internal_revenue_service appeals_division marrows rd newark de certified department of the treasury release date 4fshs s01 il cade df ode i ya-o taxpayer_identification_number person to contact employee d number tel fax refer reply to ap in re exempt status tax years last day to file a petition with the united_states tax_court dear this is a final adverse determination as to your exempt status under sec_501 as an organization described under sec_501 of the internal_revenue_code our adverse determination was made for the following reason s you did not meet the operational_test as required by sec_1 cx3 -1 of the treasury regulations you did not engage in activities which accomplish one or more of such exempt purposes specified in sec_501 as required by sec_1 c -1 c contributions to your organization are not deductible under code sec_170 you are required to file federal form_1120 for the year s shown above if you decide to contest this determination under the declaratory_judgment provisions of code sec_7428 a petition to the united_states tax_court the united_states court of claims or the district_court of the united_states for the district of columbia must be filed before the ninety-first day after the date this determination was mailed to you contact the clerk of the appropriate court for rules for filing petitions for declaratory_judgment to secure a petition form from the united_states tax_court write to the united_states tax_court second street n w washington d c you also have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals procedures etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations or extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling we will notify the appropriate state officials of this final adverse determination of your exempt status as required by code sec_6104 if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely ao wy rebbe charles f fisher appeals team manager cc


internal_revenue_service number release date index number ----------------------------------------- --------------------------- ------------------ -------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------------ ---------------------------------------------------- telephone number ---------------------- refer reply to cc intl b02 plr-135814-15 date date legend taxpayers -------------------------------------- and ------------------------------------- fc ------------------------------ country a ------------ year ------- year ------- tax accountant --------------------------- dear -------------------------- this is in response to a letter dated date submitted by taxpayers’ authorized representatives that requested the consent of the commissioner of the internal_revenue_service commissioner to make a retroactive qualified_electing_fund qef election under sec_1295 of the internal_revenue_code the code and sec_1_1295-3 with respect to taxpayers’ investment in fc the ruling contained in this letter is based upon information and representations submitted by taxpayers 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 facts taxpayers are u s citizens who file a joint_return on various dates in year taxpayers acquired shares of fc fc was a passive_foreign_investment_company plr-135814-15 pfic with respect to taxpayers and continues to be a pfic with respect to taxpayers taxpayers relied on tax accountant to prepare their income_tax return for year although tax accountant was aware of taxpayers’ acquisition of fc shares tax accountant did not inform them that fc was a pfic or that a qef election was available in year taxpayers became aware of the pfic issue with respect to their fc shares after conducting their own research and confirming the issue with fc and the taxpayers’ new tax accountant taxpayers submitted affidavits under penalties of perjury describing the events that led to their failure to make a qef election with respect to fc by the election due_date including the role of tax accountant taxpayers represent that as of the date of their request_for_ruling the pfic status of fc had not been raised by the irs on audit for any of the taxable years at issue ruling requested taxpayers request the consent of the commissioner to make a retroactive qef election with respect to fc under sec_1_1295-3 retroactive to year law sec_1295 provides that a pfic will be treated as a qef with respect to a taxpayer if an election by the taxpayer under sec_1295 applies to such pfic for the taxable_year and the pfic complies with such requirements as the secretary may prescribe for purposes of determining the ordinary_earnings and net capital_gains of such company under sec_1295 a qef election may be made for any taxable_year at any time on or before the due_date determined with regard to extensions for filing the return for such taxable_year to the extent provided in regulations such an election may be made after such due_date if the taxpayer failed to make an election by the due_date because the taxpayer reasonably believed the company was not a pfic under sec_1_1295-3 a shareholder may request the consent of the commissioner to make a retroactive qef election for a taxable_year if the shareholder reasonably relied on a qualified_tax professional within the meaning of sec_1_1295-3 granting consent will not prejudice the interests of the united_states government as provided in sec_1_1295-3 plr-135814-15 the request is made before a representative of the internal_revenue_service raises upon audit the pfic status of the corporation for any taxable_year of the shareholder and the shareholder satisfies the procedural requirements of sec_1_1295-3 the procedural requirements include filing a request for consent to make a retroactive election with and submitting a user_fee to the office of the associate chief_counsel international sec_1_1295-3 additionally affidavits signed under penalties of perjury must be submitted that describe the events that led to the failure to make a qef election by the election due_date the discovery of such failure the engagement and responsibilities of the qualified_tax professional and the extent to which the shareholder relied on such professional sec_1_1295-3 and iii conclusion based on the information submitted and representations made with taxpayers’ ruling_request we conclude that taxpayers have satisfied sec_1_1295-3 accordingly consent is granted to taxpayers to make a retroactive qef election with respect to fc for year provided that taxpayers comply with the rules under sec_1_1295-3 regarding the time and manner for making the retroactive qef election this ruling is directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter 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 plr-135814-15 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely kristine crabtree assistant to branch chief branch international


t c summary opinion united_states tax_court kristen l powers petitioner v commissioner of internal revenue respondent docket no 7917-11s filed date jan r pierce danielle meyers student and courtney peck student for petitioner erik w nelson for respondent summary opinion guy special_trial_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 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 deficiencies of dollar_figure and dollar_figure in petitioner’s federal_income_tax for and respectively years in issue petitioner filed a timely petition for redetermination with the court pursuant to sec_6213 petitioner concedes that she is not entitled to deductions for vehicle expenses depreciation business use of her home and other expenses reported on schedules c profit or loss from business for the years in issue the issues remaining for decision are whether petitioner is entitled to deductions claimed on schedule a for unreimbursed employee business_expenses for vehicle unless otherwise indicated section references are to the internal_revenue_code as amended and in effect for and and rule references are to the tax_court rules_of_practice and procedure monetary amounts are rounded to the nearest dollar petitioner failed to offer any evidence at trial in respect of deductions she claimed on schedules a itemized_deductions for certain unreimbursed employee business_expenses including parking fees tolls travel and meals and entertainment nor were those items addressed in petitioner’s posttrial brief accordingly those matters are deemed conceded see eg mcneil v commissioner tcmemo_2011_150 n aff’d 451_fedappx_622 8th cir expenses in excess of the dollar_figure and dollar_figure amounts respondent allowed for and respectively and expenses attributable to the business use of her home background some of the facts have been stipulated and are so found the stipulation of facts and the accompanying exhibits are incorporated herein by this reference petitioner resided in oregon at the time the petition was filed i petitioner’s employment with centex homes petitioner was employed as a real_estate sales agent by centex homes centex throughout and the first nine months of petitioner was an at- will employee and was compensated by commissions earned on sales of centex homes petitioner earned sales commissions of dollar_figure and dollar_figure while working for centex during and respectively petitioner frequently worked seven days a week for centex she was ranked as one of centex’s top three sales agents in oregon for and as its top sales agent in the state for respondent’s allowances for vehicle expenses are apparently based on an industry standard for real_estate sales agents and equal of petitioner’s gross_income for and a petitioner’s daily activities and responsibilities petitioner resided in beaverton oregon approximately miles from centex’s main office in the city of portland portland office centex regularly assigned her to work at its residential development sites in salem gresham canby and hillsborough oregon petitioner spent most of her time at the salem and gresham developments which were approximately and miles respectively from the portland office salem and gresham are miles apart petitioner used her personal vehicle for work-related transportation it was centex’s policy not to reimburse employees for transportation or vehicle expenses petitioner routinely started her workday at the portland office where she met with the division president her sales manager and a real_estate broker to conduct day-to-day business petitioner did not have a workstation in the portland office petitioner normally would leave the portland office and drive directly to salem or gresham to work in the sales office--either a centex trailer or an office space in a model home she often found it necessary to drive between centex developments during the day to meet with clients finalize contracts escort potential buyers to home sites and attend real_estate closings petitioner would end her workday by returning to the portland office petitioner testified that she drove an average of miles daily on round trips from the portland office to the various centex developments mentioned above the record includes receipts for petitioner’s gasoline purchases for one- week periods in january and date totaling dollar_figure and dollar_figure respectively petitioner testified that the expenditures were representative of her weekly gasoline purchases for and b petitioner’s original mileage log petitioner testified that she kept a messy handwritten mileage log in her car where she recorded the miles she traveled on daily work-related trips she further testified that it was her practice to routinely transfer the mileage from her handwritten log to an electronic spreadsheet that she kept on a centex computer and flash drive petitioner recorded her daily mileage by listing the distances between the portland office and salem or gresham as the case might be and taking odometer readings to account for the miles she drove between centex developments individual home sites and business meetings during the day c petitioner’s use of her home for centex business petitioner resided in a home built by centex and she used two of the three bedrooms in the home to conduct centex business specifically one bedroom was converted to an office where she met with clients and reviewed sales contracts and the other bedroom contained large three-dimensional topographical tables that allowed potential clients to visualize individual home sites at centex’s developments petitioner testified that she lived alone during the years in issue and did not use either of the rooms in question for personal_use d termination of petitioner’s employment with centex during fall residential real_estate prices began to fall and many centex clients withdrew from contracts to purchase new homes centex responded to adverse market conditions by delaying construction of homes under contract for as many as eight months recognizing that her commissions would likewise be delayed petitioner inquired whether centex would pay her a salary in the interim when centex declined petitioner informed her sales manager that she would have to seek employment elsewhere although petitioner assumed that she would continue to work for centex for the next couple of weeks she testified that centex immediately changed the locks at the salem office and that she was unable to gain access to the centex computer and flash drive containing her mileage records petitioner was later informed that the flash drive had been broken and that the computer she had been using could not be found petitioner was self-employed as a real_estate agent for the final three months of ii petitioner’s tax returns for and petitioner timely filed federal_income_tax returns for and petitioner attached schedules a and forms 2106-ez unreimbursed employee business_expenses to her returns claiming deductions for vehicle expenses of dollar_figure and dollar_figure for and respectively as previously mentioned petitioner also attached schedules c to her returns as relevant herein petitioner claimed deductions of dollar_figure and dollar_figure for business use of her home during and respectively petitioner attached forms expenses for business use of your home indicating that she used square feet or of the total space in her home for business purposes the forms reveal that the deductions petitioner claimed were derived as a percentage of mortgage interest of dollar_figure for and a petitioner reported on forms 2106-ez that she drove big_number miles and big_number miles during and respectively and she used standard mileage rates in computing her vehicle expenses the commissioner generally updates the optional standard mileage rates annually see sec_1_274-5 income_tax regs the standard mileage rate of cents per mile for is set forth in revproc_2006_49 sec_5 2006_2_cb_936 revproc_2007_70 sec_5 2007_2_cb_1162 established a standard mileage rate of cents per mile effective for transportation_expenses incurred on or after date the standard mileage rate for was modified midyear however by announcement 2008_2_cb_114 which increased the standard rate to cents per mile for transportation_expenses paid_or_incurred on or after date combination of mortgage interest of dollar_figure and real_estate_taxes of dollar_figure for iii tax_return preparation petitioner relied on a coworker to prepare her tax returns she provided the preparer with her records including her handwritten mileage log and relied on him to adequately prepare the returns when petitioner’s returns were selected for audit a turbotax representative assisted her petitioner testified that the representative advised her to recreate mileage logs for the years in issue using her handwritten log to provide a weekly mileage summary petitioner recreated the mileage logs as directed and apparently lost the handwritten log petitioner also claimed schedule a deductions for mortgage interest of dollar_figure and dollar_figure and real_estate_taxes of dollar_figure and dollar_figure for and respectively although respondent disallowed the deductions for business use of home petitioner reported on schedules c he allowed her schedule a deductions for mortgage interest of dollar_figure and dollar_figure for and respectively we note that the notice_of_deficiency appears to erroneously state that respondent allowed petitioner a schedule a deduction for real_estate_taxes of dollar_figure for in lieu of the dollar_figure amount she purportedly reported for that year we assume respondent intended that the adjustment would apply to petitioner’s schedule a for and the dollar_figure deduction petitioner claimed for real_estate_taxes for remains undisturbed the parties will be expected to address the matter in computations prepared pursuant to rule the mileage logs that petitioner reconstructed for and contain monthly and weekly summaries of the miles petitioner drove in connection with her work for centex the summaries include a generic description of trips taken each week eg main office agents competition driving between neighborhoods each trip was reported to have originated in beaverton and ended in gresham canby hillsboro or salem according to the summaries petitioner drove big_number miles in and big_number miles during january through date discussion the commissioner’s determination of a taxpayer’s liability in a notice_of_deficiency normally is presumed correct and the taxpayer bears the burden of proving that the determination is incorrect rule a 290_us_111 petitioner has not asserted that the burden_of_proof as to any relevant factual issue should shift to respondent under sec_7491 see sec_7491 and 116_tc_438 petitioner clarified at trial that she erred in listing beaverton rather than the portland office as the point of origin for her trips and that she did not claim vehicle expenses for her daily commute to the portland office the mileage petitioner reported for consisted of big_number miles driven between january and date and big_number miles driven between july and date deductions are a matter of legislative grace and the taxpayer generally bears the burden of proving entitlement to any deduction claimed rule a 503_us_79 292_us_435 a taxpayer must substantiate deductions claimed by keeping and producing adequate_records that enable the commissioner to determine the taxpayer’s correct_tax liability sec_6001 65_tc_87 aff’d per curiam 540_f2d_821 5th cir 43_tc_824 a taxpayer claiming a deduction on a federal_income_tax return must demonstrate that the deduction is allowable pursuant to a statutory provision and must further substantiate that the expense to which the deduction relates has been paid_or_incurred sec_6001 hradesky v commissioner t c pincite when a taxpayer establishes that he or she paid_or_incurred a deductible expense but fails to establish the amount of the deduction the court normally may estimate the amount allowable as a deduction 39_f2d_540 2d cir 85_tc_731 there must be sufficient evidence in the record however to permit the court to conclude that a deductible expense was paid_or_incurred in at least the amount allowed 245_f2d_559 5th cir under sec_162 a deduction is allowed for ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business a deduction normally is not allowed however for personal living or family_expenses sec_262 whether an expenditure satisfies the requirements for deductibility under sec_162 is a question of fact see 320_us_467 the term trade_or_business includes performing services as an employee 54_tc_374 however an employee_business_expense is not ordinary and necessary if the employee is entitled to reimbursement from his or her employer see 24_tc_21 noz v commissioner tcmemo_2012_272 sec_274 prescribes more stringent substantiation requirements to be met before a taxpayer may deduct certain categories of expenses including travel_expenses meals and entertainment expenditures and expenses related to the use of listed_property as defined in sec_280f see 50_tc_823 aff’d 412_f2d_201 2d cir as relevant here the term listed_property includes inter alia passenger automobiles sec_280f to satisfy the requirements of sec_274 a taxpayer generally must maintain adequate_records or produce sufficient evidence corroborating his or her own statement which in combination are sufficient to establish the amount date and time and business_purpose for each expenditure or business use of listed_property sec_1_274-5t c temporary income_tax regs fed reg date sec_1_274-5t temporary income_tax regs supra provides in relevant part that adequate_records generally consist of an account book a diary a log a statement of expense trip sheets or a similar record made at or near the time of the expenditure or use along with supporting documentary_evidence sec_1_274-5 income_tax regs provides that the strict substantiation requirements of sec_274 for vehicle expenses must be met even where the optional standard mileage rate is used moreover the court may not use the rule established in cohan v commissioner f 2d pincite to estimate expenses covered by sec_274 sanford v commissioner t c pincite sec_1 5t a temporary income_tax regs fed reg date taxpayers lacking a contemporaneous log are expected to maintain a record created as near in time as possible to the particular expenditure or business use including the elements outlined above supported by corroborative documentary_evidence that carries with it a high degree of probative value sec_1_274-5t temporary income_tax regs supra if a taxpayer’s records have been destroyed or lost due to circumstances beyond his or her control the taxpayer may substantiate expenses subject_to sec_274 by making a reasonable reconstruction of the expenditures through other credible_evidence 122_tc_305 sec_1_274-5t temporary income_tax regs fed reg date a taxpayer is required to reconstruct pertinent records to the fullest extent possible see eg chong v commissioner tcmemo_2007_12 wl if no other documentation is available the court may but is not obliged to accept credible testimony of a taxpayer to substantiate a deduction see boyd v commissioner t c pincite citing watson v commissioner t c memo freeman v commissioner tcmemo_2009_213 wl i vehicle expenses petitioner elected to apply standard mileage rates and claimed deductions for vehicle expenses of dollar_figure and dollar_figure for and respectively the record includes reconstructed mileage logs that purport to show the number of miles that petitioner drove in connection with her employment with centex petitioner’s testimony at trial describing her daily activities and responsibilities during the course of her employment with centex was forthright and credible we are satisfied from her testimony and other evidence in the record that she traveled substantial but relatively routine distances daily from centex’s office in portland to various centex developments frequently salem and gresham and back we likewise are convinced that the logs that petitioner reconstructed during the examination process generally are representative of the miles that she drove for business purposes although they are inexact inasmuch as they comprise only weekly and monthly summaries under the circumstances giving appropriate weight to petitioner’s reconstructed mileage logs her testimony and the sampling of gasoline receipts in the record we conclude that she has adequately substantiated that she drove miles per day six days a week or a total of big_number and big_number miles in connection with her work for centex during and the first nine months of respectively ii business use of home a taxpayer generally is not entitled to deduct any expenses related to a dwelling_unit used as a residence during the taxable_year sec_280a expenses attributable to a home_office are excepted from this general_rule however if the expenses are allocable to a portion of the dwelling_unit which is exclusively used we conclude that petitioner drove big_number miles from january to date and big_number miles from july to date petitioner did not substantiate the miles she purportedly drove as a self-employed real_estate agent beginning date through the end of that year on a regular basis as the principal_place_of_business for the taxpayer’s trade_or_business sec_280a 125_tc_271 if the taxpayer is an employee the exception under sec_280a will apply only if the exclusive use of the office space is for the convenience of the taxpayer’s employer sec_280a 94_tc_348 as with all other business_expenses the taxpayer must establish that the expense has been paid_or_incurred and the amount of the expense sec_6001 petitioner reported that she used of her home for business purposes and claimed deductions of dollar_figure and dollar_figure for business use of her home in and respectively these amounts represent of mortgage interest that petitioner reported on form_8829 for and a combination of mortgage interest and real_estate_taxes that petitioner reported on form_8829 for although we are convinced that petitioner otherwise was entitled to deductions for the business use of her home respondent determined in the notice_of_deficiency that petitioner was entitled to deductions for mortgage interest and real_estate_taxes only on schedule a for the years in issue petitioner did not contest the latter adjustments and she did not offer any evidence in respect of the difference between the home mortgage interest of dollar_figure she reported on form_8829 for and the dollar_figure for mortgage interest that respondent allowed under the circumstances we conclude petitioner is not entitled to include home mortgage interest and real_estate tax_payments in computing deductions for the business use of her home for or petitioner did not offer any evidence in respect of her monthly or yearly utility expenses or information related to the depreciation of her home that would allow us to estimate the amounts allowable as deductions for the business use of her home see cohan v commissioner f 2d pincite see also williams f 2d pincite accordingly we sustain respondent’s determination disallowing the deductions petitioner claimed for business use of her home to reflect the foregoing decision will be entered under rule


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc intl br1-plr-114829-02 date date ty a date b country c date d dear this is in response to your letter dated date requesting a ruling that a’s loss of lawful permanent resident status expatriation did not have for one of its principal purposes the avoidance of u s taxes under subtitle a or subtitle b of the code additional information was submitted in a letter dated date the information submitted for consideration is substantially as set forth below the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination a was born on date b in country c a came to the united_states for employment reasons and obtained a green card a is also a citizen of country c where she now lives on date d a relinquished her green card a will be subject_to country c tax on her worldwide income on the date of a's expatriation a’s net_worth exceeded the applicable_amount set forth in sec_877 sec_877 generally provides that a citizen who loses u s citizenship or a u s long-term_resident who ceases to be taxed as a lawful permanent resident individuals who expatriate within the 10-year period immediately preceding the close of the plr-114829-02 taxable_year will be subject_to the special rules of sec_877 for such taxable_year unless such loss did not have for one of its principal purposes the avoidance of u s taxes sec_2107 and sec_2501 provide special estate and gift_tax regimes respectively for individuals who expatriate with a principal purpose to avoid u s taxes a former u s citizen or former u s long-term_resident will be treated as having expatriated with a principal purpose to avoid u s taxes for purposes of sec_877 sec_2107 and sec_2501 if the individual’s average income_tax_liability or the individual’s net_worth on the date of expatriation exceed certain thresholds see sec_877 sec_2107 and sec_2501 a former u s citizen whose net_worth or average tax_liability exceeds these thresholds however will not be presumed to have a principal purpose of tax_avoidance if that former citizen is described within certain statutory categories and submits a request for a ruling within one year of the date of loss of u s citizenship for the secretary’s determination as to whether such loss had for one of its principal purposes the avoidance of u s taxes see sec_877 sec_2107 and sec_2501 under notice_98_34 1998_2_cb_29 modifying notice_97_19 1997_1_cb_394 a former long-term_resident whose net_worth or average tax_liability exceeds the applicable thresholds will not be presumed to have a principal purpose of tax_avoidance if that former resident is described within certain categories and submits a complete and good_faith request for a ruling as to whether such loss had for one of its principal purposes the avoidance of u s taxes notice_98_34 requires that certain information be submitted with a request for a ruling that an individual’s expatriation did not have for one of its principal purposes the avoidance of u s taxes a is eligible to request a ruling pursuant to notice_98_34 because she is a citizen and resident fully subject_to tax in country c the country in which she was born a submitted all of the information required to be submitted by notice_97_19 as modified by notice_98_34 including additional information requested by the service after review of the submission accordingly based solely on the facts submitted and the representations made we conclude that a has made a complete and good_faith submission in accordance with sec_877 and notice_98_34 therefore a will not be presumed under sec_877 to have had as one of her principal purposes for expatriating the avoidance of u s taxes we further conclude that a will not be treated under sec_877 as having had as one of her principal purposes for expatriating the avoidance of u s taxes because the information submitted clearly establishes the lack of a principal purpose to avoid taxes under subtitle a or b of the code plr-114829-02 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in addition no opinion is expressed as to a’s u s tax_liability for the taxable years prior to or after her expatriation under sections of the code other than sec_877 sec_2107 and sec_2501 a copy of this letter must be attached to a’s u s income_tax return for the year in which a obtained the ruling whether or not a is otherwise required to file a return this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file in this office a copy of this letter will be sent to a sincerely w edward williams senior technical reviewer cc intl br1


t c summary opinion united_states tax_court jane anne jeffries petitioner v commissioner of internal revenue respondent docket no 10063-99s filed date jane anne jeffries pro_se angeligue m neal for respondent pajak special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated subseguent section references are to the internal_revenue_code in effect for the year in issue respondent determined a deficiency in petitioner’s federal_income_tax in the amount of dollar_figure respondent disallowed petitioner’s deduction of dollar_figure for expenses claimed on a schedule c profit or loss from business on the grounds that petitioner did not engage in an activity for the purpose of making a profit an automatic_adjustment was made this court must decide whether petitioner engaged ina tutoring activity for profit within the meaning of sec_183 some of the facts in this case have been stipulated and are so found petitioner resided in los angeles california at the time she filed her petition during petitioner was employed as a teacher with the los angeles unified school district lausd she earned wages of dollar_figure petitioner taught at richland elementary_school richland as a teacher at richland petitioner taught first grade students from january through date and third and fourth grade students from september through date on her federal_income_tax return for petitioner claimed deductions for an alleged activity she called conversation with connection cwc in the alleged activity cwc petitioner claimed she tutored students not at or from richland about the use of computers the year at issue was the second year that petitioner’s tax returns reflected the alleged activity called cwc petitioner owned a condominium located pincite n market street apt inglewood california she alleged she operated cwc from that condominium during petitioner did not maintain a roster syllabus or any other documentation to show who the students were who were purported clients of cwc there was no documentation for the lessons that were allegedly taught to them during petitioner did not maintain a log or other documentation of any hours she spent on cwc petitioner did not obtain a business license for cwc she did not maintain any business books_and_records for cwc petitioner did not maintain a separate business checking account for cwc she did not advertise the services available through cwc petitioner reported gross_receipts and losses for cwc on her federal individual income_tax returns for the tax years through as follows gross_receipts tax_year reported loss claimed --oq- dollar_figure --q- --q- big_number --q- big_number petitioner did not charge her alleged students because she said they could not afford to pay when asked when she could make a profit petitioner answered i expected to make a profit when i could be working with people who could afford to pay for my services she further stated i intended to have a business called conversation with connection it will be when i retire from the school district petitioner is not retired from the school district petitioner deducted on her schedule c expenses which were personal expenses not deductible under sec_262 she deducted moneys paid to a handyman to paint her house she deducted moneys paid for a carpet delivered to her house she deducted a gift a membership in the screen actor’s guild to a friend’s daughter she deducted payments to a person who repaired her personal automobile she deducted payments for assistance during a funeral thus petitioner’s use of her schedule c allowed her to claim deductions for many nondeductible personal expenses sec_183 disallows any deductions attributable to activities not engaged in for profit except as provided under sec_183 a taxpayer need not have a reasonable expectation of profit however the facts and circumstances must demonstrate that he or she entered into the activity or continued the activity with the actual and honest objective of making a profit 88_tc_464 78_tc_642 affd without opinion 702_f2d_1205 d c cir sec_1_183-2 income_tax regs the taxpayer's objective to make a profit must be analyzed by looking at all the surrounding facts dreicer v commissioner supra pincite these facts are given greater weight than the taxpayer’s mere statement of intent id sec_1_183-2 income_tax regs provides a nonexclusive list of relevant factors which should be considered in determining whether the taxpayer has the requisite profit objective the factors are the manner in which the taxpayer carries on the activity the expertise of the taxpayer or advisers the time and effort expended by the taxpayer in carrying on the activity the expectation that the assets used in the activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar activities the taxpayer’s history of income or losses with respect to the activity the amount of occasional profits if any which are earned the financial status of the taxpayer and any elements indicating personal pleasure or recreation sec_1_183-2 income_tax regs these factors are not applicable or appropriate in every case 86_tc_360 petitioner did not carry on a business in a businesslike fashion she had no books_or_records no records of students and no business plans she had no gross_receipts she could not make a profit because she did not charge for the alleged services she admitted that she intended to go into business after she retired there is no credible_evidence that she spent time on this activity petitioner has a history of substantial losses with no prospect for any gain petitioner deducted personal expenses nondeductible under sec_262 on her schedule c upon a review of the facts in the record we conclude that petitioner did not engage in the cwc activity with an actual and honest objective of making a profit and that under sec_183 she is not entitled to claim the deductions in issue respondent’s determination is sustained reviewed and adopted as the report of the small_tax_case division decision will be entered for respondent


t c memo united_states tax_court home team transition management petitioner v commissioner of internal revenue respondent docket no filed date richard s avellone for petitioner karen o myrick for respondent memorandum findings_of_fact and opinion gerber judge respondent determined income_tax deficiencies of dollar_figure dollar_figure and dollar_figure for petitioner’ sec_2011 sec_2012 and sec_2013 taxable years respectively respondent also determined accuracy-related_penalties of dollar_figure dollar_figure and dollar_figure under sec_6662 a for petitioner’ sec_2011 sec_2012 and sec_2013 taxable years respectively finally respondent determined late filing additions to tax of dollar_figure and dollar_figure under sec_6651 for petitioner’ sec_2011 and sec_2013 taxable years respectively after concessions by the parties the issues remaining for our consideration are whether petitioner is entitled to deduct management fees for and whether petitioner is liable for accuracy-related_penalties under sec_6662 for each taxable_year and whether petitioner is liable for the late filing addition_to_tax for the taxable_year findings of fact3 petitioner a corporate home healthcare service provider had its principal_place_of_business at st louis missouri at the time the petition was filed 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure 2respondent conceded that petitioner did not fail to report dollar_figure of gross_income for and that it is not liable for the late filing addition_to_tax for petitioner on brief presented no argument as to the remaining sec_6662 penalties and sec_6651 addition_to_tax and conceded that its liability for the penalties and addition_to_tax depends upon the court’s holding with respect to the deductibility of the management fees 3the parties’ stipulation of facts and the attached exhibits are incorporated by this reference petitioner provides at-home aid services to assist clients in their daily living tasks such as bathing eating cooking and grocery shopping petitioner also offers brief visits from a nurse to set out regular medications monitor vital statistics and conduct a range of body exercises with a client petitioner reports its income and expenses on the cash_method_of_accounting and filed it sec_2011 form_1120 u s_corporation income_tax return on date during the years at issue petitioner’s clientele wa sec_65 -70 medicaid funded veterans affairs funded and -25 privately funded during the years at issue petitioner was wholly owned by sacer cor enterprises inc sacer cor sacer cor purchased petitioner through a combination of owner contributions interest-bearing loans funded by the owners and a corporate loan from union bank sacer cor is a missouri for-profit corporation that was incorporated by charles n honigfort sacer cor’s shares were held in equal percentages by charles and mary honigfort and sean and ruth ann noonan when sacer cor was incorporated it was the intention of the four shareholders to acquire in-home healthcare companies on date sacer cor acquired petitioner which had been an ongoing business since and had the same four shareholders owners as sacer cor when the owners acquired petitioner it was owned and operated by an individual who lived in new york state and had an existing contract with medicaid during through petitioner was sacer cor’s only holding and no other healthcare companies were acquired after sacer cor’s acquisition of petitioner mr honigfort performed its daily administrative duties including operations payroll bill payment monitoring cash_flow and bookkeeping ms noonan handled petitioner’s healthcare management responsibilities for the three years at issue mr honigfort and ms noonan received wages from petitioner for the work performed mr honigfort and ms noonan provided marketing services to petitioner for which neither received additional compensation likewise neither mr honigfort nor ms noonan received additional compensation from sacer cor during the three years at issue sacer cor did not pay wages or compensate any of the four shareholder directors for work performed sacer cor’s four owners including mr honigfort and ms noonan periodically received director’s fees each receiving an equal amount after mr honigfort and ms noonan received compensation from petitioner when there was sufficient cashflow to enable payment petitioner deducted dollar_figure dollar_figure and dollar_figure claiming that it had paid those deductions to sacer cor for management services for the and taxable years respectively respondent disallowed these deductions in full on its corporate returns sacer cor reported the management fees from petitioner as income the dollar_figure petitioner deducted as management fees for had initially been classified on its books as loans and was reclassified at the end of the year during the preparation of its return likewise during the year petitioner made transfers to sacer cor totaling dollar_figure that initially were classified on petitioner’s books as intercompany loans later a portion was reclassified as management fees at the end of the year journal entries were made on petitioner’s books to reduce the balance of the intercompany loans account to dollar_figure during petitioner made transfers of dollar_figure to sacer cor which initially were classified on petitioner’s books as intercompany loans and some of which were claimed as a management fee deduction on petitioner’s return the management fee deduction for funds transferred to sacer cor was primarily determined according to the amount of cash sacer cor needed to make outside loan repayments and also to the amount of fiscal_year operating profits of petitioner and sacer cor sacer cor’s board meeting minutes dated date state that its directors will periodically review and direct the operations of entities it controls the minutes also state that the board will assess appropriate fees against its entities for management services performed for them or on their behalf the date board meeting minutes state d ue to restricted cash_flow from operations of petitioner no member compensation or management fees would at this point in time be approved or assessed sacer cor’s date board meeting minutes state that for day-to-day management services to petitioner it was determined that the amount of twenty-seven thousand dollars dollar_figure was appropriate for its management services through date likewise the date board meeting minutes state that management fees of dollar_figure were approved for the period june through date board meeting minutes for date and date state that the board approved management fees of dollar_figure and dollar_figure for those respective years other than those references to management fees in the board minutes there were no written materials or agreements concerning management fees or management duties performed the amounts of the management fees deducted were not based upon the number of hours worked or the particular services performed essentially they were based on the amounts of cash required by sacer cor to make its loan payments and the amounts of cash available from petitioner’s operating profits respondent examined sacer cor’s and petitioner’s returns and determined that the management fees that had been deducted in reality were dividends to sacer cor on the basis of that determination respondent disallowed petitioner’s management fee deductions and sacer cor was entitled to and received refunds of tax because of a reduction in the income it had reported as management fee income sacer cor did not protest or contest respondent’s determination that it was entitled to refunds for the same years that deficiencies were determined for petitioner opinion the seminal issue remaining for our consideration is whether petitioner is entitled to its claimed deductions for management fees for and respondent determined that the management fees were disguised dividends and not deductible in support of that determination respondent argues that no management services were performed by sacer cor or its officers there was no written_agreement between petitioner and sacer cor providing for management services and that in effect the payments from petitioner to sacer cor were repayments of intercompany loans respondent also notes that petitioner remitted funds to sacer cor only as long as the intercompany loan was outstanding petitioner disagrees arguing that sacer cor’s board meeting minutes reflect that management fees were intended and voted by the board for each of the years at issue petitioner also argues that the amount of management fees varied each year because there was no way of knowing in advance the amount of time needed to manage petitioner management fees are deductible under sec_162 if they are ordinary necessary and reasonable payments made for services rendered see rts inv corp v commissioner rts tcmemo_1987_98 aff’d 877_f2d_647 8th cir rts sec_1_162-7 income_tax regs that case involved whether amounts paid as salaries and management fees in closely held corporations were reasonable_compensation the court held that the salaries and management fees that were paid_by a subsidiary were not reasonable where among other things the amount_paid was equally distributed to shareholders according to ownership percentages and was paid in direct relation to the subsidiary’s profitability the court noted in rts that where a corporation is controlled by officer employees who set their own compensation special scrutiny must be given to such salaries citing 500_f2d_148 8th cir aff’g tcmemo_1973_130 the commissioner’s determination is presumptively correct and the taxpayer has the burden of proving otherwise rule a 278_us_282 sec_1_162-7 income_tax regs provides in pertinent part any amount_paid in the form of compensation but not in fact as the purchase_price of services is not deductible an ostensible salary paid_by a corporation may be a distribution of a dividend on stock this is likely to occur in the case of a corporation having few shareholders practically all of whom draw salaries the form or method of fixing compensation is not decisive as to deductibility in any event the allowance for the compensation paid may not exceed what is reasonable under all the circumstances it is in general just to assume that reasonable and true compensation is only such amount as would ordinarily be paid for like services by like enterprises under like circumstances the circumstances to be taken into consideration are those existing at the date when the contract for services was made not those existing at the date when the contract is questioned in friendly fin inc v commissioner tcmemo_1991_551 tax ct memo lexis this court held that similar payments were distributions of corporate earnings_and_profits and not compensation as the payments made were not in relation to services provided that case also involved the treatment of payments made to shareholders of closely held entities in reaching its conclusion the court provided the following guidance thus a taxpayer must show that the amount_paid as compensation is reasonable and is for services actually rendered close scrutiny is given to deductions claimed for payments made by a corporation controlled by those to whom the payments are made if the payments are distributions of earnings rather than compensation_for services rendered they are not deductible 500_f2d_148 8th cir aff’g tcmemo_1973_130 73_tc_1142 id tax ct memo lexis at in this case we have four individuals who were equal corporate shareholders in a home care business petitioner that they had acquired in during the same four shareholders incorporated another corporation sacer cor in which they were equal shareholders and sacer cor acquired ownership of petitioner the existing home healthcare business two of the shareholders were employees of petitioner and they were paid for their services which included day- to-day operation of petitioner the other two shareholders were not employees of petitioner none of the four shareholders were employees of sacer cor and no one including the four shareholders was paid a salary for any services rendered to or on behalf of sacer cor periodically the four shareholders of sacer cor were paid equal amounts as director’s fees there is no credible_evidence showing that any management services were performed by the shareholders or other employees of sacer cor for petitioner given those facts petitioner has failed to meet its burden of showing that the deducted management fees it paid to sacer cor were for services rendered and or reasonable within the meaning of sec_162 exacerbating those circumstances are the facts that the alleged management fees were originally booked as loan payments and that the amounts corresponded to petitioner’s ability to pay ie they varied depending on petitioner’s revenues we accordingly hold that respondent’s disallowance of the management fee deductions that petitioner claimed for and is not in error and is sustained petitioner has conceded on brief that its liability for the sec_6662 penalties and the sec_6651 addition_to_tax depends on this court’s holding regarding the deductibility of the management fees because petitioner presented no evidence showing that its actions were reasonable and not negligent or in disregard of the rules or that its return was timely the penalty issues are to the extent not conceded decided for respondent to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number ---------------------------- ------------------------ ------------------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b07 plr-140020-06 date date legend trust --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- ---------------------- trust --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- ----------------------- -------- ------------------------------------------------ state grantor --------------------- date -------------------------- court child -------------------------- date ----------------------- 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 this letter responds to your letter dated date and subsequent date and date are before date no additions actual or the facts and representations are as follows grantor created two irrevocable under the terms of each of the original trust agreements and the date court plr-140020-06 trusts on date at the request of the trustees court divided the irrevocable_trust into four separate trusts on date trust and trust are two of the eight trusts created by the date court order and each is held for the benefit of child and his descendants the dispositive provisions of trust and trust are identical constructive have been made to trust or trust since date each trust is governed by state law order after child 1’s death child may direct the payment of up to one-third of the net_income in his last will and testament to his 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 his issue shall share in the net_income by exercise of a limited_power_of_appointment if child dies without issue before the termination of the trust the trust assets shall be added to the shares of the remaining children in the same proportion that such shares bear to each other order each trust 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 a_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 the 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 his rights under each trust to change the percentage of net_income paid to his issue but did not direct payment of any net_income to a surviving_spouse income from each trust 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 under the terms of each of the original trust agreements and the date court child died on date under article three of his will executed on date sec_2501 of the internal_revenue_code imposes a tax on the transfer of the trustees have requested rulings that the proposed conversions of trust plr-140020-06 the trustees of each trust have filed a complaint in court requesting that the court convert trust and trust to a total return trusts under statute and that court approve a distribution percentage from each trust after the conversion the complaint further requests the court declare that on termination the assets from each trust 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 the trustees further propose to consolidate trust and trust after the conversion and merger the unitrust_amount will be divided among the beneficiaries as directed in child 1’s will and trust to a total return trusts and subsequent merger will not cause either 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 will not cause either trust or any beneficiary to realize capital_gain from an exchange of a_trust interest for income_tax purposes and will not change the basis or holding periods of the assets of either trust 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 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_2511 provides that the tax imposed by sec_2501 applies whether the 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 rules for determining when a modification sec_26_2601-1 provides that a modification of the governing plr-140020-06 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 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 sec_26_2601-1 provides that for purposes of this section a sec_26_2601-1 example considers a situation where a_trust the trustees represent that trust and trust were irrevocable on september plr-140020-06 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 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 and that there were no additions to either 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 interests in trust and trust to unitrust interests and the subsequent merger will not be considered to shift any beneficial_interest in either trust and therefore will not cause either trust to lose its status as exempt from the gst tax we further conclude that the proposed modifications 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 under sec_1001 of the code gain from the sale_or_other_disposition of property the facts in this case are similar to those set forth in example of sec_26 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-140020-06 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 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 in the present case the preliminary question is whether the trustees and plr-140020-06 beneficiaries of the trust and 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 presented there is to be no material_change in property interests or legal entitlements for trust trust the trustees or the beneficiaries if the conversion of the trusts to total return trusts 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 the same analysis applies in determining the tax consequences of the merger of the two trusts in this case the interests of all taxpayers before and after the proposed merger of trust and trust remain the same because each trust has the same beneficiaries and identical terms the exchanged properties are not materially different because they do not involve legal entitlements that are different in_kind or confer different rights and powers neither the consolidation of trust and trust nor a deemed_distribution of the assets of both to the resulting trust result in gain_or_loss realization to any taxpayer in this case ruling sec_1015 provides that if property is acquired by a transfer in trust other than a transfer in trust by a gift bequest or devise the basis shall be the same as it would be in the hands of the grantor increased by the amount of gain or decreased by the amount of loss recognized to the grantor on such transfer date by transfer in trust other than by transfer in trust by gift bequest or devise the basis_of_property so acquired is the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on the transfer under the law applicable to the year in which the transfer was made if the taxpayer acquired the property by transfer in trust this basis applies whether the property be in the hands of the trustee or the beneficiary and whether acquired prior to termination of the trust and distribution of the property or thereafter sec_1223 provides that in determining the period for which the taxpayer has held property however acquired there shall be included the period for which such property was held by any other person if under chapter of subtitle a such property has for the purpose of determining gain_or_loss from a sale_or_exchange the same basis in whole or in part in his hands as it would have in the hands of such other person see also sec_1_1223-1 sec_1_1015-2 provides that in the case of property acquired after except as expressly provided herein no opinion is expressed or implied based on the information submitted and the representations made we conclude plr-140020-06 that because sec_1001 does not apply to the conversion and merger of the trust and trust assets under sec_1015 the basis of the assets received by the resulting trust will be the same after the conversion and merger as the basis of those assets before furthermore pursuant to sec_1223 the holding_period of each assets in the resulting trust will include the holding_period of that asset in the hands of each original trust 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 enclosure copy for sec_6110 purposes