internal_revenue_service number release date index nos control no cc ebeo tam-102993-00 february internal_revenue_service national_office technical_advice_memorandum district_director taxpayer’s name taxpayer’s address taxpayer’s ident no taxable years at issue_date of conference legend company a company b company c issue whether under the rules of sec_83 of the internal_revenue_code company a was entitled to deduct the compensation income that was includible in its employees’ gross incomes as a result of cancellation of certain nonlapse restrictions on their company a shares this technical_advice_memorandum revokes and replaces technical_advice_memorandum numbered facts as initially organized company a was a professional services corporation that was wholly owned by doctors as was required by state law from the outset all company a shares were substantially-vested and subject_to nonlapse book-value buyback provisions that would be triggered upon a doctor’s termination of employment with company a eventually the business of company a came to include the management of medical clinics in the doctors decided to sell their clinic-management business to company c and took the following integrated steps here in simplified form in preparation for the sale they canceled the book-value buyback provisions on their company a shares they then formed company b by causing company a to contribute their employment contracts with company a to company b in exchange therefor company a received all of the shares of company b they then caused company a to redeem of each outstanding company a share held by them and in consideration for the redemption they caused company a to transfer to each of them the number of company b shares equal to the number of company a shares then owned by them when so transferred the company b shares were substantially-nonvested a five-year_vesting period and subject_to nonlapse book-value buyback provisions that would be triggered upon the doctor’s termination of employment with company b thus after completion of these transactions the doctors’ medical practice was housed in company b the clinic-management business remained with company a and the doctors owned substantially-nonvested shares in company b in the same proportions that they owned substantially-vested shares in company a almost immediately thereafter the doctors sold their company a shares to company c for cash company a became a wholly-owned subsidiary of company c as part of this arrangement each doctor was required to repay an annually-decreasing portion of his company a shares’ sales_price to company a as liquidated_damages if he terminated employment with company b earlier than five years from the date of sale of the shares additionally an agreement was entered into between company a and company b under which company a agreed to perform specified management services for company b in exchange for stipulated annual fees in summary the results of these transactions were that the doctors had to continue their employment with company b so that company b could generate the management fees that it owed to company a their company b stock would substantially vest and they could avoid having to repay the sales_price of their company a shares the internal revenue service’s examination function and the companies agree that the doctors’ cancellation of the nonlapse restrictions on their company a shares was compensatory and substantially nonvested company a did not reflect the cancellation on its return filed for its short taxable_year during which the cancellation occurred rather company a treated the transaction as creating a credit to its common_stock and a debit to a capitalized asset as such companies a and c which file a consolidated_return have expensed the asset over time and thereby created a net_operating_loss applicable law and analysis under sec_83 if in_connection_with_the_performance_of_services property is transferred to anyone other than the service_recipient the excess of the fair_market_value of the property over the amount_paid for the property is included as compensation income in the service provider’s gross_income for the first taxable_year in which the rights to the property are transferable or not subject_to a substantial_risk_of_forfeiture substantially_vested for this purpose the fair_market_value of the property is determined on the date that the rights to the property become substantially_vested and without regard to restrictions that lapse under sec_83 of the code and sec_1_83-5 of the income_tax regulations if a nonlapse_restriction imposed on sec_83 property is canceled then unless the taxpayer establishes i that the cancellation was noncompensatory and ii that the person who would be allowed a deduction if the cancellation were treated as compensatory will treat the transaction as noncompensatory the excess of the fair_market_value of the property at the time of cancellation determined without regard to the restriction over the sum of i the fair_market_value of the property immediately before the cancellation taking the restriction into account and ii the amount if any paid for the cancellation is treated as compensation income for the taxable_year in which such cancellation occurs whether there has been a noncompensatory cancellation of a nonlapse_restriction under sec_83 depends upon the particular facts and circumstances ordinarily the fact that the service provider is required to perform additional services or that the salary or payment of such person is adjusted to take the cancellation into account indicates that the cancellation has a compensatory purpose on the other hand the fact that the original purpose of a restriction no longer exists may indicate that the purpose of the cancellation is noncompensatory thus for example if a so-called ’buy-sell’ restriction was imposed on a corporation’s stock to limit ownership of such stock and is being canceled in connection with a public offering of the stock the cancellation will generally be regarded as noncompensatory however the mere fact that the service_recipient is willing to forego a deduction under sec_83 is insufficient evidence to establish a noncompensatory cancellation of a nonlapse_restriction the refusal by a corporation or shareholder to repurchase stock of the corporation that is subject_to a permanent right_of_first_refusal will generally be treated as a cancellation of a nonlapse_restriction however the preceding sentence does not apply where there is no nonlapse_restriction for example where the price to be paid for the stock subject_to the right_of_first_refusal is the fair_market_value of the stock additionally sec_83 does not apply where immediately after the cancellation of a nonlapse_restriction the property is still substantially nonvested and no sec_83 election has been made with respect to the property in such a case the rules of sec_83 and sec_1_83-1 apply to the property under sec_1_83-1 of the regulations if substantially-nonvested property is disposed of in an arm’s length transaction the service provider realizes compensation income in an amount equal to the excess of the amount_realized on the disposition over the amount if any paid for the property however compensation is not recognized to the extent that the service provider receives substantially-nonvested property for the disposition see sec_1_83-1 under sec_83 the service_recipient is allowed a compensation expense deduction under sec_162 of the code in an amount equal to the amount included in the service provider’s gross_income under sec_83 under the general_rule of sec_83 the deduction is allowed for the service recipient’s taxable_year in which or with which ends the service provider's taxable_year in which the amount is included in gross_income however sec_1_83-6 of the income_tax regulations provides an exception to the general timing rule for the deduction in cases where the property transferred is substantially_vested upon transfer the deduction is allowed to the service_recipient in accordance with its normal method_of_accounting additionally sec_1_83-6 provides that no deduction is allowed under sec_83 to the extent that the transfer of property constitutes a capital_expenditure an item of deferred expense or an amount properly includible in the value of inventory_items in the case of a capital_expenditure for example the basis of the property to which such capital_expenditure relates is increased at the same time and to the same extent as any amount includible in the service provider's gross_income in respect of the transfer thus for example no deduction is allowed to a corporation in respect of a transfer of its stock to a promoter upon its organization notwithstanding that the promoter must include the value of the stock in gross_income in accordance with the rules of sec_83 sec_482 of the code provides that in the case of two or more organizations trades_or_businesses owned or controlled directly or indirectly by the same interests the secretary may distribute apportion or allocate gross_income deductions credits or allowances among such organizations trades_or_businesses if the secretary determines that such distribution apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of such organizations trades_or_businesses applying the above rules to the facts of the instant case our threshold conclusion is that for tax purposes the described transactions should be viewed as if they were a single integrated transaction comprised of interdependent steps taking that approach we conclude that the subject cancellation was compensatory if for no other reason than the fact that substantially-nonvested company b shares were received by the doctors as one of the conditions of the cancellation in comparison see the second sentence of sec_1_83-6 of the regulations additionally we conclude that to the extent that immediately after the cancellation the doctors could receive an amount in excess of the book-value formula price upon a subsequent sale of their company a shares here that amount was paid to them in cash the cancellation was substantially_vested in contrast to the extent that the doctors could only here did receive substantially-nonvested property the company b shares upon a sale of their company a shares the cancellation was substantially nonvested see sec_1_83-1 and sec_1_83-5 accordingly we also conclude that to the extent that the doctors received cash in excess of the book-value formula price for their shares they immediately realized compensation income under the rules of sec_83 see sec_1_83-1 as such under the rules of sec_83 and sec_1_83-6 a deduction was allowed under company a’s normal method_of_accounting for that compensation expense in this regard company a argues that its normal method_of_accounting required capitalization of that expense we note however that we have been presented no facts supporting company a’s conclusion that it had a normal method_of_accounting with respect to cancellations of nonlapse restrictions on its shares or its conclusion that the cancellation created an asset that it owned which had a useful_life extending beyond the end of its short taxable_year after that year no services were required to be performed by the doctors for any company other than company b or its conclusion that company a’s contribution of the doctors’ employment contracts to company b means that company a is entitled to capitalize the value of those contracts company a had no cost_basis in the contracts and they were part of a sec_351 transaction or its conclusion that under its normal accrual_method of accounting it would delay the deduction of accrued compensation currently includible its employees’ gross incomes accordingly we also conclude that to the extent that sec_83 required compensation income to be immediately includible in the doctors’ gross incomes as a result of the cancellation of the restrictions on and the contemporaneous sales of their company a shares company a became entitled to an immediate corresponding compensation expense deduction under the rules of sec_83 however in cases such as this where cancellation of a nonlapse_restriction is contemporaneous with a reorganization of the employer_corporation into a parent_corporation and a subsidiary_corporation the rules of sec_482 should be referenced to determine whether the sec_83 deduction attributable to the cancellation should be allocated between the resulting corporations under those rules compare revrul_80_198 1980_2_cb_113 please note in this regard that no opinion is expressed and none was requested as to proper allocation of the deduction under the rules of sec_482 in contrast we also conclude that any compensation expense deductions resulting from substantial vesting of the doctors’ company b shares may be taken only by company b again under the rules of sec_83 this is because company b is the sole recipient of the services causing such vesting the doctors’ employment contracts are between only them and company b and the management services contract is between only company a and company b we note in this regard that if under their contracts with company b the doctors were properly considered to be performing medical practice services for company a rather than company b they and company a would seemingly be committing numerous violations of applicable state licensing and corporate laws in fact it seems clear that the subject corporate_reorganization was structured the way it was in order to avoid such violations finally we conclude that the federal tax treatment of any amount that has been or might be repaid by a doctor to company a upon a premature termination of his employment with company b is not governed by the rules of sec_83 rather we agree as the parties explicitly intended that such amounts should be considered liquidated_damages whose tax treatment is governed by other code sections conclusion under the rules of sec_83 a deduction was allowable as explained above for the compensation income includible in the doctors’ gross incomes as a result of the cancellation of the nonlapse restrictions on and the contemporaneous sales of their company a shares sec_482 should be referenced to determine whether and if so how the deduction should be allocated between company a and company b to clearly reflect their incomes a copy of this technical_advice_memorandum is to be given to the companies sec_6110 of the code provides that it may not be used or cited as precedent -end-


department of the treasury internal_revenue_service washington d c apr u i l no tapp ka ueity legend county x state g board d plan z plan w date date date _ date dear this letter is in response to your request for a private_letter_ruling dated as supplemented by a letter dated your authorized representative concerning the federal_income_tax treatment of mandatory employee contributions that will be picked up by county x under sec_414 of the code submitted on your behalf by your representative has submitted the following facts and representations county x is a county in state g that is governed by local county government board d plan z was established by county x on date to provide pension benefits for the employees of that county employees of county x are given the choice to participate in - plan z or plan w plan z is a defined contribution money purchase plan where participants are required to contribute of their compensation to the plan as a condition_of_employment additionally participants may make an optional irrevocable election to contribute an additional one percent of compensation to the plan once made the election to increase the contribution_percentage cannot be changed county x will contribute of a participant's_compensation if such participant contribute sec_4 of compensation county x’s contribution increases to of compensation if a participant elects to contribute of compensation since date employee contributions to the plan are picked-up by county x pursuant to sec_414 of the internal_revenue_code the code as of date participants in plan w were given a one-time election to have the value of their benefit under plan w transferred to plan z that if the employer in the adoption sec_4 of the plan z document provides agreement so elects each eligible_participant shall be required to make employee after-tax contributions if these contributions are picked-up by the employer they will be treated as employer contributions for federal_income_tax purposes these contributions will not be included in the employee’s compensation in the year made and are not subject_to income_tax_withholding the employer may pick-up the required contributions by a reduction in cash compensation by an offset against future salary increases or by a combination of both - in section of plan z's adoption_agreement county x has indicated that employee contributions will be picked-up in accordance with sec_414 of the code _ plan z has not received a determination from the internal_revenue_service that it is a ‘qualified retirement_plan under sec_401 of the code however county x represents that plan z meets the requirements of sec_401 of the code based on the above facts you request a determination that plan z qualifies as a government_plan within the meaning of sec_414 of the code that required contributions to plan z picked-up by county x on behalf of participating employees will be treated as valid pick-up contributions under sec_414 of the code that no part of the pick-up contributions will constitute gross_income to participating employees for federal_income_tax purposes until distributed or otherwise made available to those employees that the contributions picked-up by county x will be treated as employer contributions for federal_income_tax purposes that the contributions picked-up by county x will not constitute wages from which federal_income_tax must be withheld in the taxable_year in which contributed with respect to your ruling requests sec_414 of the code provides that a governmental_plan means a plan established and maintained for its employees by the government of the united_states by the government of any state or political_subdivision thereof or by any agency_or_instrumentality of any of the foregoing county x is a local county established and empowered by state g plan z is an instrumentality of county x county x is funded primarily by the imposition of tax assessments on the citizens residing in such county as empowered by the laws of state g considered government employees of that county thus plan z is a governmental_plan within the meaning of sec_414 of the code all eligible participants in plan z are employees of county x and are sec_414 of the code provides that contributions otherwise designated as employee contributions shall be treated as employer contributions if such contributions are made to a plan described in sec_401 established by a state government or a political_subdivision thereof and are picked-up by the employing unit the federal_income_tax treatment to be accorded contributions that are picked-up by the employer within the meaning of sec_414 of the code is specified in revrul_77_462 c b in that revenue_ruling the employer school district agreed to assume and pay the amounts employees were required by state law to contribute to a state pension_plan revrul_77_462 concluded that the school district's picked-up contributions to the plan are excluded from the employees’ gross_income until such time as they are distributed to the employees the revenue_ruling held further that under the provisions of sec_3401 of the code the school district's contributions to the plan are excluded from wages for purposes of the collection of income_tax at source on wages therefore no withholding is required from the employees' salaries with respect to such picked-up contributions the issue of whether contributions have been picked-up by an employer within the meaning of sec_414 of the code is addressed in revrul_81_35 1981_1_cb_255 and revrul_81_36 1981_1_cb_255 these revenue rulings established that the following two criteria must be met the employer must specify that the contributions although designated as employee contributions are being paid_by the employer in lieu of contributions by the employee and the employee must not be given the option of choosing to receive the contributed amounts directly instead of having them paid_by the employer to the pension_plan furthermore it is immaterial for purposes of the application of sec_414 of the code whether district y picks-up contributions through a reduction in a salary an offset against future salary increases or a combination of both revrul_87_10 c b provides that in order to satisfy revenue rulings and the required specification of designated employee contributions must be completed before the period to which such contributions relate thus employees may not exclude from current gross_income designated employee contributions to a qualified_plan that relate to compensation earned for services prior to the date of the last governmental action necessary to effect the pick-up sec_4 of the plan document and section of the adoption_agreement of plan z as adopted by county x satisfy the criteria set forth in revrul_81_35 and revrul_81_36 because it provides that county x will pick-up employee contributions to plan z and specifies that such picked-up contributions although designated as employee contributions are being paid_by the employer in lieu of contributions by participating employees and that the participating employees may not elect to receive such contributions directly instead of having such contributions paid_by county x to plan z additionally as required under revrul_87_10 the last governmental action required to effect the pick-up of employee contributions was the approval of plan z to include the pick-up of contributions by board d and the execution of the plan document both of which took place on date date was prior to the effective date of the pick-up of required contributions which was date therefore the pick-up of employee contributions satisfied the requirements of revrul_87_10 accordingly we conclude that that plan z qualifies as a government_plan under sec_414 of the code that required contributions to plan z picked-up by county x on behalf of participating employees will be treated as valid pick-up contributions under sec_414 of the code that no part of the picked-up contributions will constitute gross_income to participating employees for federal_income_tax purposes until distributed or otherwise made available to those employees that the contributions picked up by county x will be treated as employer contributions for federal_income_tax purposes that the contributions picked-up by county x will not constitute wages from which federal_income_tax must be withheld in the taxable_year in which contributed the effective date for the commencement of the pick-up will not be any earlier than date these rulings are based on the assumption that plan z meets the requirements for qualification under sec_401 of the code at the time of the contributions no opinion is expressed as to whether the amounts in question are subject_to tax under the federal_insurance_contributions_act no opinion is expressed as to whether the amounts in question are paid pursuant to a salary reduction agreement within the meaning of sec_3121 of the code this letter_ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent a copy of this ruling is being sent to your authorized representative in accordance with a power_of_attorney on file with this office sincerely yours manager i pipkin employee_plans technical group tax_exempt_and_government_entities_division enclosures deleted copy of letter notice cc cc ep area manager


internal_revenue_service number release date index number ------------------------------ -------------------------- ----------------------------------------- -------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-154752-09 date date x a state a d1 d2 d3 d4 month year1 year2 ------------------------------------ ----------------------- ------------------------------------ ------------------------- ------------------------------------ ------------------------------------ ----------------- ------------------ ---------------------- ------------------------------------ ------------------------------------ ------------------------------------ ------------------------------------ ------- dear ------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x by its authorized representatives requesting a ruling under sec_1362 of the internal_revenue_code facts the information submitted states that x was incorporated in state on d1 x made an election to be treated as an s_corporation effective d1 plr-154752-09 on d2 a who was a resident_alien became a shareholder of x on d3 a filed a form i-407 abandonment of lawful permanent resident status with the united_states department of homeland security consequently a became a nonresident_alien which inadvertently terminated x’s s_corporation_election on d3 a did not realize that becoming a nonresident_alien would terminate x's s_corporation_election in month x learned of the consequences of a becoming a nonresident_alien from its external tax advisors on d4 x redeemed a's shares in x with a payment of a the shares of x from d1 to d4 were owned by a and the other shareholders of x x represents that x did not intend for its s_corporation_election to terminate x represents that at no time prior to x’s external tax advisors informing x of the consequences of a becoming a nonresident_alien did x or any of its shareholders know that a’s becoming a nonresident_alien would terminate x’s s_corporation status x and its shareholders have filed their tax returns for all applicable tax years consistent with x being an s_corporation a represents that a reported a’s share of x’s taxable_income for year1 a represents that a will report and pay tax on a’s share of x’s taxable_income for year2 for the period that a owned stock in x through d4 when a files a’s u s individual_income_tax_return for year2 a also represents that a will report and pay any u s federal_income_tax on any gain recognized in connection with the payment of a in redemption of a’s ownership_interest received on d4 x represents that the circumstances resulting in the termination of x’s s_corporation_election were inadvertent and were not motivated by tax_avoidance or retroactive tax planning x and its shareholders consent to make any adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary law and analysis sec_1361 of the code provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not have a nonresident_alien as a shareholder sec_1362 provides that a in general an election under sec_1362 shall be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small plr-154752-09 business corporation and b any termination under sec_1362 shall be effective on and after the date of cessation sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the ineffectiveness or termination the corporation will be treated as an s_corporation during the period specified by the secretary conclusion based solely on the facts submitted and the representations made we conclude that x’s s_corporation_election terminated on d3 and that the termination was inadvertent within the meaning of sec_1362 we further hold that pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from d3 and thereafter provided x’s s_corporation_election was valid and provided that the election was not otherwise terminated under sec_1361 the shareholders of x including a must include their pro-rata share of the separately_stated and nonseparately computed items of x as provided in sec_1366 make any adjustments to basis as provided in sec_1367 and take into account any distributions made by x as provided in sec_1368 in addition a will report and pay any u s federal_income_tax on any gain recognized in connection with the payment of a in redemption of a's ownership_interest received on d4 if x or its shareholders fail to treat themselves as described above this ruling is null and void except as specifically ruled above we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the code this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent plr-154752-09 pursuant to a power_of_attorney on file a copy of this letter is being sent to x’s authorized representatives sincerely melissa c liquerman chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court gregory alberico petitioner v commissioner of internal revenue respondent docket no filed date james w faber for petitioner william r davis jr for respondent memorandum findings_of_fact and opinion fay judge by notice_of_deficiency dated date respondent determined deficiencies in petitioner's income_tax for the taxable years and in the amounts of dollar_figure and dollar_figure respectively and accuracy-related_penalties for the taxable years and under sec_6662 a the issues for decision are whether petitioner is entitled to deductions for gambling_losses during the tax_year we hold that he is not whether petitioner failed to report gambling winnings for the tax_year we hold that he did whether a penalty should be imposed against petitioner under sec_6662 we hold that it should findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorpo- rated herein by this reference at the time the petition was filed petitioner resided in broomfield colorado petitioner is a professional gambler in after serving three tours of duty in vietnam petitioner was stationed as the post adjutant of rocky mountain arsenal in denver colorado it was at this time that petitioner's gambling activity started by petitioner had developed a gambling addiction petitioner was discharged from the military in after being convicted of stealing government property to support his gambling addiction petitioner was incarcerated twice for 1all section references are to the internal_revenue_code in effect for the years in issue unless otherwise indicated 2petitioner testified that he declared the money he received from the sale of the stolen government property on his federal_income_tax return theft of government property once from to and again from to during and the years in issue petitioner frequented colorado dog racing tracks and played the slot machines in las vegas for and petitioner reported his gambling winnings as dollar_figure and dollar_figure respectively and his gambling_losses as dollar_figure and dollar_figure respectively the winnings reported on petitioner's federal_income_tax returns for and are in excess of the amounts stated as reported income for gambling winning sec_3 on petitioner's forms w-2g 3for and petitioner reported dollar_figure and dollar_figure respectively as gambling winnings however petitioner's form w- 2g income statements only showed petitioner winning dollar_figure and dollar_figure respectively 4the payer of proceeds from a wager must report gambling winnings on form w-2g if a taxpayer receives dollar_figure or more in gambling winnings from a b horse racing dog racing jai alai state lotteries and other wagering transactions in which the winnings are at least times the amount of the wager or lotteries raffles sweepstakes wager- ing pools or drawings such as those held by churches or civic organizations dollar_figure or more of gambling winnings from bingo or slot machines or dollar_figure or more of winnings from keno instructions to recipient for irs form w-2g statement for recip- ients of certain gambling winnings under the general_rule of sec_3402 certain gambling winnings are subject_to_withholding sec_3402 extension of withholding to certain gambling winnings -- continued petitioner testified that he reported income in excess of the form w-2g for both years in issue based upon his personal record sec_4 continued general_rule --every person including the government of the united_states a state or a political_subdivision thereof or any instrumentalities of the foregoing making any payment of winnings_which_are_subject_to_withholding shall deduct and withhold from such payment a tax in an amount equal to percent of such payment winnings_which_are_subject_to_withholding - for purposes of this subsection the term winnings_which_are_subject_to_withholding means proceeds from a wager determined in accordance with the following a in general --except as provided in subparagraphs b and c proceeds of more than dollar_figure from a wagering_transaction if the amount of such proceeds is at least times as large as the amount wagered b state-conducted lotteries --proceeds of more than dollar_figure from a wager placed in a lottery conducted by an agency of a state acting under authority of state law but only if such wager is placed with the state_agency conducting such lottery or with its authorized employees or agents c sweepstakes wagering pools certain parimutuel pools jai alai and lotteries -- proceeds of more than dollar_figure from-- i a wager placed in a sweepstakes wagering pool or lottery other than a wager described in subparagraph b or ii a wagering_transaction in a parimutuel pool with respect to horse races dog races or jai alai if the amount of such proceeds is at least times as large as the amount wagered exemption for bingo keno and slot machines -- the tax imposed under paragraph shall not apply to winnings from a slot machine keno and bingo of his gambling activities however petitioner produced no records showing his gambling results for except for his federal_income_tax return for petitioner presented dog racing programs covering part of the period during which he gambled at the dog tracks petitioner testified that he had recorded in a notebook how much he bet on each race in but after his divorce his ex- wife or her new husband threw away all of the gambling records that petitioner had stored in their house petitioner offered no evidence at trial to support this story for petitioner stated that he maintained two sets of records petitioner's main set of records consisted of his daily race programs in which he would record how much money he had to bet that day how much money he bet on each race and how much he won or lost the second set of records was a ledger in which petitioner recorded his losses at trial petitioner stated that his ledger was inaccurate and was prepared solely for the audit with respondent in late the internal_revenue_service after examining petitioner's race programs for january to june of requested to examine petitioner's race programs for the second half of petitioner testified that he and his daughter delivered the race programs to a gentleman handing out tax forms in the lobby of the internal_revenue_service office building and asked the man to give the programs to mr thomas ellison the auditor handling his case petitioner did not ask for nor receive a receipt for these documents several weeks later petitioner received a phone call from his accountant informing him that mr ellison could not locate the programs that petitioner claims to have delivered to the internal_revenue_service petitioner contends that the internal_revenue_service lost his records when they remodeled and moved the tax auditor's office to a different part of the irs building neither party introduced evidence that petitioner's programs were ever found while petitioner claims that he and an adult daughter gave a complete set of records to respondent nothing in the record corroborates it additionally petitioner's daughter never testified nor did the gentleman handing out the tax forms in the lobby of the internal_revenue_service office building based on the programs for january to june of that respondent had received respondent extrapolated the amount of payouts of less than dollar_figure small winnings for the period without programs july to date by applying the ratio of small winnings to form w-2g winnings from the period with pro- grams to the form w-2g winnings respondent then added this amount plus the winnings reported on the form w-2g the small winnings reported in petitioner's programs and petitioner's slot machine winnings to determine petitioner's total gambling winnings likewise based on the ratio of losses-to-winnings reflected in petitioner's dog racing programs for january to june of respondent determined that for the additional gambling winnings determined by extrapolation petitioner was entitled to addi- tional gambling_losses and respondent made such an adjustment in the notice_of_deficiency opinion taxable_year petitioner claimed dollar_figure in gambling winnings and dollar_figure in gambling_losses on his return after audit respondent disallowed his claimed gambling_losses in the notice of defi- ciency petitioner bases his challenge to the deficiency on his claim for the court to estimate his losses citing 39_f2d_540 2d cir taxpayers have the burden of showing that they are entitled to a gambling loss deduction 939_f2d_874 9th cir affg in part revg in part tcmemo_1989_390 sec_6001 requires taxpayers to keep adequate_records to substantiate their income and deductions see also sec_1_6001-1 income_tax regs absent production of adequate_records sustaining a taxpayer's claimed losses taxpayers are not entitled to any gambling deduction norgaard v commissioner f 2d pincite conley v commissioner tcmemo_1992_215 however under the rule_of cohan v commissioner supra pincite when a taxpayer fails to keep records but a court is convinced that deductible expenditures were made it should make as close an approximation as it can bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making here the parties do not dispute that petitioner failed to produce any documents to support his claimed gambling_losses for rather petitioner testified that at one time he had records but either his ex-wife or her new husband had thrown them away thus petitioner tries to fit within the framework of the rule_of cohan by laying the blame at the feet of his ex-wife however petitioner failed to call his ex-wife to testify thus the court did not have the opportunity to corroborate petition- er's story unless the court has some proof that the taxpayer is entitled to some deduction the taxpayer should not be granted relief 245_f2d_559 5th cir additionally where 'there are no reliable figures from which to calculate or extrapolate a reasonable estimate of a taxpayer's losses' no such adjustment is warranted metas v commissioner tcmemo_1982_36 quoting 306_f2d_784 d c cir here the only evidence presented to support petitioner's losses reported on his federal_income_tax return was petitioner's own testimony thus although it logically follows that petitioner must have sustained some losses considering his substantial gambling activity the complete absence of any documentation or other credible corroborating evidence concerning his gambling activ- ities affords the court no opportunity to estimate petitioner's alleged sustained losses under the rule_of cohan v commissioner supra accordingly we hold that petitioner has failed to carry his burden_of_proof with respect to the gambling loss substantia- tion issue and that his gross gambling winnings are taxable as determined by the commissioner for the year in question taxable_year on his return petitioner reported dollar_figure in gambling winnings and dollar_figure in losses attached to the return were forms w-2g reflecting dollar_figure in dog track winnings won by petitioner and reported to respondent by the tracks after audit respondent determined that petitioner had failed to report dollar_figure in gambling winnings respondent also made a correla- tive adjustment increasing petitioner's gambling_losses by dollar_figure petitioner challenges the deficiency on the grounds that respondent had no basis to suspect that petitioner earned more income than reported respondent inappropriately and incorrectly applied extrapolation and respondent is unable to establish using a net_worth_method or any other method that petitioner made or lost more than he reported on his federal_income_tax return 5the parties both stated that petitioner's forms w-2g attached to his federal_income_tax return totaled dollar_figure in dog track winnings however the forms w-2g attached to petitioner's federal_income_tax return received into evidence totaled dollar_figure petitioner claims that for the tax_year he provided respondent a complete set of original dog racing programs to substantiate the income reported on his federal_income_tax return but that some of the programs were lost by respondent however at trial both of respondent's tax auditors who were working on petitioner's audit testified that they never received the pro- grams for the second half of petitioner failed to present any evidence to support his claim that he delivered these pro- grams to respondent he presented no receipt for the programs and offered no testimony or other evidence to corroborate his story thus petitioner presented an incomplete picture of his gambling activities when a taxpayer fails to maintain adequate books_and_records the commissioner is authorized to reconstruct income by any reasonable means which will clearly reflect income 348_us_121 74_tc_1160 affd in part and revd in part 692_f2d_587 9th cir extrapolation is a permissi- ble method of proving the volume of unreported wagers 572_f2d_193 9th cir 560_f2d_693 5th cir 6petitioner also provided respondent with a ledger showing petitioner's net winnings or losses for each day that he gambled and the cumulative running total of petitioner's net winnings or losses for the year however petitioner admitted both at the audit and at trial that the ledger was inaccurate here petitioner failed to maintain adequate_records to determine his correct_tax liability for the taxable_year in order to determine petitioner's correct_tax liability respondent reasonably used petitioner's dog racing programs for the first half of to reconstruct through extrapolation petitioner's gambling winnings and losses for accordingly we hold that petitioner has failed to substantiate the accuracy of his federal_income_tax return and that his net gambling winnings are taxable as determined by the commissioner for the year in question negligence_penalty respondent determined that petitioner was negligent under sec_6662 in claiming a deduction for gambling_losses for the tax_year and in failing to properly report his gambling income for the tax_year for purposes of sec_6662 the term negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code and disregard includes any careless reckless or intentional disregard sec_6662 negligence frequently takes the form of failure to report income or overstatement of deductions 380_f2d_509 5th cir 64_tc_651 affd 566_f2d_2 6th cir 261_f2d_176 9th cir understatement of income or overstatement of deductions often reflects the inadequacy of the taxpayer's records which is in itself a basis for imposing the penalty a taxpayer is required to maintain records sufficient to establish information provided on a tax_return sec_1_6001-1 income_tax regs therefore failure to keep adequate_records is evidence not only of negligence but of intentional disregard of the regulations marcello v commissioner supra 73_tc_980 here the taxpayer failed to maintain records sufficient to establish the amount of gambling winnings and losses on both his and federal_income_tax returns accordingly we hold for respondent decision will be entered under rule


id office uilc cca_2010030909372450 ------------------------- number release date from -------------------- sent tuesday march am to ----------------- cc -------------------------------------------------------------------------------------------------- subject re ira question - prohibited_transaction this kind of scenario is the reason why i think that there needs to a tightening of the custodian provisions an ira owner should not be receiving the proceeds from the sale of the investment of the ira owned llc this is the intent of sec_4975 of the internal_revenue_code to not allow the ira owner to be able to deal indirectly or directly with assets of the plan for her own personal_use if we are not going to allow compensation to be paid directly to the ira owner why would we allow a distribution of sale proceeds of the llc owned by the ira to the ira owner my feeling is that at the very least a r must be issued to the ira owner by the custodian of the ira account indicating a distribution from the ira if not then i would say you have a pt also based on when the 1099-r is issued could also raise a factual question as to whether the custodian really has management of the ira account and whether the custodian is just a figure head -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------


internal_revenue_service number release date index number ---------------------------------- ------------------------------ ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc psi plr-105055-10 date date in re -------------------------------------------- --------------------------------------------------------- --------------------- legend ---------------------------- testator -------------------------------------- child a ----------------------------- child b --------------------------------------- child c -------------------------------- stock ------------------------------------------------------------------------------ stock trust ------------------------------------------------------------------------------ residuary_trust children’s agreement ------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------- state state a date date date date date date a b c d stock trust a residuary_trust a cite --------------------------------------------------------------------------------------------------- cite ------------------------------------------------------------------------------------------------------------------------ ------------------ ---------- -------------------- ------------------- -------------------------- ------------------------- ------------------------- ----------------------- ------ ------- ------ ------ ------------------------------------------------------------------------ --------------------------------------------------------------------------------- ------------------------------------------------------------------------ --------------------------------------------------------------------------------- plr-105055-10 ------------------------------------------------------------------------ ------------------------------------------------------ cite cite ------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------------------------- cite ------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------ cite ------------------------------------------------------------------------ ------------------------------------------------------ cite cite ------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------- highest court highest court of state a state court state statute ------------------------------------------------------------------------------------------ state governing statute a --------------------------------------------- -------------------------------------------------- state governing statute b --------------------------------- state a statute ---- q r ---- ---- s ---- t u -------- -------- v -------- x ------ y z ------------ ------------------------------------------- ----------------------------------- ------------------------------------------------------------------------ --------------------------------------------------------------------------------- dear ---------------- this responds to the date letter from your authorized representative requesting rulings on the income gift estate and generation-skipping_transfer gst tax consequences of a proposed settlement agreement the facts and representations are as follows testator died a resident of state on date he was survived by three children child a child b and child c the children five grandchildren the five grandchildren were then living there were no great-grandchildren at the time under articles third and eighth of testator’s will the will his shares of stock were to be held in trust the stock trust trust income was to be divided equally among the children on a child’s death the child’s income share was to be divided equally plr-105055-10 among the child’s then living children testator’s grandchildren the stock trust was to terminate twenty-one years after the death of testator’s last surviving grandchild when the principal would be divided equally per capita among testator’s then living great-grandchildren and deceased great-grandchildren whose then living descendants would take by representation under article twenty-second of the will the residue of testator’s estate was to be held in another trust the residuary_trust the residuary_trust provisions were identical to those of the stock trust except that the residuary_trust was to terminate when testator’s youngest great-grandchild reached age twenty-one the rule_against_perpetuities under the state rule_against_perpetuities in effect at testator’s death a bequest of a future_interest was void if considered prospectively at the testator’s death there was a possibility that the interest would not vest by the end of twenty-one years after the death of a life or lives in being at the testator’s death the permissible period a bequest to a class was void if there was a possibility that all the members of the class would not be ascertained and take vested interests within the permissible period a void specific_bequest passed to the testator’s residuary_estate if the testator’s disposition of the residuary_estate was void as well the residuary_estate passed as a reversion by intestacy cite in this case at testator’s death it was possible for the children to have additional children so that there could be grandchildren whose lives were not then in being this was the pivotal factor in determining whether his bequests of stock trust and residuary_trust income and remainders to his grandchildren and great-grandchildren violated the rule_against_perpetuities testator’s bequest of lifetime income interests to the grandchildren was to all of his grandchildren as a class a grandchild born after testator’s death would be part of the grandchildren’s class and would receive stock trust income_for_life based on this it was considered possible that not all of the grandchildren’s income interests would vest during lives in being at testator’s death testator’s bequests of remainders to his great-grandchildren were to vest only after all of testator’s grandchildren died the life of a grandchild born after testator’s death would also be a measuring life therefore at testator’s death it was possible that the certain annuities were also created that have since terminated each trust considered herein ie stock trust and residuary_trust in the will and stock trust a and residuary_trust a under the children’s agreement provided for distribution of the remainder at the end of twenty-one years following the death of the last survivor of the persons whose lives measured the duration of that trust because the perpetuities issue in this case centers on the lives measuring a respective trust’s duration and not on the twenty-one year period following the death of the last survivor the twenty-one year period is hereafter assumed to be a part of each trust’s duration even though it is plr-105055-10 time for vesting of the great-grandchildren’s remainders would be based on a life not in being at testator’s death accordingly the validity of these bequests was in doubt the bequests in the stock trust if void passed to the residuary_trust at testator’s death the bequests in the residuary_trust if void passed to testator’s intestate estate as a reversionary_interest the children’s agreement the children were testator’s heirs at law they acquired his property passing by intestacy consequently on date shortly after testator died the children entered into an agreement the children’s agreement revising the time when the great-grandchildren’s remainders were to vest under the children’s agreement the trusts were to terminate and the great-grandchildren’s remainders were to take effect on the death of the survivor of the children and five grandchildren that is lives in being at testator’s death the children’s agreement also changed the will’s pro_rata distribution of the stock trust and residuary_trust remainder to a per stirpes distribution on termination trust principal would be divided into three equal parts and distributed per stirpes under this revision the great-grandchildren descended from child a would share one third of the principal per stirpes those descended from child b would share a second third per stirpes and those descended from child c would share the last third per stirpes in all other respects the terms of the revised stock trust stock trust a and residuary_trust residuary_trust a were the same as those provided in testator’s will on a date before date testator’s shares of stock were transferred to stock trust a residuary_trust a was not funded it is represented that no additions have been made since then the litigation over more than x decades the trust beneficiaries and others have instituted actions for state court determinations regarding testator’s will and the children’s agreement specifically in cite the highest court of state highest court considered testator’s bequests of income interests to the grandchildren the court reasoned that under testator’s will a grandchild’s income_interest would vest when his or her parent child a child b or child c died thus the grandchildren’s class would necessarily close at the death of the last survivor of the children who were in being at testator’s death highest court held that therefore the bequest of lifetime income interests to the grandchildren as a class did not violate the rule_against_perpetuities the court held the stock trust created in the will to be valid through the lives of the grandchildren not specifically stated testator’s bequest to the grandchildren though valid did not provide for distribution of a grandchild’s income share when the grandchild died before the trust ended on the death of the first grandchild to plr-105055-10 highest court then considered testator’s bequest of remainders to his great-grandchildren the court reasoned that the grandchildren’s life estates preceded the remainders and the grandchildren’s class was not limited to lives in being at testator’s death because the remainders would take effect only after all of those including afterborn grandchildren died it was possible that the remainders would not vest within lives in being at testator’s death therefore highest court held the stock trust remainders to be void and illegal as violating the rule_against_perpetuities cite state statute the wait and see rule nearly y decades after highest court rendered its decision in cite the state legislature enacted state statute state statute provides a wait and see rule in determining whether a future_interest satisfies the rule_against_perpetuities or is void under the wait and see rule a future_interest does not violate the rule_against_perpetuities if actual events demonstrate that the interest did in fact vest by the end of the permissible period state statute applies retroactively to all interests heretofore created following the enactment of state statute highest court considered the statute’s retroactivity cite in the case before the court the trust was created many decades before state statute was enacted at the time of creation certain interests were void as violating the rule_against_perpetuities however highest court applied state statute’s wait and see rule to conclude in retrospect that the interests were not void and did not violate the rule_against_perpetuities as a result the courts of state now apply the wait and see rule retroactively to conclude that a future_interest that was void when created many years before state statute was enacted is not void because in hindsight it vested before the permissible period ended accordingly such otherwise void interests are retroactively sustained as not violating the rule_against_perpetuities cite however highest court has not yet addressed due process issues that may be presented die on date the trustees petitioned the state court for instructions the state court held that based on testator’s intent a deceased grandchild’s children succeeded to the income share for the duration of the trust cite by inference highest court also considered testator’s bequest of the residuary_trust remainders highest court in effect confirmed that the stock trust remainder and residuary_trust remainder passed by intestacy to the children however the court did not rule on how the remainder would pass to the great-grandchildren in contrast the legislature of state a enacted state a statute which like state statute retroactively applies a wait and see rule to determine whether a future_interest that was void at the time it was created before the state a statute was enacted did in fact vest during the permissible period highest court of state a refused to apply the wait and see rule retroactively despite the relevant language in plr-105055-10 the actualities in this case no additional grandchildren were born after testator’s death the lives of the children and the five grandchildren were all in being at testator’s death all of the children have died the last survivor of the five grandchildren died on date at the time there were z great-grandchildren of testator the trust will terminate twenty-one years after date which is date of testator’s z great-grandchildren a descended from child a b descended from child b and c descended from child c if the wait and see rule is applied to validate testator’s bequest of remainders to his great-grandchildren the principal would be divided into z equal shares and distributed under the will alternatively if testator’s disposition of the remainders is considered void the principal would be divided into three equal shares and distributed per stirpes under the children’s agreement the portion of a one-third share distributable to a great-grandchild would depend on the framework of the family line ie child a’s child b’s or child c’s to which that great-grandchild belongs great-grandchildren’s litigation there is a substantial difference between what a great-grandchild would receive in a per capita distribution and what he or she would receive in a per stirpes distribution on date the great-grandchildren benefitting from a per capita distribution the per capita parties instituted their action in state court for adjudication on the distribution of the stock trust remainder the great-grandchildren benefitting from a per stirpes distribution the per stirpes parties opposed the suit and also requested adjudication in addition an action was instituted concerning the distribution of income during the twenty-one year period state court combined the proceedings to consider the income and principal issues together cite over a d-year period guardians ad litem were appointed there was extensive discovery counsel filed three voluminous sets of briefs and the court heard two days of oral arguments the per capita parties argued that the wait and see test of state statute now applies under that test testator’s the will’s disposition of the stock trust remainder does not violate the rule_against_perpetuities therefore the stock trust principal is distributable per capita to testator’s living great-grandchildren and deceased great-grandchildren whose living descendants would take by representation the per stirpes parties argued that the highest court’s determinations were final and state a statute instead that court addressed issues of constitutionality and held that state a statute could not be applied retroactively to destroy vested or substantive rights created before state a statute was enacted cite plr-105055-10 those rulings can not now be constitutionally impaired by a later-in-time state statute or judicial_ruling because highest court determined the remainders in the will to be void they passed as reversionary interests by intestacy to the children as such the remainders passed per stirpes under the children’s agreement some parties argued that trust income should be distributed per stirpes through the roots of the children for the duration of the stock trust others argued that the income is distributable per capita the court encouraged the parties to explore ways to resolve their differences through negotiation and compromise rather than through continued litigation among the potential outcomes regarding trust principal was a judicial_ruling that i ii iii principal is distributable per capita on date under the terms of the stock trust in the will or principal is distributable per stirpes on date under the terms of the children’s agreement or principal was distributable as of the last surviving grandchild’s death under the residuary_trust in the will which vested or will vest in the takers under the residuary_trust among the potential outcomes regarding trust income was a judicial_ruling that iv v vi income is distributable per stirpes from the death of the last surviving grandchild to date under either the will or the children’s agreement or income is distributable per capita from the death of the last surviving grandchild to date under the will or the children’s agreement or all rights to receive stock trust income terminated when the last surviving grandchild died at which time the stock trust principal was distributable under the residuary_trust of the will the great-grandchildren’s settlement agreement the parties negotiated extensively at the outset they agreed that the issues could be settled using a fractional difference settlement based on an assessment of the relative strengths of their adverse positions under the general framework of the compromise the great-grandchildren’s settlement agreement the ggc agreement provides for the stock trust principal to be divided into z separate shares based on the number of testator’s then living plr-105055-10 great-grandchildren and deceased great-grandchildren with then living children the share of a deceased great-grandchild will be divided per stirpes among that great-grandchild’s living descendants the stock trust assets will be divided in accordance with certain percentages the formula of the compromise provides for a q per stirpes r per capita fractional difference as to income and an s per stirpes t per capita fractional difference as to principal after the division into separate shares u of each great-grandchild’s share will be distributed outright to the great-grandchild if living or if the great-grandchild is deceased to his or her living descendants per stirpes the remaining v of each share will continue in trust for such great-grandchild or such descendants until the termination_date date each share will be a separate trust the respective great-grandchild or deceased great-grandchild’s descendants will be the sole beneficiary of the share for distributions of income and principal a sophisticated algorithm taken to thirteen decimal places will be used in the pro_rata division and outright distributions the division will take into account both the market_value and respective tax bases of the assets the ggc agreement was presented to state court for consideration the state court approved the settlement and ordered the division and distribution of the stock trust as set forth in the ggc agreement the ggc agreement is subject_to a favorable ruling from the internal_revenue_service you have asked for the following rulings the terms of the ggc agreement will not cause distributions from the stock trust or the continuing separate settlement trusts to become subject_to the generation-skipping_transfer_tax the terms of the ggc agreement will not cause any party to the agreement to make a gift to any other party to the ggc agreement the terms of the ggc agreement will not cause any party to the agreement to be required to include trust assets in his or her gross_estate unless such assets are distributable or have been distributed to such party prior to his or her death the terms of the ggc agreement will not cause any party to the agreement to realize income from the sale_or_exchange of any trust assets or interests ruling generation-skipping_transfer gst tax for purposes of describing the ggc agreement the stock trust and stock trust a are considered to be the same trust plr-105055-10 sec_2601 of the internal_revenue_code imposes a tax on every generation-skipping_transfer which is defined under sec_2611 as a taxable_distribution a taxable_termination or a direct_skip under of the tax_reform_act_of_1986 the act gst tax is generally applicable to generation-skipping transfers made after date however under b a of the act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the tax does not apply to a transfer under a_trust that was irrevocable on date except to the extent the transfer is made out of corpus added to the trust by an actual or constructive_addition after date sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax under sec_26_2601-1 will not cause the trust to lose its exempt status these rules are applicable only for purposes of determining whether an exempt trust retains exempt status for gst tax purposes the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 sec_26_2601-1 provides that a court-approved settlement of a bona_fide issue regarding the administration of the trust or the construction of terms of the governing instrument will not cause an exempt trust to be subject_to chapter if the settlement is the product of arm's length negotiations and the settlement is within the range of reasonable outcomes under the governing instrument and applicable state law addressing the issues resolved by the settlement a settlement that results in a compromise between the positions of the litigating parties and reflects the parties' assessments of the relative strengths of their positions is a settlement that is within the range of reasonable outcomes in this case the stock trust was irrevocable on date further it is represented that there have been no actual or constructive additions to the stock trust after date accordingly the stock trust is exempt from gst tax under sec_26_2601-1 the terms of the ggc agreement including the proposed division of the stock trust into separate shares and partial distributions of principal are the result of a settlement of substantial issues between the per capita parties and the per stirpes parties these issues have been tenaciously litigated over more than x decades highest court rendered opinions regarding these trusts many years ago however state statute has since been enacted with retroactive effect and highest court has affirmed state statute’s retroactive application to a similarly-created trust in light of this that court’s earlier determinations of the issues in this case are now in question plr-105055-10 we conclude that the ggc agreement constitutes a settlement of bona_fide issues concerning the provisions of the stock trust and its administration we also conclude that the terms of the ggc agreement are the product of arm's length negotiations they represent a compromise between the positions of the parties and reflect the parties' assessments of the relative strengths of their positions we further conclude that the ggc agreement is within the range of reasonable outcomes under the governing instruments and the applicable state law addressing the issues resolved in the ggc agreement accordingly based upon the facts submitted and the representations made we rule that the division of the stock trust into the z separate great-grandchildren’s trusts and the distributions to the living great-grandchildren and the descendants by representation of a deceased great-grandchild made in accordance with the ggc agreement will not cause the stock trust the continuing separate stock trusts or the distributions as described above to be subject_to the generation-skipping_transfer_tax ruling gift_tax issue sec_2501 provides that a tax is imposed for each calendar_year on the transfer of property by gift during such calendar_year 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 as to any property or part thereof or interest therein of which the donor has so parted with dominion and control as to leave in him or her no power to change its disposition whether for his or her own benefit or for the benefit of another the gift is complete sec_25_2511-1 provides that any transaction in which an interest in property is gratuitously passed or conferred upon another regardless of the means or device employed constitutes a gift subject_to tax whether an agreement settling a dispute is effective for gift_tax purposes depends on whether the settlement is based on a valid enforceable claim asserted by the parties and to the extent feasible produces an economically fair result see 674_f2d_761 9th cir citing 387_us_456 thus state law must be examined to ascertain the legitimacy of each party's claim if it is determined that each party has a valid claim the service must determine that the distribution under the settlement reflects the result that would apply under state law if there is a difference it is necessary to consider whether the difference may be justified because of the uncertainty of the result if the question were litigated plr-105055-10 the proposed settlement is a mediated settlement and is based on arm's length negotiations among all the parties all interested parties who hold or may hold an interest in the trusts including any minors and unborn heirs have been represented in the negotiations as discussed above the ggc agreement represents the resolution of a bona_fide controversy between the parties the terms of the ggc agreement are the product of arm's length negotiations and represent i a compromise between the positions of the per capita parties and the per stirpes parties and ii reflect the parties' assessments of the relative strengths of their positions we further conclude that the ggc agreement is within the range of reasonable outcomes under the governing instruments and applicable state law accordingly based on the facts submitted and representations made we conclude that the terms of the ggc agreement as described above will not cause any of the beneficiaries to have made a taxable gift_for purposes of the federal gift_tax under sec_2501 ruling estate_tax issue sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2033 provides that the value of the gross_estate includes the value of all property to the extent of the interest therein of the decedent at the time of death sec_2035 provides that if the decedent transferred an interest in property or relinquished a power with respect to any property during the 3-year period ending on the date of death and the value of the property or interest therein would have been included in the gross_estate under sec_2036 sec_2037 sec_2038 or sec_2042 if the interest or power had been retained by the decedent on the date of death then the value of the gross_estate includes the value of the property or interest that would have been so included sec_2036 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in the case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise under which he has retained for his life or for any period not ascertainable without reference to his death or for any period that does not in fact end before his death possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income from the property sec_2037 provides that the value of the gross_estate includes the value of all plr-105055-10 property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise if possession or enjoyment of the property can through ownership of such interest be obtained only by surviving the decedent and the decedent has retained a reversionary_interest in the property and the value of such reversionary_interest immediately before the death of the decedent exceed sec_5 percent of the value of such property sec_2038 provides that the value of the gross_estate includes the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona fine sale for adequate_and_full_consideration in money_or_money's_worth by trust or otherwise where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power either by the decedent alone or in conjunction with any person to alter amend or revoke or where the decedent relinquished any such power during the 3-year period ending on the date of the death sec_2041 provides that the value of the gross_estate shall include the value of all property with respect to which the decedent possessed a general_power_of_appointment at the time of death sec_2041 defines the term general_power_of_appointment as 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 in order for sec_2035 through to apply a decedent must have made a transfer of property or an interest therein except in the case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth under which the decedent retained an interest in or power over the income or corpus of the transferred property as discussed above the ggc agreement represents the resolution of a bona_fide controversy between the parties it is a settlement of bona_fide issues and is the product of arm's length negotiations it reflects the parties' assessments of the relative strengths of their positions no great-grandchild or deceased great-grandchild’s descendants by representation has made a transfer to the stock trust or to any other great-grandchild by reason of the settlement agreement accordingly based upon the facts submitted and representations made we conclude that the terms of the ggc agreement will not cause any party to the agreement to have made a transfer within the meaning of sec_2035 through however once the ggc agreement becomes effective any trust property actually distributed or receivable by a beneficiary or his or her assignee would generally be included in the beneficiary’s federal transfer_tax base see eg sec_2033 sec_2041 sec_2501 ruling income_tax issue plr-105055-10 sec_61 provides that gross_income includes gains derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized sec_1001 provides that the amount_realized from the sale_or_other_disposition of property shall be the sum of any money received plus the fair_market_value of the property other than money received under sec_1001 except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1_1001-1 of the income_tax regulations provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained 499_us_554 addresses the issue of whether a sale_or_exchange that has taken place results in the realization of gain_or_loss under sec_1001 in cottage savings a financial_institution exchanged its interests in one group of residential mortgage loans for another lender's interests in a different group of residential mortgage loans the two groups of mortgages were considered substantially identical by the agency that regulated the financial_institution the supreme court in cottage savings u s pincite concluded that sec_1_1001-1 reasonably interprets sec_1001 and stated that an exchange of property gives rise to a realization event under sec_1001 if the properties exchanged are materially different in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material to the code so long as their respective possessors enjoy legal entitlements that are different in_kind or extent cottage savings u s pincite the court held that mortgage loans made to different obligors and secured_by different homes did embody distinct legal entitlements and that the taxpayer realized losses when it exchanged interests in the loans cottage savings u s pincite in the present case state governing statute a allows the court for cause shown to authorize the division of a_trust into two separate trusts on such terms and conditions and with such notice as the court directs in addition state governing statute b gives trustees the power to distribute in cash or in_kind or partly in each and allocate particular assets in proportionate or disproportionate shares in this case the court order approving the ggc agreement orders the division and distribution of the stock trust as set forth in the ggc agreement accordingly the plr-105055-10 court approved the non-pro rata distributions called for in the ggc agreement and further authorized the trustees to make the necessary transfers and assignments of the unconverted investment securities t herein awarded in_kind accordingly the submission concludes that the distribution scheme in this case is authorized by state law we agree the stock trust will be divided into z trusts on a non pro-rata basis under the state statutes cited above the court has the authority to authorize the trustees to make this type of non pro-rata apportionment thus the proposed division and distribution of the stock trust assets among the z trusts will not result in a material difference in_kind or extent of the legal entitlements enjoyed by the beneficiaries within the meaning of cottage savings accordingly based upon the facts submitted and representations made we conclude that the division of the stock trust into the z great-grandchildren’s trusts will not result in the recognition of gain_or_loss under sec_1001 by the stock trust any beneficiary of the stock trust or any separate great-grandchild’s trust the rulings in this letter pertaining to the federal estate and or generation-skipping_transfer_tax apply only to the extent that the relevant sections of the internal_revenue_code are in effect during the period at issue 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 sincerely yours leslie h finlow acting senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosure copy for purposes


internal_revenue_service number release date index number -------------------------------------- ---------------------------- -------------------- ---------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------- id no ------------- telephone number --------------------- refer reply to cc psi b06 plr-127468-06 date date ------------------------------------------------------ -------------- re request for extension of time to make the election not to deduct the additional re request for extension of time to make the election not to deduct the additional first year depreciation taxpayer state shareholder ---------------------------------------------- date1 date2 sbse official --------------------------------------------------- dear ------------ -------------------------- -------------------------- this letter responds to a letter dated date and supplemental correspondence submitted by taxpayer requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the election not to deduct the additional first year depreciation under sec_168 of the internal_revenue_code for all classes of qualifying property placed_in_service in the taxable years ended date1 and date2 facts taxpayer represents that the facts are as follows taxpayer is an s_corporation that is wholly owned by shareholder located in state and engaged in the business of short term automobile leasing shareholder files as a resident of state for tax purposes taxpayer timely filed its federal_income_tax returns for the taxable years ended date1 and date2 plr-127468-06 state adopts federal taxable_income as the starting point for determining state taxable_income including any election made by the taxpayer in accordance with the internal_revenue_code on these returns taxpayer based on the advice of its tax_return_preparers did not make the election not to deduct the additional first year depreciation for all qualifying property placed_in_service during each of the taxable years ended date1 and date2 and therefore did deduct the 30-percent additional first year depreciation for all qualified_property and the 50-percent additional first year depreciation for all 50-percent bonus_depreciation property placed_in_service during those taxable years however after taxpayer’s federal_income_tax return for the taxable_year ended date2 was prepared and after shareholder’s federal_income_tax return for that taxable_year was filed taxpayer’s tax_return_preparer determined that taxpayer should have elected not to deduct the additional first year depreciation for all qualifying property placed_in_service during each of those taxable years due to state tax consequences prior to the date taxpayer filed its taxable return for the taxable_year ended date1 state enacted a statute that did not fully adopt retroactively to the taxable_year the additional first year depreciation allowed under sec_168 under the state tax statute it was disadvantageous for taxpayer to not make the election not to deduct the additional first year depreciation for each of the taxable years in question because of the effect it had upon shareholder’s state tax_liability ruling requested accordingly taxpayer requests an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the election not to deduct the additional first year depreciation under sec_168 for all property placed_in_service during the taxable years ended date1 and date2 that qualifies for the additional first year depreciation law and analysis deduction for the taxable_year in which qualified_property is placed_in_service by a taxpayer sec_168 provides a 50-percent additional first year depreciation deduction for the taxable_year in which 50-percent bonus_depreciation property is placed_in_service by a taxpayer sec_168 provides a 30-percent additional first year depreciation sec_168 provides that a taxpayer may elect not to deduct the percent additional first year depreciation for any class of property placed_in_service during the taxable_year the term class of property is defined in sec_1_168_k_-1 of the income_tax regulations as meaning in general each class of property described in sec_168 for example 5-year_property plr-127468-06 sec_168 provides that a taxpayer may elect to deduct 30-percent instead of 50-percent additional first year depreciation for any class of property that is 50-percent bonus_depreciation property placed_in_service during the taxable_year if this election is made sec_1_168_k_-1 provides that the allowable additional first year depreciation deduction is determined as though the class of property is qualified_property under sec_168 sec_1_168_k_-1 further provides that a taxpayer may elect not to deduct both 30-percent and 50-percent additional first year depreciation for any class of property that is 50-percent bonus_depreciation property placed_in_service during the taxable_year sec_1_168_k_-1 provides that the election not to deduct additional first year depreciation must be made by the due_date including extensions of the federal tax_return for the taxable_year in which the property is placed_in_service by the taxpayer sec_1_168_k_-1 provides that the election not to deduct additional first year depreciation must be made in the manner prescribed on form_4562 depreciation and amortization and its instructions the instructions to form_4562 for the taxable years ended date1 and date2 provided that the election not to deduct the additional first year depreciation is made by attaching a statement to the taxpayer’s timely filed tax_return indicating that the taxpayer is electing not to deduct the additional first year depreciation and the class of property for which the taxpayer is making the election sec_1_168_k_-1 further provides that the election is made separately by each person owning qualified_property or 50-percent bonus_depreciation property for example for each member of a consolidated_group by the common parent of the group by the partnership or by the s_corporation under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time under the rules set forth in and to make a regulatory election sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of ' sec_301_9100-3 provides that requests for relief under ' will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusions plr-127468-06 based solely on the facts and representations submitted we conclude that the requirements of and have been satisfied accordingly taxpayer is granted calendar days from the date of this letter to make the election not to deduct the additional first year depreciation under sec_168 for all property placed_in_service by taxpayer during the taxable years ended date1 and date2 that qualify for the additional first year depreciation this election must be made by taxpayer by filing an amended federal tax_return for each of these taxable years with a statement indicating that taxpayer is electing not to deduct the additional first year depreciation for all property placed_in_service during that taxable_year except as specifically set forth above we express no opinion concerning the federal_income_tax consequences of the facts described above under any other provisions of the code specifically no opinion is expressed or implied on whether any item of depreciable_property placed_in_service in the taxable years ended date1 and date2 is eligible for the additional first year depreciation deduction in accordance with the power_of_attorney we are sending copies of this letter to taxpayer’s authorized representatives we are also sending a copy of this letter to the sbse official this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely william p o’shea william p o’shea associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes