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 ita plr-103924-09 date date in re -------------------------------------------------------------- ---------------------------------------------------------------------------------- legend act ----------------------------------------------------------------------------------------- agency --------------------------------------------------- agreement ---------------------------------------- b ----------------- court ----------------------------------------------------------------------------- department ---------------------------------------------------------------------------- entity1 -------------------------------------------------------- entity2 --------------------------------- entity2 claimants ------------------- incident ------------------------------------------------------------------------------------------------------- ------- t -------------------------------------- z ------------------------------------------------ plr-103924-09 c ----- date ------------------- date ---------------- date -------------------- date ---------------------- year ------- year ------- year ------- f ---------------------- dollar_figureq dollar_figure--------------- dollar_figurer dollar_figure--------------- dollar_figuret dollar_figure------------------- dollar_figurev dollar_figure------------------- w ----- dollar_figurex dollar_figure--------------- dollar_figurey dollar_figure--------------- dear -------------- this is in reply to your request for a ruling that dollar_figurex the estate of b estate received in year and any payment estate receives from department for the wrongful death of b’s c are excludable from estate’s gross_income under sec_104 of the internal_revenue_code you are the independent executor of estate facts b’s c was one of w individuals killed in incident in year the estates of those killed and their survivors including estate entered into a joint prosecution agreement jpa plr-103924-09 to pursue claims for damages against entity1 and its officials who were responsible for incident the jpa sets forth how the plaintiffs will divide any amounts they recover in litigation or settlement of their claims initial litigation the estates of those killed and their survivors initially sued entity1 in court in year the causes of action included claims for wrongful death and intentional infliction of emotional distress as independent executor for estate you sought recovery for wrongful death and intentional infliction of emotional distress caused by the death of b’s c in year court granted summary_judgment for plaintiffs on the issue of liability in year court awarded the plaintiffs an aggregate recovery_of dollar_figurev for compensatory_damages prejudgment_interest and punitive_damages estate was awarded an aggregate of dollar_figurey dollar_figurer against t and dollar_figureq against z sale of damage award while court award of damages was on appeal and no later than date estate sold the rights to a portion of its damage award to an investor for an immediate cash payment of dollar_figurex plus a graduated rate of return on that amount estate received the dollar_figurex on or about date several other plaintiffs also sold portions of their damage awards to the investor legislative settlement subsequently on date entity2 passed the act to provide fair compensation to all entity2 claimants who have f claims for wrongful death and physical injury including claims for emotional distress against entity1 through a comprehensive settlement of those claims upon entity1’s payment to entity2 the act voided all prior court proceedings and judgments for f claims by entity2 claimants against entity1 or its officials and permanently precluded entity2 claimants from asserting f claims against entity1 or its officials on date entity1 and entity2 entered into the agreement to resolve all f claims against entity1 entity1 then transferred dollar_figuret to entity2 which will be paid to claimants covered by the agreement thus pursuant to the act court award of damages to the plaintiffs was voided and has been vacated agency has established procedures to compensate victims pursuant to the agreement as the independent executor of estate you must file a claim with department to recover damages for claims of wrongful death based on the death of b’s c law and analysis sec_104 provides in general that gross_income does not include the amount of any damages received whether by suit or agreement on account of personal physical injuries or physical sickness sec_1_104-1 of the income_tax regulations provides that the term damages received whether by suit or agreement means an amount received through prosecution of a legal suit or action based upon tort or tort type rights or through a settlement agreement entered into in lieu of such prosecution plr-103924-09 section of the small_business job protection act of limits the exclusion_from_gross_income provided by sec_104 to amounts received on account of personal physical injuries or physical sickness subject_to one exception in h_r conf_rep no pincite congress expressed its intent concerning the treatment of wrongful death damages and emotional distress damages attributable to a physical injury d amages other than punitive_damages received on account of a claim of wrongful death continue to be excludable from taxable_income as under present law because all damages received on account of physical injury or physical sickness are excludable from gross_income the exclusion_from_gross_income applies to any damages received based on a claim of emotional distress that is attributable to physical injury or physical sickness the action estate brought in court and the claim estate files with department each seek recovery_of damages for wrongful death and intentional infliction of emotional distress attributable to a personal physical injury these claims are based in tort under sec_1_104-1 the court granted summary_judgment on the issue of liability on estate’s claim of wrongful death and intentional infliction of emotional distress due to the death of b’s c and had awarded dollar_figurey for compensatory_damages interest and punitive_damages estate exchanged its right to recover a portion of the award for an immediate cash payment of dollar_figurex that dollar_figurex takes the place of court’s award to the extent that the dollar_figurex represents compensatory_damages awarded for wrongful death and associated emotional distress it is excludable from estate’s income under sec_104 under the act any recovery_of compensatory_damages that department awards estate is for the wrongful death of b’s c this wrongful death recovery as adjusted by the jpa is excludable from estate’s income under sec_104 conclusions based strictly on the information submitted and the representations made we conclude that- the amount estate receives from department as adjusted by the jpa for the wrongful death of b’s c is excludable from estate’s gross_income under sec_104 except for any interest received the portion of the dollar_figurex representing amounts received on account of a personal physical injury is excludable from estate’s gross_income under sec_104 plr-103924-09 we do not express or imply an opinion on the federal tax consequences of any aspect of these transactions other than those expressed in conclusion sec_1 and above specifically we do not express an opinion about what portion if any of dollar_figurex is properly allocable to damages received on account of a personal physical injury see sec_4 of revproc_2009_3 2009_1_irb_107 in addition we do not express any opinion whether estate’s transaction with the investor constituted a sale for federal_income_tax purposes see sec_4 of revproc_2009_3 pincite this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent the rulings contained in this letter are based upon information and representations that you submitted under penalties of perjury while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination you must attach to any income_tax return to which it is relevant a copy of this letter or if estate files its returns electronically a statement providing the date and control number of this letter_ruling in accordance with the power_of_attorney on file with this office we are sending a copy of this letter to your authorized representatives sincerely michael j montemurro branch chief office of associate chief_counsel income_tax accounting


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 corp plr-112657-09 date date legend distributing ---------------------------------------------------------------------------- -------------------------------------------------------------------- ---------------------------- distributing ---------------------------------------------------------------------------- -------------------------------------------------------------------- ------------------ controlled -------------------------------------------- --------------------------------------------- -------------------------------- shareholder a ----------------------------------------------------------------------- ---------------------- shareholder b ----------------------------------------------------------------------- ------------------ ------------------------- shareholder c ----------------------------------------------------------------------- shareholder d ------------------------------------------------------------------------ ------------------------------ shareholder e ------------------------- ----------------------------------------------------------------------- plr-112657-09 shareholder f business a location a location b service a state a state b a b c d x dear ---------------- -------------------- ------------------------------------ --------------------------------------------- -------------------------------- ----------------------------------- ----------------------------------------- ------------- ------------------ -------- -------- --------- --------- ---- this letter responds to your representative’s letter dated date requesting rulings as to the federal_income_tax consequences of a proposed transaction additional information was submitted by emails dated date and date the material information submitted for consideration is summarized below the rulings contained in this letter are based upon facts and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process in particular this office has not reviewed any information pertaining to and has made no determination regarding whether the internal distribution and split-off each described below i satisfy the business_purpose requirement of sec_1_355-2 of the income_tax regulations ii are used principally as a device for the distribution of the earnings_and_profits of the distributing_corporation or the controlled_corporation or both see sec_355 of the internal_revenue_code as amended the code and sec_1 plr-112657-09 d or iii are part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in the distributing_corporation or the controlled_corporation see sec_355 and sec_1_355-7 summary of facts distributing a state a corporation is the common parent of an affiliated_group_of_corporations that files a consolidated_return for federal_income_tax purposes distributing is owned a percent by shareholder a b percent by shareholder b c percent shareholder c and d percent by shareholder d shareholder e and shareholder f together the other shareholders distributing wholly owns distributing controlled a state b corporation is a wholly owned subsidiary of distributing controlled was formed to effectuate the proposed transaction described below distributing directly conducts business a in location a the location a business and location b the location b business the financial information submitted by distributing indicates that the location a business and the location b business each have had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years proposed transaction for what are represented to be valid business purposes and to effect the separation distributing proposes the following steps the proposed transaction i distributing will transfer the assets of the location b business to controlled in exchange for all of the controlled stock and the assumption by controlled of related liabilities if any the contribution ii distributing will distribute the stock of controlled to distributing the internal distribution iii distributing will distribute the controlled stock to shareholder c in exchange for all of his distributing stock the split-off iv controlled and distributing will enter into an agreement not to exceed x months under which distributing will provide services relating to business a to controlled the service agreement representations the following representations have been made contribution and the internal distribution in connection with the plr-112657-09 a b c d e f g h any indebtedness owed by controlled to distributing after the internal distribution will not constitute stock_or_securities no part of the consideration distributed by distributing will be received by distributing as a creditor employee or in any capacity other than that of a shareholder of distributing the five years of financial information submitted on behalf of the location a business conducted by distributing are representative of its present operations and with regard to that business there have been no substantial operational changes since the date of the last financial statements submitted throughout the five-year period ending on the date of the internal distribution distributing and distributing will have been the principal owners of the goodwill and significant assets of the location a business and they will continue to be the owners following the internal distribution the five years of financial information submitted on behalf of the location b business to be conducted by controlled immediately after the internal distribution are representative of its present operation and with regard to that business there have been no substantial operational changes since the date of the last financial statements submitted distributing and distributing will have been principal owners of the goodwill and significant assets of the location b business through the five-year pre- distribution period until the split-off and controlled will be principal_owner of these assets after the split-off following the internal distribution distributing will continue the active_conduct of the location a business independently and with its separate employees following the internal distribution controlled will continue the active_conduct of the location b business independently and with its separate employees neither the location a business conducted by distributing nor control of an entity conducting this business will have been acquired during the five- year period ending on the date of the internal distribution in a transaction in which gain_or_loss was recognized or treated as recognized under prop_reg sec_1_355-3 in whole or in part neither the location b business to be conducted by controlled nor control of an entity conducting this business will have been acquired during the five-year period ending on the date of the internal distribution in a plr-112657-09 i j k l m n transaction in which gain_or_loss was recognized or treated as recognized under prop_reg sec_1_355-3 in whole or in part the internal distribution will be carried out to facilitate the split-off the split-off will separate the location a business from the location b business and thereby eliminate management disagreements that have developed over how best to conduct operations at the two locations the internal distribution is motivated in whole or substantial part by this corporate business_purpose the internal distribution will not be used principally as a device for the distribution of earnings_and_profits of distributing or controlled or both the internal distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a percent or greater interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of any such corporation the total adjusted_basis of the assets transferred to controlled by distributing in the contribution will equal or exceed the sum of i the total liabilities assumed as determined under sec_357 by controlled and ii the total amount of any money and the fair_market_value of any other_property within the meaning of sec_361 received by distributing and transferred to its creditors in connection with the reorganization any liabilities assumed as determined under sec_357 in the contribution will have been incurred in the ordinary course of business and will be associated with the assets being transferred the total fair_market_value of the assets transferred to controlled by distributing in the contribution will exceed the sum of i the amount of any liabilities assumed as determined under sec_357 by controlled in connection with the exchange ii the amount of any liabilities owed to controlled by distributing that are discharged or extinguished in connection with the exchange and iii the amount of any cash and the fair_market_value of any other_property other than stock and securities permitted to be received under sec_361 without the recognition of gain received by distributing in connection with the exchange if any the fair_market_value of the assets of controlled will exceed the amount of its liabilities immediately_after_the_exchange plr-112657-09 o p q r s t u distributing will neither accumulate receivables nor make extraordinary payments of its payables in anticipation of the internal distribution its no intercorporate debt will exist between distributing and distributing on the one hand and controlled on the other at the time of or subsequent to the internal distribution immediately before the internal distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and - as in effect before the publication of t d 1995_2_cb_147 and as currently in effect sec_1_1502-13 as published by t d further any excess_loss_account that distributing has in the controlled stock will be included in income immediately before the internal distribution to the extent required by regulations see sec_1_1502-19 at the time of the internal distribution distributing will not have an excess_loss_account in the stock of controlled payments made in connection with any continuing transactions between distributing and controlled including the service agreement will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length distributing is not and controlled after its formation will not be an investment_company as defined in sec_368 and iv the internal distribution will not be a disqualified_distribution as defined in sec_355 because immediately after the internal distribution i no person determined after applying sec_355 will hold disqualified_stock defined in sec_355 in distributing that constitutes a 50-percent_or_greater_interest defined in sec_355 in distributing and ii no person determined after applying sec_355 will hold disqualified_stock defined in sec_355 in controlled that constitutes a 50-percent_or_greater_interest defined in sec_355 in controlled v immediately after the transaction as defined in sec_355 neither distributing nor controlled will be a disqualified_investment_corporation within the meaning of sec_355 distributing makes the following representations for the split-off w any indebtedness owed by controlled to distributing after the split-off will not constitute stock_or_securities plr-112657-09 x y z the fair_market_value of controlled stock received by shareholder c will be approximately equal to the fair_market_value of the distributing stock surrendered by shareholder c in the split-off no part of the consideration distributed by distributing will be received by shareholder c as a creditor employee or in any capacity other than that of a shareholder of distributing the five years of financial information submitted on behalf of the location a business conducted by distributing a member of the distributing separate_affiliated_group sag as defined in sec_355 are representative of its present operation and with regard to that business there have been no substantial operational changes since the date of the last financial statements submitted distributing is and immediately after the split-off will be affiliated with distributing in a manner that satisfies sec_1504 without regard to sec_1504 aa the five years of financial information submitted on behalf of the location b business to be conducted by controlled are representative of its present operation and with regard to that business there have been no substantial operational changes since the date of the last financial statements submitted bb following the split-off distributing will continue the location a business through distributing independently and with its separate employees cc following the split-off controlled will continue the location b business independently and with its separate employees dd neither the location a business conducted by distributing nor control of an entity conducting this business will have been acquired during the five- year period ending on the date of the split-off in a transaction in which gain_or_loss was recognized or treated as recognized under prop_reg sec_1_355-3 in whole or in part ee neither the location b business to be conducted by controlled nor control of an entity conducting this business will have been acquired during the five-year period ending on the date of the split-off in a transaction in which gain_or_loss was recognized or treated as recognized under prop_reg sec_1_355-3 in whole or in part ff the split-off will be carried out for the following corporate business_purpose to separate the location b business from the location a business and thereby eliminate management disagreements that have developed over how best to conduct operations at the two locations the plr-112657-09 split-off is motivated in whole or substantial part by this corporate business_purpose gg the split-off will not be used principally as a device for the distribution of earnings_and_profits of distributing or controlled or both hh the split-off is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire other than as a result of the split-off directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of any such corporation ii jj kk ll no intercorporate debt will exist between distributing and distributing on the one hand and controlled on the other at the time of or subsequent to the split-off immediately before the split-off items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and -14 as in effect before the publication of t d 1995_2_cb_147 and as currently in effect sec_1_1502-13 as published by t d further any excess_loss_account that distributing has in the controlled stock will be included in income immediately before the split-off to the extent required by regulations see sec_1_1502-19 at the time of the split-off distributing will not have an excess_loss_account in the stock of controlled payments made in connection with any continuing transactions between distributing and controlled including the service agreement will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length immediately after the split-off will not be a disqualified_distribution as defined in sec_355 because the split-off i no person determined after applying sec_355 will hold disqualified_stock defined in sec_355 in distributing that constitutes a 50-percent_or_greater_interest defined in sec_355 in distributing and ii no person determined after applying sec_355 will hold disqualified_stock defined in sec_355 in controlled that constitutes a 50-percent_or_greater_interest defined in sec_355 in controlled mm immediately after the transaction as defined in sec_355 neither distributing nor controlled will be a disqualified_investment_corporation within the meaning of sec_355 plr-112657-09 rulings based solely on the information submitted and the representations set forth above we rule as follows on the contribution and internal distribution the contribution followed by the internal distribution will qualify as a reorganization within the meaning of sec_368 distributing and controlled will each be a_party_to_a_reorganization within the meaning of sec_368 no gain_or_loss will be recognized by distributing on the contribution sec_357 and sec_361 no gain_or_loss will be recognized by controlled on the contribution sec_1032 the basis controlled has in each asset received in the contribution will equal the basis of that asset in the hands of distributing immediately before its transfer sec_362 the holding_period controlled has in each asset received in the contribution will include the period during which distributing held that asset sec_1223 no gain_or_loss will be recognized by distributing on the internal distribution sec_361 no gain_or_loss will be recognized by and no amount will be included in the income of distributing on the internal distribution sec_355 the aggregate basis of the stock of distributing and controlled in the hands of distributing immediately after the internal distribution will equal distributing 2's aggregate basis in the stock of distributing immediately before the internal distribution this aggregate basis will be allocated between the distributing stock and the controlled stock in proportion to the fair_market_value of each in accordance with sec_1_358-2 sec_358 b and c the holding_period distributing has in the controlled stock will include the holding_period of the distributing stock on which the internal distribution is made provided that the distributing stock is held as a capital_asset on the date of the internal distribution sec_1223 plr-112657-09 earnings_and_profits will be allocated between distributing and controlled in accordance with sec_312 and sec_1_312-10 and sec_1_1502-33 based solely on the information submitted and the representations set forth above we rule as follows on the split-off no gain_or_loss will be recognized by distributing on the split-off sec_355 no gain_or_loss will be recognized by and no amount will be included in the income of shareholder c on the split-off sec_355 the aggregate basis shareholder c has in the controlled stock immediately after the split-off will equal his aggregate basis in the distributing stock immediately before the split-off in accordance with sec_1_358-2 sec_358 and b the holding_period shareholder c has in the controlled stock will include the holding_period of the distributing stock exchanged in the split-off provided the distributing stock is held as a capital_asset on the date of the split-off sec_1223 earnings_and_profits will be allocated between distributing and controlled in accordance with sec_312 and sec_1_312-10 and sec_1_1502-33 caveats no opinion is expressed about the federal_income_tax treatment of the proposed transaction under other provisions of the code or regulations or the federal_income_tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings in particular no opinion is expressed regarding i whether the internal distribution and split-off satisfy the business_purpose requirement of sec_1_355-2 ii whether the internal distribution or split-off is used principally as a device for the distribution of the earnings_and_profits of distributing distributing or controlled and iii whether the internal distribution or split-off and an acquisition or acquisitions are part of a plan or series of related transactions under sec_355 procedural matters this ruling is directed only to the taxpayers who requested it sec_6110 provides that it may not be used or cited as precedent plr-112657-09 a copy of this ruling letter must be attached to the federal_income_tax return of each party involved in the proposed transaction for the taxable_year in which the proposed transaction is completed alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their returns that provides the date and control number of the letter_ruling in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely mark j weiss assistant to branch chief branch office of associate chief_counsel corporate cc


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 b04 plr-149860-07 date date legend legend trust decedent year niece niece nephew nephew nephew a b c d e f state statute --------------------------------- state statute ------------------------------------- ------------------------------------------- -------------------------------- ------- ------------------------- ------------------------------------- ---------------------- ------------------ ------------------ --------- ------------------------------------ ------------------------------------ -------------- --------- -------------- dear ----------- this responds to your representative’s letter dated date requesting rulings on the income and generation-skipping_transfer gst tax consequences of the proposed modification of trust facts the facts and representations submitted are summarized as follows trust was established under the will of decedent in year a date prior to date under the terms of trust niece niece nephew nephew and nephew decedent’s nieces and nephews are each to receive an annuity of dollar_figurea out of the net plr-149860-07 income of the trust the remaining income of the trust each year is to be divided into six shares to be paid to six identified charitable organizations the charitable remaindermen upon the death of niece nephew nephew or nephew the respective annuity of dollar_figurea allocable to that niece or nephew is payable to the lawful issue of that niece or nephew by right of representation upon the death of niece or upon the death of any named niece or nephew without any surviving lawful issue his or her share of the net_income will augment the amounts provided to be paid to the charitable remaindermen upon the death of the last survivor of the lawful issue of niece nephew nephew and nephew living at the time of decedent’s death the corpus of the trust and any undistributed_income is to be distributed to the charitable remaindermen in equal shares trust was funded with approximately dollar_figureb of assets the assets of the trust are currently valued at dollar_figurec more than four and one half times the original asset value because of the death of niece and the death of nephew without surviving issue only three of the five annuities are currently being paid_by the trust to the annuitant beneficiaries pursuant to the terms of trust the remaining net_income after payment of the annuities is being distributed in equal shares to the charitable remaindermen based on the life expectancy of the youngest measuring life the trust is estimated to terminate years from now it is represented that only dollar_figured which is less than percent of the value of the trust corpus is necessary to fund the annuities for the expected duration of the trust based on the foregoing the charitable remaindermen obtained legal representation to pursue the acceleration of the charitable_remainder interests the charitable remaindermen noted that the total yearly annuity currently payable to the annuitant beneficiaries is only percent of the value of the corpus of the trust and that the trustee’s fees each year are three times the amount of the annuities distributed under these circumstances the charitable remaindermen have argued that no material purpose is served by continuing the trust until the estimated termination_date in and therefore trust should be fully or partially terminated after lengthy negotiations between counsel for the charitable remaindermen and counsel for the annuitant beneficiaries the parties came to an agreement the agreement as follows a b except to the extent of dollar_figured which is the amount required to fund the annuity payments for the remainder of trust’s duration trust should terminate and the corpus should be distributed to the charitable remaindermen trust will continue to pay the annuities of dollar_figurea out of the trust’s income each year to the annuitant beneficiaries and will continue to distribute any excess income each year to the charitable remaindermen as provided for under the original terms of trust plr-149860-07 c d upon the final termination of trust in accordance with the original terms of trust all of the then-remaining balance will be distributed outright to the charitable remaindermen in equal shares as provided for under the original terms of trust the charitable remaindermen will purchase separate and apart from the trust commercial annuities for the benefit of each of the three annuitant families under the annuity_contracts an annuity amount of approximately dollar_figuree will be paid to each annuitant family for a term identical to the term of trust at a total cost to the charitable remaindermen of dollar_figuref the charitable remaindermen have represented that each annuity policy to be purchased will remain the asset of the purchasing charity and the annuitants will have no rights to the annuity payments superior to those of the purchasing charity’s other creditors pursuant to the agreement counsel for the charitable remaindermen filed a petition for modification of trust with the consent of all beneficiaries under the authority of state statute state statute provides in pertinent part a b except as provided in b if all beneficiaries of an irrevocable_trust consent they may compel the modification or termination of the trust upon petition to the court if the continuance of the trust is necessary to carry out a material purpose of the trust the trust cannot be modified or terminated unless the court in its discretion determines that the reason for doing so under the circumstances outweighs the interest in accomplishing a material purpose of the trust the petition attests that the non-petitioning beneficiaries as well as the petitioning beneficiaries have consented to the proposed modification you have requested the following rulings the implementation of the agreement and court order will not cause trust to lose its exempt status under b a of the tax_reform_act_of_1986 and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the partial_termination of trust and the early distribution to the charitable remaindermen will not result in the immediate realization of capital_gain capital_loss or taxable_income by the annuitant beneficiaries the trust or the charitable remaindermen the purchase of the commercial annuities by the charitable remaindermen for the benefit of the annuitant beneficiaries will not result in the immediate plr-149860-07 realization of capital_gain capital_loss or taxable_income by the annuitant beneficiaries law and analysis ruling sec_2601 of the internal_revenue_code imposes a tax on every generation-skipping_transfer gst 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 b i 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 modification of the governing instrument by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the gst tax if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust sec_26_2601-1 provides in part that a modification of an exempt trust will result in a shift in a beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst or the creation of a new gst to determine whether a modification of an irrevocable_trust will shift a beneficial_interest in a_trust to a beneficiary who occupies a lower generation the effect of the instrument on the date of the modification is measured against the effect of the instrument in existence immediately before the modification if the effect of the modification cannot be immediately determined it is deemed to shift a beneficial_interest plr-149860-07 in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification in the present case trust was irrevocable on date it is represented that no additions actual or constructive have been made to trust after that date accordingly trust is exempt from the gst tax under sec_26_2601-1 in measuring the effect of implementing the agreement we have determined that the interest of the annuitant beneficiaries in trust will not change as a result of the implementation of the agreement the annuitant beneficiaries will receive the same amount under the terms of trust as before implementation of the agreement accordingly provided the agreement is valid under applicable state law we conclude that implementing the agreement will not result in a shift of any beneficial_interest in trust to any beneficiary who occupies a lower generation than the beneficiaries holding the beneficial interests prior to the modification in addition implementing the agreement will not extend the time for vesting of any beneficial interests in the trust beyond the period provided for in the trust therefore the agreement will not affect the status of trust as exempt from the gst tax under sec_2601 ruling sec_2 sec_61 of the internal_revenue_code provides that gross_income includes gains derived from dealings in property and under ' a from an interest in a_trust sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized therefrom over the adjusted_basis provided in ' for determining gain and the loss shall be the excess of the adjusted_basis provided in ' for determining loss over the amount_realized sec_1001 states 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 ' c except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under ' 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 in 499_us_554 the supreme court considered whether a sale_or_exchange had taken place that resulted in realization of gain_or_loss under sec_1001 when a financial_institution exchanged its interests in one plr-149860-07 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 court concluded that sec_1_1001-1 reasonably interprets sec_1001 id pincite the court also 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 id 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 id pincite it is consistent with the supreme court's opinion in cottage savings to find that the interests of the annuitants and the six charities in trust will not differ materially as a result of the proposed partial_termination of trust and the early distribution to the charitable remaindermen the legal entitlements of the beneficiaries will not be changed each annuitant beneficiary’s payment from trust will remain unchanged only the timing of the receipt of a large portion of trust corpus by the charitable remaindermen will be modified except for the changes described above all other provisions of trust will remain unchanged accordingly the modification of trust to provide for the partial_termination of trust and the early distribution to the charitable remaindermen will not result in a material difference in_kind or extent of the legal entitlements enjoyed by the beneficiaries and no gain_or_loss will be recognized on the modification of trust under sec_1001 as for the purchase of the annuities for the benefit of the annuitant beneficiaries it is represented that each annuity policy to be purchased by the charitable remaindermen will remain the asset of the purchasing charity and the annuitant beneficiaries will have no rights to the annuity payments superior to those of the purchasing charities’ other creditors accordingly the purchase of the annuities by the charitable remaindermen for the benefit of the annuitant beneficiaries will not result in the immediate realization of capital_gain capital_loss or taxable_income by the annuitant beneficiaries this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative plr-149860-07 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely james f hogan senior technician reviewer branch passthroughs special industries enclosures copy for sec_6110 purposes copy of this letter


t c memo united_states tax_court nariman teymourian petitioner v commissioner of internal revenue respondent docket no filed date william e taggart jr for petitioner davis g yee for respondent memorandum findings_of_fact and opinion haines judge respondent determined the following deficiencies and penalties in petitioner’s federal_income_tax year deficiency dollar_figure dollar_figure sec_6662 a penalty dollar_figure dollar_figure after concessions the issues for decision are whether petitioner received rental income of dollar_figure in and dollar_figure in years in issue whether amounts disbursed to or on behalf of petitioner by caspian consulting group inc caspian during the years in issue were properly characterized as loans or should be recharacterized as constructive dividends and whether petitioner is liable for accuracy-related_penalties under sec_6662 for the years in issue findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits to the extent admitted are incorporated herein by this reference at the time unless otherwise indicated all section references are to the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure petitioner concedes that he received the following capital_gain of dollar_figure in additional income of dollar_figure in from personal expenses charged by petitioner to caspian’s credit card and paid_by caspian and additional inoome of dollar_figure in from petitioner’s personal_use of the company aircraft in respondent’s notice_of_deficiency respondent determined that petitioner had received rental income of dollar_figure for and dollar_figure for however respondent subsequently conceded that this amount was the result of a computational error and asserted that petitioner received only dollar_figure in each year of filing the petition petitioner resided in atherton california petitioner has a doctoral degree in political science and master’s degrees in political science and nuclear defense policies petitioner does not have a finance or accounting background petitioner works in software development in petitioner and bradley k morrison mr morrison formed a partnership prism consulting group prism to develop software for the health care industry on date petitioner and mr morrison organized caspian incorporated under the laws of the state of california by the end of petitioner and mr morrison transferred their partnership interests in prism to caspian in exchange for all of caspian’s stock during and prism’s business operations were taken over by caspian during the years in issue petitioner owned percent of caspian’s stock and served as the chief_executive_officer and president on the board_of directors mr morrison owned the remaining percent and served as chief technologist and secretary and treasurer on the board_of directors petitioner and mr morrison were the sole members of the board_of directors during the years in issue caspian hired cameron rolling to handle its accounting and tax matters craig rolling mr rolling was part owner of cameron rolling he received his b a in business administration a master’s degree in taxation and has been a certified_public_accountant c p a for years mr rolling personally prepared petitioner’s and caspian’s tax returns for the years in issue and he also provided general advice to petitioner and caspian on tax_accounting and other financial matters during petitioner applied for a residential_loan in connection with that loan petitioner and his wife gail s ferrando-teymourian ms ferrando-teymourian signed a uniform residential_loan application loan application the loan application was not personally filled out by petitioner but instead was prepared by reza zargari of gateway residential funding on the loan application under vi assets and liabilities schedule of real_estate owned petitioner reported that he had net rental loss of dollar_figure from property located pincite grand street4 in redwood city california redwood city house and net rental income of dollar_figure from property located pincite granville in los angeles california los angeles condominium at the time the loan application was filled out petitioner’s primary residence was the redwood city house and petitioner’s parents lived in the los angeles condominium on the loan application due to a typographical error grand street appears grant street during caspian made the following disbursements to petitioner dollar_figure dollar_figure ____________________________________ total disbursements for dollar_figure these disbursements were identified on caspian’s books as employee advances at the end of the advances were converted to notes on caspian’s books petitioner used these funds in connection with the purchase of a new home petitioner and ms ferrando-teymourian jointly filed a federal individual_income_tax_return for reporting dollar_figure of adjusted_gross_income and dollar_figure of taxable_income they did not report the disbursements received from caspian as income nor did they report rental income during caspian made the following disbursements to or on behalf of petitioner bill check credit card charges transfer credit card charges transfer credit card charges bills dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure ms ferrando-teymourian has a separate suit pending in this court docket no and is not a party to the present case dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure __________________________________________________ total disbursements for dollar_figure check check bill transfer transfer check bill check transfer bill credit card charges check transfer credit card charges bill check credit card charges transfer bill transfer transfer bill check credit cards charges bill these disbursements were identified on caspian’s books as officer’s rec - nt at the end of the advances were converted to notes on caspian’s books on date petitioner used voluntary payroll deductions to reimburse caspian dollar_figure of this amount dollar_figure represented payment of interest and dollar_figure represented repayment of the disbursements caspian reported interest_income on its tax_return reflecting petitioner’s payment of interest petitioner and ms ferrando-teymourian jointly filed a federal individual_income_tax_return for reporting dollar_figure of adjusted_gross_income and dollar_figure of taxable_income they did not report the disbursements made by caspian as income nor did they report rental income during the years in issue caspian made no formal declaration or payment of a dividend petitioner and caspian did not execute formal loan instruments with respect to the amounts disbursed to or paid on behalf of petitioner in the fall of respondent’s examining agent roseann kacheris ms kacheris began investigating caspian’s corporate tax returns for and during the course of her investigation she also examined petitioner’s individual income_tax returns for the years in issue on date respondent issued petitioner a notice_of_deficiency for and in the notice respondent made the following increases to petitioner’s taxable_income amount of increase type of adjustment capital_gain itemized_deductions exemptions rental income dividends ____________________________________________ total adjustments for dollar_figure big_number big_number big_number big_number dollar_figure type of adjustment itemized_deductions rental income dividends ____________________________________________ total adjustments for dollar_figure big_number big_number amount of increase dollar_figure respondent increased petitioner’s tax_liability by dollar_figure and dollar_figure and imposed sec_6662 penalties of dollar_figure and dollar_figure for and respectively on date petitioner filed his petition with the court alleging that he did not receive rental income that respondent improperly recharacterized the loans as constructive dividends and that he was not liable for the sec_6662 accuracy-related_penalties as set forth in respondent’s notice_of_deficiency opinion a petitioner did not have unreported rental income respondent determined that petitioner received but failed to report rental income in the amounts of dollar_figure in and dollar_figure in petitioner bears the burden_of_proof to show that respondent erred in making this determination rule a on the residential_loan application petitioner reported net rental income of dollar_figure from his los angeles condominium ms kacheris respondent’s examining agent testified that her sole reason for determining that petitioner received rental income of dollar_figure in and dollar_figure in was from statements made by petitioner on the loan application however petitioner credibly testified that when mr zargari was preparing the loan application petitioner believed the loan application was asking for the net rental value or the amount petitioner would have received had he rented out the property in addition petitioner credibly testified that his parents were living in the los angeles condominium he did not charge his parents rent and he did not receive any rent respondent argues that we do not have to accept petitioner’s self-serving testimony citing 121_tc_308 in mendes the taxpayer was contesting a 10-percent additional tax on an early distribution from a qualified_retirement_plan imposed under sec_72 id pincite the taxpayer argued that a bank had previously withheld the percent additional tax but offered no documentation to verify his testimony id the court held that it did not have to rely on the taxpayer’s self-serving testimony when he failed to present other evidence that the 10-percent additional tax was previously withheld unlike the taxpayer in mendes petitioner is asserting that he never received income we recognize the inherent difficulty in proving a negative and because we find petitioner’s testimony to be credible and his explanation of the loan application persuasive we accept petitioner’s testimony given petitioner’s credible and persuasive explanation of the loan application we find that peitioner has met his burden_of_proof based on the above we hold that petitioner did not receive rental income during the years in issue and is thus not liable for any income_tax deficiencies relating to rental income b respondent improperly recharacterized petitioner’s loans as constructive dividends respondent determined that disbursements made by caspian to and on behalf of petitioner during the years in issue were constructive dividends and not loans the resolution of this issue does not depend on which party bears the burden_of_proof on the basis of the evidence in the record we hold that the amounts disbursed to petitioner were loans whether a corporation’s disbursements to an employee- shareholder are loans or constructive dividends depends on whether at the time of the disbursements the employee- shareholder intended to repay the amounts received and the corporation intended to require payment 85_tc_1005 56_tc_1324 affd without published opinion 496_f2d_876 5th cir 56_tc_556 affd without published opinion 474_f2d_1338 3d cir if repayment was intended at the time of disbursement the amounts are generally considered loans miele v commissioner supra pincite on the other hand if no repayment was intended the amounts are to be considered constructive dividends id this determination depends on all the facts and circumstances surrounding the transactions 322_f2d_956 9th cir affg tcmemo_1962_6 j a tobin constr co v commissioner supra pincite miele v commissioner supra pincite 29_tc_1193 affd 271_f2d_267 5th cir when an employee-shareholder is in substantial control of the corporation such control invites special scrutiny roschuni v commissioner supra pincite mere declarations by an employee- shareholder that he intended a transaction to constitute a loan are insufficient if the transaction fails to meet more reliable indicia of debt j a tobin constr co v commissioner supra pincite in making the necessary factual determination courts have looked to a number of objective factors including w hether the promise to repay is evidenced by a note or other instrument whether interest was charged whether a fixed schedule for repayments was established whether collateral was given to secure payment whether repayments were made whether the borrower had a reasonable prospect of repaying the loan and whether the lender had sufficient funds to advance the loan and whether the parties conducted themselves as if the transaction were a loan 204_f3d_1228 9th cir affg tcmemo_1998_121 see also j a tobin construction co v commissioner supra pincite no single factor is controlling and the transaction must be examined as a whole welch v commissioner supra pincite we address each of these factors in turn petitioner’s promise to pay was not evidenced by a note the absence of a note or other loan documentation is indicative of a constructive_dividend miele v commissioner supra pincite see also roschuni v commissioner supra pincite2 jones v commissioner tcmemo_1997_400 affd without published opinion 177_f3d_982 11th cir weigel v commissioner tcmemo_1996_485 however loans without documentation are not uncommon between a shareholder and a closely_held_corporation and such documentation is not a prerequisite to finding that a loan exists miele v commissioner supra pincite weigel v commissioner supra petitioner stipulated that he did not execute formal loan documents with respect to the disbursements made by caspian during the years in issue while this factor alone is not determinative it weighs in favor of finding a constructive_dividend petitioner paid dollar_figure in interest the payment of interest indicates the existence of a loan 962_f2d_1077 1st cir affg tcmemo_1990_636 see also roschuni v commissioner supra pincite2 jones v commissioner supra at trial mr rolling testified that an interest rate of percent was charged on the other hand petitioner testified that he was uncertain as to the percentage but he believed the an interest rate was prime plus one respondent argues that the contradictory testimony of mr rolling and petitioner casts doubt on whether interest was charged however petitioner mr rolling and mr morrison all credibly testified that they knew interest was being charged in addition petitioner paid dollar_figure in interest on date while there may have been some confusion as to the rate of interest the stated intent of the parties and the actual payment of interest weighs in favor of finding a loan there was no fixed schedule for repayment the lack of a fixed schedule for repayment is indicative of a constructive_dividend see crowley v commissioner supra roschuni v commissioner supra pincite jones v commissioner supra petitioner testified at trial that there was no fixed schedule for repayment this factor weighs in favor of finding a constructive_dividend no collateral secured repayment of the loan the lack of collateral pledged to secure repayment is indicative of a constructive_dividend see crowley v commissioner supra pincite roschuni v commissioner supra pincite2 jones v commissioner supra petitioner testified that he was not asked to provide collateral but he understood his shares of caspian would secure repayment under california state law a creditor can acquire an enforceable security_interest in collateral by having the debtor sign a security_agreement and deliver the certificated security to the secured party cal com code secs b west the record is devoid of any evidence that petitioner signed a security_agreement or delivered his caspian stock to caspian therefore we find that there was no collateral including the caspian stock pledged to secure repayment this factor weighs in favor of finding a constructive_dividend petitioner made repayments of dollar_figure repayments of the amounts disbursed indicate the existence of a loan crowley v commissioner supra pincite see also miele v commissioner supra pincite roschuni v commissioner supra pincite weigel v commissioner supra however to be persuasive the amounts of repayments in comparison to the amounts owed must be substantial and not merely nominal miele v commissioner supra pincite during the years in issue caspian made disbursements to or on behalf of petitioner in amounts totaling dollar_figure caspian reflected the disbursements on its books as either advances officer’s receivables or notes on date petitioner repaid a total of dollar_figure of which dollar_figure was applied to reduce the balance of the notes receivable accounts petitioner’s repayment of slightly more than percent of the total disbursements was substantial and not merely nominal this factor weighs in favor of finding a loan petitioner had a reasonable prospect of repayment a reasonable prospect of repayment indicates the existence of a loan see 204_f3d_1228 9th cir a taxpayer’s insolvency or financial difficulty casts doubt on the ability to repay and thus on the characterization of a disbursement as a loan see id petitioner and his wife reported adjusted_gross_income of dollar_figure and dollar_figure for and respectively on date petitioner repaid dollar_figure leaving dollar_figure outstanding given petitioner’s income and history of repayment petitioner had a reasonable prospect of repaying the remainder of the disbursements this factor weighs in favor of finding a loan the parties involved treated the disbursements as loans the conduct of the parties may indicate the existence of a loan morrison v commissioner tcmemo_2005_53 see welch v commissioner supra pincite 25_tc_387 petitioner credibly testified that at the time the disbursements were made he intended the disbursements to be loans he believed that interest would be charged and he understood that he would have to repay the amounts disbursed during petitioner paid dollar_figure in interest and repaid dollar_figure of the disbursements mr morrison the minority shareholder of caspian credibly testified that he understood the amounts disbursed to petitioner were loans and he expected petitioner to repay the loans together with interest in addition caspian reported petitioner’s dollar_figure payment as interest_income on its income_tax return caspian treated the disbursements to petitioner as notes receivable indicating caspian’s expectation that the amounts would be repaid the behavior of the parties weighs heavily in favor of finding a loan summary while three of the seven factors weigh in favor of finding a constructive_dividend we find those factors to be less persuasive in the present case in transactions between shareholders and closely held corporations formalities are often not followed a lack of formality does not preclude treatment of disbursements as loans see miele v commissioner supra pincite- the absence of a note does not outweigh the behavior of petitioner or caspian in treating the disbursements as loans in addition the fact that petitioner paid back a substantial portion of the disbursements indicates that the lack of collateral and the lack of a set repayment schedule did not diminish his intent to repay petitioner and mr morrison understood the amounts disbursed to be loans petitioner acted in a manner consistent with the existence of a loan as demonstrated by his payment of interest and substantial repayment of a portion of the amounts disbursed due to his salary and his history of repayment petitioner had a reasonable prospect of repaying the disbursements in full based on the evidence in the record we hold that the amounts disbursed to petitioner during the years in issue were loans c petitioner is not liable for sec_6662 accuracy-related_penalties respondent assessed sec_6662 penalties of dollar_figure and dollar_figure against petitioner for and this finding does not include the following amounts conceded by petitioner capital_gain of dollar_figure received in and additional income of dollar_figure and dollar_figure received in and respectively respectively petitioner contests these penalties arguing that there was no underpayment_of_tax or in the alternative petitioner had reasonable_cause for his underpayment of taxes sec_6662 imposes an accuracy-related_penalty of percent of the underpayment_of_tax attributable to negligence or disregard of the rules or regulations or attributable to a substantial_understatement_of_income_tax sec_6662 b and however no penalty will be imposed if the taxpayer had reasonable_cause for the underpayment_of_tax and the taxpayer acted in good_faith sec_6664 sec_1_6662-3 sec_1 a income_tax regs the commissioner bears the burden of production with respect to penalties sec_7491 116_tc_438 however the taxpayer must show that he had reasonable_cause and acted in good_faith rule a petitioner conceded that he received but did not report long-term_capital_gain of dollar_figure additional income of dollar_figure in and additional income of dollar_figure in we negligence is defined as the failure to make a reasonable attempt to comply with the provisions of this title and the term ‘disregard’ includes any careless reckless or intentional disregard sec_6662 sec_1_6662-3 income_tax regs there is a substantial_understatement_of_income_tax for any year if the amount of understatement exceeds the greater of percent of the tax required to be shown on the return or dollar_figure sec_6662 do not need to reach the issues of whether the resulting underpayments were substantial or were due to negligence because we find petitioner had reasonable_cause and acted in good_faith a taxpayer’s reliance on the advice of a professional as to the tax treatment of certain items does not automatically constitute reasonable_cause 115_tc_43 affd 299_f2d_221 3d cir see sec_1_6664-4 income_tax regs for a taxpayer to reasonably rely on the advice of a professional the taxpayer must show the adviser was a competent professional who had sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment neonatology associates v commissioner supra pincite mr rolling has a b a in business administration and a master’s degree in taxation he is a licensed c p a and has been practicing for more than years during the years in issue mr rolling prepared tax returns for petitioner and caspian and served as a general consultant to both on tax- related issues throughout the course of mr rolling’s testimony we found him to be a competent professional who had sufficient expertise to justify petitioner’s reliance based upon the testimony of petitioner and mr rolling regarding the amounts of income not reported but eventually conceded by petitioner the characterization of those amounts was open to reasonable doubt at the time petitioner filed his returns based upon mr rolling’s testimony and on other evidence submitted we find that mr rolling was provided with necessary and accurate information by both petitioner and caspian finally based upon petitioner’s credible testimony we find that petitioner relied on mr rolling for the preparation of his tax returns during the years in issue and that petitioner’s reliance was in good_faith for the foregoing reasons we conclude that petitioner reasonably and in good_faith relied on the advice of a competent professional and we hold that petitioner is not liable for the sec_6662 penalties conclusion we hold that petitioner did not receive rental income during the years in issue and is thus not liable for any income_tax deficiencies relating to rental income we further hold that disbursements made by caspian to and on behalf of petitioner were loans and not constructive dividends finally we hold that petitioner is not liable for accuracy-related_penalties in reaching our holdings we have considered all arguments made and to the extent not mentioned we conclude that they are moot irrelevant or without merit to reflect the foregoing decision will be entered under rule


t c summary opinion united_states tax_court brian craig johnson petitioner v commissioner of internal revenue respondent docket no 11543-13s l filed date brian craig johnson pro_se john f driscoll and edwin b cleverdon for respondent summary opinion lauber judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed unless otherwise indicated all statutory references are to the internal_revenue_code in effect at all relevant times and all rule references are to the tax_court rules_of_practice and procedure pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case in this collection_due_process cdp case petitioner seeks review pursuant to sec_6320 of the determination by the internal_revenue_service irs or respondent to uphold the filing of a notice_of_federal_tax_lien respondent has moved for summary_judgment under rule contending that there are no disputed issues of material fact and that his determination to uphold the notice of tax_lien_filing was proper as a matter of law we agree and accordingly will grant the motion background petitioner timely filed a federal_income_tax return for the irs ex- amined the return determined a tax_deficiency and additions to tax and mailed a notice_of_deficiency to petitioner’s last_known_address by certified mail the notice_of_deficiency was returned to the irs unclaimed after three failed delivery attempts petitioner did not petition this court in response to the notice_of_deficiency in date the irs assessed the income_tax deficiency and additions to tax for and thereafter began its collection efforts in date a settlement officer so from the irs appeals_office sent petitioner with respect to his tax_liability a final notice_of_intent_to_levy and notice of your right to a hearing petitioner timely submitted form request for a collection_due_process or equivalent_hearing in which he sought to dispute his underlying tax_liability for according to petitioner his ori- ginal return for that year reported an incorrect amount due to an erroneous sched- ule k-1 shareholder’s share of income deductions credits etc at the cdp hearing held in date the so told petitioner that he could not challenge his tax_liability because he had neglected to petition the tax_court in response to the notice_of_deficiency as stated in her case activity report petitioner was prohibited from challenging his underlying liability because the statutory_notice_of_deficiency was mailed to the last_known_address t he notice was returned to irs unclaimed following the hearing the so issued to petitioner a notice_of_determination concerning collection action s under sec_6320 and or sustaining the proposed levy which petitioner does not dispute receiving petitioner did not petition this court in response to that notice_of_determination in a further effort to collect petitioner’s assessed tax_liability the irs filed in date a notice_of_federal_tax_lien nftl which is the subject of the present controversy the irs sent petitioner a notice_of_federal_tax_lien filing and your right to a hearing under sec_6320 and he timely requested another cdp hearing in his request petitioner advanced the same challenge to his underlying tax_liability that he had attempted to raise at the prior cdp hearing he also sought a collection alternative in the form of an offer-in- compromise and or withdrawal of the nftl a different settlement officer so2 acknowledged receipt of petitioner’s hearing request and scheduled a telephone cdp hearing she informed petitioner that in order for her to consider a collection alternative he had to be in compliance with his federal tax_return filing obligations she noted that according to irs records he had filed no return for or during the date hearing so2 advised petitioner he could not con- test his assessed tax_liability because he had neglected to petition this court in response to either the notice_of_deficiency or the notice of determina- tion moreover because petitioner had filed no tax_return for or she was unable to consider his request for an offer-in-compromise how- ever she told him that she might consider a request for withdrawal of the nftl she faxed him the relevant form and gave him days to respond petitioner did not return the withdrawal form nor did he provide any other documentation to so2 during the hearing process she subsequently closed the case and on date the irs issued petitioner a notice_of_determination upholding the nftl petitioner while residing in louisiana timely petitioned this court for review of that determination discussion i summary_judgment standard summary_judgment is intended to expedite litigation and avoid unnecessary and costly trials 115_tc_554 we may grant summary_judgment when no genuine dispute exists regarding any material fact and a decision may be rendered as a matter of law see rule b 98_tc_518 aff’d 17_f3d_965 7th cir in response to a motion for summary_judgment the nonmoving party must set forth specific facts showing that a genuine dispute of material fact exists for trial rule d sundstrand corp t c pincite petitioner responded to the motion for summary_judgment by filing a letter noting that certain property subject_to the tax_lien had been sold and expressing the hope that the proceeds would discharge his tax_liability this letter did not allege any material facts in dispute we conclude that summary adjudication is appropriate ii standard of review neither sec_6320 nor d prescribes the standard of review that this court should apply in reviewing an irs administrative determination in a cdp case the general parameters for such review are marked out by our prece- dents where the validity of the underlying tax_liability is at issue the court re- views the irs’ determination de novo 114_tc_176 where the underlying tax_liability is not properly at issue we review the irs’ decision for abuse_of_discretion id pincite an abuse_of_discretion exists when a determination is arbitrary capricious or without sound basis in fact or law see 125_tc_301 aff’d 469_f3d_27 1st cir a taxpayer’s underlying liability is not properly at issue during a cdp hearing and therefore cannot be raised in this court on review thereof if the taxpayer received a notice_of_deficiency for such liability or otherwise had a prior opportunity to dispute it see sec_6330 sec_301_6320-1 q a-e2 proced admin regs a taxpayer has had a prior opportunity to dispute a liability when he participated in an earlier cdp hearing received a notice_of_determination regarding the same liability and was entitled to petition this court for review of the determination under sec_6320 or sec_6330 see 126_tc_356 here petitioner participated in a prior cdp hearing regarding his tax liability--the date hearing regarding the notice_of_levy he attempted to raise his tax_liability at that hearing but the so refused to let him do so conceivably that refusal may have been erroneous if it was petitioner could have challenged that determination as well as his underlying tax_liability by seeking review in this court see bell t c pincite because petitioner had a prior opportunity to contest his tax_liability but neglected to do so that liability was not properly raised at the date cdp hearing we accordingly review so2’s determination for abuse_of_discretion only the so during the date hearing refused to let petitioner challenge his underlying tax_liability because he had not petitioned this court in response to the notice_of_deficiency generally a taxpayer must actually receive the notice_of_deficiency for the preclusion under sec_6330 to apply see tatum v commissioner tcmemo_2003_115 but see onyango v commissioner t c __ date preclusion applies despite lack of receipt where taxpayer declines to retrieve mail despite multiple reasonable opportunities to do so 114_tc_604 preclusion applies despite lack of receipt where taxpayer deliberately refuses delivery of mail the record contains no evidence as to why the notice_of_deficiency though mailed to petitioner’s last_known_address was returned to the irs unclaimed after three failed delivery attempts because petitioner did not petition in response to the notice_of_determination we need not decide whether the so was correct in determining that preclusion applied because he did not petition in response to the notice_of_deficiency iii analysis we consider whether in the course of making her determination so2 properly verified that the requirements of any applicable law or administrative procedure have been met considered any relevant issues petitioner raised and determined whether any proposed collection action balances the need for the efficient collection_of_taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary sec_6330 we have reviewed the record and conclude that so2 properly verified that all requirements of applicable law and administrative procedure were met so2 also properly balanced the need for efficient collection_of_taxes with petitioner’s legitimate concern that collection action be no more intrusive than necessary so2 declined to consider petitioner’s request for an offer-in-compromise because he had not filed a tax_return for or it is not an abuse of dis- cretion for the irs to decline discussion of a collection alternative where the tax- payer is not in compliance with his tax_return filing obligations see eg rodriguez v commissioner tcmemo_2003_153 rather generously so2 did offer petitioner the opportunity to request withdrawal of the nftl petitioner did withdrawal of an nftl is a collection alternative see sec_301 e q a-e6 proced admin regs because petitioner was not in continued not return the withdrawal form within the days allowed and he thus declined to pursue this opportunity petitioner has not alleged a material dispute of fact concerning any of these points and we therefore resolve them in respondent’s favor finding no abuse_of_discretion in any respect we will grant summary_judgment for respondent and affirm the irs’ determination to sustain the notice_of_federal_tax_lien filing to reflect the foregoing an appropriate order and decision will be entered continued compliance with his tax_return filing obligations so2 was not obligated to offer that relief


t c summary opinion united_states tax_court william w brown petitioner v commissioner of internal revenue respondent docket no 6899-06s filed date william w brown pro_se kathleen k raup for respondent ruwe judge this case was heard pursuant to the provisions of section of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined a deficiency in federal_income_tax of dollar_figure for petitioner’ sec_2001 tax_year after concessions the issue we must decide is whether petitioner is entitled to deduct payments totaling dollar_figure toward the principal of an outstanding debt reported on his schedule c profit or loss from business background some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated by this reference when the petition was filed petitioner resided in egg harbor township new jersey petitioner has been a residential home builder since on date petitioner purchased five vacant lots lots in egg harbor township new jersey for dollar_figure in order to pay for the lots petitioner borrowed dollar_figure from respondent concedes that petitioner is entitled to deduct dollar_figure for mortgage interest reported on his schedule c the parties stipulate that petitioner is not entitled to a deduction for mortgage interest reported on his schedule a itemized_deductions but he is entitled to the dollar_figure standard_deduction for the parties also agree that petitioner is entitled to a schedule c business deduction of dollar_figure instead of the claimed dollar_figure for business use of home and a lifetime_learning_credit of dollar_figure instead of the claimed dollar_figure for whether petitioner is liable for additional self-employment_tax or entitled to an earned_income_credit for are computational adjustments that will need to be made in the parties’ rule_155_computations anchor savings and loan association anchor gave a mortgage on the lots and a second mortgage on his home as security entire transaction hereinafter referred to as the loan according to the loan commitment letter dollar_figure of the amount borrowed was to be placed into a passbook savings account at anchor as an interest reserve in petitioner completed a home on one of the lots and in he sold a partially completed home on another one of the lots before petitioner sold all of the lots that had secured repayment of the loan during and anchor was placed in receivership by the resolution trust corporation and petitioner’s loan was subsequently sold to federal financial co on date petitioner and federal financial co executed a modification agreement whereby petitioner agreed to repay the outstanding indebtedness of the loan dollar_figure at a 9-percent interest rate over months pursuant to the terms of the modification agreement petitioner was required to make dollar_figure monthly payments each payment consisting of principal and interest pursuant to the modification agreement petitioner made monthly payments of dollar_figure toward the loan to federal financial co in of the dollar_figure paid dollar_figure was applied to interest and dollar_figure was applied to the principal of the loan petitioner timely filed a federal_income_tax return on date respondent mailed a notice_of_deficiency to petitioner with respect to the tax_year petitioner timely filed a petition on date discussion based on the foregoing facts which are not in dispute petitioner argues that the portion of his loan payments applicable to the principal should be deductible as a business_expense respondent argues that to allow petitioner a deduction for repayment of the principal on the loan would essentially allow a double deduction respondent argues that petitioner used the loan to purchase the lots and established petitioner’s tax basis in them respondent notes that each of the five lots that secured the loan was sold before and that any gain_or_loss on the sale of those lots should or could have already been reported on petitioner’s returns for years before summarily respondent’s argument is that petitioner has or could have already recovered the cost of the lots when they were sold petitioner filed a ch petition in the u s bankruptcy court for the district of new jersey on date in the filing of a ch petition triggered an automatic_stay which prohibits the commencement of a proceeding in the tax_court concerning the debtor see u s c sec_362 the automatic_stay was lifted on date when the bankruptcy court entered an order granting petitioner a discharge under ch of the bankruptcy code due to the automatic_stay the running of the time for petitioner to file a petition in this court was suspended which allowed him to file a timely petition after the discharge from bankruptcy see sec_6213 and that the deduction of the principal of the loan would effectively duplicate a tax_benefit to petitioner we agree with respondent’s argument after borrowing the funds petitioner used the proceeds to purchase lots the borrowed funds used for the purchase created a tax basis the subsequent sale of the lots resulted in either a profit or loss at trial petitioner acknowledged that he would have reported any gain from the sale of the lots in prior years by subtracting his cost from the sales_price if petitioner had suffered a loss he could have offset other income regardless of whether petitioner had a gain_or_loss on the sale of the lots the tax_benefit of the cost incurred in purchasing the lots would have been realized in the year_of_sale the repayment of the loan’s principal is a different transaction from the purchase and sale of the lots and does not create a deductible business_expense petitioner was simply returning borrowed money see 62_tc_878 11_bta_1299 therefore we sustain respondent’s determination that petitioner is not entitled to a deduction for the repayment of principal on the loan to reflect the foregoing decision will be entered under rule