t c memo united_states tax_court estate of albert strangi deceased rosalie gulig independent executrix petitioner v commissioner of internal revenue respondent docket no filed date norman a lofgren g tomas rhodus and michael c kelsheimer for petitioner gerald l brantley lillian d brigman janice b geier and john d maceachen for respondent __________________ this opinion supplements our previously filed opinion in 115_tc_478 affd in part and revd and remanded in part 293_f3d_279 5th cir supplemental memorandum findings_of_fact and opinion cohen judge this matter is before the court on remand from the court_of_appeals for the fifth circuit for further consideration consistent with its opinion in 293_f3d_279 5th cir strangi ii affg in part and revg and remanding in part 115_tc_478 strangi i the issue for decision on remand is whether the value of property transferred by albert strangi decedent to the strangi family limited_partnership sflp and stranco inc stranco is includable in his gross_estate pursuant to sec_2036 unless otherwise indicated all section references are to the internal_revenue_code in effect as of the date of death and all rule references are to the tax_court rules_of_practice and procedure findings_of_fact facts with respect to this case were found in our original opinion in strangi i and are incorporated by this reference we summarize for convenience relevant facts from strangi i and set forth additional findings for purposes of deciding the issue on remand general background decedent and his first wife had four children jeanne rosalie albert t and john strangi collectively the strangi children after divorcing his first wife in decedent married irene delores seymour mrs strangi who had two daughters angela and lynda seymour collectively the seymour daughters from a previous marriage in rosalie hereinafter mrs gulig married michael j gulig mr gulig an attorney with the law firm of sheehy lovelace and mayfield p c in waco texas on date decedent and mrs strangi executed wills that named the strangi children and the seymour daughters as residual beneficiaries in the event that either spouse predeceased the other during and mrs strangi suffered a series of serious medical problems in decedent and mrs strangi decided to move from their then home in fort walton beach florida to waco texas to facilitate this move decedent on date executed a power_of_attorney naming mr gulig as his attorney in fact and thereby authorizing mr gulig in decedent’s name place and stead to exercise do or perform any act right power duty or obligation whatsoever that i now have or may acquire relating to any person item thing transaction business property real or personal tangible or intangible or matter whatsoever to lease purchase exchange and acquire and to bargain contract and agree for the lease purchase exchange and acquisition of and to take receive and possess any real or personal_property whatsoever tangible or intangible or interest therein on such terms and conditions and under such covenants as the attorney in fact shall deem proper to improve repair maintain manage insure rent lease sell release convey subject_to lien mortgage hypothecate and in any way or manner deal with all or any part of any real or personal_property whatsoever intangible or any interest therein which i now own or may hereafter acquire for me and in my name and under such terms and conditions and under such covenants as said attorney shall deem proper to engage in and transact any and all lawful business of whatever nature or kind for me and in my name to sign endorse execute acknowledge deliver receive and possess such contracts agreements etc and such other instruments in writing of whatever kind and nature as may be necessary or proper in the exercise of the rights and powers herein granted thus among other things mr gulig was authorized to close the purchase of a residence in waco after the move to waco sylvia stone ms stone was hired as decedent’s housekeeper and also provided assistance with the care of mrs strangi on date decedent executed a new will naming the strangi children as the sole residual beneficiaries if mrs strangi predeceased him this will also designated mrs gulig and ameritrust texas n a ameritrust as coexecutors of decedent’s estate mrs strangi died on date during decedent had surgery to remove a cancerous mass from his back was diagnosed with supranuclear palsy a brain disorder that would gradually reduce his ability to speak walk and swallow and had prostate surgery mr gulig thereafter took over decedent’s affairs pursuant to the power_of_attorney mr gulig also developed a close personal relationship with decedent after the death of mrs strangi every morning mr gulig would visit decedent to have coffee and read the newspaper sflp and stranco on date mr gulig attended a seminar provided by fortress financial group inc fortress on the use of family limited_partnerships as a tool for asset preservation estate_planning income_tax planning and charitable giving the following day on date mr gulig as decedent’s attorney in fact formed sflp a texas limited_partnership and its corporate general_partner stranco a texas corporation and filed with the state of texas the respective certificate of limited_partnership and articles of incorporation in date mr gulig believed decedent had about to months to live mrs gulig expected decedent to survive about years an agreement of limited_partnership of strangi family limited_partnership sflp agreement was prepared by mr gulig using documents licensed from fortress and sets forth the governing provisions for the entity stranco is designated therein as the managing general_partner the authority of which is broadly described as follows except as otherwise provided in this agreement the managing general_partner of the partnership shall have the sole exclusive and absolute right and authority to act for and on behalf of the partnership and all of the partners in connection with all aspects of the business of the partnership more specifically the sflp agreement enumerates various rights powers and authorities of the managing general_partner including without limitation to acquire hold lease encumber pledge option sell exchange transfer dispose or otherwise deal with real or personal_property or rights or interests therein of any nature whatsoever as may be necessary or advisable for the operation of the partnership to borrow or lend money for partnership purposes and to determine the use of the revenues of the partnership for partnership purposes the sflp agreement obligates the managing general_partner to use its good_faith efforts to manage partnership affairs in a prudent and businesslike manner and to act at all times in the best interests of the partnership according to the sflp agreement limited partners are without any authority or right to take part in the management of the business or transact any business for the entity as regards distributions the sflp agreement provides that income from operations and capital_transactions after deduction for certain listed expenses shall be distributed at such times and in such amounts as the managing general_partner in its sole discretion shall determine taking into account the reasonable business needs of the partnership including plan for expansion of the partnership’s business the managing general partner’s determination regarding whether or not to make distributions and the amount of distributions to be made shall be final and binding on all partners such distributions shall be made to each partner in accordance with such partner’s interest in the partnership likewise assets of the partnership may be distributed in_kind in the sole and absolute discretion of the managing general_partner pursuant to the sflp agreement the partnership would be dissolved and terminated upon a unanimous vote of the limited partners and unanimous consent of the general partners a decision of the managing general_partner after the disposition of substantially_all partnership assets an entry of judicial dissolution the death insolvency bankruptcy removal or withdrawal of any general_partner unless the limited partners within days unanimously elect a new general_partner to continue the business the involuntary transfer of a general_partnership interest in the event there is only one general_partner unless the limited partners within days vote unanimously to continue the partnership or date upon dissolution and termination sflp was to be liquidated the managing general_partner was designated as liquidator and instructed to dispose_of partnership assets first in payment of third-party debts then in repayment of loans from partners and finally in repayment to partners of positive capital_account balances by a series of transfer documents mr gulig assigned to sflp property of decedent with a fair_market_value of dollar_figure constituting approximately percent of decedent’s wealth in exchange for a 99-percent limited_partnership_interest the contributed_property included decedent’s interest in specified real_estate including the residence occupied by decedent securities accrued interest and dividends insurance policies an annuity receivables and partnership interests about percent of the contributed value was attributable to cash and securities the majority of the asset transfer documents were dated date while change_of_ownership forms for the life_insurance policies were executed on august and letters dated date were also sent to the brokers holding decedent’s securities accounts to those administering the contributed partnership interests and to the borrowers on notes payable to decedent advising them regarding transfer of the underlying assets to sflp all of the contributed_property was reflected in decedent’s capital_account brokerage and bank accounts were opened in the name of the partnership during the period from august through october mr gulig invited the strangi children to participate in sflp through an interest in stranco decedent purchased percent of stranco for dollar_figure and mrs gulig purchased the remaining percent for dollar_figure on behalf of herself and her three siblings with each thereby acquiring a 25-percent interest the moneys were deposited into a bank account opened in date in stranco’s name stranco contributed a portion of these funds to sflp in exchange for a 1-percent general_partnership interest stranco’s articles of incorporation named decedent and the strangi children as the initial five directors on date the strangi children and mr gulig met to execute the stranco bylaws a shareholders agreement and a consent of directors authorizing corporate action in lieu of organizational meeting effective as of date they also signed a unanimous consent of directors in lieu of special meeting that authorized the corporate president to execute a management agreement employing mr gulig the stranco bylaws set forth provisions governing corporate formalities as pertains to shareholders the bylaws state that a majority of the outstanding shares shall constitute a quorum at a meeting shareholders may also take informal action by means of a consent in writing signed by all shareholders concerning directors the bylaws specify that there shall be five directors one of whom shall be elected president at a meeting of the board a majority of the directors then serving shall constitute a quorum and the act of a majority of the directors present at a meeting with a quorum shall be the act of the board directors may also take informal action by a written consent signed by all directors the president shall be the principal executive officer of the corporation and subject_to the control of the board shall generally supervise and control all of the business and affairs of the corporation among the particular powers or duties placed under the board is the payment of dividends as follows the board_of directors may declare and the corporation may pay dividends on its outstanding shares in any manner and upon any terms and conditions not restricted by the articles of incorporation or prohibited by law the management agreement executed by stranco and mr gulig described his duties as follows scope of employment employee is hired to manage the day-to-day business of employer additionally the employee shall manage the day-to-day business of the strangi family limited_partnership a texas limited_partnership the partnership in which employer serves as the sole general_partner and the managing partner of the partnership during the term of this agreement the employee shall devote such portion of his time attention and energies to the businesses of the employer and the partnership and will diligently and to the best of his ability perform all duties incident to his employment hereunder the duties of employee shall include but not be limited to management of the partnership’s rental properties cash and investment management and the preparation and filing of all required governmental reports including tax returns in the shareholders agreement decedent and the strangi children agreed that at each annual meeting they would vote to reelect themselves or a nominee as the five directors they further agreed that if a vacancy occurred on the board by reason of the death disability resignation retirement or removal of a director so elected they would cause the bylaws to be amended so as to reduce by one the number of directors thereafter each of the four strangi children gave a 25-percent interest in stranco to mclennan community college foundation mcc foundation and the charity became a 1-percent shareholder in the corporation mcc foundation accepted the gift by execution on date of an agreement to be bound by the terms of the preexisting shareholders agreement decedent died of cancer on date at the age of following decedent’s death texas commerce bank n a tcb successor_in_interest to ameritrust was asked to decline to serve as coexecutor of his estate tcb subsequently did so and decedent’s will was admitted to probate on date with mrs gulig appointed as the sole executor after its formation various monetary outlays were made from sflp from date until his death decedent required 24-hour home health care that was provided by olsten healthcare olsten and supplemented by ms stone during this time and while assisting decedent ms stone injured her back the resultant back surgery was paid for by sflp sflp also paid nearly dollar_figure in for funeral_expenses estate administration_expenses and related debts of decedent including a dollar_figure check to olsten for nursing services sflp then paid more than dollar_figure in and for estate expenses and a specific_bequest to decedent’s sister in date sflp distributed dollar_figure to decedent’s estate for federal estate and state inheritance taxes when such disbursements were made to or for the benefit of decedent or his estate stranco received corresponding and proportionate sums either in cash or in the form of adjusting journal entries for accounting purposes certain amounts expended by sflp were initially recorded on its books as advances to and accounts_receivable from partners sflp also accrued rent on the residence occupied by decedent and reported the rental income on its income_tax return the accrued amount was paid in date mr gulig made all entries into the books_and_records of sflp and stranco and prepared all income_tax returns for the entities estate_tax proceedings on date a form_706 united_states estate and generation-skipping_transfer_tax return filed on behalf of decedent’s estate was received by the internal_revenue_service the value reported on the form_706 for the gross_estate was dollar_figure which included dollar_figure for decedent’s interest in sflp and dollar_figure for his stock in stranco the total value of the property held by sflp as of the date of death was dollar_figure to which discounts were applied in calculating the reported fair_market_value the form_706 also reflected other assets of dollar_figure including household and personal items vehicles securities certain receivables and bank account balances totaling dollar_figure and claimed deductions of dollar_figure for debts of decedent including dollar_figure for rents to sflp and dollar_figure for expenses in a statutory notice dated date respondent determined a deficiency in federal estate_tax of dollar_figure and an alternative deficiency in federal gift_tax of dollar_figure the estate_tax deficiency resulted in large part from respondent’s conclusion that decedent’s interest in sflp should be increased by dollar_figure to dollar_figure and his interest in stranco should be increased by dollar_figure to dollar_figure the proceedings in strangi i were initiated in response to the foregoing notice_of_deficiency prior to trial respondent attempted by motion to raise sec_2036 as an issue strangi i pincite that motion was denied as untimely id with respect to the remaining issues we held in strangi i pincite the partnership was valid under state law and would be recognized for estate_tax purposes sec_2703 did not apply to the partnership_agreement the transfer of assets to sflp was not a taxable gift and decedent’s interests in sflp and stranco should be valued using the discounts applied by respondent’s expert after entry of decision respondent appealed to the court_of_appeals for the fifth circuit the appellate court ruled as follows we reverse the tax court’s denial of leave to amend and remand with instructions that the court either set forth its reasons for adhering to its denial of the commissioner’s motion for leave to amend bearing in mind the mandate of the federal rule_of civil procedure a or reverse its denial of the commissioner’s motion permit the amendment and consider the commissioner’s claim under sec_2036 we affirm all other conclusions made by the tax_court strangi ii pincite over petitioner’s objection leave was granted for respondent’s amendment to answer and a second amendment to answer raising sec_2036 opinion i inclusion in the gross estate-- sec_2036 a general rules as a general_rule the internal_revenue_code imposes a federal tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2001 the taxable_estate in turn is defined as the value of the gross_estate less applicable deductions sec_2051 sec_2031 specifies that the gross_estate comprises all property real or personal tangible or intangible wherever situated to the extent provided in sec_2033 through sec_2033 broadly states that the value of the gross_estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death sec_2034 through then explicitly mandate inclusion of several more narrowly defined classes of assets among these specific sections is sec_2036 which reads in pertinent part as follows sec_2036 transfers with retained_life_estate a general_rule --the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money or money’s worth by trust or otherwise under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death-- the possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom regulations further explain that an interest or right is treated as having been retained or reserved if at the time of the transfer there was an understanding express or implied that the interest or right would later be conferred sec a estate_tax regs given the language used in the above-quoted provisions it has long been recognized that the general purpose of this section is ‘to include in a decedent’s gross_estate transfers that are essentially testamentary’ in nature 762_f2d_1361 9th cir quoting 395_us_316 accordingly courts have emphasized that the statute describes a broad scheme of inclusion in the gross_estate not limited by the form of the transaction but concerned with all inter_vivos transfers where outright disposition of the property is delayed until the transferor’s death 437_f2d_1148 4th cir as used in sec_2036 the term enjoyment has been described as synonymous with substantial present economic benefit 265_f2d_667 3d cir affg 29_tc_1179 see also 114_tc_144 regulations additionally provide that use possession right to income or other enjoyment of transferred property is considered as having been retained or reserved to the extent that the use possession right to the income or other enjoyment is to be applied toward the discharge of a legal_obligation of the decedent or otherwise for his pecuniary benefit sec b estate_tax regs moreover possession or enjoyment of transferred property is retained for purposes of sec_2036 where there is an express or implied understanding to that effect among the parties at the time of the transfer even if the retained_interest is not legally enforceable 3_f3d_591 2d cir affg 98_tc_594 guynn v united_states supra pincite estate of reichardt v commissioner supra pincite 73_tc_82 the existence or nonexistence of such an understanding is determined from all of the facts and circumstances surrounding both the transfer itself and the subsequent use of the property estate of reichardt v commissioner supra pincite estate of rapelje v commissioner supra pincite as used in sec_2036 the term right has been construed to connote an ascertainable and legally enforceable power 408_us_125 nonetheless regulations clarify with respect to such a power it is immaterial i whether the power was exercisable alone or only in conjunction with another person or persons whether or not having an adverse_interest ii in what capacity the power was exercisable by the decedent or by another person or persons in conjunction with the decedent and iii whether the exercise of the power was subject_to a contingency beyond the decedent’s control which did not occur before his death eg the death of another person during the decedent’s lifetime the phrase however does not include a power over the transferred property itself which does not affect the enjoyment of the income received or earned during the decedent’s life nor does the phrase apply to a power held solely by a person other than the decedent but for example if the decedent reserved the unrestricted power to remove or discharge a trustee at any time and appoint himself as trustee the decedent is considered as having the powers of the trustee sec b estate_tax regs additionally retention of a right to exercise managerial power over transferred assets or investments does not of itself result in inclusion under sec_2036 united_states v byrum supra pincite an exception to the treatment mandated by sec_2036 exists where the facts establish a bona_fide sale for an adequate_and_full_consideration in money or money’s worth b burden_of_proof typically the burden of disproving the existence of an agreement regarding a retained_interest has rested on the estate and this burden has often been characterized as particularly onerous in intrafamily situations estate of maxwell v commissioner supra pincite estate of reichardt v commissioner supra pincite estate of rapelje v commissioner supra pincite in this case however the sec_2036 issues are new matters within the meaning of rule a thus the burden_of_proof is on respondent c existence of a retained_interest respondent contends that the value of the property transferred to sflp and stranco is includable in decedent’s gross_estate under either sec_2036 or sec_2036 underlying both of these arguments is the particular structure of the sflp stranco arrangement as set forth in the relevant governing documents the sflp agreement provides that distributions of proceeds and assets from the entity shall be made in the sole discretion of the managing general_partner the sflp agreement also designates stranco as the managing general_partner stranco in turn executed the management agreement employing mr gulig to manage the day-to-day business of sflp as well as of stranco itself yet mr gulig was already decedent’s attorney in fact pursuant to the general power_of_attorney under this instrument mr gulig was granted full and durable authority to act for decedent in his name place and stead mr gulig set up the sflp stranco arrangement to facilitate decedent’s estate_planning goals and capitalized the partnership primarily with decedent’s property when distilled to their most essential terms the governing documents gave mr gulig authority to specify distributions from sflp which is entirely consistent with his authority under the power_of_attorney although the estate protests that mr gulig’s authority under the management agreement was limited to managing the day-to-day business of the partnership and did not extend to making distributions or loans the pertinent instruments provide no basis for concluding that making distributions would be outside the day-to-day business of a partnership capitalized nearly exclusively with investment_assets as a practical matter actual disbursement of funds occurred when checks were issued by mr and mrs gulig in their various related capacities pursuant to rights granted to them by decedent acting through mr gulig hence to summarize the sflp agreement named stranco managing general_partner with the sole discretion to determine distributions the stranco shareholders including decedent through mr gulig then acted together to delegate such authority to mr gulig under the management agreement decedent’s attorney in fact thereby stood in a position to make distribution decisions mrs gulig effectuated these decisions by signing checks to the recipients so designated sec_2036 sec_2036 provides for inclusion of transferred property with respect to which the decedent retained by express or implied agreement possession enjoyment or the right to income enjoyment in this context is equated with present economic benefit a right to income as a threshold matter we observe that our analysis above of the express documents suggests inclusion of the contributed_property under sec_2036 based on the right to the income criterion without need further to probe for an implied agreement regarding other_benefits such as possession or enjoyment the governing documents contain no restrictions that would preclude decedent himself acting through mr gulig from being designated as a recipient of income from sflp and stranco such scenario is consistent with the reach of the right to income phrase as we described it in 49_tc_140 sec_2036 refers not only to the possession or enjoyment of property but also to right to the income from property the section does not require that the transferor pull the string or even intend to pull the string on the transferred property it only requires that the string exist see mcnichol’s 265_f2d_667 c a affirming 29_tc_1179 b possession or enjoyment the facts of this case support the finding of an implied agreement for retained possession or enjoyment we have previously considered implicit retention of these benefits under sec_2036 in situations involving family limited_partnerships in 114_tc_144 estate of thompson v commissioner tcmemo_2002_246 estate of harper v commissioner tcmemo_2002_121 and estate of schauerhamer v commissioner tcmemo_1997_242 although the instant case is based on limited post-transfer history due in part to decedent’s death only months after creation of the partnership we conclude that the reasoning underlying those opinions directs a like result here fundamentally the preponderance_of_the_evidence shows that decedent as a practical matter retained the same relationship to his assets that he had before formation of sflp and stranco circumstances that have been found probative of an implicitly retained_interest under sec_2036 include transfer of the majority of the decedent’s assets continued occupation of transferred property commingling of personal and entity assets disproportionate distributions use of entity funds for personal expenses and testamentary characteristics of the arrangement guynn v united_states f 2d pincite estate of reichardt v commissioner supra pincite estate of thompson v commissioner supra estate of harper v commissioner supra estate of trotter v commissioner tcmemo_2001_250 estate of schauerhamer v commissioner supra at the outset we acknowledge that in contrast to certain of the prior cases the participants involved in the sflp stranco arrangement generally proceeded such that the proverbial ‘i’s were dotted’ and ‘t’s were crossed’ strangi i pincite steps were taken to abide by the formal terms of the structure created such measures may give sflp and stranco sufficient substance to be recognized as legal entities in the context of valuation which requires assumption of a hypothetical buyer and seller they do not preclude implicit retention by decedent of economic benefit from the transferred property for purposes of sec_2036 first we cannot lose sight of the fact that decedent contributed approximately percent of his wealth including his residence to the sflp stranco arrangement respondent alleges that the transfer left decedent with inadequate assets and cash_flow to meet his living_expenses to which the estate takes objection the estate goes to great lengths to counter respondent’s assertion claiming that decedent at his death possessed liquefiable assets of at least dollar_figure and received on a monthly basis a pension of dollar_figure and social_security of dollar_figure the estate also stresses that respondent has not established the amount of decedent’s living_expenses and maintains that even if the dollar_figure in checks paid from decedent’s account in august and september were used as an estimate the purported liquefiable assets would have covered decedent’s needs for his concededly short life expectancy of to months however the relative dearth of liquefied decedent’s form_706 showed two bank accounts with funds totaling dollar_figure as opposed to liquefiable assets persuades us that decedent and his children and mr gulig all expected that sflp and stranco would be a primary source of decedent’s liquidity it is unreasonable to expect that decedent would be forced to rely on sale of assets to meet his basic costs of living a second feature highly probative under sec_2036 is decedent’s continued physical possession of his residence after its transfer to sflp the estate maintains that any otherwise negative implications of this circumstance are neutralized by the fact that sflp charged mr strangi rent on occupancy of the home and reported rental income on its tax_return decedent likewise reported a rent obligation on his estate_tax_return for accounting purposes the accrued rent was recorded by sflp on its books yet the accrued amount was not paid until date a residential lessor dealing at arm’s length would hardly be content merely to accrue a rental obligation for eventual payment more than years later as we have remarked accounting entries alone are of small moment in belying the existence of an agreement for retained possession and enjoyment estate of reichardt v commissioner t c pincite- estate of harper v commissioner tcmemo_2002_121 concerning factors that relate to use of entity funds the estate emphasizes that each disbursement for decedent or his estate was accompanied by a pro_rata allotment to stranco where as here the only interest in the partnership other than that held by the decedent is de_minimis a pro_rata payment is hardly more than a token in nature in these circumstances pro_rata disbursements are insufficient to negate the probability that the decedent retained economic enjoyment of his or her assets after all distributing percent to stranco would not in any substantial way operate to curb decedent’s ability to benefit from sflp property accordingly we direct our attention to the purpose as opposed to the mechanics of partnership_distributions and expenditures the record reveals several instances where sflp expended funds in response to a need of decedent or his estate sflp paid for ms stone’s back surgery to alleviate an injury she sustained in caring for decedent prior to the formation of sflp in sflp expended nearly dollar_figure for funeral_expenses estate administration and related debts including a dollar_figure check to olsten to pay for nursing services rendered to decedent before his death these sums were followed in and by further payment of over dollar_figure for estate expenses and a specific_bequest sflp also disbursed approximately dollar_figure million directed toward decedent’s estate and inheritance taxes the estate seeks to justify these payments primarily by emphasizing that they were accounted for on sflp’s books as advances to partners and later closed as distributions with pro_rata amounts either advanced or distributed to stranco the evidence also indicates that the dollar_figure-plus amount was repaid in date the estate further explains that certain of these payments from sflp were necessitated by the delay in probate of decedent’s estate engendered by the process of getting tcb to decline executorship to the extent that the estate’s arguments focus on accounting manipulations they are unavailing as demonstrated in estate of reichardt v commissioner supra pincite and estate of harper v commissioner supra accounting adjustments do not preclude a conclusion that those involved understood that the decedent’s assets would be made available as needs materialized belated repayment of certain amounts likewise does not refute the inference of an implicit agreement for retained enjoyment that arises from the demonstrated and contemporaneous availability of large sums furthermore to the extent that the estate’s explanations focus on a delay in probate they lack specificity the more salient feature would appear to be the insufficiency of the assets not contributed to sflp and stranco to cover the significant expenses reasonably to be expected to ensue in connection with decedent’s poor health and death that in turn speaks to retained enjoyment regarding testamentary characteristics the sflp stranco arrangement also bears greater resemblance to one man’s estate plan than to any sort of arm’s-length joint enterprise as in estate of harper v commissioner supra the largely unilateral nature of the formation the extent and type of the assets contributed thereto and decedent’s personal situation are indicative mr gulig established the entities using fortress documents with little if any input from other family members the contributed_property included the majority of decedent’s assets in general and his investments a prime concern of estate_planning in particular decedent was advanced in age and suffering from serious health conditions furthermore as discussed in strangi i pincite the purpose of the partnership arrangement was not to provide a joint investment vehicle for the management of decedent’s assets but was consistent with testamentary intent moreover the crucial characteristic is that virtually nothing beyond formal title changed in decedent’s relationship to his assets mr gulig managed decedent’s affairs both before and after the transfer decedent’s children did not obtain a meaningful economic stake in the property during decedent’s life they raised no objections or concerns when large sums were advanced for expenditures of decedent or his estate thus implying an understanding that decedent’s access thereto would not be restricted in face of the foregoing realities the estate argues that whatever possession or enjoyment of the contributed_property decedent may have experienced was neither retained by means of a contemporaneous agreement nor with respect to the transferred property as regards the first point the estate contends that respondent has offered no evidence to prove a contemporaneous agreement requiring the distributions made as opposed to an independent subsequent decision by stranco to make the same outlay according to the estate even if decisions to make distributions were made based on sympathy for poor old dad ie oops mr strangi imprudently put too much money into sflp and we need to give some back that would not meet the criteria set by judicial precedent for determining the existence of a retained expectation of possession of sic enjoyment which is that there must have been an implied agreement that was contemporaneous with the transfer of the property at issue not a subsequent agreement or act fn ref omitted we are persuaded that the evidence and circumstances detailed above render such a contemporaneous agreement more_likely_than_not the second point mentioned stems from the estate’s view that pro_rata distributions were made not with respect to the transferred property in which decedent possessed no legal_interest under the texas revised limited_partnership act trlpa tex rev civ stat ann art 6132a-1 sec dollar_figure vernon supp but with respect to his partnership_interest yet this argument relies on paper title to the exclusion of the practicalities that are the focus of sec_2036 the property contributed by decedent was the source of the payments made furthermore the record suggests that the impetus underlying a number of significant sflp disbursements was needs of decedent or his estate rather than exigencies pertaining to stranco or the partnership itself hence the preponderance_of_the_evidence establishes that decedent retained possession of enjoyment of or the right to income from the property transferred within the meaning of sec_2036 sec_2036 although we have held supra that sec_2036 requires the estate to include the value of the transferred assets in the gross_estate for federal estate_tax purposes the parties have argued extensively over the issue of whether sec_2036 applies consequently we address the applicability of sec_2036 to the instant case as stated above sec_2036 mandates inclusion in the gross_estate of transferred property with respect to which the decedent retained the right to designate the persons who shall possess or enjoy the property or its income this provision was interpreted by the supreme court in 408_us_125 and both parties devote a significant portion of their respective arguments to the implications of that decision we address these arguments as an alternative to our conclusions concerning sec_2036 and with particular consideration of the facts of this case in united_states v byrum supra pincite the decedent mr byrum created an irrevocable_trust for the benefit of his children he funded the trust with shares of three closely held corporations but retained the right to vote the shares and to veto any sale or transfer of the stock id pincite as a result mr byrum at his death continued to have the right to vote not less than percent of the common_stock in each of the three corporations id pincite the three corporations were involved in lithography-related businesses and had a substantial number of minority shareholders unrelated to mr byrum id pincite n n the supreme court noted that of of and of stockholders respectively in the three corporations appeared to be unrelated to mr byrum id pincite n the trust instrument specified that there be and mr byrum named an independent corporate trustee id pincite the trustee was authorized in its absolute and sole discretion to pay income and principal to or for the benefit of the beneficiaries id pincite the commissioner argued that by retaining voting control_over the corporations mr byrum was in a position to select the corporate directors and thereby to control corporate dividend policy id pincite according to the commissioner the scenario in dispute gave mr byrum the ability to regulate the flow of income to the trust which ability was characterized as tantamount to a grantor-trustee’s power to accumulate trust income for remaindermen or to distribute to present beneficiaries id pincite the court had previously ruled that the latter power to accumulate rather than disburse constituted a right to designate under sec_2036 id pincite 383_us_627 given the above facts the supreme court held that byrum did not have an unconstrained de_facto power to regulate the flow of dividends to the trust much less the ‘right’ to designate who was to enjoy the income from trust property united_states v byrum u s pincite the court rejected the commissioner’s control rationale as it would create a standard--not specified in the statute--so vague and amorphous as to be impossible of ascertainment in many instances id pincite n in reaching its conclusion the court relied on a series of economic and legal constraints to which any power that mr byrum might have had was subject and which prevented such power from being equivalent to a right to designate persons to enjoy trust income id pincite the court emphasized that the independent corporate trustee alone had the right under the trust instrument to pay out or withhold income id pincite even if mr byrum had managed to flood the trust with dividends he had no way of compelling the trustee to pay out or accumulate that income id pincite the court also noted that the power to elect directors conferred no legal right to command them to pay or not pay dividends id pincite moreover the flow of dividends from the corporations would be subject_to economic vicissitudes retained earnings policies and business needs id pincite in this regard the court explained there is no reason to suppose that the three corporations controlled by byrum were other than typical small businesses the customary vicissitudes of such enterprises--bad years product obsolescence new competition disastrous litigation new inhibiting government regulations even bankruptcy--prevent any certainty or predictability as to earnings or dividends there is no assurance that a small_corporation will have a flow of net_earnings or that income earned will in fact be available for dividends thus byrum’s alleged de_facto power to control the flow of dividends to the trust was subject_to business and economic variables over which he had little or no control id pincite furthermore the supreme court stressed that a majority shareholder has a fiduciary duty not to misuse his power by promoting his personal interests at the expense of corporate interests and the directors of a corporation have a fiduciary duty to promote the interests of the corporation id pincite- such duties were legally enforceable by means of for example a derivative suit id pincite with respect to the case at bar the estate asserts that decedent retained no legally enforceable rights of the genre required by united_states v byrum supra the estate emphasizes that management powers are insufficient to warrant inclusion and points out that under the sflp agreement the limited_partner was without even the right to exercise any managerial authority the estate likewise reiterates that right as used in sec_2036 is not to be construed as control and notes that under the trlpa tex rev civ stat ann art 6132a-1 sec dollar_figure vernon supp a limited_partner expressly does not participate in control of the business of a partnership by virtue of acting as an officer director or stockholder of a corporate general_partner in this connection the estate also remarks that as a minority shareholder of stranco decedent was without the ability to elect a majority of directors thus retaining even less control than was present in united_states v byrum supra moreover the estate repeatedly invokes the concept that any power which mr strangi or stranco might have would be subject_to state law fiduciary duties such fiduciary duties effectively render sec_2036 inapplicable under the teaching of byrum conversely it is respondent’s position that united_states v byrum supra fails to shield the assets placed in sflp and stranco from the reach of sec_2036 respondent avers that decedent had legally enforceable rights based on the relevant written agreements not mere de_facto control or influence respondent argues that decedent’s rights go beyond the management powers and influence at issue in united_states v byrum supra and extend to designation of persons who shall enjoy entity property and income respondent sets forth several ways in which decedent’s authority can be derived from the provisions of the governing documents and the roles played by the family members involved furthermore respondent maintains that no impediments comparable to those in united_states v byrum supra existed to constrain decedent’s powers and that the supreme court’s reasoning is therefore inapplicable here in the particular circumstances of this case we agree with respondent a legally enforceable rights on these facts decedent can properly be described as retaining a right to designate who shall enjoy property and income from sflp and stranco within the meaning of sec_2036 in this regard it is immaterial whether we characterize the pertinent documents and relationships as creating rights exercisable by decedent alone in conjunction with other stranco shareholders or in conjunction with stranco’s president see sec_20_2036-1 estate_tax regs with respect to sflp income and as previously recounted in greater detail the sflp agreement named stranco managing general_partner and conferred on the managing general_partner sole discretion to determine distributions the stranco shareholders including decedent through mr gulig then acted together to delegate this authority to mr gulig through the management agreement the effect of these actions placed decedent’s attorney in fact in a position to make distribution decisions mrs gulig effectuated such decisions by executing checks to the recipients so designated in addition to the rights described above related to income decedent also retained the right acting in conjunction with other stranco shareholders to designate who shall enjoy the transferred sflp property itself the supreme court indicated in united_states v byrum u s pincite ndollar_figure citing 326_us_480 that a power to terminate the trust and thereby designate the beneficiaries at a time selected by the settlor would implicate sec_2036 pursuant to the sflp agreement the partnership would be dissolved and terminated upon a unanimous vote of the limited partners and the unanimous consent of the general_partner the shareholders agreement likewise specifies that dissolution of sflp requires the affirmative vote of all stranco shareholders once dissolution and termination occur liquidation is accomplished as set forth in the sflp agreement the managing general_partner is named as the liquidator which in turn disburses partnership assets first in payment of debts and then in repayment of partners’ capital_account balances authority is expressly granted for distributions in_kind accordingly decedent can act together with other stranco shareholders essentially to revoke the sflp arrangement and thereby to bring about or accelerate present enjoyment of partnership assets furthermore it is noteworthy that such action would likely revest in decedent himself as the 99-percent limited_partner the majority of the contributed_property as regards property transferred to stranco and income therefrom decedent held the right in conjunction with one or more other stranco directors to declare dividends the corporation’s bylaws authorize the board_of directors to declare dividends from the entity for the board to take such action a majority vote of the directors at a meeting with a quorum present is sufficient under the bylaws a majority of the directors then serving constitutes a quorum because stranco had five directors a quorum would consist of three so two directors eg decedent through mr gulig and one other could potentially act together to declare a dividend the stranco shareholders agreement further provided that each of the initial five directors would be reelected annually thus effectively ensuring decedent’s position on the board in response to various of the above concepts pertaining to joint action particularly by stockowners the estate suggests if the mere fact that a shareholder could band together with all of the other shareholders of a corporation and such banding together would be sufficient to cause inclusion under sec_2036 then it would have been impossible for the united_states supreme court to reach the decision that it did in byrum the estate’s observation ignores the existence in united_states v byrum supra of the independent_trustee who alone had the ability to determine distributions from the disputed trust notwithstanding any prior action by corporate owners or directors it also ignores the identity of the shareholders in this case and the dual roles played by mr gulig to summarize review of the documentary_evidence discussed above reveals that decedent here retained rights of a far different genre from those at issue in united_states v byrum supra rather than mere control management or influence there are traceable to decedent through the explicit provisions of the governing instruments ascertainable and legally enforceable rights to designate persons who shall enjoy the transferred property and its income the estate’s reliance on a limited partner’s lack under the trlpa of participation in control and under the sflp agreement of management authority is thus misplaced the alleged absence of such powers cannot negate the dispositive rights granted in the instant case the sflp stranco arrangement placed decedent in a position to act alone or in conjunction with others through his attorney in fact to cause distributions of property previously transferred to the entities or of income therefrom decedent’s powers absent sufficient limitation as discussed infra therefore fall within the purview of sec_2036 b constraints upon rights to designate the supreme court in united_states v byrum supra relied upon several impediments to the exercise of powers held by mr byrum in concluding that such powers did not warrant inclusion under sec_2036 here the rights held by decedent are of a different nature and were not accompanied by comparable constraints in our view the constraints alleged by the estate are illusory one circumstance highlighted by the supreme court was the existence of an independent_trustee with the sole authority ultimately to pay or withhold income from the trust here in contrast no similar layer of independence was interposed rather decisions with respect to distributions were placed in stranco of which decedent owned percent and was the largest shareholder all decisions ultimately were made by mr gulig who continued to act as decedent’s attorney in fact another element stressed by the supreme court was the manner in which the flow of funds allegedly under mr byrum’s control would be subject_to economic and business realities consequent upon the status of the relevant corporations as typical small operating enterprises earnings and dividends of a small operating company could be affected by inter alia changes in products in competition or in industry regulation and outlook use of funds for replacement of plant and equipment or for growth and expansion and the need to retain sufficient earnings for working_capital these complexities do not apply to sflp or stranco which held only monetary or investment_assets yet another constraining factor cited by the supreme court was the presence of fiduciary duties held by directors and shareholders and it is upon this aspect of the supreme court’s opinion that the estate focuses the supreme court emphasized that corporate directors and shareholders have a fiduciary duty to promote the best interests of the entity as opposed to their personal interests the supreme court further pointed to a substantial number of unrelated minority shareholders who could enforce these duties by suit the fiduciary duties present in 408_us_125 ran to a significant number of unrelated parties and had their genesis in operating businesses that would lend meaning to the standard of acting in the best interests of the entity as a result there existed both a realistic possibility for enforcement and an objective business environment against which to judge potential dereliction given the emphasis that the supreme court laid on these factual realities byrum simply does not require blind application of its holding to scenarios where the purported fiduciary duties have no comparable substance we therefore analyze the situation before us to determine whether the fiduciary duties relied upon by the estate would genuinely circumscribe use of powers to designate the estate summarizes its contentions regarding fiduciary duties as follows just like mr byrum mr strangi’s rights whatever those rights appear to be were severely limited by the fiduciary duties of other people who according to byrum presumably could be counted on the sic observe those restraints against whatever desires they might otherwise have had to run pell-mell to do the bidding of the decedent mr gulig who separate and apart from his role as attorney-in-fact for mr strangi had fiduciary duties to stranco whom he served as manager the directors of stranco who had fiduciary duties to both stranco and to sflp as a whole and mclennan county community college mccc which had rights as a minority shareholder of stranco and a fiduciary obligation to enforce such rights for the benefit of its own beneficiaries as well as the people of the state of texas with the attorney_general of texas having the ability to step in to enforce such rights if mccc failed in its duties none of the foregoing obligations cited by the estate is sufficiently on par with those detailed in united_states v byrum supra to bring the present case within the supreme court’s rationale concerning mr gulig any fiduciary duties that mr gulig might have had in his role as manager of stranco and thereby of sflp are entitled to comparatively little weight on these facts prior to his instigation of the sflp stranco arrangement mr gulig stood in a confidential relationship and owed fiduciary duties to decedent personally as his attorney in fact thus to the extent that stranco or sflp’s interests might diverge from those of decedent we do not believe that mr gulig would disregard his preexisting obligation to decedent as regards fiduciary obligations of stranco and its directors these duties too have little significance in the present context although stranco would owe a fiduciary duty to sflp and to the limited partners decedent owned the sole 99-percent limited_partnership_interest the rights to designate traceable to decedent through stranco cannot be characterized as limited in any meaningful way by duties owed essentially to himself nor do the obligations of stranco directors to the corporation itself warrant any different conclusion decedent held percent of stranco and his own children held of the remaining percent intrafamily fiduciary duties within an investment vehicle simply are not equivalent in nature to the obligations created by the united_states v byrum supra scenario with respect to the role of mcc foundation united_states v byrum supra affords no basis for permitting outcomes under sec_2036 to turn on factors amounting to no more than window dressing a charity given a gratuitous 1-percent interest would not realistically exercise any meaningful oversight lastly we are unpersuaded that any different result should obtain on account of the commissioner’s having taken a contrary position in certain previous administrative rulings as the estate repeatedly brings to our attention the commissioner has cited united_states v byrum supra in such rulings for the principle that fiduciary constraints counsel against inclusion of family limited_partnership assets under sec_2036 see eg priv ltr rul date priv ltr rul date tech adv mem date these written determinations are expressly declared by statute to be without precedential force sec_6110 thus any claimed reliance on them is unavailing in any event cursory exposition in limited factual circumstances does not preclude our analysis of statutory provisions and regulations in the context of this case in sum the estate’s averment that decedent’s ‘rights’ were severely limited by the fiduciary duties of other people who according to byrum presumably could be counted on to observe those restraints rests on a faulty legal premise and ignores factual realities first the supreme court’s opinion in united_states v byrum supra provides no basis for presuming that fiduciary obligations will be enforced in circumstances divorced from the safeguards of business operations and meaningful independent interests or oversight second the facts of this case belie the existence of any genuine fiduciary impediments to decedent’s rights we conclude that the value of assets transferred to sflp and stranco is includable in decedent’s gross_estate under sec_2036 d existence of consideration having decided that decedent retained an interest in the assets transferred to sflp and stranco for purposes of sec_2036 we evaluate whether the statute’s application may nonetheless be avoided on the basis of the parenthetical exception for a bona_fide sale for an adequate_and_full_consideration in money or money’s worth availability of the exception rests on two requirements a bona_fide sale meaning an arm’s-length transaction and adequate_and_full_consideration see estate of harper v commissioner tcmemo_2002_121 the situation before us meets neither of these criteria first no bona_fide sale in the sense of an arm’s-length transaction occurred in connection with decedent’s transfer of property to sflp and stranco mr gulig as decedent’s attorney in fact prepared the arrangement using fortress materials in absence of any meaningful negotiation or bargaining with other anticipated interest-holders he determined how the entities would be structured and operated what property would be contributed and what interests various parties would obtain therein hence decedent essentially stood on both sides of the transaction a fact unchanged by the manner in which the strangi children opted to join after the substantive decisions had been made second full and adequate_consideration does not exist where as here there has been merely a recycling of value through partnership or corporate solution see estate of thompson v commissioner tcmemo_2002_246 estate of harper v commissioner supra 244_fsupp2d_700 n d tex as we recently explained in estate of harper v commissioner supra to call what occurred here a transfer for consideration within the meaning of sec_2036 much less a transfer for an adequate_and_full_consideration would stretch the exception far beyond its intended scope in actuality all decedent did was to change the form in which he held his beneficial_interest in the contributed_property without any change whatsoever in the underlying pool of assets or prospect for profit as for example where others make contributions of property or services in the interest of true joint_ownership or enterprise there exists nothing but a circuitous recycling of value we are satisfied that such instances of pure recycling do not rise to the level of a payment of consideration to hold otherwise would open sec_2036 to a myriad of abuses engendered by unilateral paper transformations we see no distinction of consequence between the scenario analyzed in estate of harper v commissioner supra and that of the present case decedent contributed more than percent of the total property placed in the sflp stranco arrangement and received back an interest the value of which derived almost exclusively from the assets he had just assigned furthermore the sflp stranco arrangement patently fails to qualify as the sort of functioning business_enterprise that could potentially inject intangibles that would lift the situation beyond mere recycling cf estate of harrison v commissioner tcmemo_1987_8 church v united_states aftr 2d ustc par big_number w d tex affd without published opinion 268_f3d_1063 5th cir both involving contributions by other participants not de_minimis in nature for a genuine pooling of interests we therefore hold that decedent did not engage in any transfer for consideration upon the creation and funding of sflp and stranco accordingly the estate is entitled to no exception to the treatment mandated by sec_2036 ii amount includable with respect to the amount includable in decedent’s gross_estate on account of a retained_interest the estate makes the following assertion sec_2036 only requires inclusion of property in a decedent’s estate to the extent that the decedent retained an interest in the transferred property assuming arguendo that decedent did retain an interest in some of the property transferred to sflp sec_2036 does not automatically require inclusion of all of the property transferred by decedent to sflp and respondent has not sustained his burden_of_proof of establishing the extent if any of any retained_interest the foregoing premise however rests on a faulty understanding of the statute’s operation as we recently explained in estate of thompson v commissioner supra sec_2036 effectively includes in the gross_estate the full fair_market_value at the date of death of all property transferred in which the decedent had retained an interest rather than the value of only the retained_interest 324_us_108 this furthers the legislative policy to include in a decedent’s gross_estate transfers that are essentially testamentary--ie transfers which leave the transferor a significant interest in or control_over the property transferred during his lifetime 395_us_316 thus an asset transferred by a decedent while he was alive cannot be excluded from his gross_estate unless he absolutely unequivocally irrevocably and without possible reservations parts with all of his title and all of his possession and all of his enjoyment of the transferred property 335_us_632 emphasis added regulations further detail that if the decedent retained or reserved an interest or right with respect to a part only of the property transferred by him the amount to be included in his gross_estate under sec_2036 is only a corresponding proportion sec_20_2036-1 estate_tax regs accordingly caselaw and regulatory authority converge to indicate that the full value of transferred property is includable unless there existed some specific_portion of the contributed assets that the retained_interest or rights could not reach here the record reveals that no part of the transferred property was exempt from the rights or enjoyment retained by decedent the relevant documents make no distinction among the various assets contributed nor does the evidence reflect that mr gulig looked to particular assets in determining whether amounts should be distributed the preponderance_of_the_evidence therefore establishes that the full value of the transferred assets is includable under sec_2036 pursuant to sec_2036 percent of the net asset value of sflp and percent of the value of assets held by stranco should be included in decedent’s gross_estate nonetheless because respondent never asserted an increased deficiency in connection with the sec_2036 issue valuation of the property in dispute ie interests in sflp and stranco will be limited by the amounts determined in the notice_of_deficiency the decision to be entered however will take into account any additional deductions to which the estate is entitled for costs and expenses_incurred subsequent to the initial trial of this case to reflect the foregoing decision will be entered under rule


internal_revenue_service department of the treasury index no number info release date cid washington dc person to contact john t sapienza jr id no telephone number refer reply to cc dom it a - cor-111369-00 date date dear commissioner rossotti asked me to respond to your letter concerning obesity and weight-loss programs you asked the internal_revenue_service to issue a revenue_ruling allowing obese individuals to deduct the costs of weight-loss programs as medical_care expenses under sec_213 of the internal_revenue_code the current irs position on weight-loss programs is stated in revrul_79_151 1979_1_cb_116 this ruling holds that if participation in the program was to improve the participant’s appearance general health and sense of well-being the expenses of the program are not for medical_care and therefore are not deductible of course the expenses of a weight-loss program prescribed to treat a specific disease are for medical_care and are deductible we appreciate your suggestion and the references you provided to studies on obesity each year the irs and the department of the treasury review the many suggestions for revenue rulings and other forms of guidance to be published the projects selected are announced in the annual priority guidance plan input such as you have provided is helpful to us in selecting projects for the priority guidance plan i hope this information is helpful please call john t sapienza jr at the number above if you have any questions sincerely deputy assistant chief_counsel income_tax accounting by robert a berkovsky chief branch


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b9-plr-161517-02 date date re legend decedent trust date date trust trust trust date year dear this is in response to your letter dated date and prior correspondence requesting an extension of time under sec_301_9100-1 of the procedure and administration regulations to file a qualified physician’s certification with respect to the decedent’s incompetency as required by sec_26_2601-1 of the generation-skipping_transfer_tax regulations the facts submitted and representations made are summarized as follows decedent created trust on date and subsequently amended and restated it entirely on date trust trust and trust were created under the terms of trust as a plr-161517-02 result of decedent’s death on date the trustees represent that no additions have been made to trust trust or trust it is represented that decedent was incompetent at all times on and after date and did not regain competence to modify or revoke the terms of trust before his death decedent’s estate_tax_return was timely filed however due to inadvertence certification from a qualified physician or sufficient other evidence of decedent’s incompetence as required by sec_26_2601-1 was not attached decedent’s primary physician and psychiatrist issued the required certifications in year the trustees have requested an extension of time for filing one or more qualified physician’s certifications with respect to decedent’s incompetency as required by sec_26_2601-1 sec_2601 of the internal_revenue_code imposes a tax on every generation- skipping transfer under b c of the tax_reform_act_of_1986 and sec_26_2601-1 if an individual was under a mental_disability to change the disposition of the individual’s property continuously from date until the date of death the provisions of chapter do not apply to any generation-skipping_transfer under a_trust as defined in sec_2652 to the extent such trust consists of property or the proceeds of property the value of which was included in the gross_estate of the individual sec_26_2601-1 defines the term mental_disability as mental incompetence to execute an instrument governing the disposition of the decedent’s property whether or not there was an adjudication of incompetence and whether or not there has been an appointment of a guardian fiduciary or other person charged with either the care of the decedent or care of the decedent’s property sec_26_2601-1 provides that if a decedent has not been adjudged mentally incompetent by a court the executor must file with form_706 either - a certification from a qualified physician stating that the decedent was mentally incompetent at all times on and after date and did not regain competence to modify or revoke the terms of the trust or will prior to his or her death or sufficient other evidence demonstrating that the decedent was mentally incompetent at all times on and after date as well as a statement explaining why no certification is available from a physician under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i plr-161517-02 sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides that in general requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 must be made under the rules of sec_301_9100-3 requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been met consequently we grant an extension of time for filing the required physician certification with the internal_revenue_service center cincinnati ohio you should file a supplemental form_706 within days of the date on this letter and attach to the form_706 the year physician certifications and a copy of this letter a copy of this letter is enclosed for this purpose except as ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code specifically we express no opinion as to whether decedent was under a mental_disability within the meaning of sec_26_2601-1 on and after date resolution of this factual matter would be under the audit jurisdiction of the area director except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative plr-161517-02 this ruling is directed only to the taxpayers requesting it sec_6110 provides that it may not be used or cited as precedent sincerely heather c maloy heather c maloy associate chief_counsel passthroughs and special industries enclosures copy for purposes copy to file with the supplemental form_706


department of the treasury washington dc person to contact ------------------ id no ------------- telephone number --------------------- refer reply to cc fip - plr-146147-05 date date internal_revenue_service number release date index number -------------------------------------------- --------------------------------------------------- ----------------------------------- ----------------------------------- ---------------------- in re --------------------------------------------------- ----------------------------------- ----------------------------------- ---------------------- ----------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------- legend fund a ------------------------------------------------------------------------------------------------------------------ -------------------------------------------------- fund b -------------------------------------------------------------------------------------------------------- -------------------------------------------------- fund c ------------------------------------------------- -------------------------------------------------- fund d ------------------------------------------------------------------------------------------------------------- -------------------------------------------------- ----------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------- ------------------------------------------- -------------------------------------------------- ----------------------------------------------------------------------------------------- fund e ----------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- ------------------------------------------------ -------------------------------------------------- fund f ---------------------------------------------------------------------------------------------------------------- -------------------------------------------------- year advisor accountant firm due_date filing_date dear ----------- this is in reply to a letter dated date requesting on behalf of funds a b c d e and f the funds an extension of time under sec_301_9100-1 of the procedure and administration regulations to file an income_tax return in order to make an election under sec_855 of the internal_revenue_code --------------------------------------------------------------------------- -------------------------- ------------------ ------------------ facts prior to the preparation of the funds’ income_tax returns due by the due_date the funds are corporations that elected in years prior to year to be treated as regulated_investment_companies rics under subchapter_m sec_851 et seq of the internal_revenue_code such return preparation had followed a customary procedure for several years advisor the advisor to the funds had firm a firm of independent accountants prepare the tax returns firm used information provided by accountant an independent accounting firm used by the funds for both accounting and administrative services historically accountant did not file the tax returns on behalf of the funds under the customary procedure firm sent prepared tax returns directly to as to the income_tax return for year the customary procedure changed two advisor who signed and filed them all such returns were timely filed days before the due_date which included extensions for filing the return for year advisor telephoned accountant intending to have the funds’ treasurer cfo who is an employee of accountant sign and file the funds’ returns the treasurer cfo is a non- tax professional who was not experienced with tax_return due dates and filing_requirements this change in procedure was not communicated to accountant’s tax department the income_tax returns for the funds were forwarded to the treasurer cfo before the due_date for his signature and filing the day before the due_date the treasurer cfo did not check his mailbox he was out of the office on the due_date and he did not return to the office until three days after the due_date after his return to the office the failure to timely file the returns was discovered by the funds and the funds’ returns were filed on the filing_date which was six days after the due_date code support of this requested ruling the returns filed by the funds included the election under sec_855 of the the funds have submitted the affidavit of accountant’s treasurer cfo in funds make the following representations the request for relief was filed by funds before the failure to make the regulatory election was discovered by the service granting the relief will not result in funds having a lower tax_liability in the aggregate for all years to which the regulatory election applies than funds would have had if the election had been timely made taking into account the time_value_of_money funds do not seek to alter a return position for which an accuracy-related_penalty has been or could have been imposed under sec_6662 of the code at the time funds requested relief and the new position requires or permits a regulatory election for which relief is requested being fully informed of the required regulatory election and related tax consequences funds did not choose to not file the election plr-146147-05 law and analysis under sec_855 of the code if a ric declares a dividend before the due_date including extensions for filing its income_tax return for a taxable_year and distributes the dividend in the 12-month_period following the end of the tax_year and not later than the date of the first regular dividend payment made after the declaration the dividend is considered paid during the taxable_year if the ric so elects on its income_tax return for the taxable_year under sec_1_855-1 of the income_tax regulations the election under sec_855 of the code must be made in the return filed by the ric for the taxable_year sec_301_9100-1 of the regulations provides that the commissioner has discretion to grant a reasonable extension of time to make a regulatory election defined in sec_301_9100-1 as an election whose deadline is prescribed by regulations or by a revenue_ruling a revenue_procedure a notice or an announcement published in the internal_revenue_bulletin or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 through c i of the regulations sets forth rules that the internal_revenue_service generally will use to determine whether under the facts and circumstances of each situation the commissioner will grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that subject_to paragraphs b i through iii of sec_301_9100-3 when a taxpayer applies for relief under this section before the failure to make the regulatory election is discovered by the service the taxpayer will be deemed to have acted reasonably and in good_faith and sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all years to which the regulatory election applies than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money conclusion based upon the facts and representations submitted we conclude that funds have shown good cause for granting a reasonable extension of time to elect under a accordingly the funds’ income_tax returns for year which have already been filed with the election under sec_855 of the code are treated as timely filed for purposes of making the election under that section for purposes of the election under sec_855 of the code this ruling does not this ruling is limited to the timeliness of the filing of the funds’ income_tax returns no opinion is expressed with regard to whether the tax_liability of the funds is not plr-146147-05 relieve funds from any penalties they may owe as a result of their failure_to_file their federal_income_tax return on time this ruling’s application is limited to the facts representations code sections and regulations cited herein no opinion is expressed with regard to whether funds otherwise qualify as rics under subchapter_m of the code lower in the aggregate for all years to which the election applies than such tax_liability would have been if the election had been timely made taking into account the time_value_of_money upon audit of the federal_income_tax returns involved the director’s office will determine such tax_liability for the years involved if the director’s office determines that such tax_liability is lower that office will determine the federal_income_tax effect income_tax consequences of the transaction described above except as specifically provided otherwise no opinion is expressed on the federal this ruling is directed only to the taxpayers that requested it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the terms of a power_of_attorney on file in this office copies of this letter are being sent to your authorized representatives sincerely yours william e coppersmith william e coppersmith chief branch office of associate chief_counsel financial institutions products


internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc corp plr-131639-02 date date legend distributing controlled controlled sub fsub fsub fsub fsub fsub fsub fsub business y business z investor date a date b date c date d date e date f date g date h date i date j date k date l year a b c d e f g h i dear this letter responds to your date request for rulings on certain federal_income_tax consequences of a proposed and partially completed transaction the transaction the information submitted in that request and in subsequent correspondence is summarized below the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of these facts or representations but such verification may be required as part of the audit process summary of facts publicly traded distributing is a domestic_corporation and the common parent of an affiliated_group that files a consolidated federal_income_tax return distributing directly conducts business y and has a single class of common_stock outstanding controlled conducts business z controlled has outstanding class c voting common_stock controlled class c common and series a voting preferred_stock controlled series a preferred distributing wholly owns the controlled class c common and investor wholly owns the controlled series a preferred controlled wholly owns fsub and controlled sub controlled sub is indebted to distributing for a dollars the loan distributing also wholly owns fsub and fsub fsub wholly owns fsub and fsub controlled sub wholly owns fsub and fsub wholly owns fsub fsub fsub fsub and fsub have each elected the elections to be treated as an entity disregarded from its owner pursuant to sec_301_7701-3 of the federal_income_tax regulations the regulations each fsub is a foreign_entity on date a distributing transferred certain business z assets including the stock of controlled sub to controlled in exchange for controlled preferred_stock which represented all of the then outstanding controlled stock the date a asset transfer on date b date c and date d respectively distributing transferred the stock of fsub b dollars and c to controlled collectively the date b-d transfer before the date a asset transfer and beginning in year distributing directly conducted the business z operations now conducted by controlled since the date a asset transfer controlled has directly and continuously conducted these business z operations on date e when distributing wholly owned controlled distributing exchanged the controlled preferred_stock that it received in the date a asset transfer for shares of controlled class c common the exchange on date f controlled issued controlled series a preferred to investor representing approximately d percent of the outstanding controlled stock in exchange for a dollars each share of the controlled series a preferred is convertible into controlled class a voting common_stock controlled class a common on a one-to- one basis the only debt that will exist between distributing and controlled following the distribution as defined below will be debt that arises in the ordinary course of business including from the license of controlled’s e to distributing from the provision of certain facilities and services by distributing to controlled on an arm’s length basis and for a limited transition_period and in connection with controlled’s obligation to reimburse distributing for expenditures made by distributing under or in connection with f financial information has been submitted indicating that distributing’s business y and controlled’s business z each has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years to avoid certain operational and managerial problems created by operating business y and business z within the same affiliated_group and to ease certain concerns of the clientele of business z regarding this affiliation management decided on date g to fully separate business y and business z by undertaking the distribution before the distribution management also restructured and intends to further restructure distributing’s operations as described more fully below the transaction to accomplish the separation of business y from business z distributing has proposed and partially undertaken the following series of transactions on date h i controlled sub formed fsub the fsub formation ii fsub sold certain rights to existing technology and other intangible_property relating to business z to fsub the fsub sale iii distributing and fsub agreed that fsub would pay part of the costs of developing future intellectual_property relating to business z in exchange for ownership of certain rights relating to that intellectual_property the distributing fsub arrangement on date i iv fsub formed fsub the fsub formation two business z employees were transferred from fsub to fsub and fsub sold two computers to fsub for their net_book_value the fsub sale on date j v distributing undertook a reverse split of its common_stock the distributing split in which one new share of distributing common_stock was issued for each g shares of distributing common_stock prior to date k vi controlled may issue shares of controlled series a preferred to one or more additional third-party investors vii distributing will contribute h dollars of the principal_amount of the loan through controlled to controlled sub the contribution as a result of the contribution controlled sub will be relieved of part of its obligation as obligor on the loan the partial forgiveness viii controlled may undertake a stock split or reverse_stock_split of its stock if consummated the controlled split ix all of the outstanding controlled series a preferred shares will convert to shares of controlled class a common the conversion x the controlled class c common held by distributing will convert into either controlled class a common or controlled class b common the controlled class a common and the controlled class c common have equal economic and voting rights however the controlled class c common differs from the controlled class a common in two respects first it can only be issued to distributing second distributing can convert the controlled class c common into either controlled class a common or controlled class b common under controlled’s certificate of incorporation the controlled class b common is entitled to of the total combined voting power of controlled before the distribution distributing will convert its controlled class c common into controlled class b common only if its voting interest in controlled declines below the required amount needed to satisfy the control requirement of sec_368 otherwise distributing will convert its controlled class c common into controlled class a common xi fsub and fsub will a transfer certain employees and b sell any related minor business_assets to new subsidiaries owned by controlled or by fsub the fsub asset sale and the fsub asset sale on date k xii distributing will distribute all of its controlled stock pro_rata to the distributing shareholders the distribution by date l xiii controlled sub will repay the i dollar balance of the loan in connection with the transaction distributing and controlled have entered into or will enter into a general assignment and assumption_agreement a master technology ownership and license agreement a master patent ownership and license agreement a master trademark ownership and license agreement a tax_sharing_agreement an employee matters agreement a master confidential disclosure agreement an indemnification and insurance matters agreement a software license agreement and certain agreements relating to shared services and facilities as described above collectively the ancillary agreements contribution and distribution representations the taxpayer has made the following representations regarding the contribution and the distribution a 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 b the five years of financial information submitted on behalf of the businesses conducted by distributing and controlled represents the present operations of each of these businesses and there have been no substantial operational changes to these businesses since the date of the last submitted financial statements c immediately after the distribution the gross assets of the businesses actively conducted as defined in sec_355 by each of distributing and controlled will have a fair_market_value equal to at least five percent of the total fair_market_value of the corporation’s gross assets d except for certain services and facilities provided by distributing to controlled on an arm’s length basis and for a limited transition_period after the distribution distributing and controlled will each continue the active_conduct of its respective business independently and with its own employees e the distribution is being carried out to eliminate certain operational and managerial problems that exist due to operating business y and business z within the same affiliated_group and to ease certain concerns of the clientele of business z regarding this affiliation the distribution is motivated in whole or substantial part by these corporate business purposes f management of distributing to its best knowledge is not aware of any plan or intention on the part of any shareholder or security holder of distributing to sell exchange transfer by gift or otherwise dispose_of any stock in or securities of either distributing or controlled after the distribution 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 distribution 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 distribution except in the ordinary course of business i the total adjusted bases and the fair_market_value of the assets transferred to controlled by distributing each equals or exceeds the sum of the liabilities assumed by controlled plus any liabilities to which the transferred assets are subject any liabilities of distributing assumed within the meaning of sec_357 by controlled will have been incurred in the ordinary course of business and will be associated with the assets being transferred j no investment_credit has been or will be claimed under sec_46 for any property transferred k no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the distribution except for any debt that may arise in the ordinary course of business including from the license of controlled’s e to distributing from the provision of certain facilities and services by distributing to controlled on an arm’s length basis and for a limited transition_period or in connection with controlled’s obligation to reimburse distributing for expenditures made by distributing under or in connection with f none of this debt will constitute stock_or_securities for purposes of sec_355 l immediately before the distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d 1995_32_irb_6 and as currently in effect sec_1_1502-13 as published by t d further any excess_loss_account distributing may have in controlled stock will be included in income immediately before the distribution to the extent required by applicable regulations see sec_1_1502-19 m payments made in connection with all continuing transactions 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 n no two parties to the transaction are investment companies as defined in sec_368 and iv o the distribution is not part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock possessing percent or more of the total combined voting power of all classes of either distributing or controlled entitled to vote or stock possessing percent or more of the total value of all classes of stock of either distributing or controlled within the meaning of sec_355 p for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution q for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled stock entitled to vote or percent or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution or ii attributable to distributions on distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution r neither distributing nor controlled will have been a united_states_real_property_holding_corporation as defined in sec_897 at any time during the five-year period ending on the date of the distribution neither distributing nor controlled will be a united_states_real_property_holding_corporation immediately after the distribution to the best knowledge of distributing no foreign_person owns five percent or more of distributing’s stock and no such person will own five percent or more of distributing’s stock after the distribution other representations s no gain_or_loss was recognized by any party in the exchange t there is no plan intention or formal or informal understanding to change the capital structure of controlled following the transaction contribution and distribution rulings based solely on the information submitted and the representations made we rule as follows regarding the contribution and the distribution the contribution followed by the distribution will be a reorganization under sec_368 distributing and controlled will each be a_party_to_a_reorganization under sec_368 no gain_or_loss will be recognized by distributing on the contribution sec_361 no gain_or_loss will be recognized by controlled on the contribution sec_1032 the basis of each asset received by controlled in the contribution will equal the basis of that asset in the hands of distributing immediately before its transfer sec_362 the holding_period of each asset received by controlled in the contribution will include the period during which distributing held that asset sec_1223 no gain_or_loss will be recognized by distributing on the distribution sec_361 no gain_or_loss will be recognized by and no amount will otherwise be included in the income of the distributing shareholders on their receipt of controlled stock in the distribution sec_355 the aggregate basis of the controlled stock and the distributing stock in the hands of each distributing shareholder after the distribution will equal the shareholder’s basis in the distributing stock immediately before the distribution allocated between the controlled stock and the distributing stock in proportion to the fair_market_value of each in accordance with sec_1_358-2 sec_358 and b the holding_period of the controlled stock received by each distributing shareholder will include the holding_period of the distributing stock on which the distribution is made provided such stock is held as a capital_asset on the date of the distribution sec_1223 as provided in sec_312 proper allocation of earnings_and_profits will be made between distributing and controlled under sec_1_312-10 caveats no opinion is expressed about the tax treatment of the transaction or of any other events described above under any other provision of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the transaction or of any other event described above that are not specifically covered by the above rulings in particular no opinion is expressed about the federal_income_tax consequences of the elections the date a asset transfer the date b-d transfer the exchange the fsub formation the fsub sale the distributing fsub arrangement the fsub formation the fsub sale the partial forgiveness the distributing split the controlled split if consummated the conversion the fsub asset sale the fsub asset sale or the ancillary agreements procedural statements this ruling letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent each taxpayer affected by the transaction should attach a copy of this ruling letter to the taxpayer’s federal_income_tax return for the taxable_year in which the transaction is completed pursuant to a power_of_attorney on file in this office a copy of this letter is being sent to your authorized representative sincerely richard k passales senior counsel branch office of associate chief_counsel corporate