internal_revenue_service department of the treasury washington dc person to contact telephone number refer reply to cc ita plr-101793-02 date date number release date index no in re legend corporation foundation state1 state2 dear this letter responds to a ruling_request jointly submitted by corporation and the foundation by a letter dated date as supplemented by letters dated date date corporation and the foundation requested identical letter rulings on the issues listed below corporation and the foundation have executed forms tax information authorizations allowing each to receive the other’s confidential tax information related to the joint ruling_request both corporation and the foundation have the same authorized representatives issue sec_1 whether the pledge of the options by corporation constitutes an act of self-dealing between a private_foundation and a disqualified_person under the provisions of sec_4941 of the code plr-101793-02 whether the exercise of the options by the foundation pursuant to the net exercise procedure will constitute an act of self-dealing between the foundation and a disqualified_person under sec_4941 of the code whether the exercise of the options by an unrelated charity will constitute an act of self-dealing between the foundation and a disqualified_person under sec_4941 of the code whether any proceeds that the foundation receives upon the transfer of options to the unrelated charities will be excluded from the computation of the foundation’s net_investment_income under sec_4940 of the code whether the gain on the foundation’s exercise of the options through the net exercise procedure or sale of the options to an unrelated charity will not be subject_to tax on unrelated_business_taxable_income imposed by sec_511 of the code a if the foundation transfers the options to an unrelated charitable_organization whether corporation will be entitled to a charitable_contribution_deduction under sec_170 of the code upon the exercise of the options by an unrelated charitable_organization and whether such deduction will be for an amount equal to the difference between the exercise price and the fair_market_value of the corporation stock on the date of exercise subject_to the limitations on the amount of a charitable_contribution_deduction of a corporation under sec_170 of the code b if the foundation engages in a net exercise of the options whether corporation will be entitled to a charitable_contribution_deduction at the time of the net exercise and whether such deduction will be for an amount equal to the fair_market_value of the corporation stock transferred to the foundation upon the net exercise subject_to the limitations on the amount of a charitable_contribution_deduction of a corporation under sec_170 of the code facts corporation is a for-profit state1 corporation its publicly held stock is listed on the new york stock exchange it is the common parent of an affiliated_group_of_corporations filing consolidated federal_income_tax returns the foundation was established as a state2 trust pursuant to a declaration of trust to provide a vehicle for corporation’s charitable giving pursuant to a letter_ruling issued by the irs the foundation is recognized as exempt from tax under code sec_501 and is a private_foundation within the meaning of code sec_509 the foundation was organized for the purpose of making distributions to or for_the_use_of organizations described in sec_170 and or plr-101793-02 corporation is a substantial_contributor to the foundation and as such is a disqualified_person with respect to the foundation within the meaning of code sec_4946 each of the foundation's trustees is an officer of corporation corporation proposes to pledge to the foundation stock_options for the purchase of shares of common_stock of corporation corporation stock pursuant to a stock_option pledge agreement corporation will not receive any consideration for its pledge of the options the options will be exercisable at a price equal to the closing price of corporation stock on the new york stock exchange on the date that the option pledge agreement between corporation and the foundation is executed the options will be exercisable in whole or in part at any time and from time to time for a fixed number of years after the date of execution of the option pledge agreement the foundation will not directly exercise the options because payment of the purchase_price to corporation could constitute self-dealing within the meaning of code sec_4941 instead it is anticipated that the foundation will either transfer the options to an unrelated tax-exempt_organization or engage in a net exercise with corporation through a procedure more fully described below under the option pledge agreement the foundation will have the power to transfer the options or any portion thereof to one or more unrelated charitable organizations i described in code sec_170 and sec_501 and ii that are not private_foundations under code sec_509 or organizations described in code sec_509 the option agreement will define an unrelated charitable_organization as a charitable_organization that is i not controlled by the foundation and ii not controlled by any person or entity that is a disqualified_person as defined in code sec_4946 with respect to the foundation generally the options will be exercisable in whole or in part and from time to time by a written notice of exercise delivered to corporation upon the exercise of the options the certificate or certificates for shares of corporation stock as to which the options will have been exercised will be registered in the name of the person or persons exercising the options in addition the option pledge agreement will provide a cash-less exercise net exercise procedure in which no consideration is paid to corporation by the holder of the options under the net exercise procedure the foundation would elect to receive corporation shares equal to the net value of the options being exercised on the date of exercise the net value of the options is calculated by subtracting the exercise price for the number of shares being exercised from the value of the shares that the holder would have received upon a direct exercise if the foundation were to elect the net exercise procedure the foundation would notify corporation of the number of options being exercised along with written notice of its election to use the net exercise procedure and corporation would issue to the foundation the number of shares of plr-101793-02 corporation stock computed using the formula specified in the option pledge agreement therefore there are two ways that the foundation will be able to obtain value from the option pledge from corporation it will either i use the net exercise procedure to effect a transfer of corporation stock from corporation in satisfaction of its pledge obligation or ii transfer the options to one or more unrelated charities it is anticipated that an unrelated charity would pay to the foundation a price for the options equal to the difference between the fair_market_value of the corporation stock on the date of the transfer and the exercise price of the option less an agreed-upon discount these terms would be negotiated at arm's length alternatively the foundation might choose to transfer options to an unrelated charity without consideration the unrelated charity would be expected to exercise the options prior to their expiration the business_purpose of the pledge of the options is to further the charitable purposes of the foundation and other charitable organizations corporation will comply with the recordkeeping and return requirements of sec_1_170a-13 to the extent applicable law and analysis - issues law sec_4941 of the code provides that the term self-dealing includes any lending of money or other extension of credit between a private_foundation and a disqualified_person sec_53_4941_d_-2 of the foundation and similar excise_taxes regulations provides that the making of a promise pledge or similar arrangement to a private_foundation by a disqualified_person whether evidenced by an oral or written_agreement a promissory note or other instrument of indebtedness to the extent motivated by charitable intent and unsupported by consideration is not an extension of credit within the meaning of this paragraph before the date of maturity sec_53_4941_d_-1 of the regulations provides that the term indirect self- dealing includes any transaction between a disqualified_person and an organization controlled by a private_foundation within the meaning of sec_53_4941_d_-1 sec_53_4941_d_-1 of the regulations provides for purposes relative to acts of indirect self-dealing under sec_4941 of the code two basic tests for determining whether an organization is controlled by a private_foundation there is control if the foundation or one of its foundation managers acting only in such capacity may only by aggregating their votes or positions of authority require the organization to engage in a transaction which if engaged in with the private_foundation would constitute plr-101793-02 self-dealing or in the case of a transaction between the organization and a disqualified_person if such disqualified_person together with one or more persons who are disqualified persons by reason of such a person's relationship within the meaning of sec_4946 through g to such disqualified_person may only by aggregating their votes or positions of authority with that of the private_foundation require the organization to engage in such a transaction the regulation also provides that an organization will be considered to be controlled by a private_foundation or by a private_foundation and disqualified persons if such persons are able in fact to control the organization even if their aggregate voting power is less than percent of the total voting power of the organization's governing body or if one or more of such persons has the right to exercise veto power over the actions of such organization relevant to any potential acts of self-dealing sec_511 of the code imposes a tax on the unrelated_business_taxable_income of organizations described in sec_501 of the code sec_512 of the code defines unrelated_business_taxable_income as the gross_income earned by an organization from an unrelated_trade_or_business which is regularly carried on less applicable deductions sec_512 of the code excludes from unrelated_business_taxable_income gains or losses from the sale exchange or other_disposition of property other than a stock_in_trade or other_property of a kind which would properly be includible in inventory if on hand at the close of the taxable_year or b property_held_primarily_for_sale to customers in the ordinary course of the trade_or_business in 755_f2d_404 5th cir the court held that gain from the sale of timberland was excluded from the computation of an organization's capital_gain_net_income the court stated that property that produces capital_gain through appreciation is not an independent category of property whose disposition will be taxable and that the regulations to the extent that they imply it is are invalid because they exceed the scope of the code provisions analysis because the pledge of the option was given without any consideration for the purpose of furthering the charitable purposes of the foundation and other unrelated charitable organizations the pledge of the stock_options by corporation to the foundation does not constitute an act of self dealing between corporation and the foundation sec_53_4941_d_-2 of the regulations such pledges are not extensions of credit pursuant to sec_53_4941_d_-2 of the regulations corporation pledged the stock_options and will satisfy the options with common_stock equal in value to the pledged options because the pledged stock_options were given gratuitously the substitution of common_stock in satisfaction of the plr-101793-02 pledged stock_options before the expiration date will not result in a self-dealing sale_or_exchange of property between corporation and the foundation thus the foundation's use of the net exercise provisions to collect corporation’s pledge obligation will not result in a self-dealing sale_or_exchange of property between corporation and the foundation the transfer of the option by the foundation to an unrelated charity will not be an act of self-dealing since the cancellation of the enforceable pledge will be for consideration paid_by a non-disqualified person or an entity not controlled by a disqualified_person the consideration will be an amount equal to the difference between the fair_market_value of the stock subject_to the option on the date of the transfer less an agreed upon discount since a representation has been made that the unrelated charity will not be controlled by the foundation as defined in sec_53_4941_d_-1 of the regulations the exercise of the stock_option by the unrelated charity will not constitute an act of self- dealing between the foundation and a disqualified_person as concluded in zemurray foundation v united_states cited above the tax on capital_gain through appreciation applies only to non-charitable assets susceptible to use to produce interest dividends rents and royalties stock_options are not such assets accordingly the foundation's proceeds from the sale of the stock_options to an unrelated charity would be excluded from the computation of the foundation's net_investment_income under sec_4940 of the code because the foundation will not hold the stock_options either as stock_in_trade inventory or for sale in the ordinary course of business the gain on the sale of the stock_options will be excluded from the computation of unrelated_business_taxable_income under sec_512 of the code gain on the sale of the stock_options by the foundation to an unrelated charity will not produce any unrelated_business_taxable_income because the sale comes within the exclusion under sec_512 of the code the exceptions to the exclusion do not apply because the foundation does not resemble a merchant who acquires or produces property to sell to customers furthermore the foundation's receipt of common_stock pursuant to the net exercise of the stock_options is simply the collection of a pledge obligation that will not create unrelated_business_income under sec_512 of the code conclusions - issues the pledge of the options by corporation will not constitute an act of self-dealing between the foundation and a disqualified_person under the provisions of sec_4941 of the code plr-101793-02 the exercise of the options by the foundation pursuant to the net exercise procedure will not constitute an act of self-dealing between the foundation and a disqualified_person under sec_4941 of the code the exercise of the options by an unrelated charity will not constitute an act of self-dealing between the foundation and a disqualified_person under sec_4941 of the code any proceeds that the foundation receives upon the transfer of options to an unrelated charity will be excluded from the computation of the foundation’s net_investment_income under sec_4940 of the code gain on the foundation’s exercise of the options through the net exercise procedure or sale of the stock_options to an unrelated charity will not be subject_to tax on unrelated_business_taxable_income imposed by sec_511 of the code this letter does not address the treatment of foundation’s ownership of stock_options in the minimum_investment_return under sec_4942 of the code law and analysis - issue sec_170 of the code provides the general_rule that subject_to certain limitations there shall be allowed as a deduction any charitable_contribution as defined in sec_170 payment of which is made within the taxable_year a charitable_contribution shall be allowable as a deduction only if verified under regulations prescribed by the secretary see also sec_1_170a-1 of the income_tax regulations sec_1_170a-1 provides that any charitable_contribution as defined in sec_170 actually paid during the taxable_year is allowable as a deduction in computing taxable_income irrespective of the method_of_accounting employed or of the date on which the contribution is pledged see also sec_1_461-1 however charitable_contributions by corporations may under certain circumstances be deductible even though not paid during the taxable_year as provided in sec_170 and sec_1_170a-11 sec_1_170a-1 provides that ordinarily a contribution is made at the time delivery is effected sec_1_170a-1 provides that if a charitable_contribution is made in property other than money the amount of the contribution is the fair_market_value of the property at the time of the contribution reduced as provided in sec_170 and sec_1_170a-4 or sec_170 and sec_1_170a-4a sec_1_170a-1 provides that the fair_market_value is the price at which the property would change plr-101793-02 hands between a willing buyer and a willing seller neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts revrul_68_174 1968_1_cb_81 provides that a debenture bond or a promissory note issued and delivered by the obligor to a charitable_organization described in sec_170 represents a mere promise to pay at some future date and is not a payment for purposes of deducting a contribution under sec_170 cf revrul_78_38 1978_1_cb_67 revrul_75_348 1975_2_cb_75 holds that a corporation that pledges to sell shares of its common_stock at a specified price to a charitable_organization described in sec_170 is entitled to a charitable_contribution_deduction in the taxable_year in which the pledge is exercised the amount of the contribution is the excess of the fair_market_value of the shares on the date the pledge is exercised over the exercise price also because of the provisions of sec_1032 no gain will be recognized by the corporation as a result of the exercise of the pledge agreement revrul_82_197 1982_1_cb_72 concludes that an individual who grants an option on real_property to a charitable_organization described in sec_170 is allowed a charitable_contribution_deduction for the year in which the organization exercises the option the amount of the contribution is the excess of the fair_market_value of the property on the date the option is exercised over the exercise price conclusion - issue a if the foundation transfers the options to an unrelated charitable_organization corporation will be entitled to a charitable_contribution_deduction under sec_170 of the code upon the exercise of the options by an unrelated charitable_organization and such deduction will be for an amount equal to the difference between the exercise price and the fair_market_value of the corporation stock on the date of exercise subject_to the flush language of sec_170 concerning requirements for use of contributions made by corporations and subject_to the limitations on the amount of a charitable_contribution_deduction of a corporation under sec_170 b if the foundation engages in a net exercise of the options corporation will be entitled to a charitable_contribution_deduction at the time of the net exercise and such deduction will be for an amount equal to the fair_market_value of the corporation stock transferred to the foundation upon the net exercise subject_to the flush language of sec_170 concerning requirements for use of contributions made by corporations and subject_to the limitations on the amount of a charitable_contribution_deduction of a corporation under sec_170 if the stock that corporation transfers is subject_to restrictions that may materially affect the fair_market_value of the stock compare sec_1_170a-13 plr-101793-02 because this letter could help resolve any future questions about your income_tax responsibility please keep a copy of this letter_ruling in your permanent records except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any item discussed or referenced in this letter this ruling is directed only to the organization requesting it sec_6110 provides that it may not be used or cited as precedent sincerely christopher f kane chief branch office of associate chief_counsel income_tax accounting enclosures copy of this letter copy for sec_6110 purposes


cca-07060841-15 id uilc number release date third party communication date of communication month dd yyyy from ---------------- sent monday date am to --------------------- cc ----------------------------------------------- subject fw referrals for attorneys to state bar disciplinary commissions there is no authority for disclosure of a taxpayer’s return or return_information to state bar authorities absent consent from the taxpayer s involved the tax_court petition is public information and may be disclosed to the state bar while sec_6103 nor any other provision of the code contains any express exception authorizing publication of returns or return_information that have become a matter of public record the supreme court has held that what transpires in a court of law is a matter of public record and can be reported with impunity no reasonable expectation of privacy attaches to information that is a matter of public record 435_us_589 media is entitled to portions of tapes already released during trial 420_us_469 even the prevailing law of invasion of privacy generally recognizes that the interests in privacy fade when the information involved already appears on the public record 331_us_367 a trial is a public event what transpires in the court room is public property see also restatement second of torts sec_652d cmt b there is no liability when the defendant merely gives further publicity to information about the plaintiff that is already public thus there is no liability for giving publicity to facts about the plaintiff’s life that are matters of public record but see dep’t of justice v reporters comm for freedom of the press 489_us_749 inherent privacy interest in the nondisclosure of something that may once have been public but has with passage of time passed into practical obscurity in the context of unauthorized disclosure lawsuits however the circuits are split regarding the proper treatment of returns and return_information that have become a matter of public record in connection with tax_administration the seventh circuit which would be the circuit at issue with respect to the matter at hand has adopted a hybrid test referred to as the immediate source test ie that the definition of return_information comes into play only when the immediate source of the information is a return or some internal document based on a return as these terms are defined in sec_6103 and not when the immediate source is a public document lawfully prepared by an agency that is separate from the internal_revenue_service and has lawful access to tax returns 890_f2d_18 7th cir irs release of court’s opinion in tax case to newspaper which then published article based on the decision was not an unauthorized disclosure because the information was obtained from the court’s opinion here a copy of the tax_court petition as filed with the court would pass the immediate source test with respect to the form_2848 the public record exception would not apply the form_2848 would not fall within the definition of the return_information of the taxpayer with respect to whom the form_2848 was filed in that it was not gathered with respect to the taxpayer’s liability under the code this is however a close call if the form_2848 is disclosed to the state bar the tin and the tax years and tax matters at issue should be redacted the safest course would be to ask the taxpayer to consent to the disclosure of the form_2848 ------------------------ ------------------------------ -------------------------- ----------------------------- -------------------------


number release date id office uilc cca-088949-08 from ----------- sent friday august am to ------------------------- cc ---------------------------- subject ------------------------------------ ---------------------------------- -------- i managed to lose your email but i recall your question as being about taxpayer's position that a provision in the contract barring 3d parties from obtaining rights under the contract prevents the government from collecting on the basis of assumption of tax_liability by the contract assuming that both provisions exist in the contract they are inconsistent either the tax_liabilities have been assumed or they have not if assumed it must be for payment and thereby collection by the irs this is an element of the purchase_price for which the transferor can sue note that the irs is not a 3d party in this matter we stand in the shoes of the taxpayer transferor and can bring suit on whatever ground the transferor who is a party to the contract could have brought suit upon including failure to provide a portion of the promised consideration ----


internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc corp - plr-143237-01 date date legend us shareholder purchaser target sellers date a date b date c company official tax professional this letter responds to a letter dated date submitted on behalf of us shareholder requesting an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file an election us shareholder as the united_states_shareholder of purchaser the foreign purchasing_corporation is requesting an extension to file a sec_338 election under sec_338 with respect to purchaser’s acquisition of the stock of target sometimes hereinafter referred to as the election on date b all citations in this letter to regulations under sec_338 are to regulations in effect on date b additional information was received in a letter dated date the material information is summarized below purchaser a foreign_corporation is a wholly owned subsidiary of us plr-143237-01 shareholder us shareholder does not join in a consolidated_return target is a foreign_corporation on date a purchaser and sellers entered into a purchase agreement for purchaser to acquire all of the target stock from sellers on date b purchaser acquired all of the stock of target from sellers in exchange for cash pursuant to the purchase agreement it is represented that purchaser’s acquisition of the stock of target qualified as a qualified_stock_purchase as defined in sec_338 prior to the acquisition target did not file a united_states income_tax return was not subject_to united_states income_taxation nor was required under sec_1_6012-2 to file a united_states income_tax return in addition target was not a controlled_foreign_corporation within the meaning of sec_957 a passive_foreign_investment_company for which an election under sec_1295 was in effect or a foreign_investment_company or a foreign_corporation the stock ownership of which is described in sec_552 purchaser is a cfc as defined in sec_957 and is not required under sec_1_6012-2 other than sec_1_6012-2 to file a united_states income_tax return for its taxable_year that includes the acquisition_date us shareholder intended to file the election the election was due on date c but for various reasons a valid election was not filed after the due_date for the election it was discovered that the election had not been filed subsequently this request was submitted under sec_301_9100-1 for an extension of time to file the election the period of limitations on assessment under sec_6501 has not expired for us shareholder’s taxable_year in which the acquisition occurred the taxable_year in which the election should have been filed or any taxable years that would have been affected by the election had it been timely filed sec_338 permits certain stock purchases to be treated as asset acquisitions if the purchasing_corporation makes or is treated as having made a sec_338 election or a sec_338 election and the acquisition is a qualified_stock_purchase under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections requests for relief under sec_301_9100-3 plr-143237-01 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the election is fixed by the regulations ie sec_1_338-2t d therefore the commissioner has discretionary authority under sec_301_9100-1 to grant an extension of time for us shareholder to file the election provided us shareholder acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by purchaser company official and tax professional explain the circumstances that resulted in the failure to timely file a valid election the information establishes that us shareholder reasonably relied on a qualified_tax professional who was aware of all relevant facts the request for relief was filed before the failure to make the election was discovered by the internal_revenue_service and that the government will not be prejudiced if relief is granted see sec_301_9100-3 and v based on the facts and information submitted including the representations made we conclude that us shareholder has shown it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-1 until days from the date on this letter for us shareholder to file the election with respect to the acquisition of the stock of target as described above the above extension of time is conditioned on the filing within days of the date on this letter of all returns and amended returns if any necessary to report the transaction in accordance with the election and the taxpayer’s us shareholder’s tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the taxpayer’s tax_liability for the years involved a determination thereof will be made by the applicable director’s office upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayer’s tax_liability is lower sec_301_9100-3 us shareholder must file the election in accordance with sec_1_338-2t d and e that is a new election on form_8023 must be executed on or after the date on this letter which grants an extension and filed in accordance with the instructions to the form a copy of this letter must be attached to the election form us shareholder must file or amend as applicable its returns to report the transaction as a sec_338 transaction for the taxable_year in which the transaction was consummated and for any other plr-143237-01 affected_taxable_year and to attach to the returns a copy of this letter and a copy of the election we express no opinion as to whether the acquisition of the target stock qualifies as a qualified_stock_purchase under sec_338 or any other tax consequences arising from the election in addition we express no opinion as to the tax consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-1 we relied on certain statements and representations made by the taxpayer however the director should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-1 to file the election penalties and interest that would otherwise be applicable if any continue to apply this letter is directed only to the taxpayer s who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file in this office copies of this letter are being sent to your authorized representatives sincerely yours ken cohen senior technician reviewer branch office of associate chief_counsel corporate


internal_revenue_service number release date index number --------------------- ------------------------------------------------------------ ---- --------------------- --------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ------------ telephone number -------------------- refer reply to cc tege eoeg e02 plr-124004-05 date date --------------------------- ------------------------------------------------------------------------ ----------------------------------------------------------------------- legend taxpayer -------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------ ------------------------------------------------------------------------ ------------------------------------------------------------------- state statute a ------------------------------------------------------------------------------------------------------------- statute b date a date b statute c statutes x regulations ----------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ ------------------------------------------------------------------------ ------------------------------------------------------------------------ ------------------------------------------------------------------------ ------------------------------------------------------------------------ ---------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------- --------------------------------------- ----------------------- ----------------------- ----------------------------- this is in reply to your letter dated date and subsequent plr-124004-05 statute d dear ----------- correspondence in which you request certain rulings on behalf of taxpayer facts corporation formed by two state public school districts pursuant to the authority described in statute a for the purpose of acting as a public procurement unit within the meaning of statute b taxpayer’s sole purpose is to procure goods and services for public school districts and taxpayer’s other members through cooperative purchasing power taxpayer enables its members to purchase a range of goods and services at reduced prices the expense of organizing and operating taxpayer is borne by its members taxpayer has only one class of members entities may become members of taxpayer after properly executing a written contract or intergovernmental_agreement with taxpayer taxpayer has made the following representations of fact taxpayer is a nonprofit taxpayer filed amended articles of incorporation with state on or about date a amended articles taxpayer’s amended articles provide that its members must be public school districts and governmental public entities that are political subdivisions of state or other states in addition nonprofit educational or public health institutions of state or of other states may become members but only to the extent that such entities are political subdivisions for purposes of federal_income_tax or meet the requirements of sec_115 of the internal_revenue_code the code according to taxpayer’s written policy manual a nonprofit educational and healthcare entity must include documentation when requesting membership with taxpayer to substantiate that the entity is a political_subdivision for purposes of federal_income_tax or meets the requirements of sec_115 of the code taxpayer has identified certain current members that do not meet the membership requirements provided in the amended articles but represents that the membership of all such entities will be terminated effective no later than date b nor declare or pay dividends no part of taxpayer’s net_earnings may inure to the benefit of or be distributable to any director or officer of taxpayer nor to any other individual reasonable_compensation for services rendered and payments and distributions in furtherance of its purposes as described in taxpayer’s organizing in accordance with its amended articles taxpayer may not issue shares of stock in accordance with statute c taxpayer must upon request provide all plr-124004-05 documents may be made however in the event of taxpayer’s dissolution or final liquidation the amended articles provide that any property and assets remaining after the satisfaction and discharge of taxpayer’s liabilities and obligations shall be distributed solely to the members of taxpayer remaining assets are to be distributed to members by averaging the purchases made by each member up to and including the three years prior to dissolution to determine the percentage of ownership or final distribution for each member should only liabilities and obligations remain at the time of dissolution the same formula is to be used to determine each member’s percentage of the total obligation at dissolution documentation concerning any cooperative purchasing transaction that it administers to the state’s auditor general taxpayer must also comply with all procurement laws applicable to the school districts participating in cooperative purchasing transactions administered by it and comply with all aspects of statutes x regulations and policies taxpayer is governed by a board_of trustees at least three of whom must be elected officials or employees of public entities within state members of the board_of trustees must meet the qualifications set forth in statute d government function and taxpayer’s income accrues to one or more political subdivisions of state and that taxpayer’s income therefore is not included in the definition of taxable gross_income pursuant to sec_115 of the code law and analysis taxpayer’s income is derived from the exercise of an essential taxpayer requests the following rulings sec_115 of the code provides that gross_income does not include income derived from any public_utility or the exercise of any essential government function and accruing to a state or any political_subdivision thereof in revrul_77_261 1977_2_cb_45 income from an investment fund established under a written declaration of trust by a state for the temporary investment of cash balances of the state and its participating political subdivisions is excludable from gross_income for federal_income_tax purposes under sec_115 the ruling indicates that the statutory exclusion was intended to extend not to the income of a state or municipality resulting from its own participation in activities but rather to the income of a corporation or other entity engaged in the operation of public_utilities or the performance of some governmental function that accrued to either a state or municipality the ruling points out that it may be assumed that congress did not desire in any way to restrict a state's participation in enterprises that might be useful in carrying out projects that are plr-124004-05 desirable from the standpoint of a state government and which are within the ambit of a sovereign properly to conduct revrul_90_74 1990_2_cb_34 holds that the income of an organization formed funded and operated by one or more political subdivisions to pool risks casualty public liability workers'_compensation and employees' health is excluded from gross_income under sec_115 of the code in this ruling private interests neither materially participate in the organization nor benefit more than incidentally from the organization in order for taxpayer’s income to be excluded from gross_income under sec_115 of the code its income must be derived from a public_utility or the exercise of an essential government function taxpayer sole purpose is to act as a public procurement unit so as to pool its members’ resources to procure goods and services at more competitive prices for its members all of which are public school districts political subdivisions or other entities meeting the requirements of sec_115 of the code the types of benefits provided by taxpayer are similar to those described in revrul_90_74 like the organization described in revrul_90_74 taxpayer performs an essential_governmental_function within the meaning of sec_115 in addition taxpayer’s income must accrue to a state or any political_subdivision thereof in order to meet the requirements of sec_115 taxpayer’s income accrues to its members through the procurement of goods and services for its members upon dissolution all assets remaining after the satisfaction of liabilities are distributed on a pro_rata basis to taxpayer’s members all of which will be public school districts other political subdivisions of state or other states or entities that meet the requirements of sec_115 of the code as of date b no part of taxpayer’s net_earnings may inure to the benefit of or be distributable to private persons other than incidentally or as reasonable_compensation for services rendered and payments and distributions in furtherance of its purposes accordingly taxpayer’s income accrues to a state or any political_subdivision thereof within the meaning of sec_115 of the code effective as of date b based on the information submitted and representations by taxpayer we conclude as follows taxpayer’s income derives from the exercise of an essential government function and taxpayer’s income accrues effective as of date b to one or more political subdivisions within the meaning of sec_115 accordingly taxpayer’s income is excluded from the definition of taxable gross_income pursuant to sec_115 of the code plr-124004-05 this ruling is based on the information and representations provided by taxpayer because this ruling is contingent on changes to the composition of taxpayer’s membership this ruling applies only for periods on and after the date such changes consistent with the membership requirements stated in the amended articles are effective no opinion is expressed concerning the federal tax consequences of taxpayer under any other provision of the code other than that specifically stated herein the code provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer requesting it sec_6110 of sincerely david l marshall branch chief exempt_organizations br exempt_organizations employment_tax government entities tax exempt government entities cc


internal_revenue_service number release date index number -------------------------- -------------------------------- -------------------------------------- --------------------- ----------------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------------ ---------------------------------------------------- telephone number -------------------- refer reply to cc psi b04 plr-108041-18 date july legend decedent spouse attorney dear ----------- ---------------------------------------------------- -------------------------- ---------------------------- this letter responds to your personal representative’s letter of date requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to file a form_8939 allocation of increase in basis for property_acquired_from_a_decedent to make the sec_1022 election and to allocate basis provided by sec_1022 of the internal_revenue_code code to eligible_property transferred as a result of decedent’s death the facts and representations submitted are summarized as follows decedent died in spouse in her capacity as executor of decedent’s estate retained attorney to prepare the necessary tax filings for the estate attorney failed to prepare the form_8939 before the filing deadline of date consequently the executor failed to make a sec_1022 election for decedent’s estate law and analysis sec_1022 provides that property_acquired_from_a_decedent who died after date is treated as transferred by gift and the basis of the person plr-108041-18 acquiring the property from such a decedent is the lesser_of the adjusted_basis of the decedent or the fair_market_value of the property at the date of the decedent's death sec_1022 provides in general that the basis_of_property under sec_1022 is increased by basis increase that is allocated to the property sec_1022 provides in general that basis increase is the portion of the aggregate basis increase that is allocated to the property sec_1022 and c provide that the aggregate basis increase is dollar_figure and that the aggregate basis increase is increased by-- i the sum of the amount of any capital_loss_carryover under sec_1212 and the amount of any net_operating_loss_carryover under sec_172 that would but for the decedent's death be carried from the decedent's last taxable_year to a later taxable_year of the decedent plus ii the sum of the amount of any losses that would have been allowable under sec_165 if the property acquired from the decedent had been sold at fair_market_value immediately before the decedent's death sec_1022 provides that in the case of property that is qualified spousal property the basis of such property under sec_1022 as increased under sec_1022 is increased by spousal property basis increase allocated to the property sec_1022 provides in general that spousal property basis increase is the portion of the aggregate spousal property basis increase which is allocated to the property sec_1022 provides that the aggregate spousal property basis increase is dollar_figure sec_1022 provides in general that the basis_of_property acquired from a decedent may be increased under sec_1022 or c only if the property was owned by the decedent at the time of death sec_1022 describes property that is considered to be owned by the decedent at the time of death sec_1022 provides that the basis adjustments under sec_1022 and c shall not increase the basis of any interest in property above its fair_market_value in the hands of the decedent as of the date of the decedent's death sec_1022 provides in general that the executor is to allocate the basis adjustments under sec_1022 and c on the return required by sec_6018 and that any allocation made may be changed only as provided by the secretary sec_1022 describes property that is considered to be acquired from the decedent for purposes of sec_1022 subtitle a of title v of the economic_growth_and_tax_relief_reconciliation_act_of_2001 p l stat enacted sec_2210 which made chapter the plr-108041-18 estate_tax inapplicable to the estate of any decedent who died in and chapter the generation skipping transfer gst tax inapplicable to generation-skipping transfers made in on date tax relief unemployment insurance reauthorization and job creation act of truirjca p l stat became law and sec_301 of truirjca retroactively reinstated the estate and gst taxes however sec_301 of truirjca allows the executor of the estate of a decedent who died in to elect to apply the code as though sec_301 of truirjca did not apply with respect to chapter and for property acquired or passing from a decedent within the meaning of sec_1014 thus sec_301 of truirjca allows the executor of the estate of a decedent who died in to elect not to have the provisions of chapter apply to the decedent’s estate but rather to have the provisions of sec_1022 apply the sec_1022 election notice_2011_66 2011_35_irb_184 section i a provides that the executor of the estate of a decedent who died in makes the sec_1022 election by filing a form_8939 on or before date notice_2011_76 2011_40_irb_479 extended the due_date of the form_8939 and thus the election from date to date notice_2011_66 section i d provides that the internal_revenue_service will not grant extensions of time to file a form_8939 and will not accept a form_8939 filed after the due_date except in four limited circumstances provided in section i d under this section of notice_2011_66 an executor may apply for relief under sec_301_9100-3 sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose date is prescribed by a regulation and not expressly provided by statute requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore the personal_representatives of decedent’s estate are granted an extension of time of days from the date of this letter to make the sec_1022 election on a form_8939 and allocate additional basis to eligible_property as provided by sec_1022 a copy of this letter should be attached to the form_8939 plr-108041-18 in accordance with the power_of_attorney on file with this office we have sent a copy of this letter to your authorized representatives except as expressly provided herein we neither express nor imply any opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely associate chief_counsel passthroughs and special industries by lorraine e gardner _________________________ lorraine e gardner senior counsel branch office of the associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter


t c summary opinion united_states tax_court lisa a virgilio petitioner and frank a virgilio intervenor v commissioner of internal revenue respondent docket no 4323-08s filed date lisa a virgilio pro_se john m janusz for respondent ruwe judge this case was heard pursuant to the provisions of section of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to unless otherwise indicated all section references are to the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined a dollar_figure deficiency in petitioner and intervenor’s federal_income_tax neither petitioner nor intervenor disagrees with the liabilities set forth in the notice_of_deficiency the only issue for decision is whether petitioner is entitled to full or partial relief from joint_and_several_liability with respect to the portion of the understatement_of_tax attributable to intervenor background 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 new york at the time the notice of intervention was filed intervenor resided in florida intervenor has since returned to and currently resides in the state of new york petitioner and intervenor were married in the state of new york in date petitioner and intervenor lived at their marital residence until sometime in late date petitioner and intervenor filed a joint federal_income_tax return for tax_year however as of the end of date the couple had separated their finances so that intervenor could accumulate his earnings to move out and get his own apartment on date petitioner and intervenor entered into a property settlement and separation agreement agreement article v of the agreement in pertinent part states the husband and wife warrant that all joint income_tax returns heretofore filed are true and complete to the best of their knowledge and belief and that all liabilities thereon have been fully paid and that there is no pending audit or examination of any returns in any event the husband or the wife shall pay all liability thereafter assessed or imposed with respect to his or her portion of income on such income returns and will indemnify the other party against and hold the other party harmless for all such liabilities and expenses losses and damages as may be incurred by such other party in connection with those returns all audits examinations suits or other proceedings in connection with those returns shall be handled at the cost and expense of the party who caused such liability and or audit or by counsel or accounts sic selected by him or her approximately months later petitioner and intervenor divorced the judgment of divorce decree dated date incorporated but did not merge the agreement and stated that the agreement survived in all respects on date respondent separately mailed a notice_of_deficiency notice to petitioner and intervenor for the taxable_period ending date petitioner and intervenor’s joint federal_income_tax return was incorrect because it failed to include in income dollar_figure of unemployment_compensation intervenor received unemployment_compensation and dollar_figure of miscellaneous income intervenor received from r d construction construction income the unemployment_compensation and the construction income were reported on forms but the forms were not received until after the joint federal_income_tax return had been filed at the time the joint federal_income_tax return was filed petitioner knew that intervenor had worked for r d construction from approximately july 27th through the end of october and the beginning of november in ‘05 and that a form_1099 would be received petitioner did not however know that intervenor had received unemployment_compensation during petitioner sent to respondent a form_8857 request for innocent spouse relief which respondent received on date in her request for relief petitioner asserts she has been divorced since date she holds a college degree of legal associate’s degree she was not a victim of spousal abuse or domestic violence during she signed the federal_income_tax return she did not have a mental or physical health problem then or now her involvement in the preparation of the tax_return was limited to giving the tax documents to the person who prepared the return at the time she signed the return she the joint federal_income_tax return also failed to reflect a dollar_figure early distribution penalty attributable to a retirement_plan distribution petitioner received petitioner acknowledged that the dollar_figure was attributable to her and she has since provided two payments dollar_figure and dollar_figure to the internal_revenue_service to address this omission from the joint federal_income_tax return did not know anything was incorrect or missing she knew that intervenor had income during but did not know any amount was owed to the internal_revenue_service she was having financial problems in her involvement with household finances was limited to the use of a joint bank account to which she made deposits paid bills balanced the checkbook or reviewed the monthly bank statements intervenor had never transferred assets to her she was unaware of any unemployment benefits intervenor received in intervenor’s forms from r d construction and for unemployment_compensation were received after she had already filed the joint federal_income_tax return and the agreement stated that intervenor would be responsible for any_tax liability attributable to his income before respondent determined whether to grant petitioner relief petitioner timely filed a petition raising as an affirmative defense entitlement to innocent spouse relief with respect to the unemployment_compensation and construction income respondent pursuant to rule and 115_tc_118 served notice of this proceeding on intervenor intervenor timely filed a notice of intervention on date in the notice of intervention intervenor asserts that petitioner should be held liable for not only the dollar_figure early withdrawal penalty but also half of the tax owed on the unreported income he received by exercising his right to intervene intervenor became a party to this case sec_6015 king v commissioner supra intervenor however neither appeared nor participated in the trial of this case discussion petitioner raised her claim for innocent spouse relief in a petition for redetermination filed pursuant to sec_6213 in the context of a deficiency proceeding a claim for innocent spouse relief historically has been an affirmative defense that must be set forth in the pleadings 114_tc_276 our authority to review petitioner’s affirmative defense that she is entitled to innocent spouse treatment is governed by our general jurisdiction to consider any issue that affects the deficiency before us id pincite sec_6013 provides that taxpayers filing joint federal_income_tax returns are jointly and severally liable for the taxes due sec_6015 however provides that notwithstanding sec_6013 under certain facts and circumstances limited relief from joint_and_several_liability may be available under sec_6015 c or f except as otherwise provided in sec_6015 the taxpayer seeking relief bears the burden_of_proof rule a 119_tc_306 affd 101_fedappx_34 6th cir sec_6015 to qualify for relief pursuant to sec_6015 the requesting spouse must establish that a a joint_return was filed b there was an understatement_of_tax attributable to erroneous items of the nonrequesting spouse c at the time of signing the return the spouse seeking relief did not know and had no reason to know of the understatement d taking into account all the facts and circumstances it is inequitable to hold the spouse seeking relief liable for the deficiency in tax attributable to the understatement and e the requesting spouse seeks relief within years of the first collection activity there is no dispute that petitioner satisfies subparagraphs a b and e of sec_6015 petitioner however does not satisfy subparagraph c with respect to the portion of the understatement_of_tax attributable to the construction income petitioner testified that she was aware that intervenor was working during and that he would receive a form_1099 consequently we find that petitioner had actual knowledge of the item giving rise to the portion of the understatement_of_tax attributable to the construction income before she signed the joint federal_income_tax return notwithstanding the individual’s knowledge or reason to know of some part of the understatement_of_tax sec_6015 permits the individual to qualify for relief as to the remainder of the understatement cullen v commissioner tcmemo_2004_ petitioner stated in both her petition and on form_8857 that she did not know of the unemployment_compensation it has also been established that although petitioner and intervenor continued to live together in the marital residence until date they had segregated their finances as of the end of date consequently we find that pursuant to sec_6015 petitioner has established that she did not know and had no reason to know of the portion of the understatement_of_tax attributable to the unemployment_compensation we turn to subparagraph d to determine whether taking into account all the facts and circumstances it is inequitable to hold petitioner liable for that portion of the understatement_of_tax both petitioner and intervenor have stated that intervenor never transferred assets to petitioner furthermore respondent conceded that petitioner did not receive a significant benefit from the item giving rise to the deficiency thus taking into account all the facts and circumstances we find it inequitable to hold petitioner liable for the portion of the understatement_of_tax attributable to the unemployment_compensation accordingly we find that petitioner is entitled to relief from joint_and_several_liability pursuant to sec_6015 for the portion of the understatement_of_tax attributable to the unemployment_compensation next we must decide whether petitioner is entitled to relief under sec_6015 or f for the portion of the deficiency attributable to the construction income sec_6015 sec_6015 limits the liability of a taxpayer such as petitioner who is no longer married and who makes the appropriate election if a taxpayer elects relief under sec_6015 such taxpayer’s liability for any deficiency which is assessed with respect to the return shall not exceed the portion of such deficiency properly allocable to the individual under sec_6015 sec_6015 relief under sec_6015 is not available to petitioner if respondent demonstrates that petitioner had actual knowledge of the item giving rise to the deficiency sec_6015 as we have already found petitioner had actual knowledge of the item giving rise to the portion of the understatement_of_tax attributable to the construction income accordingly petitioner is not entitled to sec_6015 relief for the portion of the understatement_of_tax attributable to the construction income sec_6015 if a taxpayer does not qualify for relief from joint_and_several_liability under sec_6015 or c the taxpayer may seek equitable relief under sec_6015 sec_6015 confers on the secretary discretion to grant equitable relief to taxpayers where it is inequitable to hold the individual liable for any unpaid tax or any deficiency or any portion of either as directed by sec_6015 the secretary’s delegate the commissioner has prescribed guidelines in revproc_2003_ 2003_2_cb_296 for determining whether equitable relief should be granted revproc_2003_61 sec_4 c b pincite lists seven threshold conditions that must be met for a request for relief under sec_6015 to be considered the seven threshold requirements are the requesting spouse filed a joint_return for the taxable_year for which he or she seeks relief relief is not available to the requesting spouse under sec_6015 or c the requesting spouse applies for relief no later than years after the date of the service’s first collection activity after date with respect to the requesting spouse no assets were transferred between the spouses as part of a fraudulent scheme by the spouses the nonrequesting spouse did not transfer disqualified assets to the requesting spouse the requesting spouse did not file or fail to file the return with fraudulent intent and absent enumerated exceptions the income_tax_liability from which the requesting spouse seeks relief is attributable to an item of the individual with whom the requesting spouse filed the joint_return petitioner has satisfied all seven of the threshold conditions we must therefore determine whether petitioner is entitled to equitable relief revproc_2003_61 sec_4 c b pincite lists eight nonexclusive factors that the commissioner will consider in determining whether taking into account all the facts and circumstances it is inequitable to hold the requesting spouse liable for all or part of the deficiency and whether full or partial equitable relief under sec_6015 should be granted the eight nonexclusive factors and their application to petitioner’s facts and circumstances are summarized below petitioner’s marital status at the time she requested relief from joint_and_several_liability petitioner was divorced from intervenor this factor weighs in favor of granting relief economic hardship petitioner has conceded that she would not suffer economic hardship if relief is not granted this factor weighs against granting relief knowledge or reason to know as we have already found petitioner had actual knowledge of the item giving rise to the deficiency as a result this factor weighs against granting relief nonrequesting spouse’s legal_obligation under this factor we consider whether the nonrequesting spouse has a legal_obligation to pay the outstanding income_tax_liability pursuant to a divorce decree or agreement the decree having incorporated the agreement makes petitioner and intervenor liable for the payment of any later imposed or assessed income_tax_liability attributable to her or his portion of income on the income_tax return the remaining unreported income from which petitioner seeks relief the construction income is attributable to intervenor’s work with r d construction by the terms of petitioner and intervenor’s decree and agreement intervenor the nonrequesting spouse is obligated to pay the portion of the understatement_of_tax that is attributable to him ie the unemployment_compensation and the construction income accordingly we find that this factor weighs in favor of granting relief significant benefit respondent has conceded that petitioner did not receive a significant benefit from the item giving rise to the deficiency as a result this factor weighs in favor of granting relief good_faith effort to comply with tax laws respondent has also conceded that petitioner made a good_faith effort to comply with the income_tax laws in the taxable years following the taxable_year in issue and this factor favors granting relief see harris v commissioner tcmemo_2009_26 spousal abuse petitioner has not alleged that there was abuse in her former marriage consequently we find this factor is neutral mental or physical health petitioner concedes that she was not in poor mental or physical health on the date she signed the return or at the time that she requested relief accordingly we find this factor is neutral conclusion in sum four factors weigh in favor of granting relief two factors are neutral and two factors weigh against granting relief accordingly we conclude that petitioner is entitled to equitable relief pursuant to sec_6015 on that portion of the understatement_of_tax attributable to the construction income to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number ------------------------------------------ ---------------------------------------------- ------------------------------------ ------------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-102470-10 date date x ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- -------------------------- state ------------- trust trust trust trust trust trust trust trust ----------------------------------------------------------------------------------------------------- ----------------------- ----------------------------------------------------------------------------------------------------- ----------------------- ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- ----------------------- ----------------------------------------------------------------------------------------------------- ----------------------- ----------------------------------------------------------------------------------------------------- ----------------------- ----------------------------------------------------------------------------------------------------- ----------------------- trust ----------------------------------------------------------------------------------------------------- plr-102470-10 trust trust trust trust trust d1 d2 d3 d4 d5 d6 ----------------------- ----------------------------------------------------------------------------------------------------- ----------------------- ----------------------------------------------------------------------------------------------------- ----------------------- ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- ----------------------- ----------------------------------------------------------------------------------------------------- ----------------------- ---------------------- ---------------------- -------------------------- ------------------- --------------------------- ------------------- dear -------------- this responds to a letter dated date submitted on behalf of x by its authorized representative requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated in state on d1 and made an election to be treated as an s_corporation effective d2 on d3 a shareholder of x transferred shares of x stock to trust trust trust and trust trust trust trust and trust are represented as being eligible to be electing small_business trusts esbt as of d3 however the trustees of the trusts failed to make esbt elections for each trust x’s s_corporation_election terminated on d3 additionally shareholders of x transferred shares of x stock to trust trust trust trust and trust on d4 to trust trust and trust on d5 and to trust and trust on d6 each trust is represented as being eligible to be an esbt as of d4 d5 and d6 respectively x and its shareholders have consistently treated each trust as an esbt from the date the shareholders transferred shares of x stock to the trusts plr-102470-10 x represents that the failure_to_file the esbt elections for each trust was not motivated by tax_avoidance or retroactive tax planning x and its shareholders have agreed to make any adjustments that the commissioner may require consistent with the treatment of x as an s_corporation sec_1361 of the code provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 defines an esbt sec_1361 provides that except as provided in sec_1362 an esbt means any trust if i such trust does not have as a beneficiary any person other than i an individual ii an estate iii an organization described in sec_170 or or iv an organization described in sec_170 which holds a contingent_interest in such trust and is not a pcb ii no interest in such trust was acquired by purchase and iii an election under sec_1361 applies to such trust sec_1361 provides that an election under sec_1361 shall be made by the trustee sec_1_1361-1 provides that the trustee of an esbt must make the esbt election by signing and filing with the service_center where the s_corporation files its income_tax return a statement that meets the requirements of sec_1_1361-1 sec_1362 provides that a in general an election under sec_1362 shall be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation and b any termination under sec_1362 shall be effective on and after the date of cessation sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the plr-102470-10 corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the ineffectiveness or termination the corporation will be treated as an s_corporation during the period specified by the secretary based solely on the facts submitted and the representations made we conclude that x’s s_corporation_election terminated on d3 and that the termination was inadvertent within the meaning of sec_1362 we further hold that pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from d3 and thereafter provided x’s s_corporation_election was valid and provided that the election was not otherwise terminated under sec_1361 trust trust trust and trust will be treated as esbts from d3 and thereafter trust trust trust trust and trust will be treated as esbts from d4 and thereafter trust trust and trust will be treated as esbts from d5 and thereafter trust and trust will be treated as esbts from d6 and thereafter the shareholders of x must include their pro-rata share of the separately_stated and nonseparately computed items of x as provided in sec_1366 make any adjustments to basis as provided in sec_1367 and take into account any distributions made by x as provided in sec_1368 if x or its shareholders fail to treat themselves as described above this ruling is null and void this ruling is conditioned upon the trustees of the trusts filing appropriately completed esbt elections effective d3 d4 d5 and d6 and the trusts the beneficiaries of the trusts and any other affected_shareholders of x filing any amended returns necessary to conform to this letter with the appropriate service_center within days following the date of this letter a copy of this letter should be attached to each esbt election except as specifically ruled above we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the code in particular we express no opinion on whether the trusts are otherwise eligible to be esbts this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent plr-102470-10 pursuant to a power_of_attorney on file a copy of this letter is being sent to x’s authorized representatives sincerely charlotte chyr senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court raymond k and minerva r mason petitioners v commissioner of internal revenue respondent docket no filed date ps shareholders of a closely_held_corporation received certain advances of funds from the corporation in and which they used for personal and investment_expenses the loans were not evidenced by a note or security_agreement and no interest rate was agreed to or set by the parties during these years ps also made certain repayments on the loans in and which were reflected as reductions of principal on the financial ledgers of both ps and the corporation r determined that ps were the recipients of below- market loans from the corporation and among other things adjusted their income to reflect distributions pursuant to sec_7872 i r c held ps have dividend income in an amount equal to the forgone_interest from the below-market demand loans 108_tc_100 applied held further additions to tax under sec_6661 i r c are sustained subject_to recomputation under rule mike e jorgensen for petitioners charles baer for respondent memorandum opinion nims judge respondent determined the following deficiencies additions to tax and accuracy-related_penalty with respect to the federal_income_tax of petitioners raymond k and minerva r mason for the taxable years and year deficiency additions to tax sec_6661 penalty sec_6662 ______________ dollar_figure big_number -- dollar_figure big_number -- -- -- 1dollar_figure this figure is equal to percent of the underpayment_of_tax previously assessed unless otherwise indicated all section references are to the internal_revenue_code in effect for the years at issue all rule references are to the tax_court rules_of_practice and procedure after concessions the remaining issues for decision are whether petitioners received below-market demand loans from their closely_held_corporation such that dividends may be imputed to them in and in the amount of the forgone_interest pursuant to sec_7872 and whether petitioners are liable for additions to tax pursuant to sec_6661 for a substantial_understatement of tax for and petitioners concede the correctness of the sec_6662 accuracy-related_penalty for this case was submitted pursuant to rule on a full stipulation of facts and the facts as stipulated are so found this reference incorporates herein the stipulation of facts and attached exhibits petitioners resided in jacksonville florida at the time they filed their petition in this case the term petitioner will be used henceforth to refer to raymond k mason background petitioners are the only shareholders of rebuilding service inc rsi a corporation which makes investments and loans in addition to providing consulting services petitioner is rsi's president and director petitioners report their income on a calendar_year and cash_basis rsi is also on a calendar_year rsi reports its income on an accrual basis as of the time this case was submitted a revolving credit relationship between petitioners and rsi in which petitioners periodically borrowed from and repaid advances made by rsi had existed for a number of years during and rsi advanced funds to petitioners in the amounts of dollar_figure and dollar_figure respectively for both personal and investment purposes the terms of the loans were not reduced to a note or security_agreement the loans had no fixed maturity_date for repayment and rsi could have demanded the outstanding principal balances at any time during and petitioners and rsi did not record set or otherwise contemplate a rate of interest on these loans also during and petitioners made repayments to rsi in the total_amounts of dollar_figure and dollar_figure respectively rsi's ending balances in and for all of its advances to petitioners were dollar_figure and dollar_figure respectively no interest_expense relating to these payments was shown on petitioners' joint form sec_1040 u s individual_income_tax_return nor was interest_income reflected on rsi's forms u s_corporation income_tax return whenever petitioner and rsi exchanged money during this period rsi's financial ledger simply reported a debit or credit to note payable--shareholder as appropriate likewise petitioner's financial ledger reported a credit or debit to accounts_payable account receivable--rsi as appropriate neither petitioners' nor rsi's ledger explicitly characterized the repayments as either principal or interest however the ledgers indicate that all payments by petitioners to rsi reduced the outstanding principal of the loans dollar-for- dollar by the amount of the payments in petitioners retained the accounting firm kpmg peat marwick kpmg to analyze the ledgers of both petitioners and rsi kpmg calculated what rsi's interest_income on the loans would have been at the applicable_federal_rate afr under sec_7872 for and of petitioners' repayments to rsi kpmg calculated that dollar_figure and dollar_figure ought to have been applied to reduce the outstanding principal on the loans for and respectively and dollar_figure and dollar_figure should have been allocated to interest at the afr for those same years respondent timely issued a statutory_notice_of_deficiency on date among other things respondent adjusted petitioners' income for the relevant tax years to reflect dividend income from rsi pursuant to sec_7872 respondent adjusted rsi's income on its forms for and to reflect interest_income in the amounts calculated by kpmg respondent further adjusted petitioners' itemized_deductions to allow for a partial deduction for the interest respondent deemed paid to rsi by petitioners for the years in question respondent allowed petitioners a full deduction for interest_expenses identified from investment sources in the kpmg analysis and a partial deduction for interest_expenses identified from personal sources in accordance with sec_163 discussion we must decide whether respondent properly imputed dividends to petitioners in and under sec_7872 where no evidence indicates that interest had accrued or was otherwise paid on the loans in those years petitioners concede that respondent's adjustments to rsi's income and to petitioners' itemized_deductions were correct we must also decide whether petitioners are liable for additions to tax under sec_6661 for a substantial_underpayment of tax for and i were dividends properly imputed to petitioners under sec_7872 for and sec_7872 was enacted as part of the deficit_reduction_act_of_1984 publaw_98_369 98_stat_699 sec_7872 sets forth the appropriate income and gift_tax treatment for certain categories of below-market loans ie loans that are interest free or that provide for interest that is lower than the afr sec_7872 108_tc_100 sec_7872 recharacterizes a below-market_loan as defined in sec_7872 so that the loan becomes the equivalent of an arm's-length_transaction in which the lender made a loan to the borrower in exchange for a note requiring the payment of interest at a statutory rate as a result the parties are treated as if the lender had made a transfer of funds to the borrower and the borrower then used these funds to pay interest to the lender the deemed transfer to the borrower is treated either as a gift dividend contribution of capital payment of compensation or other payment depending on the substance of the transaction the deemed interest payment is included in the lender's income and generally may be deducted by the borrower subject_to the rules governing the deductibility of interest kta-tator inc v commissioner supra pincite see h conf rept pincite 1984_3_cb_1 staff of joint comm on taxation general explanation of the revenue provisions of the deficit_reduction_act_of_1984 pincite- j comm print sec_7872 applies to a transaction that is a loan subject_to a below-market interest rate and described in one of several enumerated categories sec_7872 e f petitioners do not contest that the advances from rsi constitute loans or that the loans were from a corporation to its shareholders one of the enumerated categories under sec_7872 rather petitioners maintain that the advances were not made at a below-market rate and therefore sec_7872 does not apply to impute dividend income to them in order to determine whether the below-market_loan requirement is satisfied for purposes of applying sec_7872 we must ascertain whether the loan is a demand or term_loan and subject_to a below-market interest rate see sec_7872 below-market loans fit into one of two categories demand loans and term loans sec_7872 see h conf rept pincite c b vol pincite a demand_loan includes any loan which is payable in full at any time on the demand of the lender sec_7872 a term_loan is any loan which is not a demand_loan sec_7872 the determination of whether a loan is payable in full at any time on the demand of the lender is a factual one loans between closely held corporations and their controlling shareholders are subject_to special scrutiny 56_tc_1324 affd without published opinion 496_f2d_876 5th cir in the instant case rsi made loans without written repayment terms to its only shareholders and had unfettered discretion to determine when the loans would be repaid on that basis we conclude that the loans are demand loans we reached the same conclusion on similar facts in kta-tator inc v commissioner supra pincite next we must determine whether the loans were subject_to a below-market interest rate a demand_loan is a below-market_loan if it is interest free or if it provides for interest at a rate that is lower than the afr as determined under sec_1274 sec_7872 f b if a demand_loan is classified as a below-market_loan the lender has interest_income forgone_interest equal to the difference between the interest that would have accrued on the loan using the afr as the interest rate and any interest actually payable on the loan sec_7872 kta-tator inc v commissioner supra pincite the parties are treated as though on the last day of each calendar_year the lender transferred an amount equal to the forgone_interest to the borrower and the borrower repaid this amount as interest to the lender sec_7872 in the context of a loan between a corporation and a shareholder the deemed transfer of forgone_interest from the corporation to the shareholder is treated as a distribution which generally is taxed as a dividend to the shareholder kta-tator inc v commissioner supra pincite mcginnis v commissioner tcmemo_1993_45 see h conf rept pincite c b vol pincite petitioners contend that sec_7872 does not apply to the instant case arguing that interest on the loans had accrued at the afr in and and was in fact paid in those years although petitioners admit that interest was not expressly allocated as such until petitioners maintain that proposed_regulations under sec_7872 provide support for a post-tax- yearend partial allocation of a repayment to interest at the afr petitioners further assert that the adjustments made by respondent to the returns of rsi and petitioners for the years at issue shows the propriety of such post-tax-yearend partial allocations to interest respondent on the other hand argues that there was forgone_interest on the loans and therefore sec_7872 applies in this case since neither petitioners nor rsi had agreed to any interest liability during and moreover respondent avers no evidence exists that any of petitioners' payments to rsi in and were in fact applied to interest owed on the loans under the circumstances respondent maintains that a repayment cannot be partially allocated to interest at the afr after the end of the relevant tax_year in order to skirt the application of sec_7872 for the reasons which follow we agree with respondent petitioners rely primarily on sec_1 c proposed income_tax regs fed reg date as support for their position petitioners point to language in sec_1 c proposed income_tax regs that provides if a demand_loan does not have a constant outstanding principal_amount during a period the amount of forgone_interest shall be computed according to the principles set forth in paragraph b of this section with each increase in the outstanding loan balance being treated as a new loan and each decrease being treated as first a repayment of accrued but unpaid interest if any and then a repayment of principal emphasis added we note that while proposed_regulations do constitute a body of informed judgment which courts may draw on for guidance 98_tc_554 this court accords them no more weight than that given to a litigation position see kta-tator inc v commissioner t c pincite- in any case petitioners' reliance thereon is misplaced most importantly petitioners ignore the fact that contrary to the underscored language of sec_1 c proposed income_tax regs no interest accrued during the years in question in this case petitioners acknowledge that no obligation to pay interest had been agreed on or contemplated by the parties to the loan transactions during and petitioners nonetheless assert that interest need not be stated to avoid sec_7872 in so arguing petitioners ignore the language of sec_1 c proposed income_tax regs fed reg date which provides that sec_7872 does not apply to any loan which has sufficient stated_interest emphasis added in any event no evidence demonstrates that any interest was actually paid in and indeed all evidence points to the contrary no interest_income was shown on rsi's forms nor was any interest_expense reflected on petitioners' returns for the years at issue also telling is the fact that both petitioners' and rsi's financial ledgers indicate that all payments by petitioners to rsi reduced the outstanding principal of the loans dollar-for- dollar by the amount of the payments furthermore petitioners ignore the parenthetical language if any emphasized above petitioners theorize that the words unpaid interest refer to imputed_interest computed at the afr under sec_7872 and thus assert that all repayments should be treated first as payments of such interest by the borrower in that connection petitioners posit without pointing to any authority that sec_7872 applies only in the narrow circumstance where a taxpayer learns after the end of the relevant tax_year that his repayments are insufficient to satisfy first all of the interest owing at the afr however if petitioners' interpretation were correct the parenthetical language if any would be superfluous as there would always be interest to be repaid first on a below-market_loan under sec_7872 we think that the provision in sec_1 c proposed income_tax regs is more appropriately viewed as only applying to payments of below-market stated_interest in this context the parenthetical if any makes sense as there may well be no stated_interest as in the case at hand our interpretation finds support in an example given later in the proposed_regulations sec_1 d example proposed income_tax regs fed reg date treats partial repayments on an interest-free demand_loan as repayments of principal only thereby requiring a separate calculation of forgone_interest petitioners next attempt to bootstrap respondent's adjustments to rsi's interest_income and petitioners' itemized_deductions for interest_expense under sec_7872 which petitioners do not contest into evidence that interest equal to the afr was paid in and on the loans petitioners ignore the fact that as the adjustments by respondent were made after the years in question to reflect what petitioners and rsi should have reported on their returns the adjustments cannot conceivably be relied upon to show that interest was in fact paid in those amounts petitioners posit that the commissioner has already enjoyed the tax benefits of the interest payments and is now unjustly seeking an imputed dividend from the petitioners petitioners misconstrue the manner in which the transaction is viewed under sec_7872 as mentioned above the statute treats a below- market loan as a transfer from the lender to the borrower of an amount equal to the forgone_interest and a retransfer of such amount from the borrower to the lender as interest sec_7872 pursuant to that treatment petitioners have received increased itemized_deductions for interest to the extent allowed by rules governing such deductions and forgone_interest was included in income by rsi it is integral to the statutory scheme that petitioners also recognize the amount of forgone_interest as dividend income finally it is true that in kpmg determined the correct amount of interest that should have accrued on the debt in order to have avoided the application of sec_7872 however it is well established that a transaction is to be given effect in accordance with what actually occurred not with what might have taken place under different circumstances 417_us_134 taxpayers are bound by the form of the transaction they chose and must accept the tax consequences of their choice id pincite 730_f2d_718 11th cir since petitioners structured the loans without stated_interest during and they may not retroactively decide to make them interest bearing in an amount equal to the afr to achieve a more favorable tax result based on the foregoing we hold that dividend income was properly imputed to petitioners under the provisions of sec_7872 in and in the amount of dollar_figure and dollar_figure respectively ii are petitioners liable for additions to tax under sec_6661 in and for a substantial_understatement of tax respondent determined that petitioners are liable for additions to tax for a substantial_understatement of tax for and under sec_6661 as in effect for and sec_6661 imposed an addition_to_tax of percent of the amount of any underpayment attributable to a substantial_understatement of tax see 90_tc_498 an understatement is the amount by which the correct_tax exceeds the tax reported on the return sec_6661 an understatement is substantial if it exceeds the greater of percent of the correct_tax or dollar_figure dollar_figure in the case of a corporation sec_6661 petitioners bear the burden of proving that respondent's imposition of additions to tax under sec_6661 is erroneous rule a 92_tc_501 petitioners have adduced no evidence on this issue nor did they advance any reasons why the additions should not apply other than their claim that there is no sec_7872 adjustment producing an understatement petitioners do not contend that they have substantial_authority or that they adequately disclosed the understatement under sec_6661 and ii since we have held otherwise if the recomputed deficiency under rule satisfies the statutory_percentage or amount petitioners will be liable for such additions to tax see 105_tc_324 we have considered petitioners' other arguments and to the extent that they are not addressed herein we find them to be either irrelevant or without merit to reflect the foregoing decision will be entered under rule