t c memo united_states tax_court john w marsh petitioner v commissioner of internal revenue respondent docket no filed date stephen p pingree and richard p mcclellan iii for petitioner henry eb o'neill for respondent memorandum findings_of_fact and opinion ruwe judge respondent determined deficiencies in petitioner's federal income taxes and additions to tax as follows additions to tax sec_6651 sec sec_6653 sec_6653 sec_6653 sec year deficiency a b a b b b dollar_figure ---- --- dollar_figure --- --- big_number --- --- big_number --- e--- dollar_figure big_number --- --- --- dollar_figure --- big_number big_number ---- dollar_figure --- --- --- big_number big_number dollar_figure --- --- --- --- big_number big_number big_number --- ---- --- --- big_number big_number --- ---- --- --- big_number big_number big_number --- --- ---- ---- big_number --- --- --- --- big_number -- --- --- --- percent of the interest due on dollar_figure percent of the interest due on dollar_figure tf we do not sustain respondent's determination of additions to tax for fraud pursuant to sec_6653 and f for the years through respondent alternatively determined the following additions to tax for negligence or intentional_disregard_of_rules_and_regulations sec_6653 and failure_to_file within the time prescribed by law sec_6651 additions to tax sec_6651 sec_6653 sec_6653 year a a a a dollar_figure dollar_figure --- big_number big_number --- big_number --- dollar_figure big_number --- --- ‘unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure - - the issues for decision are whether petitioner a resident of hawaii and descendant of indigenous hawaiians is subject_to federal_income_tax on income derived from sources within the united_states whether dollar_figure received by petitioner in from an uninsured motorist claim constitutes taxable_income to petitioner or is excluded under sec_104 whether petitioner is liable for additions to tax for fraud in the years through and fraudulent_failure_to_file for and if not whether petitioner is liable for alternative additions to tax and whether petitioner is liable for additions to tax for failure to make estimated_tax payments for the years through findings_of_fact some of the facts have been stipulated and are so found at the time the petition was filed petitioner resided in pearl city oahu hawaii petitioner was born on date in hawaii petitioner graduated from high school in from until petitioner was employed as a police officer by the honolulu police department when he retired in he held the rank of sergeant petitioner resided in the united_states and all his income was derived from sources within the united_states during the years in issue during the years through petitioner received the following amounts of income from the described sources wages hpd dollar_figure dollar_figure dollar_figure dollar_figure non-employee big_number -q- -0o- compensation interest dividends -q- -0- -q- state_income_tax big_number -0o- -o- -0o- refund pension annuity -o0- -0- -o0- gambling winnings -q- big_number -o- -0- horseshoe casino cash deposits big_number big_number big_number -0- beginning in petitioner also operated a sole_proprietorship masonry contracting business under the name s h masonry petitioner operated this business through at least for the years through petitioner received the following amounts and incurred the following expenses in connection with the operation of s h masonry i987 gross_receipts dollar_figure dollar_figure dollar_figure dollar_figure wa es fper statutory big_number big_number big_number additional expenses big_number big_number big_number net big_number big_number big_number some of the receipts generated by this business were paid to petitioner in cash around august of petitioner stopped using his business checking account in favor of conducting business in cash petitioner drew checks against his business account from january to date approximately checks per month from august to september of the same year - - petitioner drew only checks against the business account approximately checks per month this drop in activity was due to the fact that petitioner started paying his employees in cash as of date rather than by check petitioner received the following amounts of income as set forth in the notice_of_deficiency for the years through dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure the state of hawaii imposes a general excise_tax on gross_receipts which is required to be collected by the recipient and remitted to the state of hawaii for the years through petitioner charged and collected from masonry customers the following amounts of general excise_tax dollar_figure dollar_figure dollar_figure dollar_figure petitioner did not remit any of the general excise_tax he collected to the state of hawaii during through for the years through petitioner filed joint federal and state of hawaii income_tax returns with his wife petitioner has not filed a federal or state of hawaii income_tax return for any year after petitioner’s return was selected for audit petitioner refused to cooperate with respondent's personnel during the audit -- - leading respondent to issue a notice_of_deficiency for the year the deficiency was assessed on date after receiving the bill for the assessment petitioner retained an enrolled_agent carol baptista who requested that respondent grant audit_reconsideration ms baptista discovered that petitioner had not filed income_tax returns for and and explained to petitioner that he was legally required to file such returns on date ms baptista wrote a letter to the district_director internal_revenue_service honolulu hawaii regarding the tax audit and filing position of john marsh that letter was signed by ms baptista and petitioner and stated re tax audit and filing position of john marsh gentlemen this letter is to clarify the compliance and filing position of mr john marsh as you are aware the internal_revenue_service audited mr marsh for the year mr marsh was represented by mike kailing who was then apparently an enrolled_agent mr marsh is obviously not a tax expert and did not realize that some of mr kailing’s positions were to say the least inappropriate mr kailing apparently refused to comply with internal_revenue_service requests giving rise to a substantial assessment against mr marsh mr marsh is now however represented by janell israel associates and complete information has been presented to support the return however on audit_reconsideration it appears to us that all of the supporting material presented was not taken into consideration and we cannot get the internal_revenue_service to provide us with the final report explaining why such a substantial assessment remains we would like an opportunity to discuss what portions of the - jj - supporting materials have been disallowed we cannot help but believe that this is caused at least in part by a reaction to mr kailing’s conduct which does not reflect either the position or sic janell israel associates or mr marsh in addition mr marsh has failed to file his and returns but the necessary information has been assembled and we should have the returns prepared in the very near future it must be categorically stated that mr marsh is not a tax_protester and is not willfully failing to file any return or to provide appropriate information to support returns filed it should not be held against him that he was badly represented by someone else in fact he should probably be given the benefit of the doubt as someone who as sic badly represented in the past but is trying to correct the situation hopefully we can cooperate on a more positive basis in order to get this situation properly resolved very truly yours carol baptista i have read and approved the above letter and wish to affirm that i am not trying to willfully avoid any lawfull sic internal revenue requirements john marsh cc russell bain petitioner never provided ms baptista with records from which ms baptista could prepare petitioner’s and returns during the course of the audit_reconsideration it was also discovered that petitioner had not withheld any employment_taxes not filed any employment_tax returns and not issued any forms w- or with respect to amounts paid to workers for s h masonry petitioner’s enrolled_agent advised petitioner that he was required to report to respondent on either form_1099 or w-2 --- - the amounts of compensation he paid to his masonry workers one such worker was subsequently convicted for subscribing false income_tax returns under sec_7206 for and for failing to report income earned as a mason including more than dollar_figure paid_by petitioner petitioner was indicted under sec_7201 attempt_to_evade_or_defeat_tax for the years through after a jury trial in petitioner was acquitted on all three counts sometime between petitioner purchased a male arabian horse named sunset wailea petitioner's federal_income_tax return included a schedule c that listed petitioner's business activities as contracting farrier horse breeding under the business names of s h masonry and keone's horse shoeing and breeding petitioner's federal_income_tax return claimed expenses from keone's ranch supplies on date petitioner broke his left ankle as the result of an accident he was initially treated on that same day at wahiawa general hospital the following day he underwent surgery at straub clinic the medical records from wahiawa general hospital indicate that petitioner stated the cause of the injury was a horse fell down on him petitioner told the doctors at wahiawa general hospital that his injury resulted from a horse falling on him the medical records from straub clinic also state the cause of the injury to be struck accidentally by --- - falling object horse and describe petitioner as police officer who injured his left ankle when a horse fell on him petitioner consulted an attorney sometime after the date injury petitioner then submitted a motor_vehicle accident report to the police on date that report stated petitioner was involved in a m c motorcycle accident in kahuku trying to avoid potential collision with oncoming unidentified truck he then lost control of motorcycle flipping off of m c injuring left ankle under hawaii law the driver of a motor_vehicle which is in any manner involved in an accident in which a person is injured is required to make a report of an accident not more than hours after the accident petitioner a police officer did not file a timely accident report as required_by_law petitioner’s accident report was filed more than weeks after his injury petitioner thereafter through his attorney submitted an uninsured motorist claim to his automobile insurance_company the claim asserted that the cause of petitioner's injuries was the motorcycle accident described in the police report the insurer initially denied the claim in response to petitioner’s claim the insurer wrote please be advised that under mr marsh’s personal automobile policy with the travelers your claim for uninsured motorist coverage is not applicable in this situation mr marsh’s personal automobile policy does not afford coverage for bodily injury suffered by an insured while occupying a highway vehicle which is -- - owned by the insured but is not insured for uninsured motorist coverage based on the above information mr marsh’s claim for uninsured motorist coverage under his personal automobile policy is not applicable the hawaii supreme court had held in that the exclusion relied on by the insurer was invalid in the case of kau v state farm mut auto ins p 2d haw on date petitioner commenced a lawsuit against the insurance_company for its failure to pay the above-mentioned claim the civil information sheet attached to the complaint signed by the attorney of record lists the nature of the suit as contract not motor_vehicle tort or other nonvehicle tort the complaint also alleges that count i defendant travelers has breached the implied covenant of good_faith and fair dealing under the policy by refusing or denying or failing to process or failing to pay plaintiff’s claim without a reasonable basis for such conduct and with knowledge and reckless disregard or the lack of a reasonable basis for such conduct in that plaintiff has submitted claims under the provisions of the policy and defendant travelers refused to process or pay with knowledge that the exclusion in defendant’s policy of insurance is prohibited under the laws of hawaii and that defendant travelers has no colorable defense to payment of uninsured motorist benefits count it the aforesaid outrageous conduct by defendant travelers was done intentionally for the purpose of depriving plaintiff of money due him and to inflict upon him severe emotional distress count iil in its refusal to pay uninsured motorist benefits to plaintiff defendant travelers has violated public policy as well as hawaii revised statutes chapter which states that no insurer doing business in this state shall engage in unfair claim settlement practices count iv hawaii revised statutes section provides that unfair methods of competition and unfair and deceptive acts or practices in the conduct of any trade or commerce are unlawful defendant’s failure to pay plaintiff the uninsured motorist benefits to which he was entitled or to provide legally sufficient reasons for denying payment was an unfair practice as set forth in hawaii revised statutes sec_431 a a and section entitling plaintiff to an award of general and special damages count v at the time of issuance of the policy described above the promises to pay such benefits to plaintiff were made by defendant travelers insurance with no intention of performing them or interpreting in good_faith such terms and provisions defendant and each of them knew such promises and representations were false and were made with the intent and purpose to deceive plaintiff and to induce plaintiff to purchase and accept the insurance_policy defendant and each knew that plaintiff believed such provisions to be true and the plaintiff would and did justifiably rely on such promises and buying the insurance_policy and paying the premiums thereon nevertheless defendant and its agents employees authorized representatives or assigns and each of them concealed such true intent from plaintiff in acting fraudulently and deceitfully as set forth herein defendants and each of them intended to and did vex annoy and injure plaintiff petitioner’s attorney made the insurer’s attorney aware of the kau _v state farm mut ins co supra and served an extensive discovery request seeking the identities of all persons in hawaii to whom travelers had denied claims based on the exclusion and raised the prospect of expanding petitioner’s lawsuit into a class action suit compliance with the discovery request would have required the insurer to expend thousands of hours of manual labor the insurance_company eventually agreed to settle the lawsuit for the maximum amount payable under the policy dollar_figure the release and indemnity agreement stated in pertinent part release and indemnity agreement bly these presents does release acquit and forever discharge the said releasee from and on account of any and all claims actions causes of action liability or liabilities demands or damages of whatever name or nature including any and all claims for general special punitive or treble_damages for insurance benefits of whatever name or nature for past and future earnings loss for past and future medical_expenses for attorneys fees costs or interest for loss of services for loss of support for loss of association companionship love and affection and for any and all other additional losses incident to the relationships of husband and wife or parent and child whether at law or in equity in any manner arisen arising or to grow out of the following an automobile accident more specifically described in that certain honolulu police department motor_vehicle accident report no c- the conduct acts or failures to act or refusals to act on the part of releaseer in connection with the investigation claim handling or settlement of any claim arising out of or in connection with said accident any alleged neglect or refusal by releasee to pay any benefit or recognize any obligation under any policy of insurance issued to any party and arising out of said accident the conduct acts or failures to act neglect or refusals to act on the part of releasee or any of its employees agents officers directors predecessor or successor entities or their respective attorneys in connection with the writing amendment revision issuance promulgation sale and or marketing of any policy of insurance any of which said accident conduct acts failures or refusals to act or neglect may have resulted in injuries or damages to releasor as more specifically set forth in that certain lawsuit in the united_states district_court for the district of hawaii and entitled john marsh v travelers insurance_company et al civil no 89-00262-hmf after payment of attorney's_fees and costs petitioner's share of the settlement proceeds amounted to dollar_figure petitioner negotiated the settlement check for cash on date no portion of the settlement proceeds was deposited into any bank account maintained by petitioner respondent's notice of - - deficiency for included as an item_of_income dollar_figure which represented the settlement amount opinion liability for federal_income_tax petitioner argues that he has nationality in the nation of hawai‘i by virtue of his hawaiian ancestors who were nationals of hawai‘i petitioner further argues the united states’ annexation of the nation of hawaii was based upon illegal acts was legally invalid under the constitution of the united_states therefore the united_states of america and its agency the internal_revenue_service lack jurisdiction over the petitioner and lack legal standing to assess u s taxes against the petitioner petitioner places particular reliance on a joint resolution of congress publaw_103_150 107_stat_1510 titled overthrow of hawaii that resolution provides inter alia that congress acknowledges the historical significance of the illegal overthrow of the kingdom of hawaii in which resulted in the suppression of the inherent sovereignty of the native hawaiian people publaw_103_150 107_stat_1513 petitioner urges us to find that the united_states lacks legal standing to assess taxes on his income because he is a descendant from native hawaiians petitioner resided in the united_states and by virtue of his birth in the united_states territory of hawaii in petitioner is a united_states citizen see u s c sec -- - the internal_revenue_code taxes the income of all individuals only nonresident_aliens are excluded see sec_1 however wrongful the overthrow of the kingdom of hawaii may have been we can provide no relief to petitioner from the lawful application of the general law of the united_states including the internal_revenue_code similarly based arguments with respect to native american indians have been rejected by the supreme court johnson v m'intosh 21_us_543 we see no reason for elevating petitioner's claim above that of native american indians the supreme court has more recently stated indians are citizens and that in ordinary affairs of life not governed by treaties or remedial legislation they are subject_to the payment of t income taxes as are other citizens 351_us_1 the joint resolution relied on by petitioner specifically provides nothing in this joint resolution is intended to serve as a settlement of any claims against the united_states publaw_103_150 107_stat_1514 the joint resolution is neither a treaty nor remedial legislation congress has not seen fit to exempt citizens or residents of the united_states from the imposition of income_tax on the basis of unlawful acquisition of the native land of their ancestors by the united_states if such relief is sec_2 provides in the case of a nonresident_alien_individual the taxes imposed by sec_1 and shall apply only as provided by sec_871 or sec_877 -- - to be given it must come from congress we therefore hold that petitioner was subject_to tax under the internal_revenue_code for the years in issue accident sec_104 a in the notice_of_deficiency for respondent determined that petitioner received unreported income of dollar_figure the explanation of the adjustment states it is determined that you received insurance proceeds in the amount of dollar_figure from insurance_company for tax_year this amount is determined to be taxable to you because you have failed to establish that this amount is excludable from gross_income under the provisions of the internal_revenue_code it is undisputed that petitioner suffered a broken ankle made an uninsured motorist claim on his insurance carrier the claim was not paid on demand a lawsuit followed and the insurance_company chose to settle and pay the full amount payable under the policy respondent argues that petitioner's uninsured motorist claim was based on a false motor_vehicle report respondent contends insurance proceeds obtained under false pretenses constitute ordinary_income to the recipient it is not clear from petitioner’s pleadings whether he seeks to exclude the insurance settlement under sec_104 or the original petition does not raise the matter and paragraph of the amended petition states only this money was a tax exempt personal injury settlement received by petitioner from an insurance_company petitioner's brief fails to identify the basis on which petitioner claims the insurance proceeds should be excluded from petitioner's income sec_104 excludes from gross_income the amount of damages received on account of personal injuries or sickness the term damages received whether by suit or agreement means an amount received other than workmen's_compensation through prosecution of a legal suit or action based upon tort type rights or through a settlement agreement entered into in lieu of such prosecution see sec_1_104-1 income_tax regs to exclude damages from gross_income pursuant to sec_104 respondent’s brief assumes that petitioner seeks to exclude the insurance settlement under sec_104 sec_104 and provides sec_104 compensation_for injuries or sickness a in general --except in the case of amounts attributable to and not in excess of deductions allowed under sec_213 relating to medical etc expenses for any prior taxable_year gross_income does not include-- the amount of any damages received whether by suit or agreement and whether as lump sums or as periodic_payments on account of personal injuries or sickness amounts received through accident_or_health_insurance for personal injuries or sickness other than amounts received by an employee to the extent such amounts a are attributable to contributions by the employer which were not includible in the gross_income of the employee or b are paid_by the employer -- - the taxpayer must prove the underlying cause of action is based upon tort or tort type rights and the damages were received on account of personal injuries see 515_us_323 subject_to an exception not relevant here sec_104 a provides an exclusion_from_gross_income of amounts received through accident_or_health_insurance for personal injuries or sickness emphasis added the mere fact that amounts in guestion are paid_by an insurance_company under an insurance_policy does not establish that such amounts were actually paid for injuries and sickness the taxpayer has the burden of proving this petitioner’s auto insurance regarding uninsured drivers apparently does not cover a nonvehicular accident that occurred while the insured was riding his horse petitioner sought medical help immediately after breaking his ankle at that time he informed hospital personnel that a horse had fallen on him when he was treated the next day he conveyed the same account to the medical service providers petitioner was also a career policeman who would understand the need to file a police report immediately if he had been injured as a result of actions by an uninsured motorist who had fled the scene of the accident nevertheless no such report was immediately filed indeed it was not until several weeks had lapsed after petitioner had a conversation with his attorney that he filed a belated police report claiming that an unidentified motorist had caused his injury while petitioner was riding a motorcycle after filing the police report petitioner filed a claim with his insurance_company we do not find petitioner’s testimony at trial concerning the cause of the accident to be credible while petitioner admitted telling hospital personnel on the day of the accident that a horse had fallen on him he failed to give any explanation for the inconsistency between that and his subsequent police report and insurance claim the police report was not filed until after he consulted with his attorney in contrast his statements to attending physicians immediately after the accident that the injury was caused by a horse accident in circumstances that inherently call for truthfulness are credible the release and indemnity executed by the insurer and petitioner does not apportion the settlement amount among the various claims made by petitioner in his complaint the attorney who acted for the insurance_company testified the settlement was in response to a demand for policy limits and we paid it he further testified qo after this entire case was settled you had satisfied yourself on behalf of the insurance_company that mr marsh was not committing any type of insurance fraud against the insurance_company correct - - a no we had not - it was not quite that simple it was basically that the fact that the issue of whether or not it was a motorcycle versus a horse accident was not conclusively established we had not had the opportunity to fully develop those issues but looming on the horizon was mr marsh’s attorney’s threat of expanding the lawsuit plus this very onerous discovery request that would require hundreds of thousands of hours of manual labor to comply with that had been served on us and you know we felt that we were kind of pushed against the wall basically qo if mr marsh was lying about the cause of the accident and it was a non-vehicular accident the insurance_company would have had a defense to paying out any claims under the policy correct a yes it would have had a defense to the claim under the policy but not to the other claims the insurance settlement in this case was paid_by the insurer to avoid the costs of litigating what it considered to be a doubtful personal injury claim after the insurance_company had initially and improperly relied on an invalid exclusionary provision petitioner’s claim was actually based on a false accident report and this false statement was the basis for his recovery without petitioner’s false statement regarding the circumstances of the accident there would have been no insurance recovery statutory exclusions from income such as those contained in sec_104 are to be narrowly construed see 336_us_28 we hold that the dollar_figure settlement was not on account of or for personal injuries within the meaning of sec_104 we therefore - uphold respondent’s determination that the amount of dollar_figure be included in petitioner's gross_income fraud respondent determined that petitioner is liable for an addition_to_tax for fraud for each of the years and respondent bears the burden_of_proof on this issue see sec_7454 rule b in order to discharge the burden respondent must prove by clear_and_convincing evidence an underpayment exists for each year in issue and some portion of the underpayment for that year is due to fraud see sec_7454 92_tc_661 in order to show fraud respondent must show that petitioner intended to evade taxes known to be owing by conduct designed to conceal mislead or otherwise prevent the collection_of_taxes see 398_f2d_1002 3d cir 80_tc_1111 fraud is intentional wrongdoing on the part of the taxpayer with the specific intent to evade a tax known to be owing see 796_f2d_303 9th cir affg tcmemo_1984_601 692_f2d_587 9th petitioner has made no claim for deductions of legal fees and costs in the event we were to find the dollar_figure includable in gross_income therefore we express no opinion on the deductibility of these items under the particular facts of this case -- - cir citing 252_f2d_56 9th cir affg in part and revg in part 74_tc_1160 the existence of fraud is a question of fact to be resolved upon consideration of the entire record see 67_tc_181 affd without published opinion 578_f2d_1383 8th cir fraud is never imputed or presumed it must be affirmatively established by the commissioner see 55_tc_85 fraudulent intent is rarely established by direct evidence as a consequence courts have inferred fraudulent intent from various kinds of circumstantial evidence see 317_us_492 powell v granguist supra pincite some of the indicia of fraud include understatement of income inadequate records failure_to_file tax returns implausible or inconsistent explanations of behavior concealing assets failure to cooperate with tax authorities engaging in illegal activities attempting to conceal illegal activities dealing in cash and failing to make estimated_tax payments see bradford v commissioner supra pincite willful failure_to_file does not in itself establish liability for additions to tax on account of fraud however such a failure may be properly considered in connection with other facts in determining whether any deficiency or underpayment_of_tax is due to fraud see stoltzfus v united_states supra - - respondent's fraud determinations were made in relation to three separate statutory regimes for the taxable years and the addition_to_tax for fraud is equal to percent of the portion of any underpayment attributable to fraud plu sec_50 percent of the interest due on that portion see sec_6653 b a and b if respondent establishes that any portion of the underpayment for or is attributable to fraud then the entire underpayment is to be treated as attributable to fraud except with respect to any portion of the underpayment that petitioner establishes is not attributable to fraud see sec_6653 for the fraud addition_to_tax was changed by the enactment of the technical_and_miscellaneous_revenue_act_of_1988 publaw_100_647 b 102_stat_3369 the the relevant provision provided sec_6653 fraud -- in general --if any part of any underpayment as defined in subsection c of the tax required to be shown on a return is due to fraud there shall be added to the tax an amount equal to percent of the portion of the underpayment which is attributable to fraud if the secretary establishes that any portion of an underpayment is attributable to fraud the entire underpayment shall be treated as attributable to fraud except with respect to any portion of the underpayment which the taxpayer continued -- - statutory regime was again changed in relation to respondent determined that petitioner is liable under the provision of sec_6651 in relation to his failure_to_file for that section so far as is relevant provided that if any failure_to_file any return is fraudulent the additions to tax for failure_to_file provided in sec_6651 are increased from percent to percent and from percent to percent respectively ’ there is an underpayment_of_tax for each of the years in issue petitioner was aware of his legal_obligation to file for the years preceding the years in issue and did in fact file returns for years prior to petitioner did not file returns for and or any years thereafter continued establishes is not attributable to fraud see omnibus budget reconciliation act of publaw_101_ sec c deleting code sec_6653 and sec a inserting the new code sec_6651 sec_6651 addition to the tax --in case of failure-- to file any return required under authority of subchapter_a of chapter there shall be added to the amount_required_to_be_shown_as_tax on such return percent of the amount of such tax if the failure is for not more than month with an additional percent for each additional month or fraction thereof during which such failure continues not exceeding percent in the aggregate sec_665l a f the bracketed percentages are substituted into sec_6651 pursuant to sec_6651 in cases where the failure_to_file is fraudulent - - petitioner’s failure_to_file income_tax returns for years subseguent to eventually became the subject of a criminal investigation petitioner has adopted various theories over the years in an attempt to explain his failure_to_file returns or pay federal_income_tax on his substantial income petitioner testified from i just said i’m not part of your system and i just did nothing i had state taxes taken from my pay i had federal taxes taken from my pay i made no effort to disrupt that i just said ‘hey i’m not bothering with you guys’ petitioner further testified well i also knew that the law required me supposedly to pay taxes and i took a stand against it back in petitioner’s testimony is in marked contrast to the representation that he and his enrolled_agent ms baptista made to respondent in the letter dated date requesting additional audit_reconsideration in that letter it was stated mr marsh has failed to file his and returns but the necessary information has been assembled and we should have the returns prepared in the very near future it must be categorically stated that mr marsh is not a tax_protester and is not willfully failing to file any return or to provide appropriate information to support returns filed it should not be held against him that he was badly represented by someone else - - in response to the criminal investigation petitioner wrote to respondent on date stating i have determined from written reliable legal advice from tax professionals and further research into the law that i am not liable or subject_to or for any_tax under title_26 and nothing i receive is subject_to tax under subtitle a i am not a ‘taxpayer’ as defined in sec_7701 a the remainder of the letter contains the pseudolegal argument that this court has had occasion to refer to as tax_protester rhetoric and legalistic gibberish see eg kearney v commissioner tcmemo_1999_12 in date petitioner was represented by an attorney who wrote respondent in an effort to avoid the criminal prosecution of his client and described petitioner as a naive citizen exposed to ‘tax protestor’ rhetoric and further stating when i petitioner’s attorney took the time to explain in detail the process by which federal appeals courts had rejected each of the positions on which he petitioner had relied mr marsh was shocked incredulous and mortified neither petitioner’s nor his attorney’s letters in attribute petitioner’s failure_to_pay_tax or file tax returns to a belief in hawaiian sovereignty at a conference in date with respondent at honolulu district council’s office neither petitioner nor his attorney mentioned hawaiian sovereignty as an explanation for petitioner’s noncompliance with the tax laws -- p7 - at trial petitioner a police officer testified that he did not believe he was required to file in or subsequent years because filing was voluntary and because of his growing belief in hawaiian sovereignty petitioner testified his post-1985 beliefs were based on the advice of a tax accountant a mr kailing the record is devoid of corroboration for petitioner’s testimony as to his growing belief in hawaiian sovereignty as a reason for his failure_to_file tax returns or pay taxes prior to his criminal trial in indeed the representations made by petitioner and his attorney in the record indicate petitioner held no such belief prior to his criminal trial we do not find to be credible petitioner’s testimony that he failed to file tax returns or pay taxes because he believed the tax system to be voluntary or because of his growing belief in hawaiian sovereignty rather the record clearly and convincingly demonstrates that after petitioner filed his return in the alleged reasons that petitioner used to justify his failure_to_file returns simply shifted from one rationale to another when it served petitioner’s purposes he and his agents made representations to the internal_revenue_service that he had been misled or misguided however after every such instance petitioner reverted to another justification for his continued noncompliance the only thing that remained - - constant was petitioner’s objective to dodge his responsibility to pay taxes based on the foregoing we believe that petitioner did not have a sincere belief in the reasons he now relies on for not complying with the law other facts support this conclusion for example petitioner collected a 4-percent general excise_tax from his customers but did not remit the funds so collected to the state of hawaii the fact that petitioner collected taxes and did not pay them to the state of hawaii leads us to believe that his purpose in collecting and retaining these state taxes was to enhance his financial status there was no high-minded or misguided purpose petitioner just did not want to pay tax petitioner’s conduct regarding his state tax obligations supports our conclusion that petitioner's failure_to_file or pay federal tax was not motivated by a sincere belief that he was under no legal_obligation to do so in 61_tc_249 affd 519_f2d_1121 5th cir we observed while evidence that a taxpayer was attempting to defraud another in a business transaction may not be direct evidence of fraud with intent to evade tax see 362_f2d_243 c a the court is entitled to consider such evidence along with other evidence in determining the intent of the taxpayer in doing certain acts because it is a fair inference that a man who will misappropriate another's funds to his own use through misrepresentation and concealment will not hesitate to - - misrepresent and conceal his receipt of those same funds from the government with intent to evade tax 111_f2d_987 c a the legal relevancy of such evidence is based upon logical principles which go to negate innocent intent 180_fsupp_268 n d ill 216_f2d_515 c a on date petitioner requested that the state of hawaii place his specialty masonry contractor’s license on inactive status afterward petitioner continued to operate that business on an unlicenced basis petitioner had gross_receipts from his masonry business of dollar_figure in around august of petitioner stopped using his business checking account in favor of conducting the masonry business using cash petitioner started paying his employees in cash as of date rather than by check petitioner received a large insurance settlement and converted the check into cash rather than depositing that amount into a bank account petitioner's conduct in operating an unlicenced business and switching to cash transactions is further evidence of petitioner’s fraudulent intent petitioner suggests that his failure_to_file and pay tax for the years through was not fraudulent because the internal_revenue_service was aware of his noncompliance the fact that petitioner’s failure_to_file returns was known to the irs does not preclude a finding of fraud disclosed defiance - - standing alone does not bar a finding of fraud see 829_f2d_828 9th cir affg tcmemo_1986_223 we find that petitioner knew of his obligation to pay tax and intentionally evaded the tax known to be owing by failing to report his income consequently we sustain respondent's determination of the applicability of the fraud additions to tax for each of the years and for and petitioner has not established any portion of the underpayment is not attributable to fraud addition_to_tax for failure to pay estimated_tax under sec_6654 for the years respondent determined that petitioner is liable for an addition_to_tax for failure to pay estimated income_tax under sec_6654 for the years unless the taxpayer demonstrates that one of the statutory exceptions applies imposition of this addition_to_tax is mandatory where prepayments of tax either through withholding or by making estimated guarterly tax_payments during the course of the taxable_year do not equal the percentage of total liability required under the statute see sec_6654 99_tc_202 75_tc_1 petitioner bears the burden of proving his entitlement --- - to any exception see 78_tc_304 petitioner has not filed returns for the years in issue or made any estimated_tax payments for those years nor has he shown that any of the statutory exceptions are applicable in this case we therefore sustain respondent's determination decision will be entered under rule


t c memo united_states tax_court dallas eric gravette sr petitioner v commissioner of internal revenue respondent docket no 7260-09l filed date dallas eric gravette sr pro_se kimberly l clark and john d davis for respondent memorandum findings_of_fact and opinion morrison judge the petitioner dallas gravette sr failed to pay his income-tax liabilities for and in order to collect the liabilities the irs office of appeals determined that the irs should levy on mr gravette’s assets under sec_6330 of the internal_revenue_code gravette challenges the determination of the office of appeals we sustain the determination findings_of_fact the irs sent a notice_of_intent_to_levy and notice of right to hearing to gravette this notice consisted of one page-- according to the stipulation of the parties but the stipulated page fails to state what type of tax the levy was intended to collect the amount of tax or the tax periods involved we surmise from other portions of the record that the notice was two pages rather than one and that the second page of the notice stated that the purpose of the levy was to collect gravette’s unpaid income-tax liabilities for and on date gravette requested a collection-review hearing in the request he said he challenged the irs levy to collect his income-tax liabilities for tax years through his request was made within the requisite days of the levy notice see sec_6330 giving 30-day requirement thus the request was a timely appeal of the irs proposal to levy to collect gravette’s tax_liabilities for and in hi sec_1all references to sections are to sections of the internal_revenue_code and all references to rules are to the tax_court rules_of_practice and procedure 2on date the irs wrote gravette to tell him that the irs had not issued a notice_of_intent_to_levy for the other years and that therefore he did not have a right to an administrative hearing to contest levies for those years request gravette stated that he lived at an address in the district of columbia on date gravette signed a one-year lease on a house in the district of columbia the house was at the address that was listed on his request for a hearing his fiancé shonna white signed the lease as a cotenant the two were required to pay rent of dollar_figure per month the record does not reflect how they shared the responsibility for the monthly rent payment the term of the lease was from date to date the lease agreement was eventually made a part of the administrative record meaning the set of documents that was considered by the office of appeals when it sustained the levy deborah douglas of the irs office of appeals was assigned to handle gravette’s collection-review hearing on date she wrote a letter to gravette notifying him that on date the office of appeals had received his case gravette submitted to douglas an irs form 433-a collection information statement for wage earners and self-employed individuals he also submitted supporting documentation the form 433-a which was dated date stated that gravette lived at the same address in the district of columbia that appeared on the lease that we discussed above gravette stated on the form 433-a that the date of the lease was date the date of final payment was date and the amount of the monthly payment was dollar_figure the form 433-a contained a blank for gravette to enter his monthly expenses for housing and utilities although the preprinted words stated that the housing and utilities expense includes rent mortgage payments and utilities gravette mistakenly listed only dollar_figure which was his estimate of his monthly utilities expense in the district of columbia gravette listed dollar_figure per month on a blank for court- ordered payments gravette submitted another form 433-a which like the first form 433-a had a date of date the preprinted words on the second form 433-a were different from those on the first form 433-a in at least one relevant respect unlike the first form 433-a the second form did not require the taxpayer to state specific facts regarding real_property rented by the taxpayer such as the date of the lease the date of the final rent payment and the amount of the monthly rent payment on the second form 433-a gravette stated that the housing and utilities expense was dollar_figure he did not explain how the dollar_figure was calculated we surmise that dollar_figure was the sum of the utilities expense of dollar_figure and a monthly rent of dollar_figure gravette again listed dollar_figure per month in court-ordered payments the trial record does not explain why gravette prepared the second form 433-a the second form 433-a was in the administrative record that was eventually considered by the office of appeals another document in the administrative record is a date report of gravette’s history of making child_support payments the report showed that gravette was required by court order to make payments of only dollar_figure per month the report showed that the actual payments that gravette had made over the last five months amounted to dollar_figure per month the report also showed that gravette owed over dollar_figure in back child_support on date gravette completed a form_656 offer_in_compromise he proposed to pay dollar_figure per month for months he stated that his offer would compromise his income_tax liabilities for and the basis for the offer was doubt that the irs could collect the tax_liabilities on date deborah douglas had a telephone conference with gravette as part of the collection-review hearing before the telephone conference douglas decided that gravette’s offer- in-compromise should be reviewed by boic and that if the offer- in-compromise was recommended for rejection the office of appeals would consider the offer 3boic is apparently a reference to a centralized irs unit for evaluating offers-in-compromise in date gravette moved from the district of columbia to boise idaho he and white signed a one-year lease on a house in boise for dollar_figure per month on date stephanie gage an irs offer examiner wrote a letter to gravette4 stating we have investigated your offer dated in the amount of dollar_figure we have made a preliminary decision to reject your offer for the following reason s your monthly income exceeds your expenses the decision to reject your offer is a preliminary decision made by collection personnel due to the fact that you have filed a request for a collection_due_process cdp hearing we are forwarding your case to appeals a final_determination on the offer will be issued by appeals in conjunction with the cdp case we surmise that gage relied on monthly income and expense estimates when considering the offer that the estimates assumed that gravette’s housing and utilities expense was dollar_figure per month and that gravette was informed of these estimates on date gravette wrote gage that i received your letter dated november rejecting my offer_in_compromise he continued i have enclosed irs form with this letter indicating my request for appeal of this matter he stated as you will see by the attached lease my housing costs are much higher than dollar_figure without adding the utility cost sec_4the record does not show the address to which gage’s letter was sent associated with daily living attached to the letter was a lease for the house in boise the lease required gravette and white as cotenants to pay dollar_figure per month the term of the lease was date to date the return address of the letter was the boise address that was on the lease attached to the letter was a form request for appeal of offer_in_compromise dated date on the form gravette stated that he disagreed with iet income expense table - housing and utilities costs for the following reason my monthly rent and utilities are much higher than the amount allowed copy of current lease attached on date deborah douglas sent a letter to gravette at his address in the district of columbia acknowledging that she had received his appeal of the rejection of his offer to pay dollar_figure to compromise income_tax liabilities for and the letter stated that gravette had not filed a form_1040 for and that gravette needed to file that return 5gravette probably meant dollar_figure not dollar_figure 6the form did not state any disagreement regarding court-ordered payments it is unclear what estimate of court- ordered payments gage relied on when she considered gravette’s date offer-in-compromise 7the record does not reveal why douglas did not consider gravette’s offer-in-compromise to cover or and pay any taxes due by date for the offer-in- compromise to be considered on date gravette sent douglas a copy of his income-tax return filed on that date the return reported wages of dollar_figure and business income of dollar_figure the return claimed that gravette was due a refund the address on the tax_return was the boise address on january or deborah douglas sent a letter to gravette at the boise address in the letter douglas stated that centralized offer_in_compromise had made a preliminary determination to reject gravette’s offer-in-compromise douglas stated that the offer-in-compromise had been forwarded to this office that is the office of appeals for review of gravette’s offer of dollar_figure to compromise total_tax liabilities of dollar_figure for the tax years and the letter enclosed an asset equity table and an income expense table that had been calculated by compliance the income expense table calculated that gravette would be able to pay the irs dollar_figure per month starting on date the table showed that in months gravette would pay off his liabilities which comprised dollar_figure for dollar_figure for and dollar_figure for the table also showed that over his lifetime gravette would be capable of paying the irs a total of dollar_figure in calculating 8the table did not show a liability for that gravette could pay dollar_figure per month to the irs the table assumed that gravette would pay only dollar_figure per month for housing and utili the table also reflected that court-ordered payments were dollar_figure douglas asked gravette to respond to the letter by date gravette did not respond as far as we can tell from the record on date the office of appeals determined that relief would not be granted from the notice_of_intent_to_levy to collect the and liabilities the determination stated that the reasonable collection potential--that is the amount the irs could collect from gravette--was dollar_figure the determination stated that total net equity from gravette’s assets was dollar_figure gravette’s monthly disposable income was determined to be dollar_figure a future income multiplier of months was used resulting in future disposable income of dollar_figure an income and expense table showed how the dollar_figure monthly disposable income was calculated income amount claimed amount allowed gross wages--primary tp total income expenses national standard housing and utilities transportation-- ownership costs- vehicle transportation-- ownership costs- transportation-- operating costs additional operating costs-- age mileage health care--insurance taxes income and fica court-ordered payments public transportation unreimbursed business total expenses monthly disposable income blank blank dollar_figure blank blank blank blank big_number -big_number dollar_figure dollar_figure dollar_figure dollar_figure blank blank dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure 1the reason the irs made no entry here and directly below may be that on the first form 433-a gravette did not enter wages or total income on the second form 433-a gravette entered dollar_figure for wages and dollar_figure for total income the reasonable collection potential was calculated by adding dollar_figure and dollar_figure on the basis of this estimate of reasonable collection potential dollar_figure the office of appeals determined that gravette could pay his tax_liabilities in full within the collection expiration statute date the total amount of gravette’s tax_liabilities was not stated in the determination the determination stated that an offer_in_compromise can not be recommended the determination stated you indicated you are unable to make monthly installment_agreement payments the determination stated that gravette did not dispute his liabilities gravette filed a petition with the tax_court to challenge the notice_of_determination at the time he was a resident of boise idaho gravette argues that appeals made two major errors first gravette argues that appeals should not have determined that his housing and utilities expense was dollar_figure his rent alone was dollar_figure he claims second gravette argues that the irs erred in determining that his child-support payments were only dollar_figure per month the correct number he alleges was dollar_figure opinion before the irs can collect tax_liabilities by levy it must offer the taxpayer a hearing with the irs office of appeals sec_6330 among the issues that may be raised by the taxpayer at the office of appeals are offers of collection alternatives such as offers-in-compromise sec_6330 in reviewing a rejection of an offer-in- compromise the tax_court decides whether the rejection was arbitrary capricious or without sound basis in fact or law and therefore an abuse_of_discretion 125_tc_301 affd 469_f3d_27 1st cir sec_7122 authorizes the irs to compromise civil tax cases in general the decision to accept or reject an offer as well as the terms and conditions agreed to are left to the discretion of the irs sec_301_7122-1 proced admin regs however sec_301_7122-1 proced admin regs provides no offer to compromise may be rejected solely on the basis of the amount of the offer without evaluating that offer under the provisions of this section and the secretary’s policies and procedures regarding the compromise of cases the three possible grounds for accepting a compromise of a tax_liability are doubt as to liability doubt as to collectibility and promotion of effective tax_administration sec_301_7122-1 proced admin regs gravette attempted to justify his offer- in-compromise on doubt as to collectibility doubt as to collectibility exists in any case where the taxpayer’s assets and income are less than the full amount of the liability sec_301_7122-1 proced admin regs the irs will generally compromise a liability on the basis of doubt as to collectibility only if the liability exceeds the taxpayer’s reasonable collection potential reasonable collection potential is that amount less than the full liability that the irs could collect through means such as administrative and judicial collection remedies murphy v commissioner supra pincite the office of appeals did not abuse its discretion in evaluating gravette’s offer the administrative record showed that gravette had an ongoing child-support obligation of dollar_figure per month gravette also had a substantial arrearage of child_support payments the total amount of the arrearage was reflected on the child-support report that he submitted to appeals on date the state court ordered gravette to pay dollar_figure per month in back child_support but this court order did not exist at the time the office of appeals determined to sustain the proposed levy and therefore the order cannot serve as a basis for challenging the determination of the office of appeals the office of appeals did not err in concluding that gravette’s child_support obligation was dollar_figure per month the office of appeals calculated that gravette’s housing and utilities expense was dollar_figure per month gravette argues that the office of appeals erred by not accepting his estimate of dollar_figure which was equal to his dollar_figure rent in the district of columbia and his dollar_figure estimate of utilities in the district of columbia we can see why the dollar_figure estimate was not accepted by the office of appeals the forms 433-a were submitted by gravette when he lived in the district of columbia gravette moved to boise in date thus the forms 433-a were outdated by the time of 9the dollar_figure amount was equal to the child-support payments that gravette had made during the last months covered by the child-support report divided by the determination in addition the forms 433-a were confusing even as an attempt to show gravette’s housing and utilities expense when he lived in the district of columbia the first form 433-a listed his housing and utilities expense as only dollar_figure even though his rent was dollar_figure the second form 433-a did not completely resolve the confusion the form 433-a listed his housing and utilities expense as dollar_figure apparently the sum of dollar_figure and dollar_figure although this dollar_figure estimate was substantiated by copies of gravette’s utilities bills and by the dollar_figure per month lease gravette did not explain how much of the dollar_figure rent was his responsibility and how much was white’s after gravette moved to boise he submitted to the irs his boise lease which showed a rent obligation of dollar_figure but the boise lease like the district of columbia lease showed that gravette had a cotenant white gravette did not explain how he and white allocated the rent responsibility furthermore gravette failed to estimate his utilities expense in boise he notified the irs only that his boise housing and utilities expense was much higher than dollar_figure meaning that the sum of his boise rent and his boise utilities expense was greater than his district of columbia utilities expense how much greater he did not say when the office of appeals sent gravette a table estimating that gravette’s housing and utilities expense was dollar_figure per month this was gravette’s opportunity to explain what his rent and utilities expense in boise was he did not do so in the light of his lack of response the office of appeals did not err in using dollar_figure as the estimate gravette contends that the office of appeals erred in other ways he argues that the office of appeals erred in calculating his monthly income because it failed to consider that because of the sporadic nature of his work he was unemployed several months out of the year but the office’s estimates of gravette’s monthly income were based on monthly averages of gravette’s yearly income this yearly data took into account the monthly variations in gravette’s income next gravette argues that douglas had prior involvement in his case because douglas worked on gravette’s case file for more than two months from the time she received the case until the telephone conference on date this is not a prior involvement prohibited by the statute see sec_301_6330-1 q a-d4 proced admin regs defining prior involvement as involvement in a matter other than a cdp hearing gravette also argues that he raised the matter of his underlying tax_liabilities at the administrative hearing we disagree although gravette told the office of appeals that he was unable to pay his tax because his employer failed to withhold income_tax from his wages it was not apparent that this was a challenge to the amounts of his income_tax liabilities the office of appeals’ determination to sustain the proposed levy was not an abuse_of_discretion to reflect the foregoing decision will be entered for respondent


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to plr-126709-02 cc psi b2 date date legend x a state date dear this responds to your letter dated date submitted by you as x’s general_partner requesting permission to revoke an election made pursuant to sec_761 of the internal_revenue_code that was intended to exclude x from subchapter_k of chapter of the code the information submitted states that x is a state limited_partnership on date x sent an election to the appropriate service_center the election stated that x qualified as an investment_partnership under sec_1_761-2 of the income_tax regulations and was electing to exclude itself from subchapter_k pursuant to sec_761 x requests permission to revoke that election sec_761 provides that under regulations the secretary may at the election of all the members of an unincorporated organization exclude such organization from the application of all or part of subchapter_k if it is availed of for investment purposes only and not for the active_conduct of a business if the income of the members of the organization may be adequately determined without the computation of partnership taxable_income plr-126709-02 sec_1_761-2 provides that an unincorporated organization described in sec_1_761-2 may be excluded from the application of all or a part of the provisions of subchapter_k such organization must be availed of for investment purposes only and not for the active_conduct of a business the members of such organization must be able to compute their income without the necessity of computing partnership taxable_income any syndicate group pool or joint_venture which is classifiable as an association or any group operating under an agreement which creates an organization classifiable as an association does not fall within these provisions sec_1_761-2 provides that where the participants in the joint purchase retention sale_or_exchange of investment property-- i own the property as coowners ii reserve the right separately to take or dispose_of their shares of any property acquired or retained and iii do not actively conduct business or irrevocably authorize some person or persons acting in a representative capacity to purchase sell or exchange such investment_property although each separate participant may delegate authority to purchase sell or exchange his share of any such investment_property for the time being for his account but not for a period of more than a year then such group may be excluded from the application of the provisions of subchapter_k under the rules set forth in paragraph b of this section the members of a limited_partnership own an interest in the partnership they are not coowners of the property owned by the partnership and therefore x is not an organization described in sec_1_761-2 based solely on the facts submitted and the representations made we conclude that x’s election was not valid because x did not meet the requirement set forth in sec_1_761-2 that the participants own the property as coowners therefore x is subject_to subchapter_k and is required to file as a partnership for federal tax purposes except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transaction described above under any other provision of the code this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely j thomas hines chief branch associate chief_counsel passthroughs and special industries


internal_revenue_service number release date index number ----------------------------------------- --------------------------------------------------------------- --------- ------------------- ----------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------- id no ------------- telephone number -------------------- refer reply to cc ita b05 plr-146169-08 date date ty ------- ty ------- legend grantor spouse grandchild grandchild grandchild date first trust ---------------------------------------------------- ------------------------ --------------------------- ------------------------ ---------------------------- ------------------------- ------------------------------------------------------------------------------------------- ----------------------------------------- ------------------- ----------------- --------------------------------------------------------------------------------------- ----------------------------- daughter -------------------------------------------------------------------------------------- first trust --------------------------------------------------------------------------- first trust first trust ---------------------------------------------------------------------------- second trust ---------------------------------------------------------------------------- date date second trust second trust second trust date date date state statute court --------------------- ------------------ ----------------------- ----------------------------------------- ---------------------------------------------------------- ----------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ plr-146169-08 date ------------------ dear ---------------- this is in response to your request for private_letter_ruling dated date for each of first trust first trust first trust second trust second trust and second trust in your capacity as trustee of each of these six trusts you have asked for two rulings for each of these trusts first you have requested a ruling for each trust that the proposed trust consolidations of first trust and second trust will not result in recognition of gain_or_loss under sec_1001 of the internal_revenue_code with respect to any trust assets second you have requested a ruling that the proposed consolidations of the first trusts and the second trusts will not result in any loss of current protection from the generation-skipping_transfer gst tax this private_letter_ruling pertains specifically to second trust facts the facts submitted and representations made are as follows grantor and spouse created an irrevocable_trust first trust on date a date before date for the benefit of their grandchildren first trust was immediately divided into two equal shares one for the benefit of their son’s children and one for the benefit of daughter’s children this ruling concerns the trusts established for the benefit of daughter’s children under the terms of first trust no distributions were to be made from the trust established for daughter’s children until daughter had children by birth or adoption subsequently daughter had children grandchild grandchild and grandchild on the birth of each grandchild the trust established for daughter’s children was subdivided into separate trusts one trust for the benefit of each grandchild as follows first trust for the benefit of grandchild first trust for the benefit of grandchild and first trust for the benefit of grandchild there have been no additions to first trust or first trust first trust or first trust since date on date grantor and spouse created a joint revocable_trust second trust second trust was amended and restated on date grantor died on date a date after date under the terms of second trust upon grantor’s death a portion of the second trust attributable to grantor’s property passed to a separate trust for the benefit of daughter and her descendants as a consequence of daughter’s disclaimer this portion passed to separate trusts second trust for the benefit of grandchild second trust for the benefit of grandchild and second trust for the benefit of grandchild it is represented that daughter’s disclaimer constituted a qualified_disclaimer that satisfied the requirements of sec_2518 further it is represented that a form_706 united_states estate and generation-skipping tax_return was filed for grantor’s estate and that on the return a portion of grantor’s gst_exemption was plr-146169-08 allocated with respect to the transfers to second trust second trust and second trust in sufficient amount such that each trust then had an inclusion_ratio of zero for purposes of sec_2642 spouse died on date under the terms of second trust on spouse’s death a portion of the remaining second trust corpus attributable to spouse’s property passed to a separate trust for the benefit of daughter and her descendants as a consequence of daughter’s disclaimer this portion passed in equal shares to second trust second trust and second trust it is represented that daughter’s disclaimer constituted a qualified_disclaimer that satisfied the requirements of sec_2518 further it is represented that a form_706 united_states estate and generation-skipping tax_return was filed for spouse’s estate and that on the return a portion of spouse’s gst_exemption was allocated with respect to the additional transfers to second trust second trust and second trust in sufficient amount such that the inclusion_ratio with respect to each trust continued to be zero for purposes of sec_2642 see sec_26_2642-4 under the terms of first trust first trust and first trust the child of daughter who is the primary beneficiary of the trust is entitled to distributions of principle and income in the trustee’s discretion to provide for the beneficiary’s health maintenance support and education the primary beneficiary is also entitled to of the remaining trust principle at age of the then remaining principal at age of the then remaining principal at age and the balance of the trust estate at age if the primary beneficiary fails to survive to age the balance of the trust passes per stirpes to the primary beneficiary’s then living descendants or if there are no living descendants then to the primary beneficiary’s then living siblings or per stirpes to the descendants of a predeceased sibling or if there are no such persons then living then to the living grandchildren of daughter’s parents grantor and spouse under the terms of first trust first trust and first trust unless a_trust is sooner terminated under the terms of the trust each trust must terminate no later than years after the death of the last survivor of grantor and spouse’s descendants who were living on date further subject_to this provision all interests in the three trusts will necessarily vest no later than date when the youngest primary beneficiary attains the age of under the terms of second trust second trust and second trust the child of daughter who is the primary beneficiary of the trust is entitled to receive all trust income at least quarterly in addition to the extent income is insufficient the trustee has the discretion to distribute sufficient principle to provide for the beneficiary’s health maintenance support and education the primary beneficiary is also entitled to of the remaining trust principle at age of the then remaining principal at age of the then remaining principal at age and the balance of the trust estate at age plr-146169-08 if the primary beneficiary fails to survive to age then subject_to the limitations described below the balance of the trust passes per stirpes to the primary beneficiary’s then living descendants or if there are no living descendants then to the primary beneficiary’s then living siblings or per stirpes to the descendants of a predeceased sibling or if there are no such persons then living then to the descendants of grantor and spouse by right of representation however the trust contains several additional provisions impacting on this distribution scheme under the terms of the trusts if any property passes to anyone under the age of other than a grandchild who is a primary beneficiary a new trust is established for that person that will continue until that person attains age further property passing to a person who already has a_trust operating under the document will be added to that trust in the event that all descendants of grantor and spouse die prior to having attained age and within the applicable perpetuities period then specified amounts are to be distributed to named individuals or their issue with the balance distributed to certain educational institutions finally unless a_trust is sooner terminated under the provisions of the trust each of second trust second trust and second trust must terminate no later than years after the death of the last survivor of those of grantor and spouse’s descendants who were living on the date of death of the first spouse to die that is the date of grantor’s death on date court pursuant to daughter’s petition issued an order contingent on receipt of a favorable private_letter_ruling from the irs consolidating the trusts under the order first trust is to be consolidated with second trust first trust is to be consolidated with second trust and first trust is to be consolidated with second trust the court decree provides in relevant part that the contemplated consolidation shall not alter or amend the beneficial interests of any present or future beneficiaries of the trust vested or contingent because there are differences in the distribution provisions of first trust first trust and first trust as compared to second trust second trust and second trust each consolidated trust will have two trust shares a first trust share and a second trust share the first trust share will remain subject_to the distribution provisions of first trust and the second trust share will remain subject_to the distribution provisions of second trust under the order a distribution provision is defined as any provision that could impact the rights and remedies of any beneficiaries including distribution rights rights to accounts and rights to seek redress for breach of trust further the term includes the perpetuity savings clauses contained in each respective trust the second trust provisions governing the appointment of trustees will apply to each consolidated trust the court order also provides a comprehensive statement and accompanying exhibit describing the methodology to be used to determine each share on a continuing basis and the methodology to be used in accounting for trust distributions and expenses state statute provides that if the terms of two or more trusts are substantially_similar on petition by a trustee or beneficiary the court for good cause shown may combine the plr-146169-08 trusts if the court determines that administration as a single trust will not defeat or substantially impair the accomplishment of the trust purposes of the interests of the beneficiaries law and analysis issue you have requested a ruling for each trust that the proposed trust consolidations of first trust and second trust will not result in recognition of gain_or_loss under sec_1001 of the internal_revenue_code code with respect to any trust assets sec_1001 provides that the gain from the sale_or_other_disposition of property is the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss is the excess of the adjusted_basis provided in sec_1011 over the amount_realized sec_1001 defines the amount_realized from the sale or disposition of property as the sum of any money received plus the fair_market_value of any property received sec_1001 provides that except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1_1001-1 of the income_tax regulations provides as a general_rule that except as otherwise provided in subtitle a the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained for purposes of sec_1001 in an exchange of property each party to the exchange gives up a property interest in return for a new or additional property interest such an exchange of property is a disposition under sec_1001 sec_1_1001-1 an exchange of property results is the realization of gain under sec_1001 if the properties exchanged are materially different 499_us_554 there is a material difference when the exchanged properties embody legal entitlements different in_kind or extent or if they confer different rights and powers u s pincite in 419_f2d_999 7th cir aff'g 293_fsupp_1106 n d ill cert_denied 397_us_1041 the court held that a nonrealization event occurs when despite the form of the transaction in substance the taxpayer holds the same property interest after a transaction as before is as secure with respect to the interest after the transaction as before and there is no realistic difference in the value of the property interest held as a result of the transaction plr-146169-08 based on the information submitted and the representations made the beneficiaries of second trust will possess the same interests before and after the consolidation of first trust and second trust and the proposed consolidation will merely be a merging of the assets for administrative convenience accordingly we conclude that with respect to second trust no sale_or_exchange under sec_1001 will occur as a result of the proposed merger and consolidation of first trust and second trust in addition no gain_or_loss will be realized by first trust or second trust on any trust assets or by any beneficiaries as a result of the proposed merger and consolidation issue you have also requested a ruling that the proposed consolidation of trusts will not result in any loss of current protection from the gst tax sec_2601 imposes a tax on each generation skipping transfer sec_2602 provides that the amount of the gst tax is determined by multiplying the taxable_amount by the applicable_rate sec_2641 provides that the term applicable_rate means with respect to any gst transfer the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer under sec_2642 the inclusion_ratio with any property transferred in a generation- skipping transfer is generally defined as the excess of over the applicable_fraction the applicable_fraction as defined in sec_2642 is a fraction the numerator of which is the amount of gst_exemption under sec_2631 allocated to the trust or to property transferred in a direct_skip and the denominator is the value of the property transferred to the trust or involved in the direct_skip sec_2631 provides generally that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption amount which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor under b a of the tax_reform_act_of_1986 act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the generation-skipping_transfer_tax shall not apply to any generation-skipping_transfer under a_trust that was irrevocable on date but only to the extent that the transfer is not made out of corpus added to the trust after date or out of income attributable to corpus so added sec_26_2601-1 provides that any trust in existence on date will be considered an irrevocable_trust except as provided in sec_26_2601-1 or c relating to property includible in the grantor’s gross_estate under sec_2038 and sec_2042 sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is plr-146169-08 exempt from the generation-skipping_transfer_tax under sec_26_2601-1 or will not cause the trust to lose its exempt status the regulation provides that the rules contained in the paragraph are applicable only for purposes of determining whether an exempt trust retains its exempt status for generation-skipping_transfer_tax purposes the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy b i a b or c by judicial reformation or no judicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust furthermore a modification that is administrative in nature that only indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered a shift in a beneficial_interest in a_trust sec_26_2601-1 example considers a situation where the grantor in establishes an irrevocable_trust for grantor's child and the child's issue in grantor's spouse also established a separate irrevocable_trust for the benefit of the same child and issue the terms of the spouse's trust and grantor's trust are identical in the appropriate local court approved the merger of the two trusts into one trust to save administrative costs and enhance the management of the investments the merger of the two trusts does not shift any beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the merger in addition the merger does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust therefore the example concludes that the trust that resulted from the merger will not be subject_to the provisions of chapter of the internal_revenue_code in the present case first trust first trust and first trust were irrevocable prior to date and as such are not subject_to the gst tax by reason of sec_26_2601-1 second trust second trust and second trust are exempt from the gst tax because it is represented that the executor of grantor’s estate and the executor of spouse’s estate allocated a sufficient amount of gst_exemption to grantor’s and spouse’s respective transfers to these trusts such that these trusts have an inclusion_ratio of zero as noted above the rules in sec_26_2601-1 apply in the case of trusts that are exempt from gst tax because the trusts were in existence and irrevocable prior to plr-146169-08 date no guidance has been issued concerning modifications that may affect the status of trusts that are exempt from gst tax because sufficient gst_exemption was allocated to the trusts to result in an inclusion_ratio of zero at a minimum a modification that would not affect the gst status of a grandfathered trust should similarly not affect the exempt status of such a_trust based on the facts presented and representations made we conclude that the judicial consolidation of first trust and second trust first trust and second trust and first trust and second trust as described above will not shift any beneficial_interest in the trusts to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification in addition the consolidation of trusts will not extend the time for vesting of any beneficial_interest in the trusts beyond the period provided for in first trust and second trust further the modification subjecting the consolidated trusts to the second trust provisions governing the appointment of trustees is administrative in nature conclusion sec_1 based on the information submitted and the representations made we conclude that no sale_or_exchange under sec_1001 will occur as a result of the proposed merger and consolidation with respect to second trust in addition no gain_or_loss will be realized by first trust or second trust on any trust assets or by any beneficiaries as a result of the proposed merger and consolidation based on the facts submitted and the representations made we also conclude that the court order providing for the consolidation of first trust and second trust first trust and second trust and first trust and second trust will not cause the first trust share of each consolidated trust to be subject_to the generation-skipping_transfer_tax imposed by chapter of the internal_revenue_code further the consolidation pursuant to the court order will not cause the second trust share of each consolidated trust to have an inclusion_ratio in excess of zero except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative plr-146169-08 a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely george f wright senior technician reviewer branch office_of_chief_counsel income_tax accounting enclosure cc


internal_revenue_service department of the treasury index number washington dc person to contact telephone number refer reply to plr-109457-00 cc dom p si date date number release date legend partnership x d dear this responds to a letter submitted on behalf of partnership requesting that partnership be given an extension of time in which to make an election under sec_754 of the internal_revenue_code facts x a partner in partnership died on d partnership's tax_return for the taxable_year was filed without a sec_754 election partnership represents that it has acted reasonably and in good_faith that granting relief will not prejudice the interests of the government and that it is not using hindsight in making the election law and analysis under sec_754 a partnership may elect to adjust the basis of partnership property where there is a distribution_of_property or a transfer of a partnership_interest the election applies to all distributions of property by the partnership and to all transfers of interests in the partnership during the taxable_year that the election applies and all subsequent taxable years sec_1_754-1 of the income_tax regulations provides that an election plr-109457-00 under sec_754 is made in a written_statement filed with the partnership return for the taxable_year during which the distribution or transfer occurs for the election to be valid the return must be filed no later than the time for filing for the taxable_year including extensions under sec_301_9100-1 of the procedure and administration regulations the commissioner may 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 code except subtitles e g h and i if the taxpayer demonstrates to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting the relief will not prejudice the interests of the government sec_301_9100-1 defines the term regulatory election as an election whose deadline is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-2 and provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 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 conclusion in the present situation the requirements of sec_301_9100-1 and have been satisfied as a result partnership is granted an extension of time of thirty days following the date of this letter to make a sec_754 election the election should be made in a written_statement filed with the district_director for association with partnership's tax_return a copy of this letter should be attached to the statement filed with the district_director a copy of this letter is enclosed for that purpose 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 the appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transactions described under any other provision of the code specifically no opinion is expressed concerning whether partnership is a partnership for federal tax purposes this ruling is directed only to the taxpayer on whose behalf it was requested plr-109457-00 section k provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file in this office a copy of this letter is being sent to the taxpayer sincerely yours s paul f kugler assistant chief_counsel passthroughs and special industries