qwhuqdo 5hyhqxh 6huylfh department of the treasury number release date index no washington dc person to contact telephone number refer reply to cc ita plr-126431-01 date date in re legend taxpayer charity local chapter llc corporation month year vehicle dear this letter responds to a ruling_request submitted on behalf of taxpayer by a letter dated date as supplemented by a letter dated date the request relates to whether a proposed donation of a vehicle qualifies for a charitable_contribution_deduction under sec_170 of the code plr-126431-01 charity also has submitted a separate request for a letter_ruling concerning the property donation program through which taxpayer proposes to make a donation taxpayer and charity have executed forms tax information authorizations allowing each to receive confidential tax information related to the other’s ruling_request both taxpayer and charity have the same authorized representatives facts taxpayer is an individual and the owner of vehicle there are no liens on vehicle taxpayer purchased vehicle used and has always used it solely for personal_use the current fair_market_value of vehicle is less than its purchase_price and less than dollar_figure taxpayer intends to donate vehicle to charity through a property donation program involving llc assuming taxpayer receives a favorable letter_ruling taxpayer itemizes his income_tax deductions on his return description of relevant parties charity is a charitable entity exempt from federal_income_tax under sec_501 and is not a private_foundation it normally receives a substantial part of its support from a governmental_unit or from the general_public under sec_170 charity received its determination_letter in month year charity’s primary purpose is to find a cure for certain illnesses charity engages in programs for research patient and community service public health education and professional education local chapter is one of the local chapters of charity and is not a separate legal entity local chapter is included in charity’s group exemption filing of form_990 return of organization exempt from income_tax charity expects to enter into a written_agreement with llc to solicit process and accept property donations on behalf of charity within the area served by local chapter charity proposes to enter into the relationship because it does not currently have the resources to process property donations and meet the federal and state reporting requirements additionally charity believes it is more cost efficient to enter into this relationship than to attempt to solicit and process property donations itself charity will use the proceeds from the sale of donated property to support and further its purposes almost all of the donated property is expected to be in the form of automobiles and trucks but property donations may include boats and other personal_property llc is a charitable fundraiser registered under state law llc is engaged in the for- profit business of buying storing maintaining dismantling and selling used motor vehicles and vessels and other personal_property llc is owned by corporation a for- profit entity and an individual the individual is the managing member of llc and the president of corporation no director or officer of charity which includes local chapter has a proprietary or familial relationship with llc corporation or the plr-126431-01 individual charity is fully informed of the relationship between llc corporation and the individual description of proposed written_agreement charity has represented that the future course of dealing between the parties will be in accord with the written_agreement described below the agreement is entitled agency agreement the agreement includes as a recital that charity desires to appoint llc as its agent for the purpose of assisting charity in the solicitation acceptance processing and sale of donated motor vehicles vessels and other personal_property donated by the general_public to charity and llc desires to accept its appointment as agent for such purposes on the terms and conditions set forth in the agreement within a specified geographic area llc is the exclusive agent for charity but llc also may be an agent for others the agreement states that charity appoints llc as its authorized agent pursuant to certain state_agency laws to act in charity’s name place and stead for the following purposes to advertise and otherwise solicit donations of motor vehicles vessels and other personal_property from the general_public in the name and on behalf of charity to pick up and or accept donations of motor vehicles vessels and other personal_property from the general_public in the name and on behalf of charity to arrange for qualified appraisals process provide minor repairs and sell motor vehicles vessels and other personal_property donated by the general_public in the name and on behalf of charity and to do and perform any act necessary requisite and proper to be done and to do all things that charity might or could do or cause to be done to further the purposes of the agency set forth in through subject_to the review and approval of charity llc agrees to do the following to pick up and or accept donations of the property to the extent necessary or desirable as determined by llc in the exercise of its reasonable business judgment to pay all costs and expenses pertaining to the property so as to result in the cost-efficient sale thereof including the towing and repairing of vehicles and to pay all costs and expenses of selling auctioning or otherwise disposing of the property these activities shall be performed by llc and or its agents contractors subcontractors and or third parties whether related to llc and or its principals or not as determined by llc in its sole and absolute discretion according to the terms of the agreement llc reserves the right to refuse to accept a vehicle that llc determines in the exercise of its reasonable business judgment is not saleable at a price at least adequate to cover llc’s related costs and expenses subject_to the review and approval of charity all property shall be sold or disposed of as determined by llc in its reasonable business judgment and llc agrees to use its plr-126431-01 best efforts in connection with the sale of the property to obtain the greatest price therefor llc may enter into a consignment agreement or other subcontract with an auction company or any other business_entity including any affiliate and or related_person or entity and pay such person or entity a fee for any services rendered all property shall be sold as-is and in compliance with all applicable laws rules and regulations corporation or any other person or entity related to llc may purchase any vehicle provided that the purchase_price shall be comparable to the purchase_price anticipated in the regular course of business llc has an option and right_of_first_refusal to process but not to purchase any property donated to and received directly by charity charity is and shall remain the equitable owner of the property until an authorized sale occurs upon the sale of the donated property the proceeds shall become the property of charity net of the fee payable to llc until such sale the risk of accidental loss damage or destruction of the donated property shall be borne by charity subject_to llc’s obligation to pay the cost and expenses of insurance coverage described later in the agreement llc agrees to provide advertising on behalf of charity which may include radio television newspapers and direct mail the placement and content of advertising shall be determined by llc subject_to charity’s review and approval llc will pay for all the costs and expenses of the advertising the parties have agreed to an approximate monthly sum that llc will spend on advertising llc agrees to provide a toll-free telephone number on behalf of charity for vehicle donations charity may provide its own toll-free telephone number for vehicle donations if it pays the associated costs for donated property valued above dollar_figure llc will arrange for professional appraisals by an unaffiliated appraiser donors are solely responsible for paying the costs of their appraisals llc may when requested by charity provide signatures for forms noncash charitable_contributions on behalf of charity pursuant to a power_of_attorney described later in the agreement llc will provide the donor of a vehicle with a blue_book used car price guide printout along with a disclosure that the printout does not in any way represent the opinion of llc or charity donors will sign a certificate of donation together with a bill of sale statement of facts and a limited power_of_attorney llc will send copies of the certificates of donation to charity on behalf of charity llc will send a thank you letter to each donor upon receipt of a vehicle llc agrees to send to a donor within days after donation of a vehicle an official receipt from charity on forms provided by charity plr-126431-01 on behalf of charity llc will process all department of motor vehicles dmv documents according to dmv rules and regulations charity will provide a power_of_attorney to llc in order to complete dmv title transfers llc will provide monthly accounting reports to charity in a form and in detail satisfactory to charity llc will provide weekly advertising reports to charity charity agrees to pay llc a fee based on a specified percentage of gross_proceeds received from the sale or disposition of donated property on a monthly basis llc shall remit a payment to charity in an amount equal to the preceding month’s gross_proceeds less llc’s percentage charity reserves the right to audit and inspect llc’s property donation program financial statements for charity at any time during normal business hours description of vehicle classification and dmv titling process an interested donor will call the toll-free number and a pick-up of the vehicle will be scheduled donors will be informed that llc is acting on behalf of charity vehicles will be classified as either acquisition or clear title by llc based on guidelines determined in advance by llc in consultation with charity a clear title vehicle complies with the state antipollution and safety requirements and has enough value to be sold to the public the chain of title goes from the donor to charity to llc as a dealer then to the buyer dmv will collect transfer fees for each of the transfers in the chain of title llc appears in the chain of title because llc sells all donated vehicles under its dealer license state dmv rules provide that a charitable_organization is exempt from the dealer license requirement but all of the proceeds from the sale of the vehicle must go to the charity consequently this rule is not applicable here because some of the sale proceeds will go to llc as its fee an acquisition vehicle does not meet the state antipollution and safety requirements and is destined to go to an automobile dismantler the chain of title goes from the donor to charity to llc as a dealer then to the buyer dmv considers these transactions as multiple transfers but no dmv transfer fees are imposed when an acquisition vehicle is processed by a licensed automobile dismantler the vehicle’s dmv record will reflect a junk status with the name of the automobile dismantler and the date the vehicle was acquisitioned it is expected that the buyer generally will be corporation and it has been represented that this is so because corporation pays more for acquisition vehicles than the other automobile dismantlers that are potential buyers plr-126431-01 description of state donation law state donation law provides in part that if a person donates a motor_vehicle aircraft or vessel to a nonprofit organization or commercial fundraiser for charitable purposes the nonprofit organization or commercial fundraiser must send to the donor a receipt for that property within days from the date of the donation the receipt must describe the donated property in terms of its model age level of use including but not limited to the mileage in the case of a vehicle and condition and whether a visual inspection indicated that there were any readily apparent defects that would materially reduce the value of the property the receipt must also include the date the donation was made and must indicate whether the property was operable or inoperable at the time of donation additionally if the donated property is sold prior to the issuance of the receipt the receipt must also include all of the following the date the property was sold if the property was sold to a dismantler the amount_paid to the nonprofit organization or commercial fundraiser and if the property was altered subsequent to the donation and the alteration affected the value of the property a statement that the property was altered and whether the alteration increased or decreased the value of the property the nonprofit organization or commercial fundraiser must retain a copy of the receipt for its records analysis issue - whether donation of vehicle through the property donation program involving llc is made to charity through llc as its agent sec_170 of the code provides the general_rule that subject_to certain limitations there shall be allowed as a deduction any charitable_contribution payment of which is made within the taxable_year a charitable_contribution shall be allowable as a deduction only if verified under regulations prescribed by the secretary see also sec_1_170a-1 of the income_tax regulations sec_170 provides that the term charitable_contribution includes a contribution or gift to or for_the_use_of a corporation trust or community chest fund or foundation a created or organized in the united_states or in any possession thereof or under the law of the united_states any state the district of columbia or any possession_of_the_united_states b organized and operated exclusively for religious charitable scientific literary or educational_purposes or to foster national or international amateur sports competition but only if no part of its activities involve the provision of athletic_facilities or equipment or for the prevention of cruelty to children or animals c no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual and d which is not disqualified for tax exemption under sec_501 by reason of attempting to influence legislation and which does not participate in or intervene in including the plr-126431-01 publishing or distributing of statements any political campaign on behalf of or in opposition to any candidate for public_office see also sec_1_170a-1 a taxpayer may claim a deduction for a charitable_contribution only if the contribution is made to or for_the_use_of a qualified_organization a contribution is for_the_use_of a qualified_organization when it is held in a legally enforceable trust for the qualified_organization or in a similar arrangement 495_us_472 because the proposed donation of vehicle will not be made in trust or similar arrangement it cannot be for_the_use_of charity therefore we need to determine whether contributions in the property donation program are made to charity it is well established that an organization described in sec_170 may receive contributions through its agent sec_1_170a-1 provides in part that if a taxpayer unconditionally delivers or mails a properly endorsed stock certificate to a charitable donee or the donee’s agent the gift is completed on the date of delivery or if such certificate is received in the ordinary course of the mails on the date of mailing in revrul_85_184 1985_2_cb_84 a utility company was authorized by a charitable_organization to act as its agent in receiving contributions from customers of the utility company as stated above charity submitted a separate request for a letter_ruling concerning the property donation program through which taxpayer proposes to make a donation of vehicle a separate letter_ruling issued today to charity concludes that llc is the agent for charity and donations made through the property donation program are made to charity through llc that letter_ruling also concludes that charity’s exempt status under sec_501 is not adversely affected by this program accordingly based on the facts submitted and the representations made we conclude that donation of vehicle through the property donation program involving llc is made to charity through llc as its agent issue - whether the requirements of sec_170 will be satisfied sec_1_170a-1 provides that if a charitable_contribution is made in property other than money the amount of the contribution is the fair_market_value of the property at the time of the contribution reduced as provided in sec_170 and sec_1_170a-4 or sec_170 and sec_1_170a-4a sec_1_170a-1 provides that the fair_market_value is the price at which the property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts plr-126431-01 sec_170 provides the general_rule that no deduction shall be allowed for any contribution of dollar_figure or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the donee organization that meets the requirements of sec_170 sec_170 provides that an acknowledgment must contain the following information i the amount of cash and a description but not value of any property other than cash contributed ii whether the donee organization provided any goods or services in consideration in whole or in part for any property described in clause i and iii a description and good_faith estimate of the value of any goods or services referred to in clause ii or if such goods or services consist solely of intangible religious benefits a statement to that effect sec_170 provides that an acknowledgment shall be considered to be contemporaneous if the taxpayer obtains the acknowledgment on or before the earlier of i the date on which the taxpayer files a return for the taxable_year in which the contribution was made or ii the due_date including extensions for filing such return sec_1_170a-13 provides rules for substantiation of charitable_contributions of dollar_figure or more sec_1_170a-13 provides in part that no deduction is allowed under sec_170 for all or part of any contribution of dollar_figure or more unless the taxpayer substantiates the contribution with a contemporaneous written acknowledgment from the donee organization sec_1_170a-13 provides that except as otherwise provided in sec_1_170a-13 through f and f a written acknowledgment from a donee organization must provide the following information i the amount of any cash the taxpayer paid and a description of any property other than cash the taxpayer transferred to the donee organization ii a statement of whether or not the donee organization provides any goods or services in consideration in whole or in part for any of the cash or other_property transferred to the donee organization iii if the donee organization provides any goods or services other than intangible religious benefits a description and good_faith estimate of the value of those goods or services and iv if the donee organization provides any intangible religious benefits a statement to that effect sec_1_170a-13 provides that a written acknowledgment is contemporaneous if it is obtained by the taxpayer on or before the earlier of i the date the taxpayer files the original return for the taxable_year in which the contribution was made or ii the due_date including extensions for filing the taxpayer’s original return for that year under the property donation program described above llc on behalf of charity will send a thank you letter to each donor upon receipt of a vehicle a copy of this type of letter was submitted with the ruling_request it contains detailed information some of which is apparently to meet the requirements of the state donation law and is on the letterhead of the llc llc agrees to send to a donor within days after donation of a vehicle an official receipt from charity on forms provided by charity an example of plr-126431-01 this type of receipt letter was submitted it contains less detailed information than the thank you letter and is on the letterhead of charity if appropriately modified as explained in the letter_ruling to charity the thank you letter could satisfy the requirements of sec_170 assuming it is received by taxpayer within the prescribed time periods issue - whether the requirements of sec_1_170a-13 are satisfied sec_1_170a-1 provides that if a charitable_contribution is made in property other than money the amount of the contribution is the fair_market_value of the property at the time of the contribution reduced as provided in sec_170 and sec_1_170a-4 or sec_170 and sec_1_170a-4a sec_1_170a-1 provides that the fair_market_value is the price at which the property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts sec_1_170a-13 provides rules concerning recordkeeping and return requirements for charitable_contributions of property other than money sec_1_170a-13 provides the general_rule that except for cases covered by sec_1_170a-13 any taxpayer who makes a charitable_contribution of property other than money shall maintain for each contribution a receipt from the donee showing the following information i the name of the donee ii the date and location of the contribution and iii a description of the property in detail reasonably sufficient under the circumstances although the fair_market_value of the property is one of the factors to be taken into account in determining the amount of detail to be included on the receipt such value need not be stated on the receipt a letter or other written communication from the donee acknowledging receipt of the contribution showing the date of the contribution and containing the required description of the property contributed constitutes a receipt for purposes of this paragraph the receipt letter does not include all of the information required by sec_1_170a-13 as previously discussed with taxpayer’s authorized representative as discussed in the letter_ruling to charity the thank you letter includes all of the information required by sec_1_170a-13 and meets the requirements of a letter or other written communication from the donee it has been represented that the value of vehicle is in excess of dollar_figure we note that sec_1_170a-13 provides rules concerning recordkeeping and return requirements for deductions in excess of dollar_figure claimed for a charitable_contribution of property other than money sec_1_170a-13 provides in part that in addition to the information required by sec_1_170a-13 if a taxpayer makes a charitable_contribution of property other than money and claims a deduction in excess of dollar_figure in respect of the plr-126431-01 contribution of such item the taxpayer shall maintain written records that include the following information with respect to such item of donated property and shall state such information in his or her income_tax return if required by the return form or its instructions a the manner of acquisition as for example by purchase gift bequest inheritance or exchange and the approximate date_of_acquisition of the property by the taxpayer and b the cost or other basis adjusted as provided by sec_1016 of property held by the taxpayer for a period of less than months immediately preceding the date on which the contribution was made and when the information is available of property held for a period of months or more preceding the date on which the contribution was made the preceding paragraph in describing the provisions of sec_1_170a-13 incorporated by reference the information required by sec_1_170a-13 the information required by sec_1_170a-13 includes in part the following items a the name and address of the donee organization to which the contribution was made b the date and location of the contribution c a description of the property in detail reasonable under the circumstances including the value of the property and d the fair_market_value of the property at the time the contribution was made the method utilized in determining the fair_market_value and if the valuation was determined by appraisal a copy of the signed report of the appraiser we also note that schedule a itemized_deductions for form_1040 u s individual_income_tax_return requires a taxpayer to complete and attach form_8283 noncash charitable_contributions if the deductions for the claimed gifts to charity other than by cash or check are more than dollar_figure based on the facts submitted and the representations made we conclude that the donation of vehicle made through the property donation program qualifies for a charitable_contribution_deduction under sec_170 of the code subject_to the limitations of that section caveats the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for rulings and it is subject_to verification on examination a copy of this letter must be attached to any income_tax return to which it is relevant we have enclosed a copy of the letter for this purpose also enclosed is a copy of the letter_ruling showing the deletions proposed to be made in the letter when it is disclosed under sec_6110 of the internal_revenue_code plr-126431-01 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely karin gross senior technician reviewer branch office of associate chief_counsel income_tax accounting enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom corp plr-106771-00 date date re distributing controlled business m state x date a shareholder a shareholder b aa bb this is in response to a letter dated march for rulings concerning the federal_income_tax consequences of a proposed transaction additional information was submitted date and date the material information submitted for consideration is summarized below distributing a state x corporation is currently engaged in business m and uses the cash_method_of_accounting distributing made an election to be treated as an s_corporation effective on date a distributing has two shareholders shareholder a and shareholder b who own aa and bb interests respectively controlled will be a separate and independent state x corporation also engaged in business m using the cash_method_of_accounting and plans to elect to be treated as an s_corporation we have received financial information indicating that business m of distributing has had gross_receipts and operating_expenses representative of the active_conduct_of_a_trade_or_business for each of the past five years significant disagreements between shareholder a and shareholder b have taken place which have adversely effected the management and operations of distributing accordingly the directors of distributing propose the following transaction distributing will form controlled as a wholly owned subsidiary distributing will transfer certain assets and liabilities to controlled constituting aa of all assets and associated liabilities that distributing owns distributing will distribute all of the controlled stock to shareholder a in exchange for all of shareholder a’s distributing stock following the transaction controlled will be wholly owned by shareholder a and distributing will be wholly owned by shareholder b the taxpayers have made the following representations in connection with the transaction a the fair_market_value of the controlled stock to be received by shareholder a will be approximately equal to the fair_market_value of the distributing stock surrendered in the exchange b no part of the consideration to be distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of the corporation c the years of financial information submitted on behalf of distributing is representative of distributing’s present operations and with regard to such corporation there have been no substantial operational changes since the date of the last financial statements submitted concerning business m d following the transaction distributing and controlled will each continue independently and with its separate employees the active_conduct of its share of all the integrated activities of business m e the distribution of the stock of controlled is carried out for the following corporate business_purpose to resolve management deadlock and alleviate associated inefficiencies the distribution of the stock of controlled is motivated in whole or substantial part by the above corporate business_purpose f there is no plan or intention by the shareholders of distributing to sell exchange transfer by gift or otherwise dispose_of any of their stock in either distributing or controlled after the transaction g there is no plan or intention by either distributing or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the transaction other than through stock purchases meeting the requirements of sec_4 b of revproc_96_30 1996_1_cb_696 h there is no plan or intention to liquidate either distributing or controlled to merge either corporation with any other corporation or to sell or otherwise dispose_of the assets of either corporation after the transaction except in the ordinary course of business i the total adjusted bases and fair_market_value of the assets transferred to controlled by distributing equals or exceeds the sum of the liabilities assumed by controlled plus any liabilities to which the transferred assets are subject j no property being transferred by distributing to controlled has had or will have a sec_46 investment_credit k the liabilities assumed in the transaction and the liabilities to which the transferred assets are subject were incurred in the ordinary course of business and are associated with the assets being transferred l distributing neither accumulated its receivables nor made extraordinary payment of its payables in anticipation of the transaction m no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the distribution of controlled stock n payments made in connection with all continuing transactions if any between distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length o no two parties to this transaction are investment companies as defined in sec_368 and iv p the distribution is not part of a plan or series of related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing or more of the total combined voting power of all classes of stock of either distributing or controlled or stock possessing or more of the total value of all classes of stock of distributing or controlled q distributing is currently an s_corporation within the meaning of sec_1361 controlled will elect to be an s_corporation pursuant to sec_1362 on the first available date after the distribution and there is no plan or intent to revoke or otherwise terminate the s_corporation_election of either distributing or controlled based solely on the information submitted and the representations as set forth above it is held as follows the transfer by distributing of certain assets and liabilities to controlled solely in exchange for all of the stock of controlled and the assumption by controlled of certain liabilities of distributing followed by the distribution of the controlled stock to shareholder a in exchange for all shareholder a’s distributing stock as described above will be a reorganization within the meaning of sec_368 distributing and controlled will each be a_party_to_a_reorganization within the meaning of sec_368 distributing will recognize no gain_or_loss upon the transfer of its assets and liabilities to controlled in exchange for controlled stock and the assumption by controlled of certain liabilities sec_361 and sec_357 controlled will recognize no gain_or_loss on the receipt of the distributing assets received in exchange for controlled stock sec_1032 controlled’s basis in each asset received from distributing will equal the basis of such asset in the hands of distributing immediately prior to the transaction sec_362 controlled’s holding_period for each asset received from distributing will include the period during which distributing held such asset sec_1223 distributing will recognize no gain of loss on the distribution of the controlled stock to shareholder a sec_361 shareholder a will recognize no gain_or_loss and no amount will be included in shareholder a’s income upon receipt of controlled stock in exchange for shareholder a’s distributing stock sec_355 the basis of the controlled stock received by shareholder a in the transaction will equal the basis of the distributing stock surrendered in exchange therefor sec_358 the holding_period of the controlled stock received by shareholder a in the transaction will include the holding_period of the distributing stock surrendered in exchange therefor provided shareholder a held the distributing stock as a capital_asset on the date of the distribution sec_1223 as provided in sec_312 proper allocation of earnings_and_profits between distributing and controlled will be made under sec_1_312-10 of the income_tax regulations distributing’s momentary ownership of stock of controlled as part of a reorganization under sec_368 will not cause controlled to have an ineligible shareholder for any portion of its first taxable_year under sec_1361 therefore assuming controlled will otherwise meet the requirements of a small_business_corporation under sec_1361 of the code controlled will be eligible to make an s_corporation_election under sec_1362 for its first taxable_year except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the proposed transaction under any other provision of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction specifically no opinion is expressed concerning whether distributing or controlled is otherwise eligible to be an s_corporation a copy of this letter should be attached to the federal_income_tax returns of the taxpayers involved for the taxable_year in which the transaction covered by this ruling letter is consummated this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file in this office a copy of this letter has been sent to the taxpayer sincerely yours assistant chief_counsel corporate by ken cohen senior technical reviewer branch


significant index number department of the treasury j l internal_revenue_service washington d c dec t epl waal re taxpayer dear this letter constitutes notice that approval has been granted for your request for a 5-year automatic_extension for amortizing the unfunded liabilities as of date for the above-named plan which are described in sec_431 and sec_431 of the internal_revenue_code code and sec_304 and sec_304 of the employee_retirement_income_security_act_of_1974 erisa this extension is effective with the plan_year beginning january established as of date this extension applies to the eligible amortization charge bases the extension of the amortization periods of the unfunded liabilities of the plan was granted in accordance with sec_431 of the code sec_431 of the code requires the secretary to extend the period of time required to amortize any unfunded_liability of a plan for a period of time not in excess of years if the plan submits an application meeting the criteria stated in sec_431 the plan has submitted the required information to meet the criteria in sec_431 including a certification from the plan’s actuary that i absent the extension under subparagraph a the plan would have an accumulated_funding_deficiency in the current plan_year or any of the succeeding plan years ii the plan_sponsor has adopted a plan to improve the plan's funding status iii the plan is projected to have sufficient assets to timely pay expected benefits and anticipated expenditures over the amortization period as extended and iv the notice required under paragraph a has been provided we have sent a copy of this letter to the - and to the this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited by others as precedent if you require further assistance in this matter please contact sincerely yours nm zak avid m ziegler manager ep actuarial group


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 plr-142020-05 date may ------------------------------------------------------------------- ----------------------------------------------------- -------------------------------------------------- ----------------------------------------------------------------------- ------------------------- legend h w trust ---------------------------------------------------------- trust ---------------------------------------------------------- trust -------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------ ---------------------------------------------------------- date date grandchild grandchild grandchild year year year year dear -------------- ------------------ -------------------------- ------------------------ -------------------- ------------------------------ ------- ------- ------- ------- this is in response to your letter dated date submitted on your behalf by your authorized representative and other correspondence regarding the gift_tax and generation-skipping_transfer gst tax consequences of certain transfers to trusts plr-142020-05 the facts and representations submitted are summarized as follows on date h and w established two separate irrevocable trusts trust and trust for the benefit of grandchild and grandchild respectively on date h and w established a third irrevocable_trust trust for the benefit of grandchild the terms of trusts are substantially identical but for the identity of the grandchild for whom the trust was established the primary beneficiary under the terms of each trust the trustee may distribute any part or all of the income and principal of the trust to or for the benefit of the primary beneficiary during the primary beneficiary’s lifetime if the primary beneficiary is not living then to the extent the trust corpus is not appointed by the primary beneficiary as discussed below the trustee may distribute any part or all of the income and corpus to the primary beneficiary’s descendants or if none then to the primary beneficiary’s siblings and their descendants or if none then to other beneficiaries who may include non-skip persons as defined in sec_2613 each trust provides that the trustee is to make distributions as the trustee shall deem to be in the best interest of the beneficiary or beneficiaries grantor does not intend that such distributions be limited to the amounts necessary for maintenance education and support with respect to trust sec_1 and if the primary beneficiary dies prior to reaching age the corpus is to be distributed pursuant to the primary beneficiary’s exercise of a testamentary general power to appoint the accumulated income and corpus of trust to certain person’s and entities including the primary beneficiary’s estate with respect to trust if the primary beneficiary dies prior to reaching age the primary beneficiary may with the consent of a trustee who is not an adverse_party by written instrument delivered to the trustee appoint the accumulated income and corpus of trust to the primary beneficiary’s estate a trustee who is not an adverse_party is defined in trust as a trustee who is a person not having a substantial interest in the trust estate which is adverse to the exercise of the power in favor of the primary beneficiary if there is no such trustee then acting trust provides a procedure for designating such trustee upon reaching age the primary beneficiary has the right to terminate their respective trust if the primary beneficiary exercises this right the trust assets will be distributed to the primary beneficiary in fee simple and free of trust if the primary beneficiary does not exercise this right within days after receiving notice the right to terminate will lapse if the primary beneficiary does not exercise the termination power then each trust continues after the primary beneficiary reaches age the trustee’s authority to make discretionary distributions to the primary beneficiary continues as described above upon the primary beneficiary’s death the trust corpus is to be distributed plr-142020-05 pursuant to the primary beneficiary’s exercise of a testamentary special power to appoint trust income and corpus to h and w’s descendants after the primary beneficiary reaches age any person may make a contribution to the trust and grant to any of h’s and w’s descendants the right to withdraw property from the trust equal to the lesser_of the greater of dollar_figure or of the aggregate value of the trust principal or the beneficiary’s proportionate share of the contribution based on the number of beneficiaries with withdrawal rights this right will lapse if it is not exercised within days after the beneficiary receives notice of the contribution the trustee is directed to segregate any part of the trust property to which gst_exemption was allocated the exempt portion any exempt portion shall be held by the trustee as a separate trust with the same terms conditions and name as the trust from which it was segregated provided that the exempt portion shall have a zero inclusion_ratio as defined in sec_2642 all trusts created under the trust agreement will terminate on the day preceding the expiration of years from the death of the last survivor of the following persons living on the date of trust is executed h and w h’s and w’s children and other descendants of h and w and all persons who are mentioned by name in the trust agreement and all of their descendants upon termination the assets of trust will be delivered and distributed in fee simple and free of trust to the income beneficiaries at the time of termination it is represented that h and w made transfers of cash to trust sec_1 and in years and to trust in years in each case the transfer made in a calendar_year to each trust did not exceed the gift_tax annual exclusion for that year under sec_2503 grandchild and are all currently under the age of the following rulings have been requested each of trusts satisfies the requirements of sec_2503 from the date of its inception through the date the primary beneficiary reaches age the contribution period accordingly all contributions to trust sec_1 and in years and to trust in years were excluded from h’s and w’s total gifts for federal gift_tax purposes further all future contributions to each of trusts during the contribution period will be excluded from h’s and w’s total gifts for federal gift_tax purposes except to the extent any contributions exceed the amount described in sec_2503 each of trusts is a skip_person with respect to h and w within the meaning of sec_2613 during the contribution period accordingly all contributions by h and w to trusts in years and to trust in years were direct skips within the meaning of sec_2612 and any further contributions by h and w to trusts during this period will be direct skips plr-142020-05 h’s and w’s unused gst_exemption was automatically allocated to contributions by h and w to trust sec_1 and in years and trust in years to the extent necessary to make the inclusion_ratio for such property zero in accordance with sec_2632 sec_2501 imposes a tax on the transfer of property by gift during each calendar_year by any individual sec_2511 provides that the gift_tax imposed by sec_2501 applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible interests in property made to any person by the donor during the calendar_year the first dollar_figure adjusted for inflation as provided in sec_2503 of such gifts to such person shall not be included in the total_amount_of_gifts made during such year sec_2503 provides that in the case of gifts other than gifts of future sec_25_2503-3 of the gift_tax regulations provides that no part of the sec_2503 provides that no part of a gift to an individual who has not value of a gift of a future_interest may be excluded in determining the total_amount_of_gifts made during the calendar_period future_interest is a legal term and includes reversions remainders and other interests or estates whether vested or contingent and whether or not supported by a particular interest or estate which are limited to commence in use possession or enjoyment at some future date or time sec_25_2503-3 provides that an unrestricted right to the immediate use possession or enjoyment of property or the income from property such as a life_estate or term certain is a present_interest in property an exclusion is allowable with respect to a gift of such an interest attained the age of years on the date of the transfer shall be considered a gift of a future_interest in property for purposes of sec_2503 if the property and the income therefrom may be expended by or for the benefit of the donee before his attaining the age years and will to the extent not so expended pass to the donee on his attaining the age of years and in the event the donee dies before attaining the age of years be payable to the estate of the donee or as he may appoint under a general_power_of_appointment as defined in sec_2514 sec_2503 by reason of the mere fact that there is left to the discretion of a trustee the determination of the amounts if any of the income or property to be expended for the benefit of the minor and the purpose for which the expenditure is to be made provided there are no substantial restrictions under the terms of the trust instrument on the exercise of such discretion the donee upon reaching age has the right to extend the term of the trust or the governing instrument contains a disposition of the sec_25_2503-4 provides in part that a transfer does not fail to satisfy plr-142020-05 property or income not expended during the donee’s minority to persons other than the donee's estate in the event of the default of appointment by the donee revrul_74_43 1974_1_cb_285 holds that a gift in trust for the benefit of a minor beneficiary satisfies the requirements of sec_2503 where the trust provides that the beneficiary has upon reaching age either a continuing right to compel immediate distribution of the trust corpus by giving written notice to the trustee or to permit the trust to continue by its own terms or a right during a limited period to compel immediate distribution of the trust corpus to the beneficiary which if not exercised will permit the trust to continue by its own terms accordingly a transfer to the trust will constitute a gift of a present_interest qualifying for the annual exclusion under sec_2503 sec_2514 provides that the exercise or release of a general power of sec_2514 defines general_power_of_appointment as a power exercisable appointment created after date shall be deemed a transfer of property with respect to the individual possessing the power in favor of the individual possessing the power the individual’s estate or the creditors of either in general under sec_2514 a power exercisable by the possessor in conjunction with another person is a general_power_of_appointment if the person whose joinder is required does not have a substantial interest in the property subject_to the power which is adverse to the exercise of the power in favor of the decedent sec_2514 provides that the lapse of a power_of_appointment created after date during the life of the individual possessing the power shall be considered a release of such power however this rule applies with respect to the lapse of powers during any calendar_year only to the extent that the property which could have been appointed by exercise of such lapsed powers exceeded in value at the time of such lapse the greater of the following amounts a dollar_figure or b percent of the aggregate value at the time of such lapse of the assets out of which or the proceeds of which the exercise of the lapsed powers could have been satisfied sec_2601 imposes a tax on every generation-skipping_transfer gst a gst sec_2612 provides that the term direct_skip means a transfer subject is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip to a tax imposed by chapter or of an interest in property to a skip_person sec_2613 provides that the term skip_person means a natural_person assigned to a generation which i sec_2 or more generations below the generation assignment of the transferor or a_trust if all interests in such trust are held by skip persons under sec_2652 and sec_26_2612-1 of the generation-skipping_transfer_tax regulations a person has an interest in a_trust if a person has a present right to receive trust principal or income is a permissible current recipient of trust principal or income plr-142020-05 and is not described in sec_2055 or is described in sec_2055 and the trust is a charitable_remainder_annuity_trust or unitrust as defined in sec_664 or a pooled_income_fund as defined in sec_642 be the value of the property received by the transferee sec_2623 provides that the taxable_amount in the case of a direct_skip shall sec_2602 provides that the amount of the tax is the taxable_amount multiplied by the applicable_rate sec_2641 defines applicable_rate as the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer under sec_2642 the inclusion_ratio with any property transferred in a generation-skipping_transfer is generally defined as the excess of over the applicable_fraction the applicable_fraction as defined in sec_2642 is a fraction in which the numerator is the amount of gst_exemption under sec_2631 allocated to the trust or to property transferred in a direct_skip and the denominator is the value of the property transferred to the trust or involved in the direct_skip sec_2654 provides that for purposes of gst tax the portions of a_trust attributable to transfers from different transferors shall be treated as separate trusts and substantially separate and independent shares of different beneficiaries in a_trust shall be treated as separate trusts sec_2631 as in effect for gst transfers before date provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under sec_2631 which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor for gst transfers after date the gst_exemption amount is equal to the applicable_exclusion_amount under sec_2010 sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual’s estate determined with regard to extensions regardless of whether such a return is required to be filed sec_2632 provides that if any individual makes a direct_skip during his lifetime any unused portion of such individual's gst_exemption shall be allocated to the property transferred to the extent necessary to make the inclusion_ratio for such property zero if the amount of the direct_skip exceeds such unused portion the entire unused portion shall be allocated to the property transferred sec_2632 provides that for purposes of sec_2632 the unused portion of an individual's gst_exemption is that portion of such exemption which has not previously been allocated by such individual or treated as allocated under sec_2632 or sec_2632 sec_2642 provides in part that if the allocation of the gst_exemption to plr-142020-05 any transfers of property is deemed to be made under sec_2632 or c the value of such property for purposes of sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 such allocation shall be effective on and after the date of such transfer in this case the terms of trusts provide that the trustee may make discretionary distributions of corpus and income to grandchild grandchild or grandchild respectively until the beneficiary reaches age if the grandchild dies before reaching age the corpus is to be distributed pursuant to the grandchild’s exercise of a general_power_of_appointment upon reaching age the respective grandchild has the right to terminate his or her trust and receive the accumulated income and corpus free of trust however if the grandchild does not terminate the trust then the trust continues for the benefit of the grandchild based upon the information submitted and the representations made we conclude as follows from the date of its inception through the date the primary beneficiary reaches age the contribution period each of trusts satisfies the requirements of sec_2503 accordingly h’s and w’s contributions to trust sec_1 and in years and to trust in years are excluded from the respective donor’s total gifts for federal gift_tax purposes further all of h’s and w’s future contributions to each of trusts during the contribution period will be excluded from the respective donor’s total gifts for federal gift_tax purposes except to the extent any contributions exceed the amount described in sec_2503 each of trusts is a skip_person with respect to h and w within the meaning of sec_2613 during the contribution period accordingly all contributions by h and w to trust sec_1 and in years and to trust in years were direct skips within the meaning of sec_2612 and any further contributions by h and w to trusts during this period will be direct skips in accordance with sec_2632 h’s and w’s unused gst_exemption was automatically allocated to contributions by h and w to trust sec_1 and in years and trust in years to the extent necessary to make the inclusion_ratio for such property zero except as specifically ruled herein we express or imply no opinion on the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter under the cited provisions or under any other provisions of the code no opinion is expressed or implied concerning the application of sec_2642 to trusts the rulings contained in this letter are based upon information and representations submitted by the taxpayers and accompanied by a penalty of perjury plr-142020-05 statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination this ruling is directed only to the taxpayer s requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely george l masnik branch chief branch passthroughs special industries enclosures copy for sec_6110 purposes copy of this letter


department of the treasury internal_revenue_service washington d c date cc dom fs p si tl-n-6615-98 uilc number release date internal_revenue_service national_office field_service_advice memorandum for district_counsel from assistant chief_counsel field service cc dom fs subject this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend decedent a b c date date date date a b c d e f g h x y administrative expenses form_1041 fiduciary fees executor fees bank fees property taxes subtotal professional fees attorney fees accountant fees subtotal other abstract and title administrative appraisal form k-1 total form_1041 fiduciary fees executor fees bank fees subtotal professional fees attorney fees accountant fees subtotal other administrative total form_1041 estimated fiduciary fees executor fees bank fees subtotal professional fees attorney fees accountant fees other administrative total issue whether the executors’ discretionary authority to allocate the estate’s administration_expenses against the postmortem income earned by the estate is a material limitation upon the surviving spouse’s right to the income from the property when the exercise of that discretionary authority results in dollar_figureh of administration_expenses being charged against the income of the estate conclusion the determination of whether there is a material limitation upon the surviving spouse’s right to income depends on all the facts and circumstances based on the facts presented there appear to be factors indicating that the payment of dollar_figureh of administrative expenses from postmortem income represents a material limitation upon the surviving spouse’s right to the income in this case however further factual development would be necessary before a final_determination can be made facts decedent died testate on date at the time of his death decedent was survived by his wife a and two children b and c the relevant portions of decedent's will are as follows item ii my executor shall pay my debts and charges from my estate item iv if my wife a shall survive me i give devise and bequeath in trust to the trustees hereafter named and to its successor in trust cash securities or other_property of my estate having a value equal to the maximum marital_deduction as finally determined in my federal estate_tax proceedings less the aggregate amount of marital_deduction if any allowed for such tax purposes by reason of property or interests in property passing or which have passed to my said spouse otherwise than pursuant to the provisions of this item provided however the amount of this bequest shall be reduced by the amount if any needed to increase my taxable_estate for federal estate_tax purposes to the largest amount that after allowing for the unified_credit against the federal estate_tax and the state_death_tax_credit against such tax but only to the extent that the use of such state_death_tax_credit does not increase the death_tax payable to any state will not result in a federal estate_tax being imposed on my estate the term maximum marital_deduction shall not be construed as a direction by me to exercise any election respecting the deduction of estate administration_expenses the determination of the estate_tax_valuation date or any other tax election which may be available under any_tax laws only in such manner as will result in a larger allowable estate_tax martial deduction than if the contrary election had been made item v i direct that all inheritance estate succession or other similar taxes against my taxable_estate of sic the recipients thereof including any taxes arising from the transfer or receipt of assets which are not part of my probate_estate shall be paid from the balance of my estate remaining after complying with the foregoing provisions of this will such taxes shall not be charged against the respective beneficiaries and my executor shall not seek reimbursement from anyone therefor item vi i give devise and bequeath all the rest residue and remainder of my estate to be known as the decedent trust which shall not be less that sic the equivalent_exemption for the unified_credit for federal estate_tax to the trustee hereafter named under the following terms and conditions of trust a during the life of my wife a my trustee from time to time shall pay to or apply for the benefit of my wife all of the income and such sums from the principal of this trust estate as the trustee in the exercise of its sole discretion deems advisable in addition to any other funds known to it to be available to my wife to provide for her support maintenance health and education c this trust except as hereinafter provided will terminate upon the death of a item vii the trustee of the trusts created hereunder shall have power and authority to do any act or thing reasonably necessary or advisable in a fiduciary capacity for the proper administration and distribution of each trust created by this will no power granted by this item shall be exercised with respect to the trust created in item iv if the effect of its exercise is to disqualify that trust for the marital_deduction in extension but not in limitation of any power right or discretion otherwise possessed by the trustee i grant to said trustee without the necessity of notice to or approval of any court or person the following powers d to determine what shall be charged or credited to income and what to principal notwithstanding any determination by the courts or by any custom or statute item xi it is my intention that the a_trust hereinbefore created under item iv of this will shall meet the requirements of the internal_revenue_code of the united_states so the marital_deduction will be allowed with respect to that trust to accomplish this result i specifically direct and provide that the provisions of this will shall be construed and that the said trust and my estate shall be administered so as to meet such requirements notwithstanding anything in this will to the contrary any power duty or discretionary authority granted to my executor or my trustees shall be absolutely void to the extent that the right to exercise such power duty or authority or the exercise thereof shall in any way affect jeopardize or cause the disallowance to my estate of all or any part of the tax_benefit afforded by the marital_deduction provisions of the internal_revenue_code of as amended from time to time decedent's_estate timely filed the united_states estate and generation-skipping_transfer_tax return form_706 during the examination of the form_706 a state_income_tax refund in the amount of dollar_figurea was identified as an asset of the estate therefore the corrected gross_estate is dollar_figureb line of the form_706 reports total allowable deductions of dollar_figurec computed by adding funeral_expenses debts mortgages and liens and a marital_deduction of dollar_figured the estate did not claim any executors' commissions attorney fees accountant fees or other administration_expenses as estate_tax_deductions on schedule j of the estate's form_706 the estate filed its u s income_tax return for estates and trusts form_1041 for the period ending date on that form_1041 the estate reported total income of dollar_figuree and claimed administration expense deductions as shown in the legend the estate filed the sec_642 waiver electing to claim the administrative expenses as deductions from gross_income and not as estate_tax_deductions the estate filed its u s income_tax return for estates and trusts form_1041 for the period ending date on that form_1041 the estate shows total income of dollar_figuref and the estate claimed administration expense deductions as shown in the legend the estate has not filed the sec_642 waiver electing to claim the expenses shown above as deductions from gross_income and not as estate_tax_deductions the estate has not yet filed its u s income_tax return for estates and trusts form_1041 for the period ending date the estate is estimating total income of approximately dollar_figureg the estate is estimating expenses as shown in the legend because no return has been filed the estate has not filed the sec_642 waiver electing to claim the expenses shown above as deductions from gross_income and not as estate_tax_deductions the administrative expenses of dollar_figureh claimed or to be claimed on the form sec_1041 equal approximately x percent of the corrected gross_estate and approximately y percent of the income earned during the period in which the expenses were incurred law and analysis sec_2056 provides that for purposes of the tax imposed by sec_2001 the value of the taxable_estate shall except as limited by subsections b and c be determined by deducting from the value of the gross_estate an amount equal to the value of any interest in property which passes or has passed_from_the_decedent_to_his_surviving_spouse but only to the extent that such interest is included in determining the value of the gross_estate sec_2056 provides that in determining for purposes of subsection a the value of any interest in property passing to the surviving_spouse for which a deduction is allowed by this section - a there shall be taken into account the effect which the tax imposed by sec_2001 or any estate succession legacy or inheritance_tax has on the net value to the surviving_spouse of such interest and b where such interest or property is encumbered in any manner or where the surviving_spouse incurs any obligation imposed by the decedent with respect to the passing of such interest such encumbrance or obligation shall be taken into account in the same manner as if the amount of a gift to such spouse of such interest were being determined sec_20_2056_b_-4 provides in relevant part as follows the value for the purpose of the marital_deduction of any deductible_interest which passed_from_the_decedent to the surviving_spouse is to be determined as of the date of the decedent's death the marital_deduction may be taken only with respect to the net value of any deductible_interest which passed_from_the_decedent_to_his_surviving_spouse the same principles being applicable as if the amount of a gift to the spouse were being determined in determining the value of the interest in property passing to the spouse account must be taken of the effect of any material limitations upon her right to income from the property an example of a case in which this rule may be applied is a bequest of property in trust for the benefit of the decedent's spouse but the income from the property from the date of the decedent's death until distribution of the property to the trustee is to be used to pay expenses_incurred in the administration of the estate sec_20_2056_b_-4 quoted above provides that the marital_deduction may be taken only for the net value of the interest passing to the surviving_spouse in determining the value of the interest account must be taken of the effect of any material limitations on the spouse's right to the income from the property the regulation indicates that this rule may apply in the case of a bequest of property in trust for the benefit of the spouse when income from the property is used to pay estate administration_expenses prior to distribution see notice_97_63 1997_47_irb_1 under the applicable state law an executor may charge payments of administration_expenses against either the income of the estate or its principal if the will so provides the commissioner’s position that the marital and charitable deduction must be reduced by the amount of administration_expenses charged to income of the residuary was rejected in a fully reviewed but divided tax_court opinion that was upheld by the court_of_appeals for the eleventh circuit with one dissenting judge 101_tc_314 aff’d 63_f3d_1083 11th cir the commissioner’s position had previously been upheld in 974_f2d_723 6th cir and 994_f2d_1576 fed cir cert_denied 114_sct_546 the united_states supreme court affirmed the decision of the eleventh circuit with four justices joining in the plurality opinion three justices concurring with the plurality’s result but disagreeing with the reasoning and two justices dissenting 117_sct_1124 the issue in hubert was whether the amount of the estate_tax deduction for marital or charitable_bequests must be reduced to the extent administration_expenses were paid from income generated during administration by assets allocated to those bequests s ct pincite kennedy j plurality opinion writing for the plurality justice kennedy readily conceded that there are situations in which a provision requiring payment of administration_expenses could be deemed material s ct pincite however the plurality concluded that there was no basis for reversing the tax court’s factual finding that the trustee’s discretion to pay administration_expenses out of income was not a material limitation on the right to receive income the supreme court pointed out that the estate_tax regulations do not define the term material limitation the plurality opinion indicates that where administration_expenses are paid from income that would otherwise go to the surviving_spouse the marital_deduction should reflect the date-of-death value of the expected future administration_expenses chargeable to income if they are material as compared to the date-of-death value of the expected future income s ct pincite the concurring opinion in estate of hubert reasoned that the relevant sources point to a test of quantitative materiality s ct pincite and that therefore some financial burdens on the beneficiary’s right to postmortem income will reduce the deduction others will not s ct pincite o’connor j concurring accordingly when the payment of administration_expenses from postmortem income crosses the threshold of materiality the residuary bequest must be reduced justice scalia pointed out in his dissenting opinion that a ‘material limitation’ is a limitation that is relevant or consequential to the value of what passes 117_sct_1142 the service has issued proposed_regulations providing guidance for the treatment of administration_expenses paid from income attributable to marital or charitable_bequests this guidance however if adopted will only apply to estates of decedents dying on or after the date of adoption see prop treas reg e fed reg date in this case the estate incurred administration_expenses of dollar_figureh and the executors elected to charge this amount against postmortem income dollar_figureh represents approximately x percent of d’s gross_estate and approximately y percent of the income earned during the period in which the expenses were incurred based upon the facts presented it appears that y percent of the postmortem income represents an absorption of a significant portion of a’s right to the income from the property in this case and may constitute a material limitation on her right to the income further a deduction of dollar_figureh in administrative expenses from postmortem income may be quantitatively material under the facts of this case however further factual development is necessary before a final_determination can be made as to whether dollar_figureh in administration_expenses charged against postmortem income is a material limitation in this case pursuant to the supreme court’s plurality opinion in estate of hubert in determining whether there is a material limitation on the spouse’s income_interest you will need to determine the date of death value of the projected future administration_expenses chargeable to income and the date of death value of the projected future income accordingly you should consider to what degree the estate could have anticipated administrative expenses and income in the amounts eventually incurred you should also further develop facts with respect to the type of assets in the estate the sources of the estate’s income and the actual nature of the administrative expenses claimed for example some of the expenses claimed as executors fees or administrative fees may have been incurred in the production_of_income and would be allowable deductions from the income of the estate those expenses would not be taken into account in determining if there has been a material limitation on the spouse’s right to the income of the estate case development hazards and other considerations the materiality issue is a question of fact and we recognize that however we believe there are factors indicating that there may be a material limitation on the spouse’s right to income as the supreme court’s fractured resolution of hubert reveals legal standards for determining when the payment of administration_expenses crosses the threshold of materiality are not clearly defined although the supreme court pointed out in hubert that the service did not present evidence or argue that dollar_figure million of administration_expenses were quantitatively material electing instead to argue that any diversion of postmortem income was material hubert s ct pincite a majority of the supreme court justices agreed that had the irs advanced such an argument they would have concluded that dollar_figure million was material under the facts of the case under any standard o’connor j concurring scalia j dissenting breyer j dissenting taxpayer may also argue that in comparison to the facts in hubert which had slightly fewer administrative expenses dollar_figure million and a much smaller gross_estate dollar_figure million its deducted administration_expenses were not material by melissa c liquerman senior technician reviewer passthroughs special industries branch field service division


t c memo united_states tax_court kimberly s nix petitioner v commissioner of internal revenue respondent docket no filed date michael t wells for petitioner sarah a herson and mark a nelson for respondent memorandum opinion lauber judge with respect to petitioner’s federal_income_tax for the internal_revenue_service irs or respondent determined deficiencies and accuracy-related_penalties under sec_6662 a in the following amounts 1all statutory references are to the internal_revenue_code code in effect for the tax years at issue and all rule references are to the tax_court rules of continued deficiency dollar_figure big_number big_number year penalty dollar_figure big_number big_number after concessions this case presents two questions for decision whether peti- tioner’s activity as a mary kay consultant constituted an activity_not_engaged_in_for_profit within the meaning of sec_183 and whether petitioner is liable for accuracy-related_penalties we answer both questions in respondent’s favor background the parties submitted this case for decision without trial under rule the stipulation of facts the attached exhibits and the stipulations of settled issues are incorporated by this reference petitioner resided in north carolina when she filed her petition during petitioner was employed full time as a project manager earning wages of dollar_figure dollar_figure and dollar_figure respectively in having had no prior sales experience of any kind she decided to participate in the mary continued practice and procedure we round all monetary amounts to the nearest dollar 2on date and date the parties filed stipulations of settled issues setting forth mutual concessions that resolve all other issues in this case kay network mary kay consultants hope to earn money by selling cosmetic products directly to consumers and by recruiting other sales consultants into the mary kay distribution system petitioner was motivated to join the network at least in part by the discount she would receive on mary kay products that she purchased for her own use she attended weekly meetings of mary kay consultants during which they shared ideas she did not implement any changes to her mary kay operations on the basis of information gleaned from those meetings she terminated her mary kay activity in at all times petitioner operated her mary kay activity from her home her sole mary-kay-related assets consisted of perishable beauty products that she kept in a closet she did not secure professional bookkeeping services for this activity and she maintained no business records in the form of ledgers income statements or statements of cashflows she made no effort to track the profitability of her mary kay activity or evaluate ways to control her losses the parties have stipulated that petitioner opened a separate bank account for the mary kay activity sometime in but petitioner cannot identify the date she opened the account the date she closed the account the account number or the amounts of any deposits or withdrawals during she deposited mary kay receipts into her personal account and paid purported mary kay expenses from that same account petitioner generated minimal receipts from her mary kay activity but re- ported large losses allegedly attributable to it for she timely filed form sec_1040 u s individual_income_tax_return and attached to each return a schedule c profit or loss from business on these schedules c she reported gross_receipts cost_of_goods_sold cogs and expenses for her mary kay activity as follows item gross_receipts cogs returns allowances gross_profit loss expenses advertising office expense repairs maintenance supplies travel meals entertainment utilities other business use of home dollar_figure big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number -0- big_number big_number big_number big_number -0- dollar_figure -0- big_number -0- big_number -0- depreciation car truck expenses legal professional total expenses net profit loss -0- -0- -0- big_number big_number big_number big_number big_number big_number big_number -0- big_number big_number respondent stipulated that petitioner has substantiated about of these expense sec_3 and that if her mary kay activity were deemed a trade_or_business the expenses thus substantiated would be deductible schedule c expenses but it is obvious that many of the expenses she claimed had a significant personal compon- ent her reported travel_expenses for example were incurred in separate trips during twenty of these trips were to volleyball tournaments in which her daughter participated two trips involved vacations with her daughter to eur- ope and disney world and another two trips involved meetings of her college sorority her travel_expenses alone aggregating almost dollar_figure exceeded by more than the gross_receipts she earned from her mary kay activity the irs selected petitioner’s returns for examination as a re- sult of this examination the irs disallowed all of the cogs and expense deduc- 3the parties stipulated that if petitioner is found to have engaged in her mary kay activity for profit she has substantiated schedule c expenses in the aggregate amounts of dollar_figure dollar_figure and dollar_figure for and respectively tions claimed on her schedule c to the extent they exceeded her reported gross_receipts on the ground that her mary kay activity was not an activity engaged in for profit within the meaning of sec_183 on date the irs issued petitioner a timely notice_of_deficiency setting forth these adjustments and determining accuracy-related_penalties she timely petitioned this court for redetermination a burden_of_proof discussion the irs’ determinations in a notice_of_deficiency are generally presumed correct and the taxpayer bears the burden of proving them erroneous rule a 290_us_111 the taxpayer bears the burden of proving her entitlement to deductions allowed by the code and of sub- stantiating the amounts of claimed deductions 503_us_79 sec_1_6001-1 income_tax regs petitioner does not contend and could not plausibly contend that the burden_of_proof should shift to respondent under sec_7491 the submission of this case fully stipulated changes neither the burden_of_proof nor the effect of a failure of proof see rule b 123_tc_258 b sec_183 issue sec_162 allows as a deduction all the ordinary and necessary expen- ses paid_or_incurred during the taxable_year in carrying on any trade_or_business to be entitled to deductions under this section the taxpayer must show that she engaged in the activity with an actual and honest objective of making a profit 91_tc_371 quoting 90_tc_74 see also 140_fedappx_450 4th cir aff’g tcmemo_2004_4 vest v commissioner tcmemo_2016_187 112_tcm_410 if an activity is not engaged in for profit no deduction attributable to it is allowed except to the extent of gross in- come derived therefrom unless such deductions would be allowable even if the activity were not engaged in for profit sec_183 losses are not allowable for an activity that a taxpayer carries on primarily for sport as a hobby or for recrea- tion sec_1_183-2 income_tax regs petitioner bears the burden of proving that she conducted her activity as a mary kay consultant with the principal objective of making a profit see giles v commissioner tcmemo_2005_28 89_tcm_770 although a rea- sonable expectation of profit is not required the taxpayer must conduct the activ- ity with the dominant hope and good-faith intention of earning positive_income hulter t c pincite sec_1_183-2 income_tax regs we determine whether the taxpayer has the requisite profit_motive on the basis of all surrounding facts and circumstances 792_f2d_1256 4th cir aff’g 84_tc_1244 88_tc_464 72_tc_411 aff’d without pub- lished opinion 647_f2d_170 9th cir sec_1_183-2 income_tax regs in making this determination we accord greater weight to objective facts than to the taxpayer’s subjective statement of intent 748_f2d_890 4th cir rev’g tcmemo_1983_165 94_tc_41 sec_1_183-2 income_tax regs sec_1_183-2 income_tax regs sets forth a nonexclusive list of nine factors relevant in ascertaining whether a taxpayer conducts an activity with the intent to earn a profit the factors listed are the manner in which the taxpayer conducts the activity the expertise of the taxpayer or her advisers the time and effort spent by the taxpayer in carrying on the activity the expectation that 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 loss with respect to the activity the amount of occasional profits if any the financial status of the taxpayer and elements of personal pleasure or recreation ibid no single factor or group of factors is controlling nor is it necessary that a majority of factors point to one outcome see 544_f3d_900 8th cir aff’g tcmemo_2007_309 32_f3d_94 4th cir aff’g tcmemo_1993_396 72_tc_659 sec_1_183-2 income_tax regs certain factors may be accorded more weight in a particular case because they have great- er salience or persuasive value as applied to its facts see crile v commissioner tcmemo_2014_202 108_tcm_372 green v commissioner tcmemo_1989_436 57_tcm_1333 noting that all nine factors do not necessarily apply in every case none of the nine factors weighs in favor of petitioner’s contention that she engaged in the mary kay activity with the dominant hope and good-faith intention of earning a profit see hulter t c pincite several factors weigh against her quite heavily for sake of completeness we will briefly discuss each factor manner in which the activity is conducted conducting an activity in a businesslike manner may show that the taxpayer intends to earn a profit from it sec_1_183-2 income_tax regs facts evidencing a businesslike manner may include the taxpayer’s maintenance of complete and accurate books_and_records the taxpayer’s conduct of the activity in a manner resembling that in which successful practitioners conduct similar_business activities and the taxpayer’s change_of operating procedures adoption of new techniques or abandonment of unprofitable activities in a manner consistent with a desire to improve profitability giles t c m cch pincite sec_1_183-2 income_tax regs perhaps the most important indication of whether or not an activity is being performed in a businesslike manner is whether or not the taxpayer implements some method for controlling losses dodge v comissioner tcmemo_1998_89 75_tcm_1914 aff’d without published opinion 188_f3d_507 6th cir petitioner did not conduct her mary kay activity in a businesslike manner she did not have a discernible business plan written or otherwise she did not create or keep a balance_sheet ledger or statements of cashflows although she sustained significant losses annually she took no apparent steps to control these losses during the tax years at issue petitioner opened a second bank account but she produced no documenta- tion to show that she actually used that account in conducting her mary kay activ- ity she acknowledges that at least during she deposited mary kay receipts into her personal account and paid purported mary kay expenses from that same account this behavior is not characteristic of a bona_fide business see stettner v commissioner tcmemo_2017_113 113_tcm_1503 finding that paying expenses from a personal checking account and failure to keep books records and a business plan were indicia that the taxpayer did not conduct the activity in a businesslike manner this first factor favors respondent expertise of the taxpayer or advisers a taxpayer’s preparation for an ac- tivity by extensive study of its accepted business economic and scientific prac- tices may indicate a profit_motive sec_1_183-2 income_tax regs peti- tioner had no expertise in cosmetics or in sales activity generally she did not seek the assistance of a bookkeeper or other professional although she socialized with other mary kay consultants there is no evidence that she modified or improved her operations on the basis of these meetings cf annuzzi v commissioner tcmemo_2014_233 108_tcm_533 finding that the taxpayer’s chang- ing operating procedures to increase profitability indicated a profit objective this second factor favors respondent time and effort spent petitioner had a full-time job throughout and there is no documentary_evidence to establish how much time she actu- ally devoted to her mary kay activity she contends that she spent substantial time selecting inventory making sales calls and attempting to recruit friends to enlist as mary kay consultants but there is no documentary_evidence to establish what she actually did or how many hours these activities consumed petitioner has established that she devoted many hours to travel during but there is no evidence to establish a strong link between this travel and her alleged business to the contrary at least of her trips involved travel to her daughter’s volleyball tournaments vacations to disney world and europe and reunions with her sorority sisters even if she could plausibly characterize these excursions as marketing trips the travel had obvious personal and recreational aspects that in turn suggests the absence of a true profit_motive see sec_1 b income_tax regs the third factor favors respondent expectation that assets will appreciate petitioner had no mary-kay- related assets apart from her inventory of cosmetic products these were perish- able products that she stored in a home closet these assets were far more likely to depreciate than to appreciate in value this fourth factor favors respondent taxpayer’s success in other activities when she joined the mary kay network petitioner had as far as the record shows no commercial experience apart from her salaried position as a project manager that job had no relationship to or synergy with her proposed mary kay activity she had no history of turning unprofitable enterprises into profitable ones this track record does not suggest that she would likely convert her reported losses into future profits see sec_1_183-2 income_tax regs this factor favors respondent history of losses and occasional profits for the tax years at issue peti- tioner reported net losses for her mary kay activity of dollar_figure dollar_figure and dollar_figure far from showing a net profit she did not even show a gross_profit ie gross_receipts less cogs and returned inventory for the three-year period her overall gross_profit was negative dollar_figure suggesting that she sold her inventory near or below cost this does not suggest a strong profit_motive losses during a startup_period do not necessarily negate a profit_motive see sec_1_183-2 income_tax regs but petitioner’s reported losses were largely generated by outsized expenses for travel meals and entertainment noth- ing in the record suggests that these expenditures helped jump-start her mary kay activity or were designed to generate future revenues a mary kay consultancy moreover is not the type of highly speculative venture in which losses can be rationalized by the possibility of large ultimate gains see sec_1_183-2 income_tax regs the sixth and seventh factors thus favor respondent taxpayer’s financial status substantial income from sources other than the activity particularly if the losses from the activity generate substantial tax benefits may indicate that the activity is not engaged in for profit sec_1_183-2 income_tax regs by joining the mary kay network petitioner sought to claim tax deductions for day-to-day living expenses--travel to her daughter’s volleyball tournaments vacations household utilities and vehicle costs--that would otherwise be nondeductible see sec_262 denying deductions for personal living or family_expenses although petitioner’s sal- ary was fairly modest she had income to offset and she offset it by converting in- to schedule c expenses nondeductible living costs that she would have incurred regardless of her mary kay activity the tax benefits she thus sought to derive suggest the absence of a true profit_motive see sec_1_183-2 income_tax regs elements of personal pleasure or recreation the presence of personal motives in carrying on of an activity may indicate that the activity is not engaged in for profit especially where there are recreational or personal elements invol- ved sec_1_183-2 income_tax regs there are neighborly and social as- pects to a mary kay consultancy that make it more pleasurable than say digging trenches petitioner admitted that she was attracted to the network by the discount she would get when purchasing mary kay products for her own use she undoubtedly derived recreation and personal pleasure from alleged business trips during which she attended reunions with her sorority sisters accompanied her daughter to volleyball tournaments and vacationed in disney world and europe this last factor thus favors respondent petitioner’s argument in essence is that she engaged in a business for three years lost money every year and decided to quit after concluding that the business would never be profitable but the sequence of events makes this narrative sus- pect petitioner terminated her mary kay activity shortly after receiving the irs notice_of_deficiency in this case which suggested that the jig might well be up evaluating the facts overall we conclude that petitioner joined the mary kay net- work not with an actual and honest objective of making a profit but rather to shelter her taxable wage income by claiming losses derived from otherwise non- deductible living costs see magassy f app’x pincite hulter t c pincite in sum we sustain respondent’s determination that petitioner’s mary kay activity was an activity_not_engaged_in_for_profit see sec_183 petitioner is accordingly entitled to no deductions for her mary kay activity in excess of the gross_income derived from such activity sec_183 unless such deductions would be allowable without regard to whether or not such activity was engaged in for profit sec_183 c accuracy-related_penalties the code imposes a penalty upon the portion of any underpayment_of_tax attributable to among other things n egligence or any substantial under- statement of income_tax sec_6662 and b and negligence includes any failure to make a reasonable attempt to comply with the internal revenue laws sec_6662 negligence also includes any failure to keep adequate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs see 139_tc_19 aff’d 792_f3d_1146 9th cir an understatement of income_tax is substantial if it exceeds the greater of dollar_figure or of the tax required to be shown on the return see sec_6662 under sec_7491 the commissioner bears the burden of production with respect to the liability of any individual for any penalty see 116_tc_438 respondent has satisfied his burden of pro- duction as to negligence by showing that petitioner failed to keep adequate books_and_records and lacked a genuine profit_motive for her mary kay activity see sec_1_6662-3 income_tax regs in graev v commissioner t c __ date supplementing and overruling in part 147_tc_460 we held that respondent’s burden of pro- duction under sec_7491 also includes establishing compliance with sec_6751 which requires that penalties be personally approved in writing by the immediate supervisor of the individual making such determination see 851_f3d_190 2d cir aff’g in part rev’g in part tcmemo_2015_42 the record includes a copy of a civil penalty approval form approving imposition of accuracy-related_penalties against petitioner for tax_year sec_2012 sec_2013 and sec_2014 which was executed by the immediate supervisor of the revenue_agent who examined petitioner’s returns we accordingly conclude that respondent has met his burden of production for these penalties sec_6664 provides an exception to the imposition of the accuracy- related penalty to the extent that the taxpayer establishes that there was reasonable_cause for and that she acted in good_faith with respect to the underpayment the decision as to whether the taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all pertinent facts and circumstances see sec_1_6664-4 income_tax regs circumstances that may signal reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances including the experience knowledge and education of the taxpayer ibid petitioner has failed to establish that she made a good-faith effort to deter- mine her correct federal_income_tax liability she failed to keep books and rec- ords of her mary kay activity none of the factors enumerated in the regulations supports her claim of a genuine profit_motive even if she were thought to have a profit_motive she has stipulated that less than of the expenses she reported would actually be deductible the deductions she claimed for travel to her daugh- ter’s volleyball tournaments europe and disney world would have difficulty passing the straight-face test we accordingly conclude that the underpayments in question as herein redetermined are attributable to negligence for which reasonable_cause has not been shown alternatively in the event the rule_155_computations show that the various understatements of income_tax exceed the greater of dollar_figure or of the amounts required to be shown on petitioner’s returns we conclude that those underpayments are attributable to substantial understatements of income_tax for which reasonable_cause has not been shown to reflect the foregoing and the parties’ mutual concessions decision will be entered under rule