internal hevenue service_department ot the treasury index no washi ashinston dc contact person téléphone number in’reterénce to gi dom p st ale plr-109144-98 oct y p w w q a w w d - x dear this letter responds to a letter dated april subsequent correspondence submitted on behalf of authorized representative requesting rulings under sec_29 sec_702 and sec_708 of the internal_revenue_code p by its and facts the facts as represented by p and p's authorized representative are as follows p is a limited_liability_company treated as a partnership for federal_income_tax purposes and y fuel from coal fines p was formed for the purpose of producing solid synthetic p currently has two members x a b and c each entered into a separate contract on for the construction of a facility to produce december solid synthetic_fuel from coal fines using z's process process is described below have been assigned to p under state law and each provides for liquidated_damages of least five percent of the cost of the facility construction_contract also includes a description of the facility to be constructed a completion date and a maximum price all three construction contracts the construction contracts are valid at each the y plr-109144-98 p will own the facilities and x will manage the facilities p will enter into a licensing agreement with z to use z's upon the delivery of clean coal fines to the site of the two stage process to produce solid synthetic_fuel from coal fines facilities the coal fines are sized and introduced into the mixing stage of the process at this first stage the coal fines are blended in a mixer conditioner with a proprietary combination of co-reagents consisting of a petroleum-based liquid binder and a dry inorganic mineral additive collectively the binder material liquid binder that contains oxygen-deficient aliphatic molecules and is introduced at elevated temperatures of up to degrees fahrenheit the inorganic mineral additive is introduced in the form of a dry powder and can serve as either a catalyst or a co- reactant increasing the reaction rate or the extent of the reaction the petroleum-based binder is a high viscosity in the second stage of the process the mixture of coal fines and the binder material is introduced via a volumetric metering device into the roll pelletizer and subjected to pressure of up to big_number pounds per square inch of the mixing process the heat from the binder material and the pressure from the roll pelletizer results in the formation of a high-density solid synthetic_fuel the combination p has determined that the inorganic mineral component of the binder material is not required and that the petroleum-based liquid binder component of the binder material can be delivered in the form of an emulsion that is a mixture of the petroleum- based liquid binder and water with one or more surfactants to facilitate and stabilize dispersion petroleum-based liquid binder in the form of an emulsion the binder handling temperatures can be reduced significantly to approximately degrees fahrenheit thereby reducing operating costs and potential safety risks associated with the process in addition by introducing the petroleum-based liquid binder as an emulsion the binder is more evenly mixed with the coal feedstock prior ro briquetting thereby increasing the quality of the solid synthetic_fuel by introducing the p conducted numerous tests on the fuel produced from coal fines using both the binder material and the emulsified form of the petroleum-based liquid binder without the inorganic mineral additive p's representative represent that there was a significant chemical change in the coal fines making up the fuel by the preponderance of these tests' results p and p will sell the solid synthetic_fuel on the spot market to unrelated persons plr-109144-98 the facilities are designed to facilitate relocation in the event that coal fines become unavailable at the present location ruling requests and sec_29 allows a credit for qualified_fuels sold by the taxpayer to an unrelated_person during the taxable_year production of which is attributable to the taxpayer for the taxable_year is an amount equal to dollar_figure adjusted for inflation multiplied by the barrel-of-oil_equivalent of qualified_fuels sold the the credit sec_29 c defines qualified_fuels liquid gaseous or solid synthetic fuels produced from coal including lignite including such fuels when used as feedstocks to include in revrul_86_100 1986_2_cb_3 the internal_revenue_service ruled that the definition of the term synthetic_fuel under sec_48 and its regulations are relevant to the interpretation of the term under sec_29 sec_48 a iii provided a credit for the cost of equipment used for converting an alternate_substance into a synthetic liquid gaseous or solid fuel that both sec_29 and former sec_48 contain almost identical language and have the same overall congressional intent namely to encourage energy conservation and aid development of domestic energy production c differs significantly in chemical composition as opposed to physical composition from the alternate_substance used to produce it coal is an alternate_substance under section i c ii of the income_tax regulations a synthetic_fuel under section former revrul_86_100 notes based on the representations of p and p's authorized representative including the preponderance of p's test results we agree that the fuel to be produced in p's facilities using the enumerated process on the coal fines will result from a significant chemical change in coal transforming the coal fines into a solid synthetic_fuel from coal facilities and x will manage the facilities we conclude that p will be entitled to the sec_29 credit for the production of the qualified_fuel from the facilities that is sold to an unrelated_person because p will own the ruling_request sec_29 defines barrel-of-oil_equivalent with respect to any fuel as that amount of the fuel which has a btu content of million except that in the case of qualified plr-109144-98 fuels described in sec_29 c determined without regard to any material from a source not described in sec_29 c sec_29 defines barrel to mean united_states gallons the btu content shall be as required by sec_29 the btu content of the qualified_fuel produced and sold by p must be determined without regard to any material other than coal this means that the btu content of the qualified_fuel attributable to any binder must be disregarded for purposes of calculating the sec_29 credit ruling_request sec_29 and f provide that sec_29 applies with respect to qualified_fuels which are produced ina facility placed_in_service after december january and which are sold before date and before sec_29 modifies sec_29 in the case of a sec_29 a provides that for purposes of facility producing qualified_fuels described in sec_29 sec_29 b service before january service before july contract in effect before january provides that if the facility is originally placed_in_service after date sec_29 shall be applied by substituting date for date a facility shall be treated as placed in pursuant to a binding written if the facility is placed in sec_29 b a contract is binding only if it is enforceable under local law against a taxpayer and does not limit damages to a specified amount g by use of a liquidated_damages provision contract provision limiting damages to an amount equal to at least five percent of the total_contract_price for example should be treated as not limiting damages construction contracts executed prior to january includes such essential features as a description of the facility to be constructed a completion date and a maximum price it is represented that the construction contracts are binding under applicable law and that each contract provides for liquidated_damages of at least five percent of the cost of the facility therefore the construction contracts are binding written contracts for purposes of sec_29 each of the a ruling_request to qualify for the sec_29 credit p's facilities be placed_in_service before july written contract in effect before january does not define placed_in_service must pursuant to a binding while section the term has been plr-109144-98 defined for purposes of the deduction for depreciation and the investment_tax_credit property is placed_in_service in the taxable_year the property is placed in a condition or state of readiness and availability for a specifically assigned function sec_1_167_a_-11 placed_in_service has consistently been construed as having the same meaning for purposes of the deduction for depreciation and the investment_tax_credit i and sec_1_46-3 ii see revrul_76_256 1976_2_cb_46 revrul_94_31 1994_1_cb_16 concerns sec_45 which provides a credit for electricity produced from certain renewable resources including wind the credit is based on the amount of electricity produced_by_the_taxpayer at a qualified_facility during the 10-year period beginning on the date the facility was originally placed_in_service and sold by the taxpayer to an unrelated_person during the taxable_year that originally placed_in_service even though it contains some used_property provided the fair_market_value of the used_property is not more than percent of the facility's total value the cost of the new property plus the value of the used_property for purposes of sec_45 a facility qualifies as revrul_94_31 holds revrul_94_31 concerns a factual context similar to the consistent with the holding in rev_rul the relocation of any of p's facilities after june present situation will not prevent the relocated facility from continuing to be treated as originally placed_in_service prior to date for purposes of sec_29 provided the fair_market_value of the used_property is more than percent of the relocated facility's total fair_market_value at the time of the relocation ruling_request p also requested a ruling that assuming the other requirements of sec_29 are met will entitle the members of the year_of_sale the sale of the product by p p to claim the sec_29 credit in under sec_7701 taxpayer means any person subject_to any internal revenue tax a provides that when used in title_26 where not otherwise distinctly expressed or manifestly incompatible with the intent thereof person will be construed to mean and include an individual trust estate partnership_association company or corporation furthermore section sec_702 provides that each partner determines the partner's income_tax by taking into account separately the partner's_distributive_share of the partnership's other items of income loss deduction or credit to the extent provided gain plr-109144-98 by regulations prescribed by the secretary_of_the_treasury under sec_1_702-1 the distributive_share is determined as provided in sec_704 and sec_1_704-1 sec_704 provides that a partner's_distributive_share of income gain loss deduction or credit is except as otherwise provided in chapter of subtitle a of title_26 determined by the partnership_agreement sec_704 provides that a partner's_distributive_share loss deduction or credit or item thereof is of income gain determined in accordance with the partner's_interest_in_the_partnership determined by taking into account all facts and circumstances if for the partner's_distributive_share of income gain loss deduction or credit or item thereof or the allocation to a partner under the agreement of income gain loss deduction or credit or item thereof does not have substantial economic_effect the partnership_agreement does not provide under sec_1_704-1 ii allocations of tax_credits and tax_credit recapture except for sec_38 property are not reflected by adjustments to the partners’ capital accounts thus these allocations cannot have economic_effect under sec_1 -1 b i2 b and the tax_credits and tax_credit recapture must be allocated in accordance with the partners’ interests in the partnership as of the time the tax_credit or tax_credit recapture arises or not deductible that gives rise to a tax_credit ina partnership taxable_year also gives rise to valid allocations of partnership loss or deduction or other downward capital_account adjustments for the year partnership regarding the credit or the cost giving rise to it are in the same proportion as the partners’ respective distributive shares of the loss or deduction and adjustments see sec_1 b example apply in determining the partners' interests in the partnership regarding tax_credits that arise from receipts of the partnership whether or not taxable then the partners' interests in the a partnership expenditure whether identical principles if based on our conclusion that the solid end product to be produced by p's facilities with the process and to be sold to an unrelated_person will be entitled to the sec_29 credit the credit will be allowed to p passed through to and allocated among the members of principles of sec_702 in accordance with the members interests in p as of the time the tax_credit arises and the sec_29 credit may be p under the plr-109144-98 ruling_request sec_708 b provides that a partnership shall be considered as terminated if within a twelve-month period there is a sale_or_exchange of percent or more of the total interest in partnership capital and profits sec_1_708-1 iv provides that if a partnership is the partnership contributes all of its assets terminated by a sale_or_exchange of an interest the following is deemed to occur and liabilities to a new partnership in exchange for an interest in the new partnership and immediately thereafter the terminated partnership distributes interests in the new partnership to the purchasing partner and the other remaining partners in proportion to their respective interests in the terminated partnership in liquidation of the terminated partnership either for the continuation of the business by the new partnership or for its dissolution and winding up sec_1_708-1 iv applies to terminations of partnerships under sec_708 b occurring on or after date the sec_29 credit has always been a time sensitive and before date for example the sec_44d credit as from facilities placed_in_service after december on property which first began credit in that eligibility for the credit is determined when facilities or wells producing qualified_fuels are placed_in_service and when the qualifying fuels are produced and sold to unrelated persons originally enacted in the crude_oil windfall profit tax act of was generally available for the production and sale of alternative fuels after date and before date production after january qualifying processed wood was available only as sales from facilities first placed_in_service in calendar years and available for production and sales before either october or years from the date that the facility first was placed_in_service whichever came later from solid agricultural byproducts was available only for production and use before january in service after december special rule for post-1979 increases in production capacity or replacement of facilities first placed_in_service before such production capacity increases or replacements were treated as facilities first placed_in_service after rep no h_r conf 96th cong 2d sess 1980_3_cb_1985 in addition there was a as to production from those facilities it was the sec_44d credit for in facilities placed the sec_44d credit for steam to production and the sec_29 credit has been extended by congress four times the placed-in-service deadline and the period for plr-109144-98 -a- claiming the sec_29 credit were extended in the technical_and_miscellaneous_revenue_act_of_1988 omnibus budget reconciliation act of service and for the end of the credit_period energy policy act of the credit_period and small_business job protection act of june for placed_in_service and for the end of for placed_in_service for placed in for placed_in_service if sec_29 b were read as requiring facilities producing qualified_fuels to be placed_in_service by the taxpayer facilities placed_in_service before that are sold or transferred to a new taxpayer after would entitle the purchaser transferee to claim the sec_29 credit from the legislative_history of sec_44d that congress intended the credit to apply to facilities placed_in_service after b must be read as applying to when the facility is first placed_in_service within the applicable dates in-service deadlines contained in sec_29 on the facility and not the owner of the facility legislative_history of sec_44d clearly shows that congress wanted to encourage the production of new alternative fuels from facilities first placed_in_service after and not provide tax incentive for production capacity in service before and that the placed-in-service deadline in section and g focus the it the placed- is clear sec_29 demonstrates that congress knows how to that provision provides that extension of the period for preclude transferees of facilities from claiming the sec_29 credit placing facilities in service after does not apply to any facility that produces coke or coke gas unless the original_use of the facility commences with the taxpayer or g a is made by reference to when the accordingly the determination of whether a facility has satisfied the placed-in-service deadline under either sec_29 b facility is first placed_in_service not when the facility is transferred or sold to a different taxpayer a sec_708 b termination of transfer of assets to a new partnership this technical_termination of the partnership and formation of would not affect when the facility is placed_in_service for purposes of sec_29 b b will not preclude the new partnership from taking the sec_29 credit for the production of the qualified_fuel from the facilities that is sold to an unrelated_person a future termination of p would result in a deemed p under section therefore although a new partnership plr-109144-98 conclusions accordingly based on the representations of p and p's authorized representative we conclude as follows p with use of the enumerated process will produce a qualified_fuel within the meaning of sec_29 c bp will be entitled to the sec_29 credit for the production of the qualified_fuel from a facility that is sold to an unrelated_person the btu content of the qualified_fuel produced and sold by p will be determined without regard to any material from a source not described in sec_29 c sec_29 as required by the contracts for construction of the facilities constitute binding written contracts within the meaning of sec_29 a aif a facility was placed_in_service prior to date within the meaning of sec_29 relocation of the facility after june service date for the facility for purposes of sec_29 provided the fair_market_value of the used_property is more than percent of the relocated facility's total fair_market_value at the time of the relocation will not result in a new placed in the credit allowed under sec_29 may be passed through to and allocated among all the members of with the principles of sec_702 and p in accordance a future termination of p under sec_708 b b will not preclude the new partnership from taking the sec_29 credit for the production of the qualified_fuel from a facility that is sold to an unrelated_person except as specifically ruled upon above we express no opinion concerning the federal_income_tax consequences of the transaction described above on whether the facility was placed_in_service for purposes of sec_29 or how the members' interests in p are determined specifically we express no opinion this ruling is directed only to the taxpayer who requested sec_6110 provides that it may not be used or cited it as precedent or more of the issues addressed in this ruling have not yet been adopted the adoption of temporary or final regulations to the extent the therefore this ruling may be modified or revoked by temporary or final regulations pertaining to one plr-109144-98 regulations are inconsistent with any conclusion in this ruling see section dollar_figure of revproc_98_1 1998_1_irb_7 however when the criteria in section dollar_figure of revproc_98_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative district_director we also are sending a copy of this letter to the district sincerely yours boul e bauglacle harold e burghart assistant to the branch chief branch office of assistant chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes


t c memo united_states tax_court stephen e o’neil petitioner v commissioner of internal revenue respondent docket no 17460-07l filed date kevin m flynn for petitioner shawna a early for respondent memorandum findings_of_fact and opinion vasquez judge pursuant to sec_6330 petitioner seeks review of respondent’s determination to proceed with collection of his unpaid and income_tax liabilities the issue for decision i sec_1 unless otherwise indicated all section references are to the internal_revenue_code whether respondent may proceed with collection of the above- mentioned unpaid income_tax liabilities we must decide whether petitioner submitted an offer-in-compromise oic to respondent during the collection hearing findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference at the time he filed the petition petitioner resided in new york background in petitioner graduated phi beta kappa from princeton university in petitioner graduated from harvard law school after law school petitioner was employed by the law firm of cravath swaine moore l l p in petitioner became a member of the board_of directors of brown forman corp brown forman petitioner served as a member of the board_of directors of brown forman from until april of as part of his role as a director of brown forman petitioner was awarded brown forman stock_options each july from through petitioner’s right to exercise each brown forman option expires years after the date of grant if petitioner fails to timely exercise an option it lapses each option granted petitioner the right to purchase a particular number of shares of brown forman common_stock each option had a different exercise price based on the fair_market_value ie the stock exchange trading price of the stock on the date of the award petitioner’s per-share exercise prices for the brown forman stock_options from through are as follows stock_option award year petitioner’s option exercise price dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure respondent notes that although exhibit 23-j indicates that the exercise price for the options is dollar_figure per share there apparently is an error in this calculation the exercise price should be dollar_figure per share dollar_figure total option purchase_price big_number number of shares equals dollar_figure option exercise price not dollar_figure petitioner is not required to pay cash up front in order to exercise the brown forman options rather petitioner can net exercise the options receiving cash equal to the excess of the fair_market_value of the stock at the time of exercise over the option exercise price collection notices on date respondent sent petitioner a notice_of_federal_tax_lien filing and your right to a hearing under sec_6320 lien notice with respect to petitioner’s outstanding income_tax liabilities for the taxable years and on date respondent sent petitioner a final notice-- notice_of_intent_to_levy and notice of your right to a hearing levy notice relating to petitioner’s outstanding income_tax liabilities for the taxable years and on or about date petitioner submitted to respondent a form request for a collection_due_process_hearing in response to the lien notice and the levy notice hearing request respondent treated the hearing request as a timely request for a collection hearing for all the taxable years in both the lien notice and the levy notice with the exception of and on date respondent sent petitioner a final notice--notice of intent to levy and notice of your right to a hearing relating to petitioner’s outstanding income_tax petitioner was granted an equivalent_hearing relating to taxable years and as he received prior lien and levy notices for those years and did not timely request a collection hearing liabilities for the taxable years and second levy notice on date respondent received petitioner’s form for taxable years and relating to the second levy notice with respect to taxable years and as of date petitioner’s outstanding income_tax liabilities were dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure respectively with respect to taxable years and as of date petitioner’s outstanding income_tax liabilities were dollar_figure dollar_figure and dollar_figure respectively accordingly as of date petitioner’s outstanding income_tax liabilities for the years at issue totaled approximately dollar_figure million year total amount dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure petitioner did not challenge the amount of his underlying tax_liabilities during the collection hearing the tax_liabilities relating to and stemmed from petitioner’s involvement in tax_shelters petitioner’s desire to enter into an offer-in-compromise from the time that petitioner received the collection notices from respondent it was petitioner’s intention to resolve his tax_liabilities at issue through an oic in petitioner was generally familiar with oics and he believed that an oic was the only way for him to satisfy the liabilities at issue on date petitioner submitted to respondent a form 433-a collection information statement for wage earners and self-employed individuals petitioner reported that his gross monthly income was dollar_figure petitioner claimed monthly living_expenses of dollar_figure on the form 433-a petitioner listed big_number options in brown forman stock as an investment form 433-a requests the current value the amount the asset could be sold for that day of the investments listed petitioner did not list the current value of the brown forman options instead petitioner stated that the value of the options is indeterminate because their value is contingent upon the market price of the underlying stock which fluctuates daily on date a face-to-face collection hearing was held between petitioner’s counsel and settlement officer robert j fernandez so fernandez during the face-to-face hearing the parties first discussed petitioner’s desire to submit an oic and petitioner’s counsel indicated that petitioner was willing to exercise his brown forman stock_options to fund an oic after the date face-to-face collection hearing petitioner’s counsel and so fernandez continued the collection hearing via telephone and correspondence so fernandez requested documents and information from petitioner to determine whether petitioner was eligible to submit an oic eg proof that petitioner was current with his filing and payment requirements by a letter dated date petitioner’s counsel sent information to so fernandez in response to his requests including copies of petitioner’s form_1040 u s individual_income_tax_return for canceled checks in payment of petitioner’s federal state and local estimated_taxes for and a letter from brown forman confirming that petitioner’s position as a director of the company would end on date on date petitioner’s counsel sent so fernandez a letter which contained inter alia a detailed discussion of the grant terms and operation of petitioner’s brown forman stock_options petitioner was heavily involved in the preparation of the date letter the letter proposed exercising some of the options to fund an oic in the date letter petitioner proposed to exercise his brown forman options for years through the closing price of brown forman stock on date the day before the letter was approximately dollar_figure per share using a price of dollar_figure per share petitioner calculated that the exercise of these options would result in ordinary_income of approximately dollar_figure petitioner estimated that he would owe federal income taxes of dollar_figure and state_and_local_income_taxes of dollar_figure on this income thus petitioner determined that the net_proceeds from the exercise of the options for through after all taxes were paid would be approximately dollar_figure in the date letter petitioner suggested that he pay respondent dollar_figure from the exercise of the brown forman options for through in order to settle his outstanding dollar_figure million debt further petitioner stated that respondent should accept this amount to account for the fact that i the options are nothing more than a potential asset that are valueless to both mr o’neil and the irs if he does not exercise them ii the options are not marketable and can be only exercised by mr o’neil further the options cannot be seized sold pledged or hypothecated iii the value of the options in the future is wholly unknown and unknowable the price of the brown forman stock could go down in the years to come thereby rendering it uneconomical for mr o’neil to exercise the options and iv the receipt of tax dollars today from the exercise of the options has a present_value to the irs at the time the collection hearing was conducted and as of the date of trial the fair_market_value for the brown forman stock still was approximately dollar_figure per share petitioner rather than his counsel established the figure of dollar_figure however petitioner was willing to negotiate this figure with respondent and pay a greater amount in order to reach an agreement on an oic the date letter was signed by petitioner’s counsel not petitioner this letter was not signed under penalties of perjury and was not accompanied by a dollar_figure check for the application fee while petitioner and so fernandez were discussing a possible oic congress enacted the tax_increase_prevention_and_reconciliation_act_of_2005 publaw_109_222 and d 120_stat_362 which amended sec_7122 by adding a new subsection c requiring a 20-percent downpayment for a lump- sum oic made on or after date as of date petitioner had not filed an oic that same day petitioner’s counsel informed so fernandez that he would check his records to be sure but he feels he did not send an oic in so fernandez indicated that because petitioner had not yet submitted an oic petitioner would be required to include a 20-percent deposit with an oic on march and so fernandez informed petitioner’s counsel that a 20-percent deposit was required for all oics under the new sec_7122 so fernandez requested that petitioner provide him with a copy of one of the brown forman option agreements on date petitioner’s counsel informed so fernandez that petitioner was willing to make a payment of dollar_figure--ie percent of dollar_figure petitioner’s estimate of an acceptable oic petitioner’s counsel also sent so fernandez a copy of the brown forman non-employee director’s nonqualified_stock_option award granted to petitioner on date all of the brown forman options that had been awarded to petitioner were substantially_similar in form to the option except for the grant dates expiration dates number of shares and the prices per share which varied these options could not be sold transferred pledged assigned or otherwise hypothecated on date so fernandez acknowledged receipt of the option agreement and requested that petitioner provide so fernandez by date with a schedule of all of the options that petitioner was awarded for through so fernandez requested that the schedule include the number of shares and the exercise price price per share covered by each option contract so fernandez stated in this letter that a schedule of the options rather than the individual option contracts was sufficient for him to evaluate the merits of petitioner’s proposed oic on date petitioner’s counsel sent so fernandez the requested schedule of petitioner’s brown forman options the schedule included inter alia the number of shares per option award and the exercise price price per share after reviewing the schedule of options so fernandez’s preliminary finding was that petitioner’s net realized equity nre in all of petitioner’s brown forman options was dollar_figure he found that the big_number brown forman shares for which petitioner had options had a fair_market_value of dollar_figure using the dollar_figure- per-share fair_market_value petitioner’s counsel asserted in the date letter in reaching the nre so fernandez calculated that petitioner’s cost of exercising the options the exercise price times the number of shares would be dollar_figure and subtracted that amount from the dollar_figure fair_market_value of the brown forman stock in reaching his nre amount so fernandez also deducted petitioner’s estimated federal state and local_taxes of dollar_figure from the dollar_figure fair_market_value of the brown forman stock so fernandez found no legal authority or administrative guidance to support petitioner’s counsel’s argument that the nre should be discounted this schedule lists a total of big_number options however the parties consistently referred to there being big_number options with the exception of the stipulation of facts where the total of big_number appears to be a typo for convenience we presume that petitioner had the option to purchase big_number shares of brown forman stock at the time of the collection proceedings on date so fernandez told petitioner’s counsel that he could find no basis under the internal_revenue_manual irm for reducing the nre of the options below dollar_figure on date so fernandez called petitioner’s counsel and left a voice mail message the substance of which so fernandez recounted in his activity records as follows called the rep and left a voice mail message on his voice mail to the effect that i did not believe that an offer could succeed if the taxpayer did not offer his complete equity minus the tax consequences i mentioned that i had discussed this concept with the atm appeals team manager on date so fernandez spoke with petitioner’s counsel the substance of which so fernandez recounted in his activity records as follows rep called and i finally spoke to him in person he agreed that there is no support in the irm for reducing the value of the options outside of the tax consequences so fernandez advised petitioner’s counsel that petitioner had sufficient income to meet his monthly expenses and that he could liquidate the brown forman options and make payments to reduce his balance throughout the months when petitioner’s case was assigned to so fernandez petitioner’s counsel and so fernandez had several serious focused and meaningful discussions regarding petitioner’s desire to enter into an oic and how petitioner proposed to fund one petitioner’s intention to submit an oic for the years at issue was the only collection alternative discussed by petitioner’s counsel and so fernandez at the date face-to-face collection hearing and in the months thereafter ie during the collection hearing until the notice_of_determination was issued petitioner understood and agreed that if and when required he would need to pay a dollar_figure processing fee and submit a form_656 offer_in_compromise he did neither nor did he submit a percent nonrefundable deposit petitioner considered the form_656 the 20-percent deposit and the dollar_figure processing fee to be ministerial aspects procedural formalities of an oic that could be addressed if and when petitioner and respondent reached an agreement as to the amount of the oic notice_of_determination on or about date so fernandez issued the notice_of_determination to petitioner stating his position that the nre of the options was dollar_figure the notice_of_determination further stated in relevant part the internal_revenue_manual provides no support for reducing the value of an asset of this type merely because of the inherent difficulty in collection from it the starting point for determining whether an offer can be accepted is the taxpayer’s net equity in all of the assets there is no provision for taxpayers to retain part of their equity outside of an effective tax_administration offer the facts and circumstances in this case would not justify an offer under effective tax_administration therefore in order for an offer to be seriously considered the net equity in the options must be the starting point under the heading of collection alternatives offered by taxpayer the notice_of_determination also stated you expressed a desire to offer dollar_figure but you have not formally submitted an offer opinion sec_6320 provides that the secretary shall furnish the person described in sec_6321 with written notice ie the hearing notice of the filing of a notice of lien under sec_6323 sec_6320 and b further provides that the taxpayer may request administrative review of the matter in the form of a hearing within a 30-day period the hearing generally shall be conducted in a manner consistent with the procedures set forth in sec_6330 d and e sec_6320 sec_6330 provides that the secretary shall furnish taxpayers with written notice of their right to a hearing before any property is levied upon sec_6330 further provides that the taxpayer may request administrative review of the matter in the form of a hearing within a 30-day period sec_6330 and b pursuant to sec_6330 a taxpayer may raise at the sec_6330 hearing any relevant issue with regard to the commissioner’s collection activities including spousal defenses challenges to the appropriateness of the commissioner’s intended collection action and alternative means of collection 114_tc_604 114_tc_176 where the validity of the underlying tax_liability is not at issue we review the commissioner’s determination for abuse_of_discretion sego v commissioner supra pincite an oic was the only issue petitioner’s counsel and so fernandez discussed during the collection hearing accordingly the crux of this case is whether petitioner submitted an oic to respondent during the collection hearing to decide this we look to the relevant statute and regulations sec_7122 authorizes the commissioner to compromise a taxpayer’s outstanding liabilities the regulations and procedures under sec_7122 provide the exclusive method of effecting a binding nonjudicial compromise 889_f2d_910 9th cir affg norman v commissioner tcmemo_1987_265 648_f2d_1198 9th cir citing 278_us_282 affg in part revg in part and remanding per curiam on other grounds tcmemo_1979_71 sec_301_7122-1 proced admin regs provides an offer to compromise a tax_liability pursuant to sec_7122 must be submitted according to the procedures and in the form and manner prescribed by the secretary an offer to compromise a tax_liability must be made in writing must be signed by the taxpayer under penalty of perjury and must contain all of the information prescribed or requested by the secretary see nash v commissioner tcmemo_2008_250 harbaugh v commissioner tcmemo_2003_316 see also wagner v commissioner tcmemo_1990_443 compromise agreements under sec_7122 are required to be in writing prakash v commissioner tcmemo_1990_106 same foulds v commissioner tcmemo_1989_29 same an oic must be submitted on a special form prescribed by the secretary riederich v commissioner 985_f2d_574 9th cir affg without published opinion tcmemo_1991_164 laurins v commissioner supra pincite sec_601_203 statement of procedural rules identifies form_656 as the form required for an oic offers in compromise are required to be submitted on form_656 properly executed and accompanied by a financial statement on form_433 if based on inability to pay form_656 is used in all cases regardless of whether the amount of the offer is tendered in full at the time the offer is filed or the amount of the offer is to be paid_by deferred payment or payments see also godwin v commissioner tcmemo_2003_289 taxpayers who wish to propose an offer_in_compromise must submit a form_656 offer_in_compromise affd 132_fedappx_785 11th cir ringgold v commissioner tcmemo_2003_199 settlement of tax_liabilities for less than the amount owed requires the completion of form petitioner did not submit a form_656 or any other writing made under penalties of perjury to compromise his tax_liabilities furthermore petitioner admitted that he did not submit the 20-percent downpayment required by sec_7122 as petitioner’s counsel stated so fernandez and petitioner’s counsel were discussing considering evaluating and negotiating an oic petitioner’s counsel further stated that once an amount was agreed to if it was agreed to the formalities would have been accomplished this never happened and the formalities of submitting an oic were never accomplished as petitioner did not submit a written oic to respondent we cannot find that a valid compromise was made see harbaugh v commissioner supra ringgold v commissioner supra petitioners did not submit an offer_in_compromise on the appropriate form ie form administrative negotiations regarding compromise of a tax_liability are not binding against either party and not enforceable without compliance with sec_7122 rohn v commissioner tcmemo_1994_244 petitioner’s intention to submit an oic for the years at issue was the only collection alternative proposed by petitioner and discussed by petitioner’s counsel and so fernandez at the conference on date and in the months thereafter ie during the collection hearing until the notice_of_determination was issued accordingly the settlement officer did not abuse his discretion in failing to consider an oic that petitioner never made see kindred v commissioner 454_f3d_6 first we note that so fernandez was not obligated to propose a counteroffer see 447_f3d_706 9th cir affg tcmemo_2004_13 second assuming arguendo that petitioner had submitted an oic for dollar_figure on form_656 and the 20-percent downpayment it would not have been an abuse_of_discretion for the settlement officer to reject such an oic we do not conduct an independent review of what would be an acceptable oic 125_tc_301 affd 469_f3d_27 1st cir instead the extent of the court’s review is to determine whether the decision to reject the oic was arbitrary capricious or without sound basis in fact or law id pincite see 112_tc_19 regulations implementing sec_7122 set forth three grounds for the compromise of a liability doubt as to liability doubt as to collectibility and promotion of effective tax_administration the validity of the underlying tax_liability is not at issue accordingly petitioner could not have sought an oic for doubt as to liability petitioner could not pay his liability in full accordingly petitioner could not have sought an oic to promote effective tax_administration see sec_301_7122-1 proced admin regs generally an oic based on doubt as to collectibility will be acceptable only if the offer reflects the reasonable collection potential rcp murphy v commissioner supra pincite a taxpayer’s rcp is calculated by adding together the taxpayer’s nre and future income lemann v commissioner tcmemo_2006_37 so fernandez computed that petitioner’s nre was dollar_figure petitioner determined that the nre of the options for through was approximately dollar_figure both of these figures are considerably more than dollar_figure because an oic for dollar_figure was less than the rcp an oic for dollar_figure would be unacceptable under the commissioner’s continued 7th cir stating that without an actual offer_in_compromise to consider it would be most difficult for either the tax_court or this court to conclude that the appeals officer might have abused his discretion 124_tc_69 holding that because there was no offer_in_compromise before appeals there was no abuse_of_discretion in appeals’ failing to consider an offer_in_compromise huntress v commissioner tcmemo_2009_161 citing nelson v commissioner tcmemo_2009_108 which held that appeals did not abuse its discretion in sustaining a lien when a taxpayer requested an oic generally but had not prepared one williams v commissioner tcmemo_2009_159 in reaching all of our holdings herein we have considered all arguments made by the parties and to the extent not mentioned above we find them to be irrelevant or without merit continued procedures and it would not have been an abuse_of_discretion to reject such an oic see murphy v commissioner supra pincite lemann v commissioner supra see also mcclanahan v commissioner tcmemo_2008_161 when a settlement officer has followed the commissioner’s guidelines to ascertain a taxpayer’s rcp and rejected the taxpayer’s collection alternative on that basis we have found no abuse_of_discretion lemann v commissioner supra and cases cited therein furthermore it is not an abuse_of_discretion to reject an oic that bears no relationship to a taxpayer’s ability to pay according to his own calculations hubbart v commissioner tcmemo_2007_26 affd in part and vacated in part sub nom 568_f3d_710 9th cir hawkins v commissioner tcmemo_2005_88 to reflect the foregoing decision will be entered for respondent


office_of_chief_counsel internal_revenue_service memorandum number release date cc tege eoeg et1 postn-112709-07 uilc date date to director submission processing cincinnati oh attn entity unit from office of division counsel associate chief_counsel tax exempt government entities subject railroad_retirement_tax_act status in accordance with the coordination procedure established between the service and the railroad retirement board rrb the rrb has provided us with its opinion that upon reconsideration the following business was under common_control of a rail carrier employer engaged in the transportation of property by rail under the railroad retirement act and the railroad unemployment insurance act for the period -------------- ----------------thru --------------but only with respect to employees of the ------------------------- and its predecessor employee group ----------------------------------------------------------- ------------------------------------------------------------------ --------------------------------------------------------------------- this is a departure from the rrb’s prior opinion that ------------------ was a covered employer only with regard to the finding that there is a segregable business we have reviewed the opinion of the rrb and based upon the information submitted to us by the rrb we also reaffirm our earlier opinion of ----------------------------------------------------- copy attached and conclude that ------------------ was a covered employer under the jurisdiction of the railroad_retirement_tax_act for the period ----------------through -------- ------------- ------------------- postn-112709-07 however we also agree that this status applies only with respect to the segregable portion of the taxpayer’s workforce engaged in the transportation of property by rail please take the appropriate action regarding this business attachment ______________________ janine cook


t c summary opinion united_states tax_court christopher stanback petitioner v commissioner of internal revenue respondent docket no 2139-13s filed date christopher stanback pro_se christopher j richmond for respondent summary opinion dean special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the years at issue and rule references are to the tax_court rules_of_practice and procedure respondent issued a statutory_notice_of_deficiency to petitioner determining deficiencies in income_tax of dollar_figure for and dollar_figure for the issues for decision are whether petitioner is entitled to deduct expenses claimed on schedule c profit or loss from business for utilities and travel in excess of those respondent allowed for and itemized_deductions in excess of the standard_deduction for some of the facts have been stipulated and are so found the stipulation of facts the second stipulation of facts the third stipulation of facts and the exhibits received in evidence are incorporated herein by reference petitioner resided in california when the petition was filed background since petitioner has worked as a production assistant in the film television and commercial industry a production assistant is a person in any nonunion position assisting in the production of television shows commercials or films such as a runner or for example a person making copies or filing on- the adjustment to petitioner’s itemized_deductions for is computational and will be resolved by the decision of the court on the other issues set production assistants might be responsible for getting lunches for actors and performing other miscellaneous tasks if a person is nonunion he is always a local hire and receives no payment for travel_expenses petitioner is a member of hawaii local the international alliance of theatrical stage employees local he is also a member of the international cinematographers guild local local petitioner moved in from hawaii where the work is sporadic to new york where he was still residing in local the cinematographer’s guild is international but is divided into three districts western central and eastern petitioner had accumulated days in the western district but when he moved to new york he transferred his local membership there he was unable to get union work however and ended up doing nonunion work union jobs require a certain amount of experience and are usually paid_by the day and sometimes hourly some crafts are paid_by contract production coordinators are paid a flat rate petitioner worked with a company making commercials in hawaii and he flew there from new york since petitioner was a member of the local in hawaii they made him a local hire and did not pay his travel_expenses typically only distant-hire department heads are compensated for travel head of makeup head of hair production designers all producers camera dp director of photography and his first assistant the union jobs in hawaii did pay union scale petitioner turned down jobs in hawaii where he could not at least break even considering the cost of travel but he was always mindful of making contacts for potential future jobs it is who you know at the end of while petitioner was living in new york he was offered work on a movie in hawaii he went back to hawaii and worked a union job as a production coordinator he then moved into a job as an art department coordinator he also worked on two commercials in petitioner returned to new york petitioner was then asked to come back to hawaii to work on the pilot episode of a television show the show was selected for production and petitioner was offered a job as prop master’s assistant petitioner moved to hawaii in date petitioner was unable to break his apartment lease in new york and he kept his internet service there in case i needed it because his ground floor apartment had windows abutting an alley petitioner feared leaving his personal items there and instead put them in storage he left the television show in hawaii in date from date to date petitioner went to prague czech republic to teach and learn at a film school under an exchange program affiliated with local petitioner was provided with room and board but he had to pay his own travel_expenses he was in prague about three weeks in march or date petitioner moved to california and attempted to join affiliated property craftspersons local that union however was closed to new membership so petitioner had to take nonunion jobs he went back to new york for a few jobs and continued to pay for his new york storage unit through date in date petitioner’s apartment lease was expiring petitioner traveled to new york to cancel his internet service and to retrieve his belongings from storage petitioner went back and forth in the snow donating his storage items and throwing away other items he then packed his remaining items including his tax information in a large craftsman trunk and flew back to los angeles somewhere along the way petitioner’s trunk was damaged by the airline or airport workers and the contents were mostly lost or destroyed petitioner filed his federal_income_tax return for attaching a schedule c claiming deductions for travel_expenses of dollar_figure and utilities expenses of dollar_figure petitioner’s tax_return for reported itemized_deductions including medical_expenses of dollar_figure before the reduction required by sec_213 charitable_contributions of dollar_figure and miscellaneous_itemized_deductions of dollar_figure before the application of the floor required by sec_67 discussion generally the commissioner’s determinations in a notice_of_deficiency are presumed correct and the taxpayer has the burden of proving that those determinations are erroneous see rule a 290_us_111 in some cases the burden_of_proof with respect to relevant factual issues may shift to the commissioner under sec_7491 the court finds that petitioner has not argued or shown that he has met the requirements of sec_7491 and the burden_of_proof does not shift to respondent deductions are strictly a matter of legislative grace and a taxpayer bears the burden of proving entitlement to any deduction claimed rule a 292_us_435 290_us_111 moreover taxpayers are required to maintain records that are sufficient to substantiate their deductions sec_6001 sec_162 generally allows a deduction for ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business generally no deduction is allowed for personal living or family_expenses except where specifically authorized by statute see sec_262 the an employee’s performance of services is a trade_or_business e g 54_tc_374 taxpayer must show that any expenses for which business_expenses are claimed were incurred primarily for business rather than personal living or family reasons see rule a see 72_tc_433 to show that the expense was not incurred for personal reasons the taxpayer must show that the expense was incurred primarily to benefit his business and there must have been a proximate relationship between the claimed expense and the business see walliser v commissioner t c pincite schedule c expenses where a taxpayer has established that he has incurred a trade_or_business expense failure to prove the exact amount of the otherwise deductible item may not always be fatal generally unless prevented by sec_274 the court may estimate the amount of such an expense and allow the deduction to that extent see 255_f2d_128 10th cir aff’g 27_tc_413 39_f2d_540 2d cir in order for the court to estimate the amount of an expense however there must be some basis upon which an estimate may be made 85_tc_731 without such a basis an allowance would amount to unguided largesse 245_f2d_559 5th cir petitioner presented copies of electric bills from his new york apartment for totaling dollar_figure as evidence of his utilities expense deduction of dollar_figure petitioner explained that the expenses for utilities were business_expenses because he had to maintain his apartment in new york while living in hawaii petitioner had to maintain his apartment he testified because he had unfinished business in new york and he needed the internet service and electricity to run it also he could not afford to break his lease the court finds that petitioner has not substantiated his utilities expenses and has not shown that they were business as opposed to personal expenses respondent’s determination on this issue is sustained certain business deductions described in sec_274 are subject_to strict rules of substantiation that supersede the doctrine in cohan v commissioner f 2d pincite see sec_1_274-5t temporary income_tax regs fed reg date sec_274 provides that no deduction shall be allowed with respect to certain items including a any traveling expense including meals_and_lodging away from home b any item related to an activity of a type considered to be entertainment amusement or recreation or c the use of any listed_property as defined in sec_280f unless the taxpayer substantiates certain elements for an expense described in one of the above categories the taxpayer must substantiate by adequate_records or sufficient evidence to corroborate the taxpayer’s own testimony the amount of the expenditure or use applying the appropriate measure mileage may be used in the case of automobiles the time and place of the expenditure or use the business_purpose of the expenditure or use and in the case of entertainment the business relationship to the taxpayer of each expenditure or use see sec_274 to meet the adequate_records requirements of sec_274 a taxpayer must maintain some form of records and documentary_evidence that in combination are sufficient to establish each element of an expenditure or use see sec_1 5t c temporary income_tax regs supra a contemporaneous log is not required but corroborative evidence to support a taxpayer’s reconstruction of the elements of the expenditure or use must have a high degree of probative value to elevate such statement to the level of credibility of a contemporaneous record sec_1_274-5t temporary income_tax regs fed reg date petitioner prepared for trial as evidence of his travel_expenses for a document titled work related travel_expenses a summary list of locations with the categories reason job arrival and departure dates and round number estimated costs that included airfare and hotel costs petitioner testified that he could not obtain any of his pertinent records because small banks and credit card companies get sold to bigger companies and they dissolve the assets and keep the records god knows where petitioners’ documentation for travel_expenses does not meet the standard of substantiation required by sec_274 the court sustains respondent’s determination on this issue itemized_deductions because petitioner’s allowable itemized_deductions after respondent’s adjustments were less than the standard_deduction respondent allowed petitioner the standard_deduction of dollar_figure medical and dental expenses petitioner deducted dollar_figure of medical and dental expenses before application of the statutory floor of of adjusted_gross_income see sec_213 respondent allowed petitioner a dollar_figure deduction for medical_expenses petitioner testified that his union medical plan would pay for medical treatment petitioner’s summary of travel_expenses lists dollar_figure for travel in although he did not claim a deduction for travel_expenses on schedule c for respondent did not adjust petitioner’s deduction from gross_income for that year of dollar_figure of moving_expenses which included travel_expenses of dollar_figure only in hawaii otherwise he was required to pay out of pocket petitioner further testified that he cannot get copies of his medical bills because the hospital in hawaii will mail medical records only to the street address he gave when he received care from the hospital he testified that he has only a post office box in new york he would have to go to hawaii in person to get copies of his records because the hospital will not mail them to him in any event petitioner cannot show that he actually paid any bills he might have received from any source in excess of the amounts respondent allowed petitioner has not shown that he is entitled to medical and dental expense deductions in excess of those respondent allowed charitable_contributions also included in his itemized_deductions were charitable_contributions in_kind of dollar_figure and carryover contributions of dollar_figure petitioner’s only documentary_evidence for these contributions was copies of four goodwill receipts that show the dates of donation but do not show the name of the donor or the description or valuation of the items donated respondent allowed a deduction for the dollar_figure of noncash contributions petitioner reported that the carryover contributions are from and petitioner reported only dollar_figure of charitable_contributions for petitioner offered no evidence of the carryover contributions except for his testimony that his mother advised him by telephone in late of her donations of his items evidence of which was lost when his trunk was damaged sec_170 allows the carryover of deductions for contributions to sec_170 organizations that exceed of the taxpayer’s contribution_base for the taxable_year the taxpayer’s contribution_base is his adjusted_gross_income computed without the deduction allowed by sec_172 sec_170 petitioner has not shown that he is entitled to a charitable_contribution_deduction for in excess of the dollar_figure respondent allowed and he clearly cannot meet the requirements of sec_170 with respect to carryover contributions from and unreimbursed employee business_expenses petitioner deducted dollar_figure of unreimbursed employee business_expenses of which respondent allowed dollar_figure for included in the employee_business_expense deductions were travel_expenses of dollar_figure parking fees tolls and transportation_expenses of dollar_figure vehicle expenses of dollar_figure meals and entertainment_expenses of dollar_figure and other business_expenses of dollar_figure as evidence of his employee business_expenses petitioner provided copies of credit card statements and some bank statements for that without further explanation appear overwhelmingly to show personal expenditures petitioner offered no evidence of his dollar_figure deduction for tax preparation fees and dollar_figure for attorney’s and accountant’s fees respondent’s determination that the standard_deduction exceeds the sum of petitioner’s substantiated itemized_deductions for is sustained to reflect the foregoing decision will be entered for respondent petitioner’s tax_return indicates it was self-prepared


internal_revenue_service number release date index number -------------------------- ------------------- ------------------------------------------------------ --------------------------------------- --------------------------------- re --------------------------------------------- ---------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b04 plr-119094-11 date date legend grantor_trust trust trust child child child company date date state state court individual statute statute individual trust company --------------------------- ---------------------------------------------------------------- -------------------------------------------------------------- --------------------------------------------------------- --------------------------------- ------------------------------ -------------------------- ------------------------------- --------------------------- ------------------- ------------ ------------- ---------------------------------------------------------- ---------------------- ------------------------------------------------- ----------------------------------------------------- ------------------- ------------------------------------------------------ plr-119094-11 dear ----------------- this letter responds to your authorized representative’s letter dated date requesting income estate gift and generation-skipping_transfer gst tax rulings with respect to the proposed modifications of trust the facts and representations submitted are summarized as follows on date a date prior to date grantor created trust for the benefit of child and his descendants the current trustees are trust company and individual pursuant to trust during the life of child the trustees in their discretion may distribute the income and principal of trust to or for the benefit of child his spouse and his issue to provide for their care comfort support maintenance and education and to provide for any illness accident emergency disability or other unusual circumstances upon the death of child child may appoint the trust property by will to any one or more of child 1’s issue if child does not exercise the limited_power_of_appointment on his death then until the termination_date the trustees in their discretion may distribute the income and principal of trust to or for the benefit of child 1’s spouse if child is married at the time of his death and his spouse survives him and issue to provide for their care comfort support maintenance and education and to provide for any illness accident emergency disability or other unusual circumstances any income not distributed shall be accumulated and added to principal if at any time prior to the termination_date there are no living issue of child then the trustees in their discretion may distribute the income and principal to or for the benefit of child 1’s spouse and the issue of the grantor to provide for their care comfort support maintenance and education and to provide for any illness accident emergency disability or other unusual circumstance if at any time prior to the termination_date there are no living issue of the grantor then the trustees in their discretion may distribute the income to the issue of grantor’s sister in such amounts as the trustees determine for their care comfort support maintenance education and best interests and to provide for any illness accident emergency disability or other unusual circumstance any income not distributed shall be accumulated and added to principal trust will terminate years after the last survivor of grantor grantor’s wife child child child and other individuals who were living when trust was created on the termination_date the trust property will be divided and distributed outright in equal shares to the grandchildren of child with the issue of any deceased grandchild receiving by right of representation the share such grandchild would have plr-119094-11 received if living if there are no grandchildren or more remote issue of child living on the termination_date then the trust property will be distributed one-half to child 2’s grandchildren and one-half to child 3’s grandchildren in equal shares if only one of child 1’s brothers has grandchildren or more remote issue living on the termination_date then all of the trust property will be distributed to that family line trust provides that a trustee or a successor trustee may resign upon thirty days notice to the grantor if living to child after the grantor’s death or to child 1’s guardian or to each successor beneficiary or the legal guardian of a successor beneficiary if child is deceased if individual dies resigns or for any reason cannot continue to act as the individual trustee then a successor individual trustee shall be appointed by child if living otherwise by the other living children of the grantor if the corporate trustee resigns or for any other reason cannot continue to act as the corporate trustee then a successor or substitute corporate trustee shall be appointed by child if living otherwise by the other living children of the grantor the primary asset of trust is common_stock of company trust provides that the trustees may not sell transfer exchange or dispose_of company stock without first offering to sell the stock to company if the trustees desire to sell company stock company will have an option for thirty days to redeem such stock for a price per share equal to and on the basis of the net_book_value per share of company on date child filed a petition with court a state court requesting that court accept jurisdiction over trust so that the situs of trust is in state and modify trust by approving the following proposed modifications of trust a distribution adviser is named to make all decisions related to the distribution of the trust property to the beneficiaries the distribution adviser shall direct the trustees to distribute income and principal from time to time pursuant to the standards established in the trust instrument if no distribution adviser is acting the trustees will make such decisions the initial distribution adviser will be individual an investment adviser is named to make all decisions related to the investment of the trust property if no investment adviser is acting the trustees will make such decisions the initial investment adviser will be child a_trust protector is named to make certain administrative changes to the trust agreement from time to time the trust_protector may modify the provisions relating to the identity qualifications succession removal and appointment of any fiduciary or trust_protector however the trust_protector may not modify the prohibition on appointment as officeholder see paragraph below the trust_protector may modify plr-119094-11 the investment powers granted to the trustees and the investment adviser the trust_protector may remove any trustee or the investment adviser the trust_protector may not exercise any power that would cause the trust to extend beyond any applicable rule_against_perpetuities nor cause the trust_protector to possess a general_power_of_appointment the initial trust_protector will be child the terminology used to describe the beneficiaries of trust is changed from issue to descendants while the trust situs remains in state at least one trustee must be a state trust company neither grantor nor grantor’s wife may hold any office under this trust instrument no descendant of grantor no spouse of any such descendant and no party that would be a_related_or_subordinate_party within the meaning of sec_672 as to the grantor the grantor’s wife or any such descendant may act as a trustee or as distribution adviser prohibition on appointment as officeholder state law will govern the administration of trust while state law will continue to govern the validity construction and duration of trust for purposes of determining the purchase_price for company’s purchase of any company stock from trust the definition of book_value is clarified to be the value of the stock as of the month end immediately preceding the date notice of the offer to purchase such stock is given to company child or if he fails to act those persons in the oldest generation of living descendants of child who have reached age or if none or if they fail to act those persons in the oldest generation of living descendants of the grantor who have reached age may appoint an individual or trust company to act in any vacant office of the trust the trustees represent that trust has been irrevocable since its creation and that no property has been added to trust after date trust was created under state law trust does not specify that any particular state law is to govern the administration and construction of trust initially a state bank was the trustee of trust currently trust is being administered in state by the corporate trustee trust company which is based in state statute provides that under state law the duration of a_trust and time of vesting of interests in the trust property shall not change merely because the place of administration of the plr-119094-11 trust is changed from some other jurisdiction to state statute provides that under the law of state the use of the term issue means an individual’s descendants you have requested the following rulings the change_of situs of trust for administrative purposes from state to state will not cause trust to lose its exempt status from gst tax the proposed modifications of trust will not cause trust to lose its exempt status from gst tax the proposed modifications of trust will not cause any beneficiary to have made a gift_for gift_tax purposes the proposed modifications of trust will not subject any portion of trust to estate_tax in the estate of any beneficiary the proposed modifications of trust will not cause trust or any beneficiary to realize or recognize any gain_or_loss under sec_61 or sec_1001 law and analysis ruling sec_1 and sec_2601 of the internal_revenue_code imposes a tax on every gst made after date a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2612 provides that the term taxable_termination means a termination by death lapse of time release of a power or otherwise of an interest in property held in a_trust unless a immediately after such termination a non-skip_person has an interest in such property or b at no time after such termination may a distribution including distributions on termination be made from such trust to a skip_person sec_2612 provides that the term taxable_distribution means any distribution from a_trust to a skip_person other than a taxable_termination or a direct_skip under sec_2612 a direct_skip is a transfer subject_to federal estate or gift_tax of an interest in property to a skip_person under a of the tax_reform_act_of_1986 act and sec_26_2601-1 the gst tax is generally applicable to generation-skipping transfers made after date however under b a of the act and sec_26_2601-1 plr-119094-11 the gst tax does not apply to a transfer under a_trust that was irrevocable on date but only to the extent that such transfer is not made out of corpus added to the trust after date or out of income attributable to corpus so added under sec_26_2601-1 any trust in existence on date will be considered irrevocable unless the settlor had a power that would have caused inclusion of the trust in his or her gross_estate under sec_2038 or sec_2042 if the settlor had died on date sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax under paragraph b or of this section hereinafter referred to as an exempt trust will not cause the trust to lose its exempt status in general unless specifically provided otherwise the rules contained in this paragraph are applicable only for purposes of determining whether an exempt trust retains its exempt status for gst tax purposes thus unless specifically noted the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of gain for purposes of sec_1001 sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy paragraph b i a b or c of this section by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust sec_26_2601-1 provides that for purposes of this section a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer to determine whether a modification of an irrevocable_trust will shift a beneficial_interest in a_trust to a beneficiary who occupies a lower generation the effect of the instrument on the date of the modification is measured against the effect of the instrument in existence immediately before the modification if the effect of the modification cannot be immediately determined it is deemed to shift a beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification a modification that is administrative in nature that only indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered to shift a beneficial_interest in the trust plr-119094-11 in sec_26_2601-1 example provides as follows in grantor who was domiciled in state x executed an irrevocable_trust for the benefit of grantor's issue naming a state x bank as trustee under the terms of the trust the trust is to terminate in all events no later than years after the death of the last to die of certain designated individuals living at the time the trust was executed the provisions of the trust do not specify that any particular state law is to govern the administration and construction of the trust in state x the common_law rule_against_perpetuities applies to trusts in a state y bank is named as sole trustee the effect of changing trustees is that the situs of the trust changes to state y and the laws of state y govern the administration and construction of the trust state y law contains no rule_against_perpetuities in this case however in view of the terms of the trust instrument the trust will terminate at the same time before and after the change in situs accordingly the change in situs does not shift any beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the transfer furthermore the change in situs does not extend the time for vesting of any beneficial_interest in the trust beyond that provided for in the original trust therefore the trust will not be subject_to the provisions of chapter if in this example as a result of the change in situs state y law governed such that the time for vesting was extended beyond the period prescribed under the terms of the original trust instrument the trust would not retain exempt status in sec_26_2601-1 example considers the following situation in grantor established an irrevocable_trust for the benefit of grantor's issue naming a bank and five other individuals as trustees in the appropriate local court approves a modification of the trust that decreases the number of trustees which results in lower administrative costs the modification pertains to the administration of the trust and does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification in addition the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust therefore the trust will not be subject_to the provisions of chapter in this case grantor created trust in state and the trust agreement does not specify that any particular state law is to govern trust initially a state bank was the trustee of trust currently trust company which is based in state is the corporate trustee of trust child petitioned court a state court requesting that court accept jurisdiction over trust so that the situs of trust is in state in addition the proposed modifications provide that state law will govern the administration of trust while state law will continue to govern the validity construction and duration of trust the proposed change in situs and governing law will not change the termination_date of trust thus the proposed change in situs will not shift any beneficial_interest in trust and will not extend the time for vesting of any plr-119094-11 beneficial_interest in trust accordingly based upon the facts submitted and representations made we conclude that the change in situs of trust for administrative purposes from state to state will not cause trust to lose its exempt status from gst tax the proposed modifications of trust to add a distribution adviser an investment_advisor a_trust protector and to require that while trust situs remains in state at least one trustee must be a state trust company are all administrative in nature and under sec_26_2601-1 will not be considered to shift a beneficial_interest to a lower generation in the trust see example of sec_26_2601-1 further the proposed modification to clarify the definition of book_value is administrative in nature and is considered not to shift any beneficial_interest to a lower generation in the trust finally the proposed modification of trust to change the term issue to descendants is consistent with applicable state law and does not result in a shift in any beneficial_interest to a lower generation nor does it extend the time for vesting of any beneficial_interest in trust accordingly based upon the facts submitted and the representation made we conclude that the proposed modifications of of trust will not cause trust to lose its exempt status from gst tax ruling sec_2501 imposes a tax for each calendar_year on the transfer of property by gift during the calendar_year by any individual sec_2511 provides that the gift_tax applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_2512 provides that if the gift is made in property the value thereof at the date of the gift is considered the amount_of_the_gift sec_2512 provides that where property is transferred for less than adequate_and_full_consideration in money_or_money's_worth then the amount by which the value of the property exceeded the value of the consideration is deemed to be a gift and is included in computing the amount of gifts made during the calendar_year in this case the beneficiaries of trust will have the same interests after the proposed modifications that they had prior to the modifications because the beneficial interests of the beneficiaries are substantially the same no transfer of property will be deemed to occur as a result of the modifications accordingly based on the facts submitted and the representations made we conclude that the proposed modifications of trust will not cause any beneficiary to have made a gift_for gift_tax purposes plr-119094-11 ruling sec_2001 provides that a tax is imposed on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2041 provides for the inclusion in the gross_estate of a decedent any property with respect to which the decedent possesses at the time of his death a general_power_of_appointment created after date sec_2041 provides for the inclusion in the gross_estate of a decedent any property with respect to which the decedent by will exercises a power_of_appointment created after date by creating another power_of_appointment which under the applicable local law can be validly exercised so as to postpone the vesting of any estate or interest in such property or suspend the absolute ownership or power of alienation of such property for a period ascertainable without regard to the date of the creation of the first power sec_2041 provides that the term general_power_of_appointment means a power that is exercisable in favor of the decedent decedent's_estate decedent's creditors or the creditors of decedent's_estate except that a power to consume invade or appropriate property for the benefit of the decedent that is limited by an ascertainable_standard relating to the health education support or maintenance of the decedent is not deemed a general_power_of_appointment sec_20_2041-1 of the estate_tax regulations provides that a power_of_appointment is not a general_power_of_appointment if by its terms it is either a exercisable only in favor of one or more designated persons or classes other than the decedent or his creditors or the decedent's_estate or the creditors of his estate or b expressly not exercisable in favor of the decedent or his creditors or the creditors of decedent's_estate in revrul_95_58 1995_2_cb_191 the service ruled that a decedent grantor's reservation of an unqualified power to remove a trustee and to appoint an individual or corporate successor trustee that is not related or subordinate to the decedent within the meaning of sec_672 is not considered a reservation of the trustee's discretionary powers of distribution over the property transferred by the decedent grantor to the trust accordingly the trust corpus is not included in the decedent's gross_estate under sec_2036 or sec_2038 sec_672 defines the term related_or_subordinate_party to mean any nonadverse_party who is the grantor's spouse if living with the grantor or any one of the following the grantor's father mother issue brother or sister an employee of the grantor a corporation or any employee of a corporation in which the stock holdings plr-119094-11 of the grantor and the trust are significant from the viewpoint of voting control a subordinate employee of a corporation in which the grantor is an executive in this case child in his capacity as a beneficiary of trust has two powers first child has a testamentary limited_power_of_appointment over trust that may be exercised only in favor of child 1’s descendants this limited_power_of_appointment exists in the original trust instrument this limited_power_of_appointment will not cause trust to be included in child 1’s gross_estate second child has the power to appoint successor fiduciaries the trustees and officeholders of trust these offices include the investment adviser distribution adviser and trust_protector in the original trust instrument child as beneficiary had the power to remove and replace the trustees pursuant to the modifications these powers are expanded to include all officeholders of the trust notwithstanding child 1’s new rights and powers the grantor grantor’s wife any descendants of the grantor any spouses of any descendants of the grantor and any subordinate party as to the grantor the grantor’s wife and any such descendants may not act as a trustee or distribution adviser of trust thus child is not permitted to act as a trustee or distribution adviser of trust further child may not appoint anyone related or subordinate to him as a trustee or distribution adviser accordingly this power will not cause trust to be included in child 1’s gross_estate see revrul_95_58 child will have new rights and powers as the investment adviser and trust_protector of trust as investment adviser child will make all decisions related to the investment of the trust property as trust_protector child may modify the provisions relating to the identity qualifications succession removal and appointment of any fiduciary or protector the trust_protector may modify the investment powers granted to the trustees and investment adviser the trust_protector may remove any trustee or investment adviser the trust_protector may not exercise any power that would cause the trust to extend beyond any applicable rule_against_perpetuities nor cause the protector to possess a general_power_of_appointment although child as trust_protector will have the power to modify provisions relating to the succession removal and appointment of any fiduciary or officeholder of the trust the modifications specify that no trust_protector may modify the prohibition on appointment as officeholder provision thus child or any other descendant of the grantor cannot act as a trustee or distribution adviser of the trust similarly the trustees and distribution adviser appointed by child may not be a_related_or_subordinate_party to child thus the powers of the trustees and distribution adviser will not be attributed to child or any other descendant of the grantor thus child and any beneficiary who may obtain such rights and powers pursuant to the modifications will not be treated as having general powers of appointment by virtue of such powers accordingly based on the facts submitted and the representations made we conclude that the proposed modifications of trust will not subject any portion of trust to estate_tax in the estate of any beneficiary of trust plr-119094-11 ruling sec_61 defines gross_income as all income from whatever source derived under sec_61 gross_income includes g ains derived from dealings in property under sec_61 income from an interest in a_trust is included in gross_income sec_1001 provides that the gain from the sale_or_other_disposition of property is the excess of the amount_realized over the adjusted_basis provided in sec_1011 for determining gain and the loss is the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized under sec_1001 the entire amount of gain_or_loss must be recognized except as otherwise provided sec_1_1001-1 of the income_tax regulations provides that except as otherwise provided in subtitle a the gain_or_loss realized from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or as loss sustained in 499_us_554 a financial_institution exchanges its interest in one group of residential mortgage loans for another lender’s interest in a different group of residential mortgage loans the two groups of mortgages were considered substantially identical by the agency that regulated the financial_institution the supreme court concluded that sec_1_1001-1 reasonably interprets sec_1001 and stated that an exchange of property gives rise to a realization event under sec_1001 if the properties exchanged are materially different id pincite in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material so long as their respective possessors enjoy legal entitlements that are different in_kind or extent id pincite the court held that mortgage loans made to different obligors and secured_by difference homes embodied distinct legal entitlements and that the taxpayer realized losses when it exchanged interests in the loans id pincite in this case the beneficiaries will have the same beneficial interests in trust after the modifications as they had prior to the modifications to the trust accordingly based on the facts submitted and the representations made we conclude that the proposed modifications of trust will not cause trust or any beneficiary to realize or recognize any gain_or_loss under sec_61 or sec_1001 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives plr-119094-11 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 the rulings in this letter pertaining to the federal estate and or generation-skipping_transfer_tax apply only to the extent that the relevant sections of the internal_revenue_code are in effect during the period at issue this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely _________________________ lorraine e gardner senior counsel branch office of the associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter cc