t c memo united_states tax_court dorothy ann magee petitioner v commissioner of internal revenue respondent docket no 5682-04l filed date p filed a petition for judicial review pursuant to sec_6330 i r c in response to a determination by r that levy action was appropriate for taxable_year held r’s determination to proceed with collection action is sustained held further under the facts and circumstances r’s denial of equitable relief under sec_6015 i r c is sustained dorothy ann magee pro_se fred e green jr for respondent memorandum findings_of_fact and opinion wherry judge this proceeding arises from a petition filed in response to a notice_of_determination concerning collection action under sec_6330 and a notice_of_determination concerning your request for relief pursuant to sec_6015 the issues for decision are whether petitioner was required to file a federal_income_tax return for whether respondent abused his discretion in determining that collection action under sec_6330 was appropriate and whether respondent abused his discretion in denying petitioner’s request for relief from joint_and_several_liability under sec_6015 findings_of_fact some of the facts have been stipulated and are so found the stipulations of the parties with accompanying exhibits are incorporated herein by this reference at the time this petition was filed petitioner resided in las vegas nevada i background petitioner and keith r magee mr magee were married but they separated at some time during calendar_year petitioner and mr magee had a daughter during their marriage who unless otherwise indicated all section references are to the internal_revenue_code code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure was born in petitioner has custody of her daughter and has struggled very hard to support herself and her daughter despite difficult circumstances during petitioner was a newspaper carrier following her divorce from mr magee petitioner filed for bankruptcy but she has since then purchased a home other than the fact that mr magee failed to make court-ordered child_support payments the record does not provide any specific information regarding mr magee or any information with respect to the manner in which petitioner and mr magee conducted their financial affairs ii procedural history petitioner and mr magee filed a joint form_1040 u s individual_income_tax_return for the taxable_year on date prepared at the behest of mr magee by a professional tax_return_preparer the tax_return showed the following total income of dollar_figure tax of dollar_figure tax paid of dollar_figure by mr magee’s withholdings and a balance of tax due of dollar_figure as reported on schedule c profit or loss from business income of the joint tax_return petitioner grossed dollar_figure from the delivery of newspapers and claimed dollar_figure in expenses the return was processed and the tax shown due on the return was assessed on date a notice_and_demand was mailed to petitioner on date at petitioner’s last_known_address as listed on her return respondent transferred and applied petitioner’s tax_credits from and in the amounts of dollar_figure and dollar_figure on date and date respectively to partially offset petitioner’s and mr magee’s unpaid joint liability petitioner was notified of these transfers at her last_known_address a notice_of_intent_to_levy was mailed to petitioner’s last_known_address on date a final notice_of_intent_to_levy and notice of your right to a hearing was sent to petitioner on date with an account summary showing an amount due of dollar_figure which amount at that time included the assessed balance accrued interest and an addition_to_tax petitioner submitted her form request for a collection_due_process_hearing on or about date and submitted form_8857 request for innocent spouse relief on or about date on date the requested collection hearing with an appeals officer was held by telephone at the hearing petitioner did not discuss any collection alternatives with the appeals officer on date the appeals officer issued a notice_of_determination concerning collection action under sec_6330 informing petitioner that the decision to upon levy petitioner’s property was an appropriate action also on date the appeals officer issued a notice_of_determination concerning your request for relief under the equitable relief provision of sec_6015 stating that no relief under sec_6015 would be granted because petitioner requested relief more than years after the first collection action following date took place petitioner attempted to file with the internal_revenue_service irs form 1040-ss u s self-employment_tax return for on or about date showing a net_loss of dollar_figure from self-employment petitioner attached the form 1040-ss as an exhibit to a form_843 claim_for_refund and request for abatement which she filed in her attempt to obtain a refund of her total_tax credits of dollar_figure petitioner also stated at trial that she attempted to file her own tax_return with her signature on it but the return was not accepted however this statement was made before petitioner was sworn in as a witness and therefore does not constitute evidence in this case also on or about date petitioner filed form 941c supporting statement to correct information as an adjustment to her form_843 for the taxable_year claiming an adjustment of dollar_figure petitioner attached to the form_843 a form_1040 schedule on brief respondent conceded the issue of whether petitioner properly elected relief within the years after the date the secretary had begun collection activities in light of our decision in 123_tc_314 the purpose of form 1040-ss is for residents of the virgin islands guam american samoa the commonwealth of the northern mariana islands and puerto rico to report among other things earnings from self-employment and pay self-employment_tax the court assumes that petitioner meant to file a form_1040 tax_return for see supra note the court realizes that petitioner’s form 941c filed on or continued c showing a net_loss of dollar_figure for and she also attached a form_8863 education credits hope_and_lifetime_learning_credits purportedly for the taxable_year showing that she was entitled to tentative education credits in the amount of dollar_figure on date petitioner filed the above-mentioned form_843 alleging among other things that her former husband forged her signature on their joint tax_return that the irs has kept her rebates and that she was not required to file a federal tax_return for however at trial she stated in ‘96 that was the year that i separated from my husband he asked me to leave and i said i couldn’t because we had lots of things to attend to number one we had the return and he said to leave your papers and i will take care of it petitioner later testified and yes i would have filed with him in ‘96 and you can put that on the record too i loved him and i wanted our family but in ‘98 i didn’t want him and he didn’t pay us and he didn’t keep his promises and he lied and he said he was coming and he didn’t come continued about date purports to correct information on form_843 filed subsequently on date as discussed infra in text the court notes the date inconsistency however the parties confirmed at trial that the total amount of the tax_credits transferred by respondent to offset the underpayment in was in fact dollar_figure petitioner did not introduce any evidence that she ever notified mr magee prior to the date in that mr magee filed their joint income_tax return for that petitioner had changed her mind and no longer wished to file a joint federal continued in response to respondent’s date determination letters petitioner on date timely filed a petition for lien or levy action under code sec_6320 or sec_6330 with this court for the taxable_year on date respondent filed an answer to petitioner’s petition and a certification under rule b see 115_tc_118 the certification confirmed that respondent notified mr magee that petitioner filed a claim for relief from joint_and_several_liability and that he could intervene despite the notice mr magee has not intervened in this case i contentions of the parties opinion petitioner contends that she is not required to file a federal_income_tax return for specifically she asserts that she did not generate a sufficient amount of income to require her to file a return in addition with respect to the joint_return petitioner maintains that she is entitled to relief from joint_and_several_liability because her former spouse forged her signature on the return ultimately petitioner claims that she never received a notice_of_deficiency for that joint_return was invalid that liability on the joint_return was incorrect and that she was not given a proper continued income_tax return for hearing with respect to respondent’s intent to levy petitioner also asserts that she should be entitled to recover her litigation and or administrative costs for among other things her time in preparing her defense respondent on the other hand claims that petitioner earned self-employment_income in and was required to file an income_tax return for respondent does not contend that petitioner is liable for a deficiency or that an understatement exists rather he states that this case concerns petitioner’s failure to pay her tax_liability as shown on her joint_return filed for furthermore respondent argues that he did not abuse his discretion in determining collection action was appropriate under sec_6330 or in denying relief from joint_and_several_liability under sec_6015 ii filing requirement the code imposes a federal tax on the taxable_income of every individual sec_1 gross_income for the purpose of calculating taxable_income is defined as all income from the parties did not address sec_7491 and petitioner did not argue that the burden_of_proof shifted to respondent under sec_7491 petitioner requested recovery_of legal fees for her time in preparing for the instant case in obtaining her divorce and in filing her bankruptcy in date additionally petitioner asks the court for recovery for legal fees to compensate her minor child for the child’s time to protect petitioner’s rights although petitioner did not specifically request litigation or administrative costs under sec_7430 any consideration for costs under sec_7430 would be premature and the court will not further discuss the issue see rule whatever source derived sec_61 every u s resident individual whose gross_income for the taxable_year equals or exceeds the exemption_amount is with enumerated exceptions not applicable here required to file an income_tax return sec_6012 petitioner had gross_income totaling at least dollar_figure from receipts or sales from her newspaper delivery business for taxable_year the filing threshold for a taxpayer under age filing a single return for taxable_year was dollar_figure petitioner’s gross_income exceeded the filing threshold for the taxable_year and petitioner was therefore required to file an income_tax return iii levy collection action sec_6331 authorizes the commissioner to collect any unpaid tax by levy upon all property and rights to property of a person liable for such tax within days after notice_and_demand of payment for such tax however before a levy commences under sec_6331 the commissioner must give the taxpayer at least days’ written notice of the commissioner’s intent to make such a levy in order for any collection action to proceed petitioner stated that she had gross_receipts of dollar_figure the court assumes this is a rounded amount per form_1040 schedule c petitioner had gross_income from receipts or sales of dollar_figure petitioner did not allege head_of_household filing_status for in her form 1040-ss however petitioner indicated that she had a daughter who was not yet emancipated in any event the filing threshold for for head_of_household under was dollar_figure and for married_filing_separately was dollar_figure sec_6331 such notice must also include a brief statement setting forth among other things any available administrative appeals sec_6331 sec_6330 then establishes procedures for administrative and judicial review of collection actions by levy specifically sec_6330 requires a 30-day written notification to the taxpayer of his or her right to an administrative hearing before a levy may be made including a statement of administrative appeals available sec_6330 provides that any hearing requested by a taxpayer will be held by the irs office of appeals and conducted before an impartial officer sec_6330 establishes matters which can be considered at the administrative hearing issues at hearing -- a in general --the person may raise at the hearing any relevant issue relating to the unpaid tax or the proposed levy including-- i appropriate spousal defenses ii challenges to the appropriateness of collection actions and iii offers of collection alternatives which may include the posting of a bond the substitution of other assets an installment_agreement or an offer-in- compromise b underlying liability --the person may also raise at the hearing challenges to the existence or amount of the underlying tax_liability for any_tax period if the person did not receive any statutory_notice_of_deficiency for such tax_liability or did not otherwise have an opportunity to dispute such tax_liability lastly sec_6330 permits the taxpayer to appeal a determination resulting from the hearing within days to the tax_court or to a district_court of the united_states if the tax_court does not have jurisdiction of the underlying tax_liability sec_6330 sec_6330 allows a taxpayer to raise collection issues such as spousal defenses the appropriateness of the commissioner’s intended collection action and possible alternative means of collection 122_tc_1 114_tc_604 114_tc_176 a taxpayer cannot raise issues relating to the underlying tax_liability if the taxpayer received a notice_of_deficiency or had the opportunity to dispute the liability sec_6330 sego v commissioner supra goza v commissioner supra a taxpayer’s underlying tax_liability under sec_6330 includes taxes determined by the taxpayer and shown due on the filed tax returns and assessed by respondent montgomery v commissioner supra pincite since petitioner did not receive a notice_of_deficiency for and did not otherwise have the opportunity to dispute her liability pursuant to sec_6330 she was entitled to challenge the existence or the amount of the underlying tax_liability for at her appeals_office hearing see id pincite- petitioner raised the allegation that her husband forged her signature on her tax_return as a defense to respondent’s assessment where the validity of the underlying tax_liability is not properly placed at issue the court will review the administrative determination of the appeals_office for an abuse_of_discretion sego v commissioner supra pincite goza v commissioner supra pincite however if the validity of the underlying tax_liability is properly at issue as is the case here the court reviews the matter de novo 122_tc_280 affd 132_fedappx_919 2d cir sego v commissioner supra pincite a lien or levy action under sec_6330 is commenced by the filing of a petition with this court rule a rule b addresses the content of the petition rule b and requires that petitioner’s pleading contain clear and concise assignments of each and every error which the petitioner alleges to have been committed in the notice_of_determination and clear and concise lettered statements of the facts on which the petitioner bases each assignment of error petitioner must plead her allegations of fact with sufficient specificity that the court can conduct a meaningful hearing to determine whether respondent can proceed with collection of her liability poindexter v commissioner supra pincite petitioner’s statements indicate that she disagrees with the income_tax_liability as shown on the joint_return however other than claiming that the joint_return contained false or fraudulent information petitioner fails to specifically address or identify any items of income deduction or credit or any calculations that are incorrect in fact respondent has not challenged the dollar_figure in schedule c expenses claimed on the filed tax returndollar_figure in short as to computational matters petitioner has failed to aver facts or to establish facts at trial with credible_evidence sufficient to show any error in respondent’s assessment petitioner’s only explicit argument contesting her underlying tax_liability is her contention that petitioner stated that she had gross_income of dollar_figure and incurred dollar_figure in expenses for papers and supplies in connection with her newspaper delivery business however at trial she orally listed expenses of dollar_figure for papers dollar_figure for an expense not mentioned and dollar_figure for her bond these amounts total dollar_figure none of which was substantiated by petitioner petitioner did not submit any evidence regarding any of her deductions yet respondent never disallowed any of the dollar_figure in expenses claimed on petitioner’s form_1040 schedule c it appears that petitioner attempted to file a form_1040 because she believed she was entitled to a refund of her dollar_figure in tax_credits she apparently thought that she only had income of approximately dollar_figure was therefore not liable for any_tax and had no obligation to file a return this was an erroneous belief since an individual’s obligation to file a tax_return depends upon on gross_income not net_income see sec_6012 see also supra sec ii her husband forged her signature on their joint returndollar_figure the court addresses below petitioner’s contention that her signature was forged on the joint_return but the court notes that this contention does not invalidate the joint_return and it also does not place the validity of the underlying liability at issue petitioner did not pursue her opportunities to discuss collection alternatives with the appeals officer such as a possible installment_agreement offer-in-compromise the posting of a bond or the substitution of other assets and she did not submit any financial information for the appeals officer to consider see sec_6330 the appeals officer verified that the legal and procedural requirements for collection had been satisfied in her collection_due_process explanation of items iv filing of a joint_return sec_6013 allows a husband and a wife to file a joint_return generally joint_and_several_liability applies to all joint returns sec_6013 therefore petitioner would typically be jointly and severally liable for the payment of any taxes due on the aggregate income see id where a taxpayer has consented to the filing of a joint_return such joint_return may be considered valid even if only one taxpayer signs the return 56_tc_1 see infra sec iv for a discussion on the validity of a joint_return where only one spouse signed the return 27_tc_306 affd sub nom 256_f2d_4 5th cir 27_tc_270 affd 251_f2d_44 8th cir whether a husband and a wife intended to file a joint_return is highly probative of whether the return qualifies as a joint_return 22_tc_893 a spouse’s intent is a question of fact estate of campbell v commissioner supra pincite despite petitioner’s claim that mr magee forged her signature on their joint_return the court construes petitioner’s testimony and statement as affirming that she intended to file a joint_return with mr magee for petitioner testified that she filed a separate_return for in reality petitioner belatedly filed as an attachment to her form_843 a form 1040-ss dated date for her taxable_year showing negative self-employment_income in the amount of dollar_figure and no tax due however petitioner’s previously petitioner was in the process of introducing evidence that the signature on the joint_return was not her signature when respondent agreed verbally to stipulate this fact petitioner did not introduce any credible_evidence that her agreement to file a joint federal_income_tax return was acquired under duress see supra note sec_3 and it appears that in petitioner intended to file a joint_return with mr magee however in after mr magee failed to pay child_support payments petitioner apparently questioned her decision to file jointly with him in after the irs initiated collection action petitioner attempted to file a separate_return for to avoid liability for the unpaid joint tax still due and to obtain a refund of her dollar_figure in tax_credits filed joint_return revealed that petitioner had gross_receipts of dollar_figure in the record does not indicate any reasons why petitioner or mr magee would not elect to file a joint_return and indicates that at the time they intended to do so it was not until years later that petitioner determined she no longer wished to file jointly in light of the resulting unpaid joint tax_liability and the complete breakdown of her marriage therefore the court finds that petitioner filed a joint_return with mr magee v relief under sec_6015 in certain situations a joint_return filer can avoid joint_and_several_liability by seeking relief under section dollar_figure generally a joint filer can seek relief under three alternatives full or partial relief under sec_6015 proportionate relief under sec_6015 and equitable relief under sec_6015 a introduction in relevant part sec_6015 provides sec_6015 in general --notwithstanding sec_6013 -- an individual who has made a joint_return may elect to seek relief under the procedures prescribed under subsection b and sec_6015 applies to any_tax liability arising after date and to any_tax liability arising before but remaining unpaid as of that date as in the instant case internal_revenue_service restructuring and reform act of publaw_105_206 112_stat_734 if such individual is eligible to elect the application of subsection c such individual may in addition to any election under paragraph elect to limit such individual’s liability for any deficiency with respect to such joint_return in the manner prescribed under subsection c where relief is not available under sec_6015 or c sec_6015 provides an additional alternative for relief from joint_and_several_liability at the discretion of the secretary if it would be inequitable to hold the taxpayer liable for any unpaid tax or deficiency revproc_2003_61 2003_2_cb_296 b relief under sec_6015 and c relief under sec_6015 or c is premised on the existence of a deficiency sec_6015 and c 120_tc_62 since this case does not involve a deficiency or an understatement relief under sec_6015 or c is not available c relief under sec_6015 the tax_court has jurisdiction to review a denial of equitable relief 114_tc_324 the tax_court reviews respondent’s denial of relief to determine whether respondent’s determination was arbitrary capricious clearly unlawful or without sound basis in law or fact 122_tc_32 where relief is not available under sec_6015 or c petitioner may be entitled to relief if it would be inequitable to hold the individual liable for any unpaid tax sec_6015 revproc_2003_61 sec_4 c b pincite6 lists seven threshold conditions that petitioner must satisfy in order for respondent to consider a request for relief under sec_6015 the threshold conditions are as follows the requesting spouse filed a joint_return for the taxable_year for which he or she seeks relief relief is not available to the requesting spouse under sec_6015 or c the requesting spouse applies for relief no later than two years after the date of the service’s first collection activity after date with respect to the requesting spouse no assets were transferred between the spouses as part of a fraudulent scheme by the spouses the nonrequesting spouse did not transfer disqualified assets to the requesting spouse the requesting spouse did not file or fail to file the return with fraudulent intent the income_tax_liability from which the requesting spouse seeks relief is attributable to an item of the individual with whom the requesting spouse filed the joint_return the nonrequesting spouse unless one of the following exceptions applies a attribution solely due to the operation of community_property law b nominal ownership c misappropriation of funds d abuse not amounting to duress revproc_2003_61 2003_2_cb_296 supersedes revproc_2000_15 2000_1_cb_447 revproc_2003_61 supra and is effective for requests for relief filed on or after date and for requests for relief pending as of date for which no preliminary determination_letter had been issued as of date the record does not indicate that respondent issued petitioner a preliminary determination_letter on or before date therefore revproc_2003_61 applies in this case petitioner and mr magee’s joint tax_return reflects estimated_taxes paid_by mr magee however this amount was not sufficient to cover all of his tax_liability much less any of petitioner’s tax_liability respondent did not contest that petitioner met these seven threshold conditions once petitioner has satisfied the threshold conditions revproc_2003_61 sec_4 c b pincite then provides a nonexclusive list of factors that the commissioner will consider in determining whether taking into account all the facts and circumstances it is inequitable to hold the requesting spouse liable for all or part of the unpaid income_tax_liability no single factor will determine whether equitable relief will be granted in any particular case and the commissioner will consider and weigh all relevant factors regardless of whether or not the factor is listed in revproc_2003_61 sec_4 revproc_2003_61 sec_4 a provides the following factors that may be relevant to whether the commissioner will grant equitable relief marital status economic hardship knowledge or reason to know that the nonrequesting spouse would not pay the liability the nonrequesting spouse’s legal_obligation significant benefit compliance with income_tax laws abuse and mental or physical health certain factors specifically abuse or mental or physical health will weigh in favor of granting equitable relief however they will not weigh against equitable relief if revproc_2003_61 sec dollar_figure applies to a spouse who meets the conditions of sec_4 but not sec_4 they are not found present in a case revproc_2003_61 sec_4 b c b pincite marital status whether the requesting spouse is separated or divorced from the nonrequesting spouse is a factor in favor of granting relief to the requesting spouse revproc_2003_61 sec_4 a i petitioner was divorced from mr magee at the time she sought relief this factor weighs in favor of granting equitable relief economic hardship if payment of the tax_liability would cause the requesting spouse to suffer economic hardship this factor would support the granting of equitable relief to the requesting spouse revproc_2003_61 sec_4 a ii economic hardship applies if satisfaction of the levy in whole or in part will cause an individual taxpayer to be unable to pay his or her reasonable basic living_expenses the determination of a reasonable amount for basic living_expenses will be made by the director and will vary according to the unique circumstances of the individual taxpayer sec_301_6343-1 proced admin regs in determining a reasonable amount for basic living_expenses the commissioner will consider any information provided by the taxpayer including inter alia the taxpayer’s age employment status and history ability to earn and number of dependents the amount reasonably necessary for food clothing housing medical_expenses transportation current tax_payments alimony child_support or other court-ordered payments and expenses necessary to the taxpayer’s production_of_income cost of living in the geographic area where the taxpayer resides the amount of property exempt from the levy which is available to pay the taxpayer’s expenses any extraordinary circumstances and any other factor that the taxpayer claims bears on economic hardship sec_301_6343-1 proced admin regs petitioner supports her daughter and stated that she was providing her with lessons19 and years of orthodontic work petitioner also asserted that she was in chapter bankruptcy for months because mr magee left her with medical bills and has not made required child_support payments although the court believes that petitioner honestly suffered a financial hardship resulting from mr magee’s failure to pay child_support she did not provide this court with any supporting financial records while petitioner credibly testified as to her generalized expenses she did not provide any specific evidence regarding her income the amount necessary for food clothing housing medical_expenses transportation for petitioner and her daughter or expenses necessary for petitioner’s production_of_income or any evidence regarding her net_worth absent evidence regarding the record does not indicate the type of lessons to which petitioner refers petitioner’s basic living_expenses income and net_worth petitioner has not demonstrated that she would suffer an economic hardship if she were denied relief from joint_and_several_liability this factor weighs to some degree in favor of denying equitable relief knowledge or reason to know in a situation where a liability has not been paid and the requesting spouse did not know or had no reason to know that the nonrequesting spouse would not pay the liability this factor would weigh in favor of granting relief revproc_2003_61 sec_4 a iii when petitioner and mr magee separated petitioner stated that she left all her tax information and records with mr magee for him to file their joint_return petitioner was thus aware of the need to file the return but she did not participate in the preparation of the joint_return in petitioner was self-employed as a newspaper carrier and did not make any estimated_tax payments nor did she have any_tax withheld for since petitioner and her then husband had a tax_liability resulting from his and her earned_income and petitioner did not have any withholding or pay any estimated_taxes for petitioner knew or should have known that she could owe tax on the joint_return for at least her portion of the earned_income while she testified that she did not think any_tax would be due that assumption was not justified petitioner did not offer any evidence demonstrating that it was reasonable for her to believe that mr magee would pay any unpaid tax_liability we are not persuaded that petitioner lacked knowledge or reason to know that any unpaid tax_liability for would not be paid_by mr magee this factor weighs in favor of denying equitable relief nonrequesting spouse’s legal_obligation this is a factor in favor of the requesting spouse where the nonrequesting spouse has a legal_obligation pursuant to a divorce decree or an agreement to pay the outstanding tax_liability and the requesting spouse did not know or did not have any reason to know that the nonrequesting spouse would not pay the income_tax_liability revproc_2003_61 sec_4 a vi petitioner offered form fsa - child_support enforcement transmittal showing that mr magee’s location could not be determined as of date petitioner also testified that mr magee’s driver license was revoked that any irs refunds to which mr magee would be entitled would be levied for the support of their child and that a bench warrant for mr magee had been issued the court found petitioner’s testimony regarding mr magee’s obligation to provide child_support payments to be credible and sincere however petitioner did not establish that mr magee was under an obligation to pay the tax debt pursuant to a divorce decree or other agreement this is a neutral factor significant benefit where the requesting spouse significantly benefited beyond normal support from the unpaid liability this is a factor against granting relief to the nonrequesting spouse petitioner and mr magee had income in the amounts of dollar_figure and dollar_figure respectively for as shown on their joint_return mr magee made estimated_tax payments petitioner did not petitioner’s gross_income constituted about percent of the total income and her net_income was even less there is nothing in the record regarding petitioner and mr magee’s lifestyle or spending habits when they were married it appears that petitioner did not receive a significant benefit from the filing of the joint_return this factor weighs in favor of granting relief abuse there is no evidence in the record that petitioner suffered any physical abuse from mr magee this is a neutral factor see revproc_2003_61 sec_4 b i mental or physical health there is no evidence in the record that petitioner’s mental or physical health was poor this is a neutral factor see revproc_2003_61 sec_4 b ii all factors weighed and considered the court finds that it would not be inequitable under sec_6015 to hold petitioner liable for the unpaid tax vi conclusion the court found the testimony of petitioner to be sincere it appears from the record that when petitioner and mr magee divorced he left petitioner and their child with scant financial resources and significant debt however since petitioner intended to file a joint_return with mr magee she should have been aware that each joint filer would be jointly and severally liable for any_tax shown due on the return the court is sympathetic to petitioner’s case nevertheless on this record the court concludes that respondent’s denial of equitable relief was appropriate therefore petitioner is not entitled to relief under sec_6015 and is liable for the amount shown due on the tax_return accordingly collection action by levy of petitioner’s unpaid tax_liability as reflected in the notice_of_determination may proceed the court has considered all of petitioner’s contentions arguments requests and statements to the extent not discussed herein we conclude that they are meritless moot or irrelevant to reflect the foregoing decision will be entered for respondent


internal_revenue_service national_office technical_advice_memorandum number release date index uil no case mis no tam-104462-03 cc psi b4 may taxpayer's name taxpayer's address taxpayer's identification no years involved date of conference legend taxpayer date date date year partnership trust a b c d e tam-104462-03 issue is paragraph b of the assignment of limited_partnership_interest in partnership that transfers a fractional interest in partnership having a certain fair_market_value effective for gift_tax purposes under sec_2511 of the internal_revenue_code conclusion paragraph b is not effective for gift_tax purposes facts on date taxpayer and his spouse formed partnership sec_2 of the partnership_agreement provides that taxpayer has a c general interest and a d limited interest in partnership on date in year taxpayer executed an assignment which reads assignor taxpayer desires to transfer as a gift to assignee trust that fraction of assignor’s limited_partnership_interest in partnership which has a fair_market_value on the date hereof of dollar_figurea pursuant to this assignment trust received an e interest in partnership from taxpayer on date taxpayer filed a form_709 united_states gift generation-skipping_transfer_tax return for year on the return taxpayer reported the value of gift the e interest to equal dollar_figureb an amount equal to dollar_figure less than dollar_figurea law and analysis 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_25_2511-1 of the gift_tax regulations provides that donative_intent on the part of the transferor is not an essential element in the application of the gift_tax to the transfer the application of the tax is based on the objective facts of the transfer and the circumstances under which it is made rather than on the subjective motives of the donor sec_2512 provides that if the gift is made in property the value thereof at the date of the gift shall be considered the amount_of_the_gift where property is transferred for less than an 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 shall be deemed a gift tam-104462-03 in 142_f2d_824 4th cir the donor transferred to two trusts benefitting his children the remainder interests in certain trusts created by his grandfather the donor’s trust_indenture contained the following provision the settlor is advised by counsel and satisfied that the present transfer is not subject_to federal gift_tax however in the event it should be determined by final judgment or order of a competent federal court of last resort that any part of the transfer in trust hereunder is subject_to gift_tax it is agreed by all the parties hereto that in that event the excess property hereby transferred which is decreed by such court to be subject_to gift_tax shall automatically be deemed not to be included in the conveyance in trust hereunder and shall remain the sole property of the settlor free from the trust hereby created the fourth circuit_court of appeals concluded that the provision was a condition_subsequent and void because contrary to public policy the court_of_appeals explained that the condition was contrary to public policy because i it has a tendency to discourage the collection of the tax by the public officials charged with its collection since the only effect of an attempt to enforce the tax would be to defeat the gift ii the effect of the condition would be to obstruct the administration of justice by requiring the courts to pass upon a moot case if the condition were valid and the gift was subject_to tax the only effect of the holding would be to defeat the gift so that it would not be subject_to tax and iii the condition is to the effect that the final judgment of a court is to be held for naught commissioner v procter f 2d pincite the tax_court reached a similar conclusion in 87_tc_78 in that case a husband and wife transferred shares of stock in a closely_held_corporation to each of their three sons the donors and donees executed a gift adjustment agreement providing that if it should be finally determined for federal gift_tax purposes that the fair_market_value of each share of stock transferred exceeded or was less than dollar_figure an adjustment will be made in the number of shares constituting each gift so that each donor will give to each donee the maximum number of shares the total value of which will be dollar_figure from each donor to each donee and a total of dollar_figure from each donor to each donee the court concluded that the gift adjustment clause was void as contrary to public policy see also estate of mcclendon v commissioner tcmemo_1993_459 the service reached a similar conclusion in revrul_86_41 1986_1_cb_300 in that ruling a transferred an interest in a tract of income-producing real_property to b tam-104462-03 under the deed b received a one-half undivided_interest in the property in situation the deed provided that if for federal gift_tax purposes the service determined the that value of the one-half interest was more than dollar_figure then b’s interest would be reduced so that its value equaled dollar_figure under local law the adjustment clause operated as a condition_subsequent thus if the service determined the gift was more than dollar_figure the adjustment clause would effectively reconvey to a a fractional share of the property sufficient to reduce the value of b’s interest to dollar_figure as of the date of the gift the revenue_ruling concludes that the adjustment clause will be disregarded for federal tax purposes and consequently the value_of_the_gift will be determined without regard to the adjustment clause in this case paragraph b is similar to the clauses in ward and revrul_86_41 in the instant case taxpayer transferred an e interest in partnership to trust pursuant to the assignment however if the service determines that the value of the e interest is greater than dollar_figurea and paragraph b is given effect then pursuant to paragraph b the percentage interest in partnership that exceeds the value of dollar_figurea would be retransferred to taxpayer such a clause is void as contrary to public policy taxpayer argues that paragraph b is distinguishable from the clauses in proctor because paragraph b is purportedly a definitional clause not a formula_clause a different label does not nullify the effect paragraph b would have on the gift the taxpayer argues that the donor gets nothing back as he never intended to transfer any interest beyond that having a value of dollar_figurea however pursuant to the assignment trust received an e interest in partnership from taxpayer if paragraph b is given effect and the value of the e interest as finally determined by the service is greater than dollar_figurea a certain percentage of the partnership_interest held by trust would be retransferred to taxpayer this is the type of clause that the courts in proctor and ward conclude are void as contrary to public policy accordingly in conclusion paragraph b is void as contrary to public policy and the service will make adjustments to the gift_tax on the year return to reflect the value of the e interest as finally determined by the service caveat a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 provides that it may not be used or cited as precedent


tcmemo_2004_95 united_states tax_court alden l clopton and yolanda y clopton petitioners v commissioner of internal revenue respondent docket no filed date frank sommerville for petitioners w lance stodghill for respondent memorandum opinion goeke judge respondent determined a deficiency in petitioners’ federal_income_tax of dollar_figure the sole issue for decision is whether a lump-sum amount received in exchange for an interest in a_trust holding the right to receive future annual lottery payments is ordinary_income or capital_gain we hold under the substitute_for_ordinary_income doctrine that the lump-sum amount is ordinary_income background the parties submitted this case fully stipulated under rule the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioners mr clopton and mrs clopton resided in pearland texas at the time they filed their petition mr clopton and two coworkers participated in a lottery pool to purchase tickets costing dollar_figure each for the date texas lottery drawing one of the purchased tickets was the winning ticket for the lottery drawing the prize for the lottery drawing was valued at dollar_figure million and was payable in annual installments of dollar_figure in date mr clopton r l littleton iii freddie lofton joseph hill and sally hill as trustors established the date lottery trust the trust under the terms of an amended trust agreement trust agreement mr clopton and the other trustors granted assigned and delivered all their rights title and interests in the lottery ticket to the trust mr clopton held a one-third beneficial_interest in the trust and 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure each of the other trustors held a one-sixth beneficial_interest the trust agreement provides that the trust shall within business days after the receipt of any cash amount from the texas lottery commission distribute all cash amounts received by the trust to the beneficiaries in proportion to their respective beneficial interests in the trust a portion or all of each beneficial_interest could be assigned to any other person or to any organization the first prize payment was made in date with subsequent installments to be paid on or about june of every year continuing through june there is no evidence that the trust has held any other_property or has been involved in any other activity on date mr clopton and singer asset finance co llc singer entered into a sale agreement for lottery prize payments of alden clopton and terms rider to sale agreement for lottery prize payments of alden clopton the sale agreements which provided that mr clopton’s interest in the rights title and interest in the lottery prize were sold and assigned to singer under the terms of the sale agreements annual payments of dollar_figure payable on or about june of the years through were sold to singer for dollar_figure the sale agreements provided that the law of texas required the parties to consummate an agreement and to obtain a court order directing the texas lottery commission to make the payments to singer the record is unclear whether singer ultimately received the payments from the trust or directly from the texas lottery commission the sale agreements also provided that mr clopton was the sole owner of the portion of the lottery prize being assigned to singer free and clear of any right interest or claim of any other person or entity and mr clopton had not previously assigned pledged or otherwise encumbered his rights in the lottery prize finally the sale agreements stated the lottery law in texas has been interpreted as not permitting voluntary assignments of lottery prize payments however the lottery law does not prohibit the voluntary assignment of a beneficial_interest in a_trust the record_owner of the lottery prize is the june 4th lottery trust lottery winner mr clopton is a beneficiary of the june 4th lottery trust and desires to assign his entire beneficial_interest in said trust to purchaser singer the right to receive the and payments was not sold or assigned on date the parties to the sale agreements filed with the probate_court for travis county texas travis county probate_court a joint petition for a declaratory_judgment allowing mr clopton to assign all or a portion of his beneficial_interest in the trust on date the travis county probate_court issued a final declaratory_judgment the declaratory_judgment allowing the assignment of mr clopton’s beneficial_interest in the trust for the years through singer issued to mr clopton a form 1099-b proceeds from broker and barter_exchange transactions for the form 1099-b showed proceeds from the sale of stocks bonds etc of dollar_figure petitioners jointly filed a form_1040 u s individual_income_tax_return for on schedule d capital_gains_and_losses petitioners reported the assignment of the future annual payments of dollar_figure to singer as a sale of a capital_asset held more than year petitioners reported a sales_price of dollar_figure a cost or other basis of dollar_figure and a long-term_capital_gain of dollar_figure on date respondent issued a notice_of_deficiency to petitioners for the year in the notice respondent determined that the dollar_figure received from singer was ordinary_income respondent determined that the cost or other basis reported on petitioners’ return with respect to the amount received from singer was zero petitioners reported on their joint_return for a short- term capital_loss of dollar_figure on schedule d capital_gains_and_losses for unrelated transactions due to a scrivener’s error 2the record does not reflect how petitioners computed the cost or other basis amount of dollar_figure petitioners have not argued or elaborated on brief with respect to this point nor have they argued that if we find for respondent then this basis amount must be considered in calculating the amount of ordinary_income resulting from the sale to singer the notice_of_deficiency failed to state the proper adjustment thereby denying petitioners the benefit of this capital_loss the parties agree that petitioners are entitled to a short-term_capital_loss adjustment subject_to the limitations on the amount of such adjustment if respondent ultimately prevails in this case discussion the parties dispute whether the dollar_figure received by mr clopton from singer is ordinary_income or capital_gain our resolution of the issue presented does not depend on who has the burden_of_proof in this case resolution of this issue depends on whether the sale to singer involved a capital_asset within the meaning of sec_1221 sec_1221 provides the following definition of the term capital_asset sec_1221 capital_asset defined a in general for purposes of this subtitle the term capital_asset means property held by the taxpayer whether or not connected with his trade_or_business but does not include-- stock_in_trade of the taxpayer or other_property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable_year or property held by the taxpayer primarily_for_sale_to_customers in the ordinary_course_of_his_trade_or_business property used in his trade_or_business of a character which is subject_to the allowance for depreciation provided in sec_167 or real_property used in his trade_or_business a copyright a literary musical or artistic composition a letter or memorandum or similar_property held by-- a a taxpayer whose personal efforts created such property b in the case of a letter memorandum or similar_property a taxpayer for whom such property was prepared or produced or c a taxpayer in whose hands the basis of such property is determined for purposes of determining gain from a sale_or_exchange in whole or part by reference to the basis of such property in the hands of a taxpayer described in subparagraph a or b accounts or notes receivable acquired in the ordinary course of trade_or_business for services rendered or from the sale of property described in paragraph a publication of the united_states government including the congressional record which is received from the united_states government or any agency thereof other than by purchase at the price at which it is offered for sale to the public and which is held by-- a a taxpayer who so received such publication or b a taxpayer in whose hands the basis of such publication is determined for purposes of determining gain from a sale_or_exchange in whole or in part by reference to the basis of such publication in the hands of a taxpayer described in subparagraph a petitioners contend that capital_gains treatment is appropriate because a beneficial_interest in the trust was assigned and the future annual lottery payments were payable to the trust and not to singer petitioners claim that because an interest in a_trust not used in a taxpayer’s trade_or_business is not excluded from capital_asset status the sale of an interest in a_trust results in capital_gain this court and the court_of_appeals for the ninth circuit have previously addressed the issue of whether a lump-sum amount received in exchange for the assignment of the right to receive future annual lottery payments is ordinary_income or capital_gain respondent contends that these cases are controlling for purposes of deciding the present issue in 119_tc_1 the taxpayer won a california state lottery prize and assigned his right to receive annual lottery payments to a_trust id pincite n he and his wife took all subsequent actions with respect to the lottery payments and took the position that all income of the trust was includable in their income id a portion of each of of the future annual lottery payments was subsequently assigned to singer in exchange for a lump-sum payment id pincite 3on brief respondent also raises the issue of whether the lump-sum payment constitutes ordinary_income because of the grantor_trust_rules under secs this issue was not raised in the notice_of_deficiency and it is unnecessary for us to address it we held that the right to receive such future annual payments does not constitute a capital_asset within the meaning of sec_1221 and therefore the lump-sum payment was ordinary_income id pincite we have subsequently relied on and followed our analysis in davis see simpson v commissioner tcmemo_2003_ johns v commissioner tcmemo_2003_140 boehme v commissioner tcmemo_2003_81 in simpson v commissioner supra we addressed a situation with facts almost identical to the instant case the lottery winner in that case assigned his lottery prize to a_trust of which he was sole trustee like the taxpayers in davis v commissioner supra the lottery winner took the position that all income of the trust was includable in his income id at n the lottery winner subsequently entered into assignment agreements whereby the right to receive all future annual lottery payments for the years through and a portion of the payments for and was assigned to singer the trust retained the right to a portion of the payments for and and the right to receive future annual payments for the years and was not assigned relying on our analysis in davis we held that the right to receive the future annual lottery payments did not constitute a capital_asset additionally we noted that the right to receive future annual lottery payments is distinguishable from currency contracts stocks bonds and options because the taxpayers received the lump-sum payment as a substitute for the right to receive ordinary_income id at n the most recent case on this issue is 356_f3d_1179 9th cir which involved a taxpayer who assigned to a third party his right to future lottery payments from the state of oregon the court_of_appeals for the ninth circuit thoroughly analyzed supreme court precedent regarding the definition of a capital_asset and concluded that under the substitute_for_ordinary_income doctrine the taxpayer’s right to the future payments was not a capital_asset id pincite the court_of_appeals ultimately rejected the taxpayer’s argument that the right to future lottery payments is a capital_asset within the meaning of sec_1221 and sec_1222 id pincite in analyzing whether the right to future lottery payments was a capital_asset the court_of_appeals for the ninth circuit relied on supreme court precedent and looked at whether there was an underlying investment of capital and an accretion in value over the cost of any underlying asset held id pincite the court_of_appeals concluded capital_gains treatment was not appropriate because the taxpayer made no underlying investment in exchange for the right to future payments and because there was no underlying investment there was no cost to the taxpayer for the right to receive the payments ie the money he received for the sale of his right did not reflect an increase of value above the cost of any underlying capital_asset id pincite the court_of_appeals also rejected the taxpayer’s argument that the substitute_for_ordinary_income doctrine was limited to specific fact situations none of which were present in the case the court noted that treating the sale of a lottery right as a capital_gain would reward lottery winners who elect to receive periodic_payments in lieu of a direct lump-sum payment from the state and then sell that right to a third party id pincite the court stated nothing in the revenue code compels the creation of such a dichotomous system for the taxation of lottery winnings the purpose of narrowly construing the term capital_asset under the substitute_for_ordinary_income doctrine is to protect the revenue against artful devices that undermine the revenue code’s standard treatment of ordinary_income and capital_gains that is precisely what maginnis has attempted here id pincite5 finally the court_of_appeals rejected the taxpayer’s argument that capital_gains treatment was appropriate because his lottery right is a debt_instrument under sec_1275 id pincite petitioners relying on 157_f2d_235 2d cir revg 5_tc_714 and 137_f2d_454 8th cir revg 46_bta_484 contend that property not within the statutory exclusions for capital assets produces capital_gain on its sale we have previously recognized that the cases cited by petitioners were decided before relevant supreme court decisions applying the substitute_for_ordinary_income doctrine 41_tc_476 as explained in numerous supreme court cases and the recent decisions discussed above the fact that certain property is not within the statutory exclusions for capital assets does not automatically mean that the property is a capital_asset see eg 485_us_212 n 364_us_130 356_us_260 united_states v maginnis supra pincite2 davis v commissioner t c pincite if lump-sum consideration received for the property is essentially a substitute for what would otherwise be received at a future time as ordinary_income then the consideration may not be taxed as a capital_gain commissioner v p g lake inc supra pincite united_states v maginnis supra pincite the appropriate inquiry in this case is whether the dollar_figure received for the property transferred to singer was essentially a substitute for future payments of ordinary_income petitioners claim that mr clopton transferred a beneficial_interest in the trust not the right to future lottery payments and that the interest is a capital_asset petitioners claim that the future payments were required to be made directly to the trust not to singer petitioners imply that this means that despite the fact that they did not make an underlying investment in exchange for their right to future lottery payments or for the beneficial_interest in the trust capital_gains treatment is appropriate there is no question that the lottery payments in the first instance were ordinary_income see united_states v maginnis supra pincite the trust was simply a conduit to facilitate the distribution of the lottery proceeds the character of the lottery payments as ordinary_income did not change as a result of the payments being distributed through the trust sec_652 see also 89_tc_1101 54_tc_1490 n affd 440_f2d_170 lst cir thus the sale of the future lottery payments to singer lacked the requisite realization of appreciation in value accrued over a substantial period of time that is typically necessary for capital_gains treatment regardless of whether singer bought rights to the trust distributions or direct lottery payments united_states v maginnis supra pincite citing commissioner v gillette motor transp inc supra pincite at the time the agreement between mr clopton and singer was made texas law prohibited the assignment of rights to a lottery prize tex govt code ann sec_466 vernon however texas law changed effective date prior to the issuance of the declaratory_judgment assigning mr clopton’s beneficial_interest in the trust to singer id sec_466 vernon supp the new law allows the assignment of the right to receive lottery payments to a person designated by court order excepting only the lottery payments due within the final years of the prize payment schedule id sec_466 vernon supp it is not clear in this case whether subsequent to the declaratory_judgment the lottery payments were made through the trust or directly to singer the payment of the lottery prize installments to the trust as the declaratory_judgment provides is inconsistent with the sale agreements between mr clopton and singer which provide that a court order would be obtained to direct that the lottery payments be paid directly to singer however we do not find it significant whether the lottery payments were paid directly to the trust or to singer because the trust agreement specifically provides that within days of payment from the texas lottery commission the lottery proceeds shall be distributed to the beneficiaries in proportion to their respective interests the substance of the transfer to singer is the right to receive future annual lottery payments of dollar_figure for the years through as recently noted by the court_of_appeals for the ninth circuit the supreme court has narrowly construed the term capital_asset when taxpayers have made transparent attempts to transform ordinary_income into capital_gain in ways that undermine congress’ reasons for differentially taxing capital_gains united_states v maginnis f 3d pincite citing commissioner v gillette motor transp inc supra pincite additionally the court_of_appeals for the tenth circuit has stated it is well settled that the incidence of taxation depends upon the substance of a transaction that tax consequences which arise from gains from a sale of property are not finally to be determined solely by the means employed to transfer legal_title and that the government may look at the realities of a transaction and determine its tax consequences despite the form or fiction with which it was clothed 209_f2d_761 10th cir citing 308_us_473 affg 19_tc_718 324_us_331 179_f2d_873 10th cir we believe that these statements are applicable to the transfer of the future annual lottery payments to singer under the facts of the instant case we find no meaningful distinction between the transfer of the interest in the trust and the transfer of the right to receive the lottery payments from the texas lottery commission because both involve the right to receive future ordinary_income and the sale to singer did not result in an accretion in value over any cost of the property after reviewing pertinent caselaw we are not persuaded that the transfer to singer involved the sale of a capital_asset accordingly we hold that the lump-sum amount of dollar_figure received by mr clopton is ordinary_income decision will be entered under rule 4we express no opinion whether a purchaser such as singer of a lottery right from a lottery winner who then sells that right to a third party would receive ordinary_income or capital_gain on that sale see 356_f3d_1179 n 9th cir


internal_revenue_service department of the treasury number release date ndex number washington dc person to contact telephone number refer reply to cc psi - plr-119065-00 date date legend trust - trustor - spouse - marital trust - family_trust - dollar_figureq - dollar_figurer - dollar_figures - dollar_figuret - dollar_figurev - dollar_figurew - dollar_figurex - dollar_figurey - dollar_figurez - year - year - year - year - year - date - dear this is in reference to a letter dated date from your authorized representative requesting a ruling on the federal estate and generation-skipping_transfer_tax consequences resulting from the establishment of various trusts under the terms of trust trustor created trust a revocable_trust in year and subsequently amended it on three occasions trustor died in year and the full value of the trust property was includible in trustor’s gross_estate article second of trust provides that upon trustor’s death the trustee is to pay all expenses of trustor’s last illness funeral costs of administration and allowable claims from the principal of trust the trustee is also to pay all estate inheritance and generation-skipping_transfer gst taxes that result from trustor's death from trust without apportionment article fourth provides that if spouse survives trustor the trustee is to establish a marital trust marital trust is to be funded with the smallest pecuniary amount which if allowed as a federal estate_tax_marital_deduction will result in the least possible federal estate_tax payable by reason of trustor's death article fourth provides that in computing the pecuniary amount the values of assets as finally determined for federal estate_tax purposes are to control for all other purposes values determined as of the date of distribution control the pecuniary marital bequest is to carry with it as income and not as principal its proportionate share of the income earned following trustor's death article fourth authorizes trustor’s personal representative to elect any part or all the marital trust for the estate_tax_marital_deduction if a partial election is made the trustee is to administer the separate portions as separate trusts article fourth also provides that the trustee is to divide the marital trust into two separate funds one fund is to be equal to the gst tax exemption available upon trustor's death less the amount of gst_exemption allocated to the family_trust and less any additional_amount of gst_exemption that was previously allocated this fund is referred to in trust as the generation skipping fund the balance of the marital trust is referred to as the regular fund under article fourth spouse is entitled to the net_income from both funds to be paid in convenient periodic_payments at least quarterly and to so much of the principal as the trustee determines is necessarily required for spouse's support health medical dental hospital and nursing expenses in exercising this discretion the trustee is to consider any income or other resources available to spouse any distributions of principal made to the spouse are to be charged first to the portion of the marital trust for which the qualified_terminable_interest_property qtip_election had been made upon spouse’s death the assets of the generation skipping fund are to pass in further trust for the benefit of trustor’s children and their issue under the terms of article sixth of trust the property of the regular fund is to be distributed in specified amounts to various charitable organizations and the balance is to be divided into equal shares one share for each then living child of trustor and one share for the then living descendants collectively of each deceased child of trustor under article fifth the balance of the trust estate is to be held as the family_trust spouse is to receive the net_income of the family_trust in convenient periodic_payments at least quarterly during spouse’s lifetime spouse may also receive distributions of principal in the discretion of the trustee for spouse’s support health medical dental hospital and nursing expenses upon spouse’s death spouse possesses a testamentary limited_power_of_appointment to distribute the remaining principal of the family_trust in such amounts as spouse designates to trustor’s issue if spouse fails to exercise the limited testamentary_power_of_appointment the family_trust property is to pass under the terms of article sixth under article sixth the balance of the generation skipping fund and the family_trust to the extent that spouse fails to exercise her limited_power_of_appointment is to be divided into equal shares to create one share for each then living child of trustor and one share for the then living descendants of each deceased child of trustor each child is to receive the income from his or her share in at least quarterly payments principal may be distributed for the child’s support education health or medical dental hospital and nursing expenses article sixth paragraph b provides that upon the death of such child the balance of the trust funds shall be paid to those persons whom and in the shares which such child shall designate in his will who are my issue and such child shall have this limited_power_of_appointment to dispose_of the remaining principal by his duly probated will if such child fails to exercise his limited_power_of_appointment as to all such trust property the trust property which he shall not effectively have appointed shall be distributed to such child’s issue per stirpes and each such share shall be held in further trust article thirteenth provides that the trustor's personal representative after conferring with the trustee has the authority to allocate any portion of trustor's gst_exemption to any property as to which trustor is the transferor including any property transferred by trustor during life as to which trustor did not make an allocation prior to death article thirteenth also provides that the trustee of the successor trusts established under trust has the authority to divide any property in any trust held under trust with an inclusion_ratio of neither one nor zero into two separate trusts representing two fractional shares of the property being divided one to have an inclusion_ratio of one and the other to have an inclusion_ratio of zero the federal estate_tax_return for trustor’s estate was filed on date on schedule m marital_deduction it was indicated that the total amount allocated to the marital trust under the pecuniary formula described above was dollar_figureq a partial_qtip_election was made with respect to of dollar_figureq or dollar_figurex the nonelected portion was valued at dollar_figurey on schedule r of trustor’s form_706 trustor's personal representative signified the making of the reverse_qtip_election under sec_2652 also on schedule r the personal representative signified the division of the elected portion of the marital trust dollar_figurex into a qtip gst exempt marital trust valued at dollar_figurez and a qtip non-gst exempt marital trust valued at dollar_figurew the non-qtip portion of the marital trust was valued at dollar_figurey and the amount of property allocated to the family_trust was valued at dollar_figurev on schedule r the personal representative allocated trustor's remaining gst_exemption in the amounts as follows dollar_figurez to the qtip gst-exempt marital trust dollar_figurey to the non-qtip gst exempt marital trust and dollar_figurev to the family_trust in year prior to the completion of the funding of the marital trust spouse individually and as personal representative of trustor's estate and as a cotrustee of trust agreed to accept assets in the amount dollar_figuret from trustor's estate and to treat such assets as if they had been made as a principal distribution from the marital trust to spouse in year dollar_figures was added to the marital trust in year upon examination of the marital trust records by the successor corporate cotrustee it was determined that the marital trust had been underfunded by a small percentage in the amount of dollar_figurer consequently dollar_figurer was transferred from trust to the marital trust at that time to increase the funding of the marital trust to dollar_figureq it is represented that the successor corporate trustee has severed the marital trust into a qtip non-gst exempt marital trust a qtip gst exempt marital trust and non-qtip gst exempt marital trust on a fractional basis as authorized by the trust agreement severance of the marital trust was not accomplished prior to the filing of the trustor’s estate_tax_return the following rulings are requested the severance of the marital trust into the qtip gst exempt marital trust the qtip non-gst exempt marital trust and the non-qtip gst exempt marital trust was authorized by the governing instrument and complied with the requirements of sec_20_2056_b_-7 of the estate_tax regulations and sec_26_2654-1 of the generation-skipping_transfer_tax regulations and therefore is recognized for purposes of chapter under sec_2642 the inclusion ratios of the qtip gst exempt marital trust and the non-qtip gst exempt marital trust are equal to zero under sec_2642 the inclusion_ratio of the family_trust is equal to zero under sec_2642 the inclusion_ratio of the qtip non-gst exempt marital trust is equal to one the power or appointment granted to each child of trustor over the gst exempt assets of the child's trust under article sixth of the trust will not be considered a general_power_of_appointment for purposes of sec_2041 ruling sec_2056 provides that the value of the taxable_estate is except as limited by sec_2056 determined by deducting from the value of the gross_estate an amount equal to the value of any interest in property that passes or has passed_from_the_decedent to the surviving_spouse under sec_2056 and b where upon the lapse of time on the occurrence of an event or contingency or on the failure of an event or contingency to occur an interest passing to the surviving_spouse will terminate or fail no deduction is allowed with respect to such interest if an interest in the property passes or has passed for less than an adequate_and_full_consideration in money_or_money's_worth from the decedent to any person other than the surviving_spouse or the estate of such spouse and if by reason of such passing such person may possess or enjoy any part of such property after such termination or failure of the interest passing to the surviving_spouse sec_2056 provides that qualified_terminable_interest_property for purposes of sec_2056 is treated as passing to the surviving_spouse and no part of such property is treated as passing to any person other than the surviving_spouse under sec_2056 qualified_terminable_interest_property is property which passes from the decedent in which the surviving_spouse has a qualifying_income_interest_for_life and for which the election under sec_2056 is made sec_20_2056_b_-7 provides that the election may relate to all or any part of property that meets the requirements of sec_2056 provided that any partial election must be made with respect to a fractional or percentage share of the property so that the elective portion reflects its proportionate share of the increase or decrease in value of the entire property for purposes of applying sec_2044 or sec_2519 the fraction or percentage may be defined by formula sec_20_2056_b_-7 provides that in general a_trust may be divided into separate trusts to reflect a partial election that has been made or is to be made if authorized under the governing instrument or otherwise permissible under local law any such division must be accomplished no later than the end of the period of estate administration if at the time of the filing of the estate_tax_return the trust has yet to be divided the intent to divide must be unequivocally signified on the estate_tax_return under sec_20_2056_b_-7 the division of the trust must be done on a fractional or percentage basis to reflect the partial election however the separate trusts do not have to be funded with a pro_rata portion of each asset held by the undivided trust sec_2652 provides that in the case of any trust with respect to which a deduction is allowed to the decedent under sec_2056 by reason of subsection b thereof the estate of the decedent may elect to treat all of the property in such trust for purposes of chapter as if the election to be treated as qualified_terminable_interest_property had not been made under sec_26 b an election made under sec_2652 is made on the return on which the qtip_election is made sec_26_2654-1 provides that the severance of a_trust that is included in the transferor's gross_estate or created under the transferor's will into two or more trusts is recognized for purposes of chapter if - i the trust is severed pursuant to a direction in the governing instrument providing that the trust is to be divided upon the death of the transferor or ii the governing instrument does not require or otherwise direct severance but the trust is severed pursuant to discretionary authority granted either in the governing instrument or under local law and a the terms of the new trusts provide in the aggregate for the same succession of interests and beneficiaries as are provided in the original trust b the severance occurs or a reformation proceeding if required is commenced prior to the date prescribed for filing the federal estate_tax_return including extensions actually granted for the estate of the transferor and c either- the new trusts are severed on a fractional basis if severed on a fractional basis the separate trusts need not be funded with a pro_rata portion of each asset held by the undivided trust the trusts may be funded on a non- prorata basis provided funding is based on either the fair_market_value of the assets on the date of funding or in a manner that fairly reflects the net appreciation or depreciation in the value of the assets measured from the valuation_date to the date of funding or if the severance is required by the terms of the governing instrument to be made on the basis of a pecuniary amount the pecuniary payment is satisfied in a manner that would meet the requirements of sec_26_2654-1 if it were paid to an individual sec_26_2654-1 provides that if the governing instrument of a_trust or local law authorizes the severance of the trust a severance pursuant to that authorization is treated as meeting the requirements of sec_26_2654-1 if the executor indicates on the federal estate_tax_return that separate trusts will be created or funded and clearly sets forth the manner in which the trust is to be severed and the separate trusts funded sec_20_2056_b_-7 permits the severance of the marital trust into an elected portion and a nonelected portion article fourth of trust authorizes trustor’s personal representative to elect any part or all the marital trust for the estate_tax_marital_deduction if a partial election is made the trustee is to administer the separate portions as separate trusts trust therefore authorizes the division of the marital trust into a qtip portion and a non-qtip portion to reflect that a partial_qtip_election has been made the intent to divide the marital trust to reflect the partial election was unequivocally signified on the estate_tax_return in addition article thirteenth of trust authorizes the division of trust property into separate trusts in order to create separate trusts having an inclusion_ratio of one and an inclusion_ratio of zero in accordance with sec_26_2654-1 on schedule r of trustor's form_706 the personal representative signified the division of the trust property into four trusts the qtip gst exempt marital trust the non-qtip gst exempt marital trust the qtip non-gst exempt qtip marital trust and the family_trust and the allocation of trustor’s remaining gst_exemption to the non-qtip gst exempt marital trust in the amount of dollar_figurey to the qtip gst exempt marital trust in the amount of dollar_figurez and to the family_trust in the amount of dollar_figurev the severance pursuant to that authorization is treated as meeting the requirements of sec_26_2654-1 since the executor indicated on the federal estate_tax_return that separate trusts would be created or funded and clearly set forth the manner in which the trust was to be severed and the separate trusts funded accordingly we conclude that the severance of the nonelected portion of the marital trust and the portion of the marital trust for which a qtip_election was made is authorized under sec_20_2056_b_-7 the division of the elected portion of the marital trust into the qtip gst exempt marital trust and the qtip non-gst exempt marital trust is authorized by the governing instrument and complied with the requirements of sec_26_2654-1 accordingly the division of the marital trust into these three separate trusts is recognized for purposes of chapter ruling sec_2 sec_2602 provides that the gst tax is computed in general by multiplying the taxable_amount by the applicable_rate sec_2641 provides that the applicable_rate is determined by multiplying the maximum_federal_estate_tax_rate by the inclusion_ratio sec_2631 provides that for purposes of determining the inclusion_ratio every individual is allowed a gst_exemption of dollar_figure which may be allocated by the individual or his executor to any property with respect to which the individual is the transferor sec_2642 provides that the inclusion_ratio with respect to any property transferred in a gst is the excess if any of over the applicable_fraction determined for the trust from which the transfer is made or in the case of a direct_skip the applicable_fraction determined for the skip the applicable_fraction is a fraction in which the numerator is the amount of the gst_exemption allocated to the trust or in the case of a direct_skip allocated to the property transferred in the skip and the denominator is the value of the property transferred to the trust or involved in the direct_skip reduced by any federal estate_tax or state death_tax actually recovered from the trust attributable to the property and any charitable deduction allowed under sec_2055 or sec_2522 with respect to the transfer sec_2652 provides generally that for purposes of chapter the term transferor means in the case of any property subject_to the tax imposed by chapter the decedent sec_2652 provides that in the case of any trust with respect to which a deduction is allowed to the decedent under sec_2056 by reason of subsection b thereof the estate of the decedent may elect to treat all of the property in such trust for purposes of chapter as if the election to be treated as qtip property had not been made in the present case the trustor is the transferor with respect to the qtip gst exempt marital trust and the qtip non-gst exempt marital trust because a reverse_qtip_election was made with respect to these trusts to treat the property in the trusts for purposes of chapter as if the election to be treated as qtip had not been made the trustor is also the transferor with respect to the family_trust and the non-qtip gst exempt marital trust because the property passing to these trusts was included in the trustor's gross_estate the qtip gst exempt marital trust was funded with an amount equal to dollar_figurez the non-qtip gst exempt marital trust was funded with an amount equal to dollar_figurey and the family_trust was funded in the amount of dollar_figurev trustor's personal representative allocated portions of trustor’s remaining gst_exemption on schedule r of trustor's form_706 as follows dollar_figurez to the qtip gst exempt marital trust dollar_figurey to the non-qtip gst exempt marital trust and dollar_figurev to the family_trust thus assuming these three trusts were properly funded as represented each of these trusts will have an applicable_fraction of one and an inclusion_ratio of zero for gst purposes the qtip non-gst exempt marital trust was funded with dollar_figurew no gst_exemption allocation was made to this trust thus the qtip non-gst exempt marital trust will have an applicable_fraction of zero and an inclusion ration of one ruling sec_2041 provides in part for the inclusion in the gross_estate the value of 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 in part that the term general_power_of_appointment means a power that is exercisable in favor of the decedent the decedent’s estate the decedent’s creditors or the creditors of the 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 health education support or maintenance of the decedent is not deemed a general_power_of_appointment sec_20_2041-1 provides that a power_of_appointment is not a general_power_of_appointment if by its terms it is exercisable only in favor of one or more persons or classes other than the decedent or his creditors or the decedent’s estate or the creditors of his estate as described above upon the death of spouse article sixth provides that the balance of the qtip gst exempt marital trust and the family_trust is to be divided into equal shares to create one share for each then living child of trustor and one share for the then living descendants of each deceased child of trustor each child is to receive the income from his or her share in at least quarterly payments principal may be distributed for the child's support education health or medical dental hospital and nursing expenses upon the death of such child the balance of the trust funds shall be paid to those persons whom and in the shares which such child shall designate in his will who are my issue and such child shall have this limited_power_of_appointment to dispose_of the remaining principal by his duly probated will if such child fails to exercise his limited_power_of_appointment as to all such trust property the trust property which he shall not effectively have appointed shall be distributed to such child’s issue per stirpes and each such share shall be held in further trust a child of trustor is a member of the class of issue of trustor and therefore could arguably appoint his or her child’s share to his or her estate however because the trustor has described the child’s power as a limited_power_of_appointment we construe the power as one that would prohibit the exercise of the power on behalf of the child the child’s creditors the child’s estate or the creditors of the child’s estate accordingly the power_of_appointment granted to each child of trustor to appoint the child's share among individuals who are issue of trustor constitutes a power_of_appointment that is not a general_power_of_appointment within the meaning of sec_2041 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under the cited provisions or any other provision of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent 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 certified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely lorraine e gardner acting senior technician reviewer branch passthroughs and special industries enclosure copy for purposes cc


internal_revenue_service number release date index number ----------------------------- ---------- -------------------------------------------------------- ----------------------------- ----------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact -------------- id no ----------------- telephone number -------------------- refer reply to cc ita plr-147728-11 date date taxpayer ------------------------------------------------------------ year a b c d f g year h year j ------- ------------------------------------------------------------------- -------------------------------------------- ----------------------------------------------------- -------------------------------------------------------------------------- ----------------------------------------------------------------------- ------- ------- dear ------------------ this letter refers to the taxpayer’s request for a private_letter_ruling for permission to revoke its election out of the installment_method for the sale of certain properties under of the internal_revenue_code code and 15a d of the income_tax regulations regulations in year a taxpayer sold properties b and c to f a related third party also in year a taxpayer sold property d to g a related third party as consideration for each of the properties taxpayer received promissory notes these promissory notes required the buyers to pay interest only each year until year h in year h any unpaid interest and the principal balance for the sale are to be paid in one lump sum inadvertently taxpayer’s accountant did not report the gain from the sales on the installment_method under sec_453 of the code but instead reported all of the gain on taxpayer’s year a income_tax return taxpayer first became aware of the error in year j and subsequently requested this ruling plr-147728-11 sec_453 of the code provides that income from an installment_sale shall be taken into account under the installment_method sec_453 provides that a shall not apply to any sale if the taxpayer elects not to have a apply to the sale sec_453 of the code provides that except as otherwise provided by regulations an election under d with respect to a sale may be made only on or before the due_date prescribed by law including extensions for filing the taxpayer's return for the taxable_year in which the sale occurs such an election shall be made in the manner prescribed by the regulations sec_453 of the code provides that an election under d with respect to any sale may be revoked only with consent of the secretary sec_15a_453-1 of the regulations states that an election out of the installment_method may be revoked only with consent of the internal_revenue_service a revocation will not be permitted when one of its purposes is the avoidance of federal taxes or when the taxable_year in which any payment was received is closed in this case the information submitted indicates that taxpayer’s desire to revoke their election out of the installment_method is due to inadvertence rather than for the purpose of avoiding federal taxes further the taxpayer’s taxable years in which it received payments are not closed accordingly based on the information submitted taxpayer may revoke its election out of the installment_method of reporting under d of the code and report the gain on the sales of b c and d using the installment_method 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 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant plr-147728-11 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 ruling_request it is subject_to verification on examination sincerely christina m glendening assistant to the branch chief branch office of associate chief_counsel income_tax accounting cc


internal_revenue_service department of the treasury index number number release date washington dc person to contact telephone number refer reply to cc dom p si 1-plr-107346-99 date date legend x state d1 d2 a b c d pursuant to a power_of_attorney on file in this office this responds to your letter dated date submitted on behalf of x requesting a ruling that the rental income received by x from renting commercial real_estate properties is not passive_investment_income within the meaning of sec_1362 facts x was incorporated in state on d1 and elected under sec_1362 to be taxed as a subchapter_s_corporation effective d2 through x’s employees as well as through independent contractors x provides cc dom p si 1-plr-107346-99 various services to properties services provided in the last year include property inspection grounds maintenance and general upkeep and cleaning and trash removal x is also responsible for the maintenance and repair of the buildings their structural_components and operating systems in addition to the services provided to tenants x handles the usual leasing and administrative functions involved in overseeing the management of real_estate of x’s a employees b devote time to rental activities x received or accrued approximately c in rents and paid_or_incurred approximately d in relevant expenses in d3 on properties law and analysis except as provided in sec_1362 sec_1362 provides that a small_business_corporation may elect in accordance with the provisions of sec_1362 to be a subchapter_s_corporation sec_1362 provides that an election under sec_1362 terminates whenever the corporation i has accumulated_earnings_and_profits at the close of each of three consecutive tax years and ii has gross_receipts for each of such tax years more than percent of which are passive_investment_income except as otherwise provided in sec_1362 sec_1362 provides that the term passive_investment_income means gross_receipts derived from royalties rents dividends interest annuities and sales or exchanges of stock_or_securities sec_1_1362-2 of the income_tax regulations provides that rents means amounts received for_the_use_of or the right to use property whether real or personal of the corporation sec_1_1362-2 provides that rents does not include rents derived in the active trade_or_business of renting property rents received by a corporation are derived in an active trade_or_business of renting property only if based on all the facts and circumstances the corporation provides significant services or incurs substantial costs in the rental business generally significant services are not rendered and substantial costs are not incurred in connection with net leases whether significant services are performed or substantial costs are incurred in the rental business is determined based upon all the facts and circumstances including the number of persons employed to provide the services and the types and amounts of costs and expenses_incurred other than depreciation conclusion after applying the applicable law and regulations to the facts as presented in this cc dom p si 1-plr-107346-99 ruling_request we conclude that the rents x receives from properties are not passive_investment_income under d c i 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 specifically no opinion is expressed regarding x’s election to be taxed as a subchapter_s_corporation further the passive_investment_income rules of sec_1362 are completely independent of the passive_activity rules of sec_469 unless an exception under sec_469 applies the rental_activity remains passive for purposes of sec_469 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 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is also being to sent to x’s other authorized representative sincerely dianna k miosi chief branch office of the assistant chief_counsel passthroughs special industries enclosures copy of letter copy for sec_6110 purposes