper manner to describe such property on the form 668h is the client required to forward to counsel for legal review each and every sec_2057 lien filing request would a sec_2057 lien on personal_property be enforceable against either a competing creditor who executed and levied upon the asset or a purchaser of the asset while the sec_2057 lien was in effect if personal_property subject_to a sec_2057 lien is either sold transferred or executed and levied upon by a creditor within the 10-year recapture_period imposed under sec_2032a what would be the effect on the recapture_tax conclusions the personal_property description should be sufficient as long as it reasonably identifies what is described counsel review is required if the only property securing the sec_2057 lien is personal_property or if the lien is secured_by real and personal_property but the real_property in itself is inadequate to fully secure the lien the sec_2057 lien once filed would be enforceable against a subsequent purchaser or creditor who purchases executes against the subject property there are practical concerns with seeking such enforcement however as further discussed below gl-152006-01 the recapture_tax would be triggered unless the sale was to a member of the qualified heir’s family in the ordinary course of business a like-kind_exchange or an involuntary_conversion discussion the taxpayer_relief_act_of_1997 p l added a new estate_tax election current sec_2057 which permits estates meeting certain requirements to deduct from the gross_estate the value of qualified family-owned business interests up to dollar_figure for sec_2057 elections sec_2057 provides the mechanism for establishing by reference to sec_6324b a lien for the collection of the additional estate_tax imposed if a recapture_event described in sec_2057 occurs rules similar to the following rules shall apply p sec_6324b relating to special lien for additional estate_tax sec_2057 thus a lien arises by operation of law under sec_2057 at the time the sec_2057 election is made see sec_6324b for purposes of the sec_2057 election all family members who have acquired from the decedent an interest in a qualified family-owned business qualified heirs and all other persons with an interest in business property to which the sec_2057 lien is to attach must sign an agreement consenting to the creation and filing of the lien sec_2057 sec_2057 sec_2057 i r m form_706 united_states estate and generation-skipping_transfer_tax return schedule t the property that will be subject_to the sec_2057 lien is listed in an attachment to the agreement we have been advised by the office of associate chief_counsel passthroughs and special industries that sec_2057 encompasses both real and personal_property you have been contacted by your local technical support advisory unit with several questions pertaining to the filing of a sec_2057 lien on both real and personal_property we will address each issue raised in turn below how should personal_property be described on the form 668h the sec_2057 lien is filed on form 668h notice of federal estate_tax lien as modified pursuant to guidance issued to all compliance area directors on date there are no specific requirements in sec_2057 or sec_6324b to govern how personal_property should be described in the lien notice we take the position that a description of personal_property should be sufficient as long as it reasonably identifies what is described for example the description should not merely provide the name of the qualified family-owned business corporation but should sufficiently reference the property used to secure the sec_2057 lien ie the number of shares of stock held in xyz corporation we don’t believe that such exact and detailed information as serial or i d numbers is required however when is counsel review of the sec_2057 lien required gl-152006-01 technical support does not need to seek the concurrence of counsel in every case in which the property subject_to the sec_2057 lien consists in any part of personal_property if both real and personal_property are available and a lien on the real_property can adequately secure the government’s interest there is no requirement to seek counsel’s advice however if the real_property involved is inadequate or if only personal_property is involved you should contact counsel for assistance in adequately protecting the government’s interest would a sec_2057 lien on personal_property be enforceable against a subsequent purchaser of or creditor who executed against such property notice of a sec_2057 lien must be filed in order to protect the government’s interest in the subject property the filing of a notice of a sec_6324b lien is governed by sec_6324a sec_6324b sec_20_6324b-1 because sec_2057 makes applicable rules similar to sec_6324b sec_6324a would also apply to a sec_2057 lien sec_6324a requires that a notice of lien meeting the requirements of sec_6323 be filed in order for the lien to be valid against any purchaser holder of security_interest mechanic’s lien or judgment lien creditor accordingly as long as the sec_2057 lien notice is filed in accordance with sec_6323 the sec_2057 lien will have priority over a subsequent purchaser holder of security_interest mechanic’s lien or judgment lien creditor the sec_2057 lien is therefore enforceable against a purchaser of or creditor who executes by levy against the subject property there are practical problems associated with the enforcement of the sec_2057 lien against personal_property however the internal_revenue_service the service may have no way of knowing the sec_2057 lien property has been transferred or executed upon the service may not therefore be able to locate the purchaser or creditor in possession of the property in order to enforce its lien interest accordingly it is preferable whenever possible to obtain an agreement to use real_property to secure the sec_2057 lien the interest in the qualified family- owned business may include the underlying real_property itself and is not limited to the type of ownership_interest in the property such as shares of stock we have been informally advised of certain offices entering into additional agreements which may be effective to secure the service’s interest and prevent transfer of the sec_2057 lien property in some cases for example we have learned that one office has drafted an escrow agreement which may be executed by the service the estate representative the qualified heirs and an escrow agent pursuant to such agreement shares of stock used as sec_2057 property are deposited with and held by an escrow agent bank to be held and distributed by such agent only in accordance with certain terms and conditions the agreement provides that in the gl-152006-01 event of tax recapture under sec_2057 described in item below the service may pursue enforcement including requiring the administrative sale or delivery to the service of the escrow property the agreement further provides for termination of the escrow agreement upon the lapse of the time period for recapture under sec_2057 or upon full payment of all estate_taxes owed upon termination and agreement by the service the shares may be released to the qualified heirs if all taxes have been satisfied you may wish to consider the use of a similar agreement contingent upon local law what is the effect upon the recapture_tax if the sec_2057 lien property is sold transferred or executed upon by levy sec_2057 provides for the imposition of a recapture_tax if within years after the date of the decedent’s death and before the date of the qualified heir’s death the qualified_heir disposes of any portion of a qualified_family-owned_business_interest other than by a disposition to a member of the qualified heir’s family or through a qualified_conservation_contribution under sec_170 we coordinated this question with the office of associate chief_counsel passthroughs and special industries it is that office’s position that in general the sale or transfer of the sec_2057 lien property would trigger the recapture_tax pursuant to sec_2057 unless the sale i was to a member of the qualified heir’s family ii was through a qualified_conservation_contribution iii qualifies as a sec_1031 transaction like-kind_exchange iv qualifies as a sec_1033 transaction involuntary_conversion or v was in the ordinary course of business it is also that office’s position that a third party levy would trigger sec_2057 recapture see priv ltr rul concluding that foreclosure proceedings instituted by mortgagee over taxpayer’s property did not constitute a disposition under sec_2032a since no transfer of the property had taken place revrul_89_4 1989_1_cb_298 holding that an estate’s sale of specially valued real_estate to halt a foreclosure constitutes a disposition for purposes of sec_2032a if you have any further questions please call


department of the treasury internal_revenue_service washington d c date cc dom fs corp tl-n-6809-97 number release date uilc memorandum for attn from subject corpa corpb entityx date1 internal_revenue_service national_office field_service_advice deborah a butler assistant chief_counsel field service cc dom fs stock_redemption this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend date2 date3 date4 date5 dollar_figureaa dollar_figurebb dollar_figurecc dollar_figuredd dollar_figureee dollar_figureff dollar_figuregg dollar_figurehh dollar_figureii x m n p q r issues what legal theories if any should be developed to challenge the taxpayer s reporting of a transaction in which the taxpayer redeemed stock for less than its aggregate trading value assuming an economic_substance approach is viable what facts should be developed in connection with that argument conclusion sec_1 as discussed below we have considered various possible theories that could arguably override the nonrecognition provisions in this case ---------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------- ------------ see the response to issue below facts as of date1 corpb owned approximately x of the shares of corpa stock corpb was the largest shareholder of corpa and was represented on corpa s board_of directors roughly in proportion to its stock interest on date2 corpb redeemed m shares of its corpa stock using the redemption proceeds to finance another investment corpb retained n shares after this redemption at the time of the redemption the redeemed shares had an aggregate trading value of approximately dollar_figureaa in the redemption corpb received from corpa consideration valued at dollar_figurebb comprising a dollar_figurecc in cash b dollar_figuredd in short term corpa notes and c warrants valued at dollar_figureee corpa obtained the funds for the transaction from three sources dollar_figureff from operational cash_flow dollar_figurecc from entityx which used corpa shares to finance existing employees benefit programs and dollar_figuregg of equity securities as a result of its actions to raise the necessary capital corpa received a lower credit rating than it had previously held the warrants issued to corpb in the transaction provided it the option to reacquire the same number of shares ie m that it sold to corpa the warrants and corpb s retention of n of corpa common shares constituted the principal elements in the transaction because they purportedly allowed corpb to treat the redemption as a dividend and avoid paying capital_gains on the transaction the warrant certificates granted the holder the right to buy a specific number of shares of corpa common_stock at a stipulated price within a certain time period p shares for a r- day period ending on date3 at a price of dollar_figurehh per share q shares for a r-day period ending on date4 at a price of dollar_figureii per share and q shares for a r-day period ending on date5 at a price of dollar_figureii per share the warrants were subject_to various conditions including limitations on sales to parties other than corpa after redeeming corpb s shares at less than the aggregate trading price corpa subsequently sold a portion of the redeemed shares to investors at the prevailing trading price and transferred another block of the redeemed shares to a_trust to finance corpa s employee benefit programs as a result it has been suggested that corpa also received tax benefits in the form of avoided capital_gains on these dispositions of the redeemed shares issue taxpayer s reporting of the redemption law and analysis under i r c ' a a corporation does not recognize either gain_or_loss on a distribution with respect to its stock other than a complete_liquidation of its stock or rights to acquire its stock or property the only exception to this rule is for the distribution of appreciated_property under i r c ' b a corporation recognizes neither gain nor loss on the receipt of money or property in exchange for its own stock including treasury_stock i r c ' a similarly no gain_or_loss is recognized by a corporation with respect to any lapse or acquisition of an option to buy or sell its stock including treasury_stock in the instant case corpa distributed property and warrants valued at dollar_figurebb to corpb in redemption of m shares of corpa having an aggregate trading value of approximately dollar_figureaa under the rule_of sec_311 corpa would recognize no gain_or_loss on this redemption based on the facts presented sec_311 would not apply because corpa did not distribute any appreciated_property to corpb under sec_1032 it would similarly not recognize any gain on the subsequent resale of any of the redeemed shares or on the transfer of redeemed shares to finance employee benefit programs at the higher prevailing trading price you have requested our views on whether there are any legal theories under which corpa should recognize income or gain on either the redemption or the subsequent disposition of the redeemed shares notwithstanding the nonrecognition provisions of i r c a and a we have considered the possible theories discussed below our consideration is based on the information provided with your request and we understand that additional facts may be developed during the course of the audit for purposes of this memorandum we have assumed that corpb received the tax benefits discussed above but have not determined whether it was entitled to such benefits in addition we have assumed that corpb could have obtained more from third parties than the dollar_figurebb that corpa paid for the stock in the redemption a bargain redemption beconomic substance as a general_rule a taxpayer is entitled to minimize the amount of his taxes by any means that the law permits see 293_us_465 however this rule is not absolute and does not give effect to transactions that are motivated solely by tax savings and have no independent economic_substance see 364_us_361 acm partnership v commissioner tcmemo_1997_115 73_tcm_2189 aff d in part rev d in part 157_f3d_231 3d cir although the transaction at issue appears to be a redemption by corpa of stock from corpb for dollar_figurebb the fact as assumed that corpb could have obtained more than dollar_figurebb in a sale to third parties suggests the following possible recast to account for corpa s purported bargain redemption under this theory corpa would be viewed as paying corpb a redemption price equal to the amount that third parties would have paid and corpb would then be treated as remitting to corpa an amount equal to the difference between dollar_figurebb and the redemption payment as a fee for structuring the transaction to facilitate the tax savings or alternatively as corpa s share of the tax savings realized by corpb under this theory the payment from corpb would be treated as ordinary_income to corpa b adjustment under sec_482 as discussed in your request it is well established that sec_482 may override non- recognition treatment see 137_f2d_600 3d cir cert_denied 320_us_794 856_f2d_855 7th cir rooney v united_states 281_f2d_681 9th cir 281_f2d_7 4th cir 198_f2d_214 2d cir cert_denied 344_us_874 general electric co v united_states u s t c ct_cl 643_f2d_747 ct_cl bank of america v united_states u s t c n d cal 88_tc_252 although the amount that corpb could have obtained by selling its stock to third parties is a factual question that would need to be determined the maximum such amount appears to be dollar_figureaa the aggregate trading price at the time of the redemption 80_tc_34 aff d 756_f2d_1430 9th cir cert_denied 474_us_1055 aladdin industries inc v commissioner tcmemo_1981_245 see also revrul_80_198 1980_2_cb_113 revrul_77_83 1977_1_cb_139 g_c_m the regulations under sec_482 reaffirm this principle treas reg ' f iii in order to make an adjustment under sec_482 there are two prerequisites first corpa and corpb must be two organizations owned or controlled directly or indirectly by the same interests second a sec_482 allocation must be necessary in order to prevent evasion of taxes or clearly to reflect the income of either corpa or corpb under the regulations the element of common_control depends on a determination of whether there is aany kind of control direct or indirect whether legally enforceable or not and however exercisable or exercised treas reg ' i the determination of common_control is based on all the facts and circumstances see 66_tc_373 aff d per curiam 598_f2d_1375 5th cir charles town inc v commissioner tcmemo_1966_15 aff d 372_f2d_415 4th cir cert_denied 389_us_841 453_f2d_1144 2d cir cert_denied 407_us_934 reh g denied 409_us_899 rev g 54_tc_912 598_f2d_1382 5th cir r t french co v commissione60_tc_836 under treas reg ' i a corporation can be acontrolled to where there is acontrol resulting from the actions of two or more taxpayers acting in concert or with a common goal or purpose the second prerequisite to application of sec_482 is that an allocation is needed to prevent evasion of taxes or clearly to reflect income under the regulations whether an allocation is needed to prevent evasion of taxes or clearly to reflect income depends generally on whether athe results of the transaction are consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances arm s length result if these prerequisites are met an adjustment under sec_482 would be similar to the recast discussed above in particular the amount_paid by corpa for corpb s stock would be adjusted to reflect the amount third parties would have paid for the stock and corpb would make a corresponding payment to corpa as a service fee as compensation_for agreeing to structure the redemption to facilitate corpb s tax savings in our view it would be difficult to establish common_control in this matter there is no apparent basis for concluding that corpb controlled corpa regarding the price corpa paid to redeem its shares we have considered that control may be found to exist even where there is less than majority stock ownership as indicated by the cases cited above for example in charles town inc v commissioner supra control was held to exist even though controlling parties held only percent of a corporation s stock based on the existence of aactual and effective_control evidenced among other things by additional facts relating to intercorporate agreements and the actual exercise of effective_control of the business of the corporation yet in corpa s and corpb s_case there do not appear to be facts or circumstances present to suggest that corpb s x interest in corpa enabled corpb to control corpa with respect to the purported below market redemption price which benefitted corpa and not corpb nor do there appear to be facts or circumstances to suggest that corpa controlled corpb although corpa was represented on corpb s board and was able to redeem its shares at a bargain price it does not appear that corpa had any ownership_interest in corpb particularly problematic is the fact that corpb owned only a minority interest in corpa while not precluding a finding of common_control the existence of a large majority of non- overlapping shareholders would mean that the courts would practically require a persuasive showing of why the parties are commonly controlled or even so why the consideration they agreed to is not arm s length given the incentive of corpa to take into account the interests of its majority shareholders see eg brittingham supra r t french supra in brittingham the court stated that ait is not necessary that the same person or persons own or control each controlled business before sec_482 can be applied but there must be a common design for the shifting_of_income in order for different individuals to constitute the same interests the court nevertheless found that a family relationship was not sufficient for a finding of control where one of the related individuals aowned no interest in one of the corporations and exercised no control_over the affairs of either corporation and where the other related individuals aalthough brothers each had his own family and each was financially independent of the other id pincite accord dallas ceramic co supra in r t french co the court found that where two commonly controlled corporations one percent owned and one percent owned by the same interests entered into an agreement the existence of a substantial minority interest in the second corporation operated effectively to prevent a transaction that was not at arm s length similarly in the instant case corpa was arguably under an obligation to the rest of its shareholders to pay the lowest price possible for the redemption these facts support the conclusion either that corpa and corpb were not commonly controlled or that any bargain price corpa was able to achieve for the benefit of those non- overlapping shareholders was by arm s length negotiation moreover it appears from the available facts that the price actually negotiated was the result of arm s length bargaining for these reasons we do not believe the available facts support the application of sec_482 in this case c clear_reflection_of_income under sec_446 i r c ' b provides in pertinent part that if the method_of_accounting used by the taxpayer does not clearly reflect income the computation of taxable_income shall be made under such method as in the opinion of the secretary does clearly reflect income thus the commissioner has broad discretion to determine whether a taxpayer s method_of_accounting clearly reflects income and to require a taxpayer to change its method_of_accounting to a method that does clearly reflect income commissioner v thor power tool 432_us_522 291_us_193 882_f2d_820 3d cir 292_f2d_225 3d cir the term amethod of accounting is not defined in either the code or the regulations amethod of accounting has been defined as the particular means for determining when to recognize assets liabilities and items of income and expense consistently the underlying assumption of tax_accounting is that a method_of_accounting determines the time when an item_of_income or expense is to be recognized or reported for tax purposes stephen f gertzman federal tax_accounting in this case we would not be seeking a change in the taxpayer s overall_method_of_accounting but rather a change in the treatment of one item in numerous cases the courts have reiterated that for purposes of sec_446 the term method_of_accounting refers not only to the taxpayer's overall_method_of_accounting but also refers to the treatment of any material_item 891_f2d_1579 fed cir cert_denied 498_us_823 743_f2d_781 11th cir 513_f2d_391 d c cir 356_f2d_975 6th cir cert_denied 385_us_822 88_tc_1069 78_tc_705 40_tc_50 a change in the treatment of a material_item is a change in method_of_accounting treas reg e ii a and a 42_tc_386 53_tc_439 aff'd 443_f2d_965 6th cir in fact in 415_f2d_1341 7th cir the seventh circuit stated that a change in a single item is a change in method_of_accounting in this connection treas reg ' e ii provides aa change in method_of_accounting includes a change in the overall plan of accounting for gross_income or deduction or a change in the treatment of a material_item used in the plan a material_item is any item which involves the proper time for the inclusion of an item or the taking of a deduction many courts have followed the language of the regulations that is concluding that a material_item is any item which involves the proper time for the inclusion of the item in income or the taking of a deduction 396_f2d_552 5th cir 97_tc_120 93_tc_500 78_tc_705 in knight-ridder newspapers v united_states supra pincite citing to treas reg ' e ii the eleventh circuit said the essential characteristic of a material_item is that it determines the timing of income_or_deduction accordingly the courts have found the following to be changes in the treatment of a material_item change from reporting state property taxes on ratable method to lump sum method woodward iron co v united_states supra change from capitalizing assets to depreciating them 75_tc_497 change from deducting bonuses in the year authorized to the year received summit sheet metal co v commissioner t c m revaluation of opening and closing_inventory using new method wayne bolt nut co v commissioner supra 101_tc_1 and a change in how certain inventory_items classified hamilton industries v commissioner supra moreover courts have interpreted the clear_reflection_of_income standard to require that a taxpayer s method_of_accounting arepresent economic reality acm partnership supra t c m pincite citing prabel v commissioner supra f 2d pincite in prabel the third circuit sustained the commissioner s discretion under sec_446 to disallow an accrual_method taxpayer s accrual of interest deductions using the arule of 78s method_of_accounting for its long-term obligations because that method resulted in a distortion of the taxpayer s income f 2d pincite although sec_446 gives the commissioner the discretion to require a taxpayer to change from a method_of_accounting that does not clearly reflect income in this case we would be seeking to change how the transaction is taxed rather than the time for claiming either income or deductions while a change from treating an item as a capital_asset to treating it as an expense is a change in method_of_accounting that recharacterization involves a change in the timing for claiming the deduction here the recharacterization would not involve a change in timing but would turn what would ordinarily be a nonrecognition_transaction into a taxable_event for corpa that is not a recharacterization or change in a material_item within the confines of sec_446 for the foregoing reasons we do not think that an argument based on sec_446 would apply to this transaction case development hazards and other considerations as noted above we do not believe sec_482 or sec_446 would apply in this case nor do we believe the bargain redemption economic_substance theory discussed above would be a viable argument in litigation a we recognize that as a result of the expected tax savings corpb was no doubt willing to accept less than it could have obtained from third parties for its stock corpb sought to convert its investment in corpa stock into cash in order to make another investment under the date2 redemption corpb expected to have a substantially lower tax_liability than it would have had in any other transaction to convert its investment into cash although corpb may have received less from corpa in the redemption than it would have received if it sold the stock to third parties corpb likely viewed its net after-tax position as substantially better than it would have been if corpb had exchanged its stock at a higher price value entirely for cash in either a redemption by corpa or a sale to any other purchaser thus corpb was able to maximize the amount of cash available after taxes to use for its other investment in a sense however by taking a lower nominal price for its stock corpb effectively shared a portion of its expected tax savings with corpa on the other hand while corpb could probably have received a greater price for its stock on the open market only corpa was in a position to structure a transaction that would arguably give corpb the expected tax savings corpa had an obligation to the rest of its shareholders to pay the lowest price possible to redeem corpb s shares it was therefore in corpa's best interest to seek to realize for itself the maximum possible share of the tax savings expected by corpb in the transaction against this background we do not believe a court would find that corpa should be treated as receiving income in the redemption transaction as discussed above under the law and analysis section we considered recasting the transaction as a redemption at the price third parties would have paid and a payment of a fee equal to the difference between dollar_figurebb and the redemption price from corpb to corpa under that recast the fee would be ordinary_income to corpa based on the available facts however we believe that such a position would face overwhelming hazards we recognize that a transaction must have economic_substance in order to be taxed according to its form as held in acm partnership supra however the facts of this case are distinguishable from those in acm partnership and other aeconomic substance cases because the transaction between corpa and corpb actually resulted in the redemption the corpa stock held by corpb after the transaction corpb held only n shares of corpa instead of the ----------------- shares that it previously held as a result corpb was no longer able to elect ----- members of the corpa board_of directors and or otherwise influence the management of corpa in short the available facts strongly indicate that this was not a sham_transaction and was not consummated solely to obtain tax benefits that flow from the form but not the substance of the transaction we are fully aware that this transaction was controversial and we view it as abusive however we believe that the abuse principally lies with corpb s treatment of the redemption and we do not perceive corpa s treatment as involving any abuse the service has not previously treated an apparent sharing of tax benefits in an arm s length transaction as resulting in income to the party that receives the benefit of a better price because the other party will have certain legitimate tax savings on the transaction the service has considered taking such a position in other similar transactions where the parties have negotiated a price that admittedly takes into account the tax savings by one of the parties as a matter of policy however the service has rejected such a position to take such a position in this case would represent a radical departure from past practice and would have ramifications well beyond this case for the foregoing reasons we do not recommend pursuing this theory b on the sec_482 theory even if the common_control requirement were satisfied we believe that the facts do not support a conclusion that an allocation is needed to prevent evasion of taxes or clearly to reflect income under the regulations the question of whether an allocation is needed to prevent evasion of taxes or clearly to reflect income depends generally on whether athe results of the transaction are consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances arm s length result treas reg ' b in our view corpa has a persuasive argument that the redemption price conformed to an arm's length result while it might be true that corpb could have received a better price for its shares on the open market that possibility does not mean that the redemption price corpb negotiated with corpa was not an arm s length price corpb could only qualify for the dividend received deduction through a redemption of shares by corpa the dollar value of the tax benefits associated with the dividend received deduction appears to have been more than sufficient to compensate corpb for the purported bargain_purchase price at which it allowed its shares to be redeemed as noted corpa was arguably under an obligation to the rest of its shareholders to exact the lowest price possible for the redemption it was therefore in corpa's best interest to seek to realize for itself the maximum possible share of the tax_benefit presumably claimed by corpb in the transaction by demanding to pay a lower price per share for the redeemed shares at arm's length parties may share the dollar value of tax or non-tax benefits to either resulting from a transaction based on the relative strengths of their competitive bargaining positions see treas reg ' d ii c location_savings from operation in a low-cost jurisdiction do not automatically belong to the low-cost operator but are divided depending on the relative competitive positions of buyers and sellers in each market see also 155_f3d_50 2d cir the fair_market_value of stock in a closely_held_corporation was appropriately adjusted under treas reg ' to reflect the potential tax on the built-in capital_gain of the building that was the sole asset of the corporation issue further factual development case development hazards and other considerations in light of our response to issue we have not identified any facts that need to be developed please call if you have any further questions by steven j hankin acting chief corporate branch cc assistant regional_counsel lc regional_counsel