department of the treasury int ernal revenue service washington d c o f f i c e o f c h i e f c o u n s e l date uils number release date cc tege eoeg et1 wta-n-110700-00 memorandum for director office of employment_tax administration and compliance attn charles m harvel from acting chief employment_tax branch office of division counsel associate chief_counsel tax exempt and government entities subject corporate officer compensation and classification issues as a follow-up to the advice we issued in date irs cca irs cca lexi sec_1 you have asked for additional technical_advice involving several areas related to corporate officer compensation and classification guidance and clarification in these areas for clarity these issues have been separately numbered and discussed below we welcome the opportunity to provide additional written questions presented are corporate officers entitled to treatment under sec_530 of the revenue act of and if so is submission of a form_1099 sufficient to establish the corporation’s treatment of that worker as an independent_contractor when is it appropriate to issue a notice_of_determination concerning worker classification notice_of_determination under sec_7436 when the worker involved is a corporate officer is the classification settlement program csp available when compensation to a corporate officer is mischaracterized rather than when the officer’s worker classification is incorrect are the sec_3509 rates appropriate for application in the context of corporate officer misclassification brief answer sec_1 corporate officers are entitled to treatment under sec_530 further submission of a form_1099 may be sufficient to establish a corporation’s treatment of the officer as an independent_contractor wta-n-110700-00 where an audit of a corporation has resulted in an actual controversy as to the classification of a corporate officer as an employee for employment_tax purposes or where the service has determined that the corporation is not entitled to sec_530 relief a notice_of_determination must be issued where a corporate officer’s compensation has been mischaracterized as opposed to a corporate officer’s status being misclassified csp relief is not available sec_3509 rates are appropriate for application where the status of a corporate officer has been misclassified discussion sec_530 relief for corporate officers and submission of a form_1099 as sufficient treatment for independent_contractor status under sec_530 of the revenue act of termination of certain employment_tax liability is appropriate where the taxpayer did not treat the individual as an employee for any period all required federal tax returns reflect the taxpayer’s consistent treatment of the individual as a non-employee and the taxpayer had a reasonable basis for not treating the individual as an employee additionally sec_530 requires that the taxpayer not have treated any individual in a substantially_similar position as an employee for any period however sec_530 contains specific exceptions from employment_tax liability relief under sec_530 specifically in the context of a three-party service arrangement where a business provides workers to a client sec_530 relief is unavailable if a worker provides services as an engineer designer drafter computer programmer systems analyst or other similarly skilled worker engaged in a similar line of work revenue act of sec_530 the language of sec_530 contains no specific exclusion which would prevent a taxpayer from obtaining sec_530 relief if the service determined that its corporate officers were employees indeed when congress was considering exceptions to sec_530 relief its intent was to except workers under the common_law rules retained by businesses which provide technical services see independent_contractor or employee training materials training rev tpds 84238i pincite- accordingly section of the tax_reform_act_of_1986 c b vol amended sec_530 by adding the specific exclusions under sec_530 corporate officers are not included in this exclusion furthermore section dollar_figure of revproc_85_18 specifically states that f or purposes of sec_530 of the act the term employee means employees under sec_3121 sec_3306 and sec_3401 of the code revproc_85_18 1985_1_cb_518 corporate officers are defined as employees under sec_3121 sec_3306 and sec_3401 although revproc_85_18 explains that for sec_530 relief the term employee means those individuals defined as employees under sec_3121 sec_3306 and sec_3401 it has been suggested that the intent of congress was to limit this wta-n-110700-00 relief to common_law employees indeed h_r rep no 95th cong 2nd sess c b vol pincite notes that in general the bill was intended to provide an interim solution involving controversies regarding whether certain individuals were employees under interpretations of the common_law however the corresponding senate report s rep no 95th cong 2nd sess pincite noted that w ith certain limited statutory exceptions the classification of particular workers or classes of workers as employees or independent contractors self-employed persons for purposes of federal employment_taxes must be made under common_law rules c b vol pincite emphasis added the report also noted that g enerally the basis for determining whether a particular worker is an employee or independent_contractor is the common_law test of control id emphasis added further the report noted when explaining the reason for the change that it was appropriate to provide interim relief for taxpayers who are involved in employment_tax status controversies with the service id pincite the senate's explanation did not indicate that sec_530 relief was limited to controversies surrounding determinations of employee status made under common_law rules but rather to taxpayers involved with employment status controversies common_law or otherwise the language of sec_530 makes no statement that indicates that this treatment is applicable to common_law employees only indeed although sec_530 specifically lists the exceptions to sec_530 no corporate officer exception is included additionally sec_104 a of the employment_tax handbook explains that for purposes of sec_530 relief the workers involved must be defined as employees under sec_3121 also sec_104 explains that corporate officers are employees under sec_3121 for sec_530 relief purposes see also employment_tax handbook sec_104 further revproc_85_18 specifically indicates that corporate officers are employees for the purposes of sec_530 relief therefore if a taxpayer did not treat a corporate officer as an employee and meets the other sec_530 requirements for relief from employment_taxes the taxpayer would be entitled to sec_530 relief consideration regarding whether submission of a form_1099 is sufficient to establish the taxpayer’s treatment of corporate officers as independent contractors rather than employees for purposes of sec_530 relief section dollar_figure of revproc_85_18 interprets the word treat within the context of a sec_530 relief determination that revenue_procedure includes guidelines for use when determining whether a taxpayer did not treat an individual as an employee for any period for sec_530 relief purposes these guidelines note that treatment as an employee includes such actions as withholding income_tax or federal_insurance_contributions_act fica tax from the individual’s wages or filing employment_tax returns for a period with respect to the individual where the taxpayer treats the individual as a non-employee by filing a form_1099 this would support a determination that the taxpayer did not treat the individual as an employee as required under sec_530 however it must be noted that wta-n-110700-00 this determination is highly fact specific and that sec_530 requires review of several additional related factors to determine if employment_tax relief is appropriate the taxpayer’s filing of a form_1099 for the individual must be consistent with its treatment of the individual as a non-employee revenue act of sec_530 further the taxpayer must also not have treated any individuals with substantially_similar positions as employees for employment_tax purposes for any period after revenue act of sec_530 finally the taxpayer must have had some reasonable basis for treating the individual as a non-employee revenue act of sec_530 when asking if sec_530 applied to all corporate officers you also asked how revrul_82_83 affected treatment of corporate officers under sec_530 revrul_82_83 involved a corporation that treated its officers as independent contractors without reliance on any safe haven basis under sec_530 b or c and characterized their compensation as draws rather than as salaries revrul_82_83 c b pincite additionally the officers were compensated as independent contractors for services that are typical and customary for officers to perform ie fundamental decisions regarding corporate operations and that are rarely delegated to independent contractors id pincite the ruling explained that i t is a question of fact in all cases whether officers of a corporation are performing services within the scope of their duties as officers or whether they are performing service as independent contractors id based on those facts it was held that the corporation was not entitled to sec_530 relief because there was no reasonable basis for it to treat its officers as non-employees even with a liberal interpretation of the reasonable basis requirement in sec_530 revrul_82_83 provides useful guidance when evaluating whether a corporation had some reasonable basis for treating corporate officers as non- employees as required by sec_530 it also can serve as an example to illustrate that sec_530 has two separate threshold requirements that must be met prior to application - treatment and reasonableness the initial requirement is that a taxpayer must properly treat the individual as a non-employee including the reporting requirements and consistency_requirements then if properly treated as a non- employee that treatment must have been reasonable reasonableness can be established by the use of statutory standards reasonable reliance on one of the three standards provided in sec_530 or by some other means both requirements are highly fact specific and revrul_82_83 illustrates that although the officers might have been properly treated as non-employees that treatment was not reasonable under the facts of that case therefore filing a form_1099 may establish that a taxpayer did not treat a corporate officer as an employee where that filing was consistent with its treatment of the officer as a non-employee in other non-filing contexts and where other individuals with substantially_similar positions were not treated as employees then prior to application of sec_530 relief it must be separately determined whether the taxpayer also had a reasonable basis for treating the officer as a non-employee based on the statutory standards or by some other means wta-n-110700-00 notice_of_determination issuance where the worker is a corporate officer sec_7436 of the internal_revenue_code provides the tax court’s jurisdictional requirements in order for it to review determinations made by the service that workers are employees for purposes of subtitle c of the code or that the person for whom services is performed is not entitled to treatment under sec_530 of the revenue act of specifically sec_7436 describes the tax court’s authority to review such determinations upon the filing of a petition if in connection with an audit of any person there is an actual controversy involving a determination by the secretary as part of an examination that - one or more individuals performing services for such person are employees of such person for purposes of subtitle c or such person is not entitled to the treatment under subsection a of sec_530 of the revenue act of with respect to such individual this language describes the three requirements that must be met before the tax_court can review a service determination see t c rule b because a prerequisite to tax_court review is that the taxpayer received a notice_of_determination the requirements of sec_7436 must also be met prior to the issuance of a notice_of_determination see notice_98_43 1998_33_irb_13 see also revproc_99_28 at sec_4 indeed revproc_99_28 states in sec_4 that employment_taxes dependent upon the determination of an individual’s status as an employee or upon a determination of the application of sec_530 cannot be assessed unless the taxpayer has been given an opportunity to file a petition for review by the tax_court regarding those issues therefore the requirements for issuing a notice_of_determination are that an audit was conducted ie the service did not determine that employment_taxes were due as the result of non-audit procedures such as the discovery of mathematical errors or that workers should be classified as employees based on a private_letter_ruling or an evaluation of a form ss-8 that there is an actual controversy eg not purely an academic exercise - taxes will be assessed as a result of the determination and the taxpayer must have been determined to be the employer and either a one or more of the individuals that provided service for the taxpayer were employees for the purposes of subtitle c ie federal_insurance_contributions_act fica federal_unemployment_tax_act futa and railroad_retirement_tax_act rrta or b that the taxpayer is not entitled to relief under sec_530 however notice_98_33 i r b pincite notes that in order to provide taxpayers with the opportunity to resolve both issues in one judicial determination the service will issue a notice_of_determination only after it has determined both that a person providing service is an employee and that the taxpayer is not entitled to relief under sec_530 ie requirements a and b above thus in the context of corporate officer misclassification a notice_of_determination must be issued where an audit of a corporation has resulted in an actual controversy as to the classification of corporate officers as employees for employment wta-n-110700-00 tax purposes or where the service determined that the corporation is not entitled to sec_530 relief examples of cases where issuance of a notice_of_determination would be inappropriate include where a corporation concedes both the classification issue and the sec_530 relief issue indicated by a signed closing_agreement which explicitly indicates a waiver of restrictions on assessment in sec_7436 and sec_6213 creating a lack of actual controversy see notice_98_33 i r b pincite where the audit involves employment-related issues not arising under subtitle c eg the classification of corporate officers for pension_plan coverage or treatment of individual income_tax deductions id pincite where the service determination was not made as part of an audit of the corporation id and where the corporation already treats its officers as employees by withholding income taxes and the employee portion of the fica_taxes by paying the employer’s portion of the fica_taxes and by issuing forms w-2 to the officers and the issue is whether certain payments were wages subject_to employment_tax conversely examples of cases where issuance of a notice_of_determination would be appropriate include where a corporation conceded neither the classification issue nor the sec_530 relief issue where a corporation concedes either the classification issue or the sec_530 relief issue where the service determination was made as part of an audit and involved employment_taxes and where the corporation had not already treated its officers as employees perhaps one of the scenarios most frequently encountered by examiners is where a corporation treats corporate officers as independent contractors and all payments as payments to independent contractors by filing forms and not filing forms w-2 where the service proposes an assessment of employment_taxes for payments as remuneration for services performed as corporate officers and the corporation did not treat the officers as employees ie filed forms a controversy would exist as to whether the officers were employees therefore a notice_of_determination should be issued a related controversy would exist regarding the nature of the services compensated although regulations indicate that generally corporate officers are employees of the corporation regulations also indicate that an officer is not considered an employee of the corporation where the officer performs only minor services and does not receive and is not entitled to receive any remuneration sec_31_3401_c_-1 further directors of a corporation serving in that capacity are not employees of the corporation id csp relief where compensation to a corporate officer has been mischaracterized the classification settlement program csp establishes standard settlement agreements in worker classification cases and allows businesses and tax examiners to resolve worker classification cases as early as possible in the administrative process see ir i r b lexi sec_76 fs-96-5 i r b lexi sec_75 employment_tax handbook sec_104 cases within the csp involve determinations by the service that a worker is an employee and that the taxpayer is not entitled to sec_530 relief wta-n-110700-00 where a business issued timely forms for payments it made to a corporate officer and treated that officer as an independent_contractor the business is eligible for the csp employment_tax handbook sec_104 however sec_104 of the employment_tax handbook explains that the csp is available exclusively for worker classification issues because csp is available exclusively for worker classification issues the csp is appropriate for use where the business clearly meets the sec_530 relief requirements but would rather treat workers as employees employment_tax handbook sec_104 a csp offer for prospective treatment allows the taxpayer to begin treating the workers as employees without negating their claim for sec_530 relief as to prior years id sec_104 specifically excludes for csp consideration cases which involve reclassifying distributions to officers shareholders as wages therefore for example where a taxpayer already treated an officer shareholder as an employee and the service determined that some profit distributions should be characterized as wages the case would not be eligible for the csp per sec_104 of the employment_tax handbook additionally sec_104 states that the csp is not available for issues other than worker classification which includes cases in which a threshold issue such as the nature of a payment as dividends or wages has not been resolved at the examination level the csp is available exclusively for worker classification issues employment_tax handbook sec_104 accordingly csp is not available to resolve issues involving the nature of compensation paid to corporate officers corporate officer status misclassification and application of sec_3509 rates sec_3509 of the internal_revenue_code reduces an employer’s liability for income_tax_withholding and the employee portion of the fica_taxes where the employer failed to deduct and withhold those taxes because it treated the employee as a non- employee that liability is reduced to of the employee’s wages for income_tax_withholding and of the employees’ portion of the fica tax sec_3509 however if the employer failed without reasonable_cause to comply with applicable information reporting requirements consistent with the treatment of the employee as a non-employee those percentages are doubled sec_3509 the employer is liable for the full tax where it intentionally disregarded the deduction and withholding requirements sec_3509 however sec_3509 reductions do not apply to the reduction of the employer’s liability for the employee’s portion of the fica_taxes for those statutory employees described in sec_3121 ie certain agent- or commission-drivers those who sell life_insurance full-time home workers and traveling or city salespersons sec_3509 this exception is without regard to whether the individual is otherwise described in sec_3121 or ie a corporate officer or common_law_employee id in other words if the individual could be classified as either a corporate officer under sec_3121 or a statutory_employee as described in sec_3121 then sec_3509 reductions of the employer’s liability for the employee’s portion of the fica_taxes would be inapplicable similarly if the individual could be classified as either a common_law wta-n-110700-00 employee under sec_3121 or a statutory_employee as described in sec_3121 then sec_3509 reductions of the employer’s liability for the employee’s portion of the fica_taxes would be inapplicable this is further explained in proposed regulation sec_31 d which notes that sec_3509 does not apply to social_security_taxes of individuals described in sec_3121 i f an individual would be an employee under sec_3121 but for the fact that such individual is an employee under sec_3121 or such individual shall be treated as an individual described in sec_3121 therefore in the context of corporate officers sec_3509 reductions are applicable unless the corporate officer could also be classified as an agent- or commission-driver a full-time life_insurance salesperson a home worker or a traveling or city salesperson in a case where a corporate officer could also be classified as an employee under sec_3121 then the sec_3509 rates apply only as to the employer’s liability for income_tax_withholding and not as to the employer’s liability for the employees’ portion of the fica_taxes we hope this discussion will be helpful to you if you have any questions please contact me at lynne camillo


t c summary opinion united_states tax_court dora margaret benson petitioner v commissioner of internal revenue respondent docket no 14010-11s filed date dora margaret benson pro_se sara jo barkley and robert a vara for respondent summary opinion swift judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure to sec_7463 the decision to 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 deficiency of dollar_figure in petitioner’s federal_income_tax and a dollar_figure accuracy-related_penalty under sec_6662 the issues for determination are whether petitioner’s activities were engaged in with a profit objective under sec_183 whether petitioner adequately substantiated her claimed business_expense deductions and whether imposition of the accuracy-related_penalty under sec_6662 is appropriate background some of the facts have been stipulated and are so found at the time the petition was filed petitioner resided in colorado before petitioner who is a mother worked as a nurse in date petitioner won a dollar_figure million lottery jackpot instead of receiving dollar_figure million in installments over years petitioner opted to receive a lump-sum payment of dollar_figure million after taxes petitioner received dollar_figure million a month after winning the lottery petitioner retired from her job as a nurse later in petitioner purchased a building for dollar_figure pincite columbine street in denver colorado memorial building one purpose for petitioner’s purchase of the memorial building was to use it in a manner that would honor her deceased mother the memorial building had eight rooms plus a kitchen a reception room and a bathroom petitioner converted one of the rooms into a christian reading and prayer room petitioner allowed her brother to use one room to play computer games petitioner converted another room into an office for use by others petitioner used another room to provide reflexology treatments to members of the local community the last four rooms were used as a small conference room a powder room a laundry and petitioner’s office in petitioner took a class to become a mortgage loan broker and began offering mortgage loan services and reflexology treatments in two of the rooms in the memorial building petitioner however never brokered a single mortgage and only on occasion did she charge individuals for reflexology treatments she provided from through petitioner allowed individuals from the community to use several of the offices in the memorial building without charge from through petitioner’s receipts from reflexology services she provided did not exceed dollar_figure annually in petitioner incorporated benson exposition inc as a colorado subchapter_s_corporation benson exposition in an apparent attempt to bring some organization and management to her activities petitioner however had no meaningful business experience and was completely naive about business practices and taxes petitioner and benson exposition did not maintain books_and_records did not have a business plan and failed to use a business adviser no federal_income_tax return_information or otherwise has ever been filed on behalf of benson exposition for through any income and expenses of benson exposition were reported on schedules c profit or loss from business filed with petitioner’s individual federal_income_tax returns on schedule c of her federal_income_tax return petitioner reported zero income but expenses of dollar_figure relating to her activities in the memorial building and to benson exposition including her reflexology and mortgage loan activities in this court issued an opinion regarding federal_income_tax issues relating to petitioner for and similar to those involved herein we determined that petitioner did not conduct her activities in the memorial building with a profit objective and we disallowed deductions for all of the business- related expenses petitioner claimed see benson v commissioner t c summary opinion respondent did not determine a penalty against petitioner with regard to her liabilities for and in late petitioner ceased all of her activities relating to reflexology and mortgage loans in date petitioner sold the memorial building for approximately dollar_figure and dissolved benson exposition on audit for respondent disallowed deductions for all of the business_expenses petitioner claimed relating to her activities in the memorial building and to benson exposition for lack of a profit objective and for lack of substantiation discussion in general the commissioner’s determination in a notice_of_deficiency is presumed correct rule a welch v helvering 219_us_111 petitioner does not contend that the burden_of_proof should shift to respondent see sec_7491 sec_162 allows a deduction for all ordinary and necessary expenses paid_or_incurred during a taxable_year in carrying_on_a_trade_or_business in the case of an activity_not_engaged_in_for_profit sec_183 generally limits allowable deductions attributable to an activity to the extent of gross_income generated by the activity sec_183 to be treated as engaged in a trade_or_business under sec_162 a taxpayer must have had an actual and honest profit objective 28_f3d_1024 10th cir aff’g 99_tc_132 helmick v commissioner tcmemo_2009_220 the expectation of profit need not be reasonable however the taxpayer must have entered into the activity or continued it with the objective of making a profit helmick v commisioner tcmemo_2009_220 sec_1_183-2 income_tax regs provides a nonexhaustive list of factors to be considered in determining whether an activity is engaged in for profit no single factor is dispositive rather the facts and circumstances of the case control see 94_tc_41 see also 544_f3d_900 8th cir aff’g tcmemo_2007_309 the factors include but are not limited to the manner in which the taxpayer carried on the activity the expertise of the taxpayer or his advisers the taxpayer’s history of income or losses with respect to the activity and the amount of occasional profits earned aside from incorporation of benson exposition in petitioner failed to do anything that indicates a profit objective with regard to the memorial building and benson exposition petitioner and benson exposition failed to maintain books_and_records and had no business plan petitioner sought no advice for the conduct of her activities the record is devoid of evidence that would suggest petitioner intended to make a profit from her activities in the memorial building and from benson exposition in petitioner received zero income and apparently provided no services but claimed significant business-related expenses we sustain respondent’s determination that petitioner did not conduct her activities in the memorial building or operate benson exposition with a profit objective in petitioner is not allowed the claimed business_expense deductions on the basis of the above holding we need not address the substantiation issue regarding petitioner’s claimed business_expense deductions sec_6662 accuracy-related_penalty sec_6662 and b and imposes a penalty equal to of the part of an underpayment attributable to i negligence or disregard of rules or regulations or ii a substantial_understatement_of_income_tax for purposes of sec_6662 negligence constitutes a failure to make a reasonable attempt to comply with the internal_revenue_code sec_6662 sec_6664 provides a defense to an accuracy-related_penalty where a taxpayer acts with reasonable_cause and in good_faith reasonable_cause and good_faith are ascertained on a case-by-case basis taking into account all of the facts and circumstances see sec_1_6664-4 income_tax regs circumstances that may establish reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in the light of the experience knowledge and education of the taxpayer id petitioner was well intentioned and was trying to serve her community in spite of the disallowance in her prior case and our disallowance herein of her claimed business_expense deductions on the basis of petitioner’s testimony at trial we do not believe she had any intent to underpay her federal_income_tax liability petitioner’s lack of business acumen and her obvious good_faith provide a reasonable_cause and good_faith defense to the determined accuracy-related_penalty petitioner is not liable for the accuracy-related_penalty to reflect the foregoing decision will be entered for respondent as to the deficiency in tax and for petitioner as to the accuracy- related penalty under sec_6662


t c memo united_states tax_court anthony p hart petitioner v commissioner of internal revenue respondent docket no filed date anthony p hart pro_se andrew r moore for respondent memorandum opinion beghe judge after a course of conduct that confused respondent and avoided the payment of income taxes clearly due petitioner filed a frivolous petition and maintained these proceedings for the sole purpose of delaying the efficient administration of the tax law - - respondent determined a deficiency an accuracy-related_penalty under sec_6662 and an addition_to_tax for failure to pay estimated_taxes under sec_6654 in petitioner’s federal_income_tax in the respective amounts of dollar_figure dollar_figure and dollar_figure petitioner was a resident of san jose california at the time he filed his petition petitioner was employed by the quicksilver group a software consulting company throughout petitioner admits that in he received wages of dollar_figure interest of dollar_figure and an early distribution from his individual_retirement_account of dollar_figure petitioner also admits that no federal_income_tax was withheld from his wages and that he made no estimated_tax payments or other_payments on account of his income for petitioner’s employer filed with respondent a form_w-2 wage and tax statement showing that it had paid petitioner wages tips other compensation of dollar_figure the interest and the early distribution from petitioner’s individual_retirement_account were reported to respondent by the payors on form 1099s petitioner demanded that his employer file an amended form_w-2 stating that he had received no wages tips or other compensation when petitioner’s employer refused to amend the ‘unless otherwise indicated all section references are to the internal_revenue_code in effect for the years at issue form_w-2 petitioner submitted a form_4852 substitute form_w-2 requesting a form_w-2 correction to indicate that he received no wages tips or other compensation throughout this course of events petitioner knew that the form_w-2 statement was entirely accurate petitioner also filed an unsigned form_1040 u s individual_income_tax_return indicating that he had no income and no tax_liability apparently the internal_revenue_service center treated the unsigned form_1040 as if it were a valid_return and thus failed to determine a 25-percent addition_to_tax under sec_665l a for petitioner’s failure_to_file a timely tax_return instead respondent determined in the notice_of_deficiency that petitioner was liable for a 20-percent accuracy- related penalty under sec_6662 also in the notice respondent determined an addition for failure to pay estimated_taxes under sec_6654 in his petition petitioner states that he is not a tax_protester he says our tax laws are very clearly written and provide that he need not pay tax on his income because he was not engaged in an excise taxable activity for the tax period in guestion on date in compliance with the court’s pretrial order petitioner filed a trial memorandum that we are treating as his brief petitioner argues in his brief that he owes no q4e- income taxes on his income because the income_tax is an excise_tax and he did not engage in any excise taxable activity the income_tax is applicable only to nonresidents and to earnings by residents from sources outside the united_states and no law requires petitioner to sign a document under penalty of perjury and no law requires him to file a tax_return petitioner of course cites no relevant authority in support of his theories petitioner also had the temerity to ask for dollar_figure in sanctions against respondent because he had to respond to respondent’s deficiency_notice long before petitioner filed his trial brief respondent had provided petitioner with copies of this court’ss opinions in 80_tc_1111 and 82_tc_235 in both cases this court specifically rejected with copious citation of authorities the arguments advanced here by petitioner that wages are not subject_to tax as income thus petitioner was well aware when petitioner cites a single case 240_us_103 which upheld the validity of a tax ona mining company under the income_tax section of the tariff act of date ch 38_stat_166 petitioner appears to cite the case for the proposition that the 16th amendment to the constitution does not permit congress to impose a tax on income petitioner’s argument is of course utter nonsense the text of the amendment could not be clearer in establishing the power of congress to impose and collect income taxes 580_tc_1111 sustained the continued - - he filed his brief that his arguments lack any basis in law and have been previously rejected by this court at the hearing the court asked respondent to send petitioner a copy of our opinions in liddane v commissioner tcmemo_1998_259 affd without published opinion 208_f3d_206 3d cir cocozza v commissioner tcmemo_1997_305 and talmage v commissioner tcmemo_1996_114 affd without published opinion 99_f3d_1131 4th cir further to inform petitioner that his arguments are frivolous and have been repeatedly rejected by this court and that his continued maintenance of these frivolous arguments could subject him to a penalty of up to dollar_figure under sec_6673 according to a motion filed by respondent after the hearing respondent’s counsel contacted petitioner on or about date at which time petitioner stated that he would sign a decision document based on the amounts stated in the statutory_notice_of_deficiency respondent mailed a cover letter and a decision document attached to petitioner on the same day respondent left messages on petitioner’s answering machine on date and date inguiring whether petitioner had sent the signed continued commissioner’s determination of the fraud_penalty against a tax_protester nonfiler 82_tc_235 awarded the commissioner damages under a prior version of sec_6673 against a taxpayer who continued to maintain the frivolous positions taken in his petition see also 806_f2d_1451 9th cir affg an unreported order of this court to impose damages against the same taxpayer for a later year and also awarding additional damages to the government on account of the taxpayer’s frivolous appeal decision document to respondent thus far no response has been received petitioner could have avoided causing further delay and expense by executing and returning the stipulated decision document however petitioner elected not to do so or even to inform respondent that he had changed his mind about doing so due to the delay caused by petitioner’s initially agreeing to sign and return the stipulated decision document and then failing to do so respondent was forced to file a motion to extend the briefing schedule the court granted the motion and set dates for respondent to file his opening brief petitioner to file his answering brief and respondent to file his reply brief respondent timely filed a posttrial opening brief setting forth a detailed response to petitioner’s frivolous contentions petitioner did not file a posttrial answering brief and respondent elected not to file an additional brief thereafter respondent filed a motion for an award of sanctions under sec_6673 deficiency determination petitioner’s wages interest_income and distributions from his individual_retirement_account are taxable as income see eg 898_f2d_942 3d cir every court which has ever considered the issue has unequivocally rejected the argument that wages are not income 723_f2d_646 8th cir - j- argument that wages and salaries are not income is totally lacking in merit 619_f2d_716 8th cir rowlee v commissioner supra pincite 82_tc_235 liddane v commissioner supra cocozza v commissioner supra talmage v commissioner supra we need not exhaustively review and respond to petitioner's baseless and misguided contentions 737_f2d_1417 5th cir accuracy-related_penalty under sec_6662 a the 20-percent accuracy-related_penalty under sec_6662 can be imposed only if a valid tax_return is filed sec_6664 b in 114_tc_136 this court held that a sec_6662 penalty can be imposed only if a taxpayer files a valid although erroneous return because the taxpayer in williams had filed only invalid returns first an unsigned return and second a signed amended_return with an improper disclaimer no sec_6662 accuracy-related_penalty could be imposed like the taxpayer in williams petitioner filed an unsigned form_1040 tax_return showing zero tax owing an unsigned tax_return is of no effect a form_1040 that is not duly signed and verified under penalties of perjury does not constitute a valid federal_income_tax return 281_us_245 113_tc_125 --- - 72_tc_818 it is well established that the filing of an unsigned return form is not the filing of a return 65_tc_68 in order for a form_1040 to constitute a valid income_tax return it must be signed by the taxpayer under penalties of perjury affd without published opinion 559_f2d_1207 3d cir petitioner has admitted that he did not file a valid income_tax return for petitioner stated in his brief no law requires petitioner to sign a document under penalty of perjury and no law requires him to file a tax_return since petitioner was not required he did not file a tax_return for respondent’s statement to the contrary 1s erroneous and petitioner challenges respondent to produce any form for irs might have in file for petitioner because petitioner failed to file a valid_return respondent is not entitled to recover a sec_6662 accuracy-related_penalty petitioner’s unsupported argument is of course dead wrong sec_6011 provides that any person made liable for any_tax shall make a return according to the forms and regulations prescribed by the secretary a return required to be filed shall contain or be verified by a written declaration that it is made under the penalties of perjury sec_6065 sec_6061 provides the general_rule that any return statement or other document required to be made under any provision of the internal revenue laws or regulations shall be signed in accordance with forms or regulations prescribed by the secretary sec_1_6012-1 income_tax regs provides that form_1040 is prescribed for general use in making the return required under this paragraph therefore contrary to his unsupported allegations petitioner was required to file a form_1040 properly signed under penalties of perjury --- - addition for failure to pay estimated_tax petitioner admits that he did not pay estimated_taxes on his income he is therefore liable for an addition_to_tax under sec_6654 respondent properly included the failure to pay estimated_taxes addition in the notice_of_deficiency where as in the case at hand no valid_return for the taxable_year was filed these amounts are to be assessed collected and paid as taxes under sec_6665 and are subject_to the deficiency procedures sec_6665 because petitioner failed to file a valid_return for the taxable_year it was proper for respondent to include the sec_6654 addition in the notice_of_deficiency and we have jurisdiction to determine whether petitioner is liable for the addition we sustain respondent’s determination that petitioner is liable for a failure to pay estimated_taxes addition under sec_6654 -tt’s worth noting that respondent included the sec_6654 a addition_to_tax in the notice_of_deficiency even though respondent apparently thought that petitioner had filed a valid income_tax return we would have no jurisdiction to review the sec_6654 addition_to_tax if petitioner had filed a valid income_tax return sec_6665 see also 78_tc_19 for a discussion of the legislative_history of sec_6665’s identical predecessor former sec_6659 in any event it’s improper for respondent to include in the notice_of_deficiency unless in the alternative both a sec_6654 addition for failure to pay estimated_tax and a sec_6662 accuracy-related_penalty the sec_6662 penalty applies only if a valid_return is filed and the deficiency procedures can be used in connection with a sec_6654 addition only if a valid_return is not filed -- - addition for failure to timely file return sec_6651 provides that a taxpayer who fails to timely file a return shall pay an addition_to_tax of percent per month of the amount required to be shown on the return not to exceed percent the provision is mandatory unless it is shown that such failure is due to reasonable_cause and not due to willful neglect id respondent did not include a failure_to_file addition under sec_6651 in the notice_of_deficiency presumably because respondent’s personnel at the internal_revenue_service center were confused by the unsigned form_1040 filed by petitioner showing no tax due had respondent included the sec_6651 addition in the notice_of_deficiency petitioner would have been liable for an addition of percent of the amount that should have been shown on the return sec_6214 gives us jurisdiction to redetermine the correct amount of the deficiency even if the amount so redetermined is greater than the amount set forth in the notice_of_deficiency if claim therefor is asserted by the secretary at or before the hearing or a rehearing even after realizing that petitioner had failed to file a valid income_tax return respondent inexplicably did not assert a claim for the sec_6651 addition because respondent asserted no claim for the sec_6651 addition at or before the hearing we cannot award the addition o’rourke v commissioner tcmemo_1997_152 court could not award statutory increase in addition_to_tax under sec_6661 where not asserted by commissioner sec_6673 penalty respondent after filing his posttrial brief filed a motion for the imposition of a sec_6673 penalty against petitioner sec_6673 allows the tax_court to impose a penalty of up to dollar_figure payable to the united_states when a taxpayer institutes or maintains a proceeding primarily for delay where the taxpayer’s position in the proceeding is frivolous or groundless or where the taxpayer unreasonably failed to pursue available administrative remedies in the case at hand we hold that petitioner is subject_to a penalty under sec_6673 on two cumulative grounds---he maintained the action solely for the purposes of delay and he continued to do so after receiving copies of authorities rejecting as frivolous and groundless the same arguments he has advanced in the case at hand moreover after trial petitioner first orally agreed to sign a decision document conceding the case and then failed to sign the document or respond to respondent’s inquiries petitioner’s conduct required respondent to file a motion to extend time to file opening brief prepare and file the brief and prepare a motion for sanctions under sec_6673 petitioner’s conduct also reguired the court to -- prepare this opinion spending time and effort that would have been better spent on a good_faith controversy requiring resolution of claims having colorable merit we therefore exercise our discretion under sec_6673 a and b and impose upon and require petitioner to pay a penalty of dollar_figure to the united_states to give effect to the foregoing an appropriate order and decision will be entered


id office uilc cca_2010030208313457 ------------ number release date from ------------------ sent tuesday march am to ---------------------- cc --------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------- ------------------------------------ subject re additional cam needed ---------i would also like to add that what is the asset uop for depreciation and retirement purposes may not be the same as the uop for repair capitalization purposes -----------------


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 corp plr-137747-08 date date ty ------------- ty ------------- legend distributing controlled holding lp holding gp dre dre dre --------------------------------------------------------- --------------------------------------------------------- ----------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- ----------------------- --------------------------------------------------------- --------------------------------------------------------- ----------------------- --------------------------------------------------------- --------------------------------------------------------- ----------------------- ------------------------------ --------------------------------------------------- ------------------------------- --------------------------------------------------- --------------------------------------------------------- plr-137747-08 lp lp lp lp lp other controlled shareholders manager company company finance company finance company ----------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- ----------------------- --------------------------------------------------------- --------------------------------------------------------- ----------------------- --------------------------------------------------------- --------------------------------------------------------- ----------------------- --------------------------------------------------------- --------------------------------------------------------- ----------------------- --------------------------------------------------------- --------------------------------------------------------- ----------------------- --------------------------------------- --------------------------------------------------------- ------------------------------- --------------------------------------------------------- --------------------------------------------------------- ----------------------- --------------------------------------------------------- ---------------------------------- --------------------------------------------------------- ------------------------------- --------------------------------------------------------- ------------------------------- plr-137747-08 finance company investor investor new holding lp new holding gp new holdco new holdco new holdco new holdco new holdco new holdco business a date a date b date c --------------------------------------------------------- --------------------------------------------------------- ----------------------- --------------------------------------------------------- ----------- -------------------------- --------------------------------------------------------- --------------------------------------------------------- ----------------------- --------------------------------------------------------- --------------------------------------------------------- ----------------------- --------------------------------------------------------- --------------------------------------------------------- ----------------------- --------------------------------------------------------- ------------------------------- --------------------------------------------------------- ------------------------------- --------------------------------------------------------- ------------------------------- --------------------------------------------------------- -------------------------------- --------------------------------------------------------- ------------------------------------------------ ---------------------------------------------- -------------------------- ------------------- ------------------- plr-137747-08 a b c d e f g h i j k dollar_figurel dollar_figurem dollar_figuren dollar_figureo p q r s t u v ----------------------------- ----------------------------- --------------------------- --------------------------- ----------------------------- --------------------------- --------------------------- --------------------------- ------------------------- ------------------------- --------------------------- ------------------ -------------- ------------------ ------------------ ---------- ---------- --------- ------- ------------------------------- ------------------------------- ------------------ plr-137747-08 w x y z aa bb cc dd ee ff gg ----- ------------- -------------- ------------- ------- --------------------------------- --------------------------- -------------------------------------- ----------------------------------- -- ----------------- dear -------------- this letter responds to your date letter requesting that we supplement our letter rulings dated date plr plr and date plr plr the prior rulings the information submitted for consideration in this supplemental request is summarized below capitalized terms not defined in this ruling have the meanings assigned to them in the prior rulings the ruling contained in this letter is based on facts and representations submitted by the taxpayers and accompanied by penalty of perjury statements executed by the appropriate parties this office has not verified any of the materials submitted in support of the request for a ruling verification of the information representations and other data may be required as part of the audit process in particular this office has not reviewed any information and has not made any determination regarding i whether internal distribution internal distribution and the share exchange satisfy the business_purpose requirement of sec_1_355-2 of the income_tax regulations ii whether the proposed transactions are being used principally as a device for the distribution of the earnings_and_profits of the distributing_corporation or the controlled_corporation or both see sec_355 of the internal plr-137747-08 revenue code and sec_1_355-2 or iii whether internal distribution internal distribution or the share exchange are part of a plan or series of related transactions pursuant to which one or more persons acquire directly or indirectly stock representing a 50-percent_or_greater_interest in the distributing or controlled corporations see sec_355 and sec_1_355-7 the prior rulings address certain federal_income_tax consequences of certain transactions under sec_355 and sec_368 of the internal_revenue_code and other code provisions except as modified below the representations and caveats set forth in the prior rulings remain in effect for purposes of this supplemental ruling letter summary of supplemental facts distributing is a publicly traded holding_company with a single class of stock outstanding voting common_stock distributing is the common parent of an affiliated_group_of_corporations that files a consolidated federal_income_tax return from the completion of the share exchange on date a until the time of the combination described below controlled was the common parent_corporation of an affiliated_group_of_corporations that filed a consolidated federal_income_tax return controlled is a holding_company with a single class of stock outstanding voting common_stock controlled through its subsidiaries is engaged in business a at the time of the controlled contribution described below the stock in controlled was owned as follows lp1 through a disregarded_entity owned approximately p of the stock lp2 through a disregarded_entity owned approximately q of the stock lp3 through a disregarded_entity owned approximately r of the stock and the other controlled shareholders owned the remaining approximately s of the stock at the time of the holding contribution described below new holding lp owned directly or indirectly all the interests in holding lp a disregarded_entity and holding lp directly owned all of the stock in company engaged in business a the limited_partner interests in new holding lp entitled to an aggregate of a of the capital and profits of new holding lp were owned b by lp c by lp d by manager e by investor and f by investor and certain current and former employees of holding lp and its subsidiaries the general_partner interest in new holding lp entitled to g of the capital and profits of new holding lp was owned by new holding gp the limited_liability_company interests in new holding gp entitled to all of the capital and profits of new holding gp were owned h by lp i by lp j by manager and k by investor on date a distributing distributed all of the stock in controlled to dre dre and dre disregarded wholly-owned subsidiaries of lp lp and lp respectively and to the other controlled shareholders in exchange for distributing on or about date b and date c holding lp which had also owned all the stock in company distributed the stock in company to new holding lp plr-137747-08 stock in the share exchange in connection with the proposed transactions distributing lp lp and lp received the prior rulings to the effect that among other things the contribution as defined in the prior rulings together with the share exchange would qualify as a reorganization under sec_368 see plr plr plr plr supplemental transactions on date b and date c subsequent to the issuance of the prior rulings and as part of a single_plan of combination the taxpayers completed the following transactions combination i new holding lp contributed all of the limited_partner interests in holding lp and all of the limited_liability_company interests in holding gp both disregarded entities to finance company a newly-formed corporation and a direct wholly-owned subsidiary of new holding lp finance company in turn contributed such interests to finance company a newly-formed corporation and a direct wholly- owned subsidiary of finance company finance company in turn contributed such interests to finance company a newly-formed corporation and a direct wholly- owned subsidiary of finance company ii new holding lp contributed all of the stock of finance company to new holdco a newly-formed corporation solely in exchange for t of the common_stock of new holdco the holding contribution iii concurrently the shareholders of controlled contributed all of the stock of controlled to new holdco solely in exchange for u in the aggregate of the common_stock of new holdco the controlled contribution the controlled contribution together with the holding contribution and the lp equity contribution as defined below are referred to as the new holdco contributions in the case of lp lp and lp the controlled contribution took the form of a contribution by the applicable lp of all of the interests in its disregarded holding_company that owns stock of controlled for example lp contributed to new holdco all of the interests in dre iv immediately after the new holdco contributions new holdco contributed all of the property that it received in the new holdco contributions to new holdco a newly-formed corporation and a direct wholly-owned subsidiary of new a committee of significant investors in each of lp lp lp lp and lp each an investment review committee has approved a valuation of dollar_figurel for the aggregate outstanding equity interests of holding lp and has further approved an allocation of dollar_figurem to the outstanding_stock of company and dollar_figuren to the outstanding_stock of company each investment review committee also has approved a valuation of dollar_figureo for the outstanding_stock of controlled plr-137747-08 holdco new holdco in turn contributed such property to new holdco a newly- formed corporation and a direct wholly-owned subsidiary of new holdco v immediately thereafter new holdco contributed all of the stock of controlled that it owned directly and all of the interests in dre dre and dre to new holdco a newly-formed corporation and a direct wholly-owned subsidiary of new holdco new holdco in turn contributed all such interests to new holdco a newly-formed corporation and a direct wholly-owned subsidiary of new holdco new holdco contributed all such interests to its wholly-owned disregarded subsidiary new holdco vi at the closing of the combination finance company borrowed approximately dollar_figurev from unrelated third party banks under a credit agreement dated date b by and among finance company as borrower and the several lenders from time to time party thereto the new bridge debt the new bridge debt has a term of w days subject_to a possible extension of up to one year in the case of a portion of the new bridge debt a variable interest rate based on the prime rate or the eurodollar rate and is unsecured lp and lp each provided a guarantee of the new bridge debt in the maximum amount of dollar_figurex million and dollar_figurey million respectively vii in addition finance company issued dollar_figurez in principal_amount of aa subordinated notes to lp the new lp notes in connection with the issuance of the new lp notes lp made an equity contribution of dollar_figurebb to new holdco in exchange for cc of the common_stock in new holdco the lp equity contribution viii the proceeds of the new bridge debt and the new lp notes were used as follows a dollar_figuredd was loaned by finance company to a wholly-owned indirect subsidiary through an intercompany loan to repay existing indebtedness b dollar_figureee was placed by finance company in an interest-bearing account that is intended to secure the payment of interest on the new bridge debt and c the remaining amounts were used to pay fees and expenses of the parties and the lenders ix in connection with the closing of the combination new holdco adopted a stockholders agreement to which lp lp lp lp in respect of its direct holding in new holdco new holding lp and the other direct holders of stock in new holdco are parties in addition lp lp manager and investor are parties to the stockholders agreement substantially as if each held directly the percentage of the stock of new holdco held by each through new holding lp under the stockholders agreement the board_of directors of new holdco consists of one director designated by each of lp lp lp lp and lp each an lp and collectively the lps five directors ff directors designated by investor and one additional director who is a member of management and who is designated by the lps on any matter considered by the board each of the five directors designated by an lp will be entitled to cast votes representing a percentage of the total voting power of the board equal to the percentage share of the stock of new holdco owned at the time plr-137747-08 directly or indirectly by the lp designating that director for this purpose lp5 will take into account its acquisition of cc of the shares in new holdco on any matter considered by the board the directors designated by investor will be entitled to cast votes in the aggregate representing a percentage of the total voting power of the board equal to the percentage share of the stock of new holdco owned at the time directly or indirectly by investor the remaining voting power of the board representing only approximately gg is held by the management director x in connection with the combination new holdco adopted a stock_option plan the option plan the option plan provides for the grant of nonqualified options to acquire the common_stock of new holdco options on customary terms and conditions to employees of or other service providers to new holdco and its subsidiaries grantees in connection with the grantee's performance of services as an employee director or independent_contractor of or to new holdco and its subsidiaries in each case the option will be nontransferable within the meaning of sec_1_83-3 the option will not have a readily_ascertainable_fair_market_value as defined in sec_1_83-7 and the acquisition of stock if any by the grantee on the exercise of the option will be subject_to sec_83 in each case the stock acquired by a grantee on the exercise of an option will not be excessive by reference to the services performed by the grantee apart from the potential effect of the coordinating group rules of sec_1 h no grantee will be a controlling shareholder of controlled within the meaning of sec_1_355-7 or a ten percent shareholder of controlled within the meaning of sec_1 h no option will be issued transferred or listed with a principal purpose to avoid the application of sec_355 xi certain of the grantees who are senior employees of company were limited partners in holding lp and became limited partners in new holding lp as a result of the combination these grantees were parties to the limited_partnership agreement of holding lp and are subject_to the limited_partnership agreement of new holding lp to each of which lp and lp also are parties xii no grantee is a party to the stockholders agreement in his capacity as a grantee or otherwise xiii each option will be exercisable for common_stock of new holdco only at and after the time of an initial_public_offering of the common_stock of new holdco if prior to the occurrence of an initial_public_offering there is a sale of new holdco then the option if then vested will be converted into a right to receive an amount in cash equal to the difference between the fair_market_value of the common_stock for which the option is exercisable and the strike_price of the option if prior to the occurrence of an initial_public_offering the employment of a grantee with new holdco and its subsidiaries terminates for any reason then the option if then vested will be converted into a right to receive an amount in cash equal to the difference between the fair_market_value of the common_stock for which the option is exercisable and the strike_price of the option plr-137747-08 xiv at the time of an initial_public_offering of the stock of new holdco new holding lp will distribute to any grantee that is a partner in new holding lp his proportionate share of the stock of new holdco held by new holding lp and the stockholder’s agreement will be terminated xv after completion of the combination and only if the taxpayers receive certain additional rulings under sec_355 the taxpayers contemplate that they would transfer company to new holdco supplemental representations distributing controlled new holding lp and the lps as applicable make the following representations except as described below no acquisition of stock of distributing or controlled of sub or company or of sub or company including any predecessor or successor of each such corporation occurred or will occur pursuant to a plan or series of related transactions within the meaning of sec_355 that includes the share exchange internal distribution or internal distribution respectively each of the following acquisitions of stock of controlled including any predecessor or successor is or may be part of a plan or series of related transactions within the meaning of sec_1_355-7 that includes the share exchange internal distribution or internal distribution the indirect acquisitions of stock in controlled by new holding lp the partners of new holding lp and lp resulting from the combination and if it occurs the proposed transfer of company to new holdco1 taking all of these acquisitions into account stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of any such corporation will not be acquired by any person or persons new holding lp and the lps contemplate that they may ultimately exit their position in new holdco through an initial_public_offering of the stock of new holdco however there has been no agreement understanding arrangement or substantial negotiations within the meaning of sec_1_355-7 concerning any such initial_public_offering supplemental ruling based on the information and representations set forth herein and submitted with the prior rulings we rule as follows the combination will not affect the continuing validity of the prior rulings plr-137747-08 caveats no opinion is expressed about the tax treatment of the combination or the proposed transactions in the prior rulings under other provisions of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the combination or the proposed transactions that are not specifically covered by the above ruling or by the prior rulings in particular no opinion is expressed regarding i whether internal distribution internal distribution and the share exchange satisfy the business_purpose requirement of sec_1_355-2 ii whether the proposed transactions are being used principally as a device for the distribution of the earnings_and_profits of any of the distributing or controlled corporations see sec_355 and sec_1_355-2 and iii whether internal distribution internal distribution or the share exchange are acquisitions that are part of a plan or series of related transactions under sec_355 procedural statements this ruling is directed only to the taxpayers requesting it sec_6110 provides that it may not be used or cited as precedent 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 in accordance with the power_of_attorney on file in this office a copy of this ruling letter will be sent to the taxpayers' authorized representatives sincerely mary e goode senior counsel branch office of associate chief_counsel corporate cc


internal_revenue_service number release date index number -------------------------- ----------------------- ------------------------------------------------ legend trust 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 b07 plr-156023-06 date date --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- ---------------------- -------- ------------------------------------------------ state grantor --------------------- date ---------------- date ------------------ court child ------------------------ child --------------------------------- date ------------------ date ------------------ date ----------------------- statute ------------------------------------------------------------------------------------ dear ----- correspondence requesting income gift and generation-skipping_transfer gst tax rulings with respect to the proposed conversion of trust to a total_return_trust under state law the facts and representations are as follows grantor created an irrevocable_trust on date on date at the request of the trustees court divided the irrevocable_trust into four separate trusts one for each of grantor’s children and their descendants this letter responds to your letter dated date and subsequent date and date are before date no additions actual or under the terms of the original trust agreement and the date court order after under the terms of the original trust agreement and the date court order trust plr-156023-06 trust is one of the four trusts created by the date court order and is held for the benefit of child and her descendants constructive have been made to trust since date trust is governed by state law child 1’s death child may direct the payment of up to one-third of the net_income in her last will and testament to her surviving_spouse the balance of the net_income or all of the net_income if none becomes payable to a surviving_spouse shall be paid to child 1’s issue from time to time surviving per stirpes child may by will change the proportion in which her issue shall share in the net_income by exercise of a limited_power_of_appointment if child dies without issue before the termination of trust the trust assets shall be added to the shares established for grantor’s surviving children and their descendants shall continue until twenty years after the death of the last surviving of eight named individuals child was the last surviving named individual child died on date upon termination of trust the trust estate shall be paid to the person s then in receipt of the income if a spouse is currently receiving income a share of trust necessary to produce such income shall continue to be held in trust during the spouse’s life but the person s who would have received the income shall immediately have a vested interest in the principal withheld the trustees may choose to purchase an annuity for the spouse and make immediate distribution of the entire trust estate child exercised her right to change the percentage of net_income paid to her issue and to direct payment of up to one-third of the net_income she had been entitled to at her death to her surviving_spouse trust income is currently distributed in accordance with the percentages set out in child 1’s will state statute permits a court to convert a_trust to a total_return_trust or unitrust if the court determines that the conversion will enable the trustee to better carry out the purposes of the trust and that the conversion is in the best interests of the beneficiaries statute provides that following conversion of a_trust to a total_return_trust income in the governing instrument means an annual amount equal to a percentage of the net fair_market_value of the total trust assets averaged over a three-year period finally statute provides that a court has the power to determine the percentage of the total value of the trust assets to be distributed from a total_return_trust trust to a total_return_trust under statute and that court approve a distribution the trustees have filed a complaint in court requesting that the court convert child died on date under article three of her will executed on date sec_2511 provides that the tax imposed by sec_2501 applies whether the sec_2501 of the internal_revenue_code imposes a tax on the transfer of plr-156023-06 percentage from trust after the conversion the complaint further requests the court declare that on termination the trust assets will be distributed to the persons then in receipt of a portion of the unitrust_amount in the same proportions as the unitrust_amount is then being paid after the conversion the unitrust_amount will be divided among the beneficiaries as directed in child 1’s will the trustees have requested rulings that the proposed conversion of trust to a total_return_trust will not cause trust to lose its status as exempt from the gst tax will not cause any beneficiary to have made a gift_for gift_tax purposes and will not cause trust or any beneficiary to realize capital_gain from an exchange of a_trust interest for income_tax purposes ruling sec_1 and property by gift by an individual transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible the date of the gift shall be considered the amount_of_the_gift distribution a taxable_termination and a direct_skip under b a of the tax_reform_act_of_1986 and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the generation-skipping_transfer_tax provisions do not apply to any generation-skipping_transfer under a_trust as defined in sec_2652 that was irrevocable on date however this exemption does not apply if additions actual or constructive are made to the trust after date regulations provides that any trust in existence on date will be considered an irrevocable_trust except as provided in sec_26_2601-1 or c which relate to property includible in a grantor’s gross_estate under sec_2038 and sec_2042 judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the generation-skipping_transfer_tax under sec_26_2601-1 or sec_2512 provides that if a gift is made in property the value thereof at sec_2611 defines the term generation-skipping_transfer as a taxable sec_26_2601-1 provides rules for determining when a modification sec_26_2601-1 of the generation-skipping_transfer_tax sec_2601 imposes a tax on every generation-skipping_transfer sec_26_2601-1 provides that a modification of the governing plr-156023-06 hereinafter referred to as an exempt trust will not cause the trust to lose its exempt status in general unless specifically provided otherwise the rules contained in sec_26_2601-1 are applicable only for purposes of determining whether an exempt trust retains its exempt status for generation-skipping_transfer_tax purposes unless specifically noted 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 gain for purposes of sec_1001 instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy sec_26_2601-1 b or c by judicial reformation or nonjudicial 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 modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer to determine whether a modification of an irrevocable_trust will shift a beneficial_interest in a_trust to a beneficiary who occupies a lower generation the effect of the instrument on the date of the modification is measured against the effect of the instrument in existence immediately before the modification if the effect of the modification cannot be immediately determined it is deemed to shift a 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 modification 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 to shift a beneficial_interest in the trust in addition administration of a_trust in conformance with applicable local law that defines the term income as a unitrust_amount or permits a right to income to be satisfied by such an amount or that permits the trustee to adjust between principal and income to fulfill the trustee’s duty_of impartiality between income and principal beneficiaries will not be considered to shift a beneficial_interest in the trust if applicable local law provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust and meets the requirements of sec_1_643_b_-1 of the income_tax regulations that is otherwise exempt from the gst tax because it was irrevocable prior to sec_26_2601-1 example considers a situation where a_trust sec_26_2601-1 provides that for purposes of this section a the trustees represent that trust was irrevocable on date and the facts in this case are similar to those set forth in example of sec_26 plr-156023-06 date provides that trust income is payable to a for life and upon a’s death the remainder is to pass to a’s issue per stirpes state x the situs of the trust then amends its income and principal statute to define income as a unitrust_amount of of the fair_market_value of the trust assets valued annually the example concludes that the administration of the trust in accordance with the state statute defining income to be a unitrust_amount will not be considered to shift a beneficial_interest in the trust therefore the trust will not be subject_to the provisions of chapter further under the facts of the example no trust_beneficiary will be treated as having made a gift_for federal gift_tax purposes and neither the trust nor any trust_beneficiary will be treated as having made a taxable_exchange for federal_income_tax purposes that there were no additions to trust after date b i e which provides that the conversion of an income_interest to a unitrust_interest pursuant to state statute will not be considered to shift a beneficial_interest in a_trust for gst purposes example further concludes that no trust_beneficiary will be treated as having made a gift_for federal gift_tax purposes and neither the trust nor any trust_beneficiary will be treated as having made a taxable_exchange for federal_income_tax purposes provided the proposed conversion meets the requirements of state statute and an order from state court approving the conversion is obtained we conclude that the conversion of the income_interest in trust to a unitrust_interest will not be considered to shift any beneficial_interest in trust and therefore will not cause trust to lose its status as exempt from the gst tax we further conclude that the proposed modification will not result in any beneficiary being treated as having made a taxable gift_for federal gift_tax purposes ruling whatever source derived including gains derived from dealings in property and income from an interest in an estate_or_trust shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in such section for determining loss over the amount_realized under sec_1_1001-1 of the income_tax regulations the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially in_kind or in extent is treated as income or loss sustained under sec_1001 of the code gain from the sale_or_other_disposition of property sec_61 and provides that gross_income means all income from sec_1001 provides that the amount_realized from the sale or other sec_1_1001-1 provides that a loss is not ordinarily sustained prior to the plr-156023-06 disposition of property shall be the sum of any money received plus the fair_market_value of the property other than money received under sec_1001 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 sale_or_other_disposition of the property for the reason that until such sale_or_other_disposition occurs there remains the possibility that the taxpayer may recover or recoup some of the adjusted_basis of the property until some identifiable_event fixes the actual sustaining of a loss and the amount thereof the loss is not taken into account an exchange of property results in the realization of gain_or_loss under sec_1001 if the properties are materially different 499_us_554 properties exchanged are materially different if the properties embody legal entitlements different in_kind or extent or if the properties confer different rights and powers id pincite in cottage savings the supreme court held that mortgage loans made to different obligors and secured_by different homes embody distinct legal entitlements and that the taxpayer realized losses when it exchanged interests in the loans id in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material to the code so long as their respective possessors enjoy legal entitlements that are different in_kind or extent id pincite sec_1_643_b_-1 provides a comprehensive definition of income as that term applies to trusts_and_estates it provides in part that items such as dividends interest and rents are generally allocated to income and proceeds from the sale_or_exchange of trust assets are generally allocated to principal however an allocation of amounts between income and principal pursuant to applicable local law will be respected if local law provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust for the year including ordinary and tax- exempt_income capital_gains and appreciation for example a state statute providing that income is a unitrust_amount of no less than and no more than of the fair_market_value of the trust assets whether determined annually or averaged on a multiple year basis is a reasonable apportionment of the total return of the trust sec_1_643_b_-1 further provides that a switch between methods of determining trust income authorized by state statute will not constitute a recognition event for purposes of sec_1001 beneficiaries of the trust will have the same property interests and legal entitlements as a result of the proposed conversion under state statute a conversion to a total_return_trust may be made upon the court's determination that the conversion will enable the trustee to better carry out the purposes of the trust in addition and under the facts in the present case the preliminary question is whether the trustees and except as expressly provided herein no opinion is expressed or implied plr-156023-06 presented there is to be no material_change in property interests or legal entitlements for trust the trustees or the beneficiaries if the conversion to a total_return_trust does not result in a material_change in property interest or legal entitlements there is no occasion for realizing taxable gain_or_loss under sec_1001 therefore under the facts presented the conversion will not trigger realization of gain_or_loss for the taxpayers for federal_income_tax purposes concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter 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 provides that it may not be used or cited as precedent being sent to the taxpayer’s representatives pursuant to the power_of_attorney on file with this office a copy of this letter is this ruling is directed only to the taxpayer s requesting it sec_6110 the rulings contained in this letter are based upon information and sincerely melissa c liquerman melissa c liquerman senior technician reveiwer branch passthroughs special industries copy for sec_6110 purposes enclosure cc


cca_2013120517500210 id uilc number release date from sent thursday december pm to cc bcc subject re signing authority -------- thanks for your question what we may not have said clearly enough is that sec_2203 is only operative in the estate_tax context in relevant part the statute provides the term executor whenever it is used in this title in connection with the estate_tax imposed by this chapter means the plain language of the statute limits the statutory executor to the estate_tax regime chapter sec_2203 does not provide any authority in the income_tax regime chapter or in the gift_tax regime chapter or in the gstt regime chapter the statutory executor has full authority to act in the estate_tax realm including the authority to execute form_890 to waive restrictions on assessment of the estate_tax but sec_2203 does not extend the statutory executor concept beyond the estate_tax in chapter nor does it provide any authority to execute form_870 to waive restrictions for assessment of income_tax or to execute form_890 to waive restrictions on assessment of gift_tax or gstt the specific question the cca addressed was who could waive restrictions or extend the ased for the decedent’s delinquent income_tax returns because sec_2203 is limited only to estate_tax we didn’t address it since similar questions are likely brought to etas fairly often ------- thought it might be helpful to discuss this on today’s call i hope that’s helpful but if you have further questions please let us know thanks -------- --------------


t c memo united_states tax_court brenda wallace petitioner v commissioner of internal revenue respondent docket no filed date brenda wallace pro_se susan smith canavello for respondent memorandum opinion couvillion special_trial_judge petitioner applied for relief from joint liability under section for the tax_year based on form_8857 request for innocent spouse relief petitioner's request was denied unless otherwise indicated section references are to the internal_revenue_code some of the facts were stipulated those facts with the annexed exhibits are so found and are incorporated herein by reference petitioner's legal residence at the time the petition was filed was shreveport louisiana petitioner was married to wayland wallace mr wallace during they had two daughters of their marriage petitioner and mr wallace never separated or divorced he died on date petitioner and mr wallace were both employed during petitioner's only income that year was wage and salary income of dollar_figure she was employed as an interpreter for the deaf mr wallace filed a timely federal_income_tax return for that return included only his income and deductions related thereto it did not include petitioner's income nor did she sign the return the return reflected an income_tax_liability of dollar_figure withholding credits of dollar_figure and an overpayment of dollar_figure the irs applied dollar_figure of the overpayment to an income_tax_liability of mr wallace for another tax_year and refunded the balance of dollar_figure during petitioner and mr wallace filed an amended federal_income_tax return for the sole purpose of the amended_return was to elect a filing_status of married_filing_jointly and to include petitioner's income for which was not included on the original return filed by mr wallace the amended_return reflected an additional income_tax of dollar_figure all of which was attributable to petitioner's income the dollar_figure tax_liability was not paid and it is for that liability that petitioner seeks relief under sec_6015 respondent has made no adjustments to either the separate_return initially filed by mr wallace or the amended_return filed by petitioner and mr wallace in which they elected the filing_status of married_filing_jointly thus respondent has not determined any deficiency against petitioner or mr wallace this case therefore involves petitioner's application_for relief under sec_6015 for a tax_liability attributable solely to her income on the form_8857 filed by petitioner seeking relief she did not attach or submit a written_statement stating the basis upon which she claimed relief moreover on the form_8857 petitioner erroneously stated that the tax_liability for which she sought relief was due to erroneous items of her spouse in the stipulation however petitioner agreed that the tax_liability was attributable solely to her income petitioner's sole basis even though the original return was not a joint_return respondent agreed at trial that petitioner and mr wallace had properly elected a filing_status of married_filing_jointly based on the amended_return sec_6013 provides generally that if an individual has filed a separate_return for a taxable_year for which a joint_return could have been filed such individual and his or her spouse may thereafter file a joint_return for such year after the date prescribed by law for the filing of the return for relief is that she was unemployed at the time the amended_return was filed and had no assets or other resources to pay the tax_liability at the time of trial however petitioner was employed respondent denied petitioner's application_for relief on the ground that the tax_liability in question was entirely attributable to her income generally spouses filing a joint income_tax return are each fully responsible for the accuracy of their return and for payment of the tax_liability sec_6013 114_tc_276 sec_6015 however provides various means by which a spouse can be relieved of this joint_and_several obligation the court's jurisdiction here arises under sec_6015 as petitioner's claim for relief is based upon what is referred to generally as a stand alone petition 118_tc_494 respondent considered petitioner's claim under sec_6015 c and f and denied her application_for relief with respect to relief under sec_6015 in 120_tc_137 this court noted that relief under that provision is based upon an understatement_of_tax attributable to erroneous items of the other spouse here as in washington v commissioner supra there is no understatement_of_tax as defined in sec_6662 nor are there erroneous items of the other spouse petitioner merely seeks relief from payment of that portion of the tax shown on the joint_return that was not paid when the return was filed petitioner therefore is not entitled to relief under sec_6015 because there was no understatement_of_tax similarly under sec_6015 which provides relief from joint liability for spouses who filed a joint_return but who are no longer married or legally_separated or have lived apart for a 12-month_period this court further held in washington v commissioner supra pincite that relief is not available under sec_6015 with respect to an unpaid liability for tax reported on the return here petitioner seeks relief of a tax that was reported on the return sec_6015 therefore allows no relief to petitioner sec_6015 provides for equitable relief with respect to any unpaid tax any deficiencies in tax or any portion thereof if relief is not available under sec_6015 or c and if taking into account all the facts and circumstances it is inequitable to hold the individual liable for such liability to prevail under sec_6015 the taxpayer must prove that additionally sec_6015 provides that relief is limited to the portion of the deficiency properly allocable to the taxpayer seeking relief since the unpaid tax in this case is totally attributable to petitioner's income sec_6015 precludes any relief to petitioner the denial of equitable relief by the irs was an abuse_of_discretion washington v commissioner supra pincite 118_tc_106 115_tc_183 affd 282_f3d_326 5th cir pursuant to sec_6015 the commissioner has prescribed guidelines setting forth various factors considered in determining whether a taxpayer is entitled to equitable relief under sec_6015 revproc_2000_15 2000_1_cb_447 among the factors against granting of relief are the unpaid liability is attributable to the requesting spouse the requesting spouse knew or had reason to know that the reported liability would be unpaid at the time the return was signed the requesting spouse significantly benefited beyond normal support from the unpaid liability and the requesting spouse will not suffer economic hardship if relief is denied petitioner has failed to establish that there was an abuse_of_discretion by respondent in denying her relief under sec_6015 her sole argument is that at the time the amended_return was filed in she was unemployed and did not have the assets or resources to pay the tax she had previously been employed and although she may have been unemployed at the time the amended_return was filed she thereafter resumed employment at the time of trial petitioner was employed on this record the court sustains respondent decision will be entered for respondent