department of the treasury internal_revenue_service washington d c date gl-802255-98 cc dom fs p si number release date uilc dollar_figure dollar_figure internal_revenue_service national_office field_service_advice memorandum for northern california district_counsel from assistant chief_counsel field service cc dom fs subject settlement of tax_liabilities this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend t b c d e year year year year year year year issues whether excise and transfer_taxes would be applicable if the corpus of c were invaded to pay the personal tax_liability of t whether the service’s self-imposed administrative stay of collection prohibits the department of justice from foreclosing the tax_lien in the absence of jeopardy if the service’s administrative stay of collection does not prohibit the department of justice from foreclosing the tax_lien whether the proposed settlement should be accepted conclusions excise and transfer_taxes would be applicable under the proposed distribution to the extent the distribution exceeds the unitrust_amount the administrative stay of collection does not prohibit the department of justice from foreclosing the tax_lien the proposed settlement offer should not be accepted facts in year sec_1 through and year sec_15 and t participated in a tax_shelter promoted by b on september year t created c a charitable_remainder_unitrust and on october year funded it with stock pursuant to the terms of the trust the unitrust_amount must be distributed in quarterly installments to t and the remainder paid to a contingent charitable_beneficiary shortly after being funded c sold the stock and used the proceeds to purchase a variable_annuity contract with t as the annuitants the charitable_remainder_unitrust is administered by d and e is named as the contingent charitable_beneficiary remainderman it is likely that the transfer of stock to c rendered t insolvent on february year the internal_revenue_service chief operations officer issued a memorandum unilaterally and voluntarily suspending collection action against investors for assessments flowing from adjustments to partnerships promoted by b except for jeopardy situations on may year the chief operations officer issued a memorandum clarifying the february year memorandum the may year memorandum clarifies that the administrative stay of collection only applies to notices of levy and seizures and does not apply to actions such as defending and filing suits pursuant to adjustments made on account of t’s participation in the tax_shelter deficiencies were determined and on december year t and the government entered into a closing_agreement on april year an assessment was made against t on may year the service filed a notice of tax_lien with respect to the tax assessments on september year the united_states filed an action to reduce tax assessments to judgment set_aside fraudulent_conveyances and foreclose federal tax_liens the action alleged that t’s transfer of stock to c was intended to hinder delay or defraud the united_states of present and future lawful taxes and that the transfers were made without fair consideration or in exchange for reasonably equivalent value and rendered t insolvent thus the transfers were fraudulent and of no effect as to the united_states accordingly the united_states seeks to foreclose on t’s interest in the annuity_contract held by c t contended that they had legitimate reasons to establish the charitable_remainder_unitrust including the avoidance of substantial capital_gains on the sale of stock on january year t filed a voluntary chapter bankruptcy petition through the bankruptcy trustee t has proposed to settle any_tax liabilities by having the bankruptcy trustee invade the trust corpus and use such funds to pay the claims of the government t would not be liable for any_tax liability associated with such a distribution such as recognition of capital_gain or excise_taxes imposed for self- dealing in addition the charitable_contribution_deduction claimed by t in year for the contribution of stock to c would not be disallowed in whole or in part finally the parties would agree that t committed no fraud law and analysi sec_1 invasion of trust corpus through the bankruptcy trustee t has proposed to settle any_tax liabilities by having the bankruptcy trustee invade the trust corpus and use such funds to pay the claims of the government the proposed settlement includes a provision that t would not be liable for any_tax liability associated with such a distribution such as excise_taxes imposed for self-dealing a charitable_remainder_unitrust is a_trust from which a fixed percentage valued annually is to be paid not less than annually to one or more persons at least one of which is not an organization described in sec_170 and in the case of individuals only to an individual who is living at the creation of the trust for a term of years not in excess of years or for the life or lives of such individuals sec_664 b the payments are referred to as the unitrust_amount following the termination of the unitrust payments the remainder_interest in the trust is transferred to or for_the_use_of an organization described in sec_170 sec_664 at the time the trust was created the fixed percentage could not be less than five percent subsequently sec_664 was amended to provide that the fixed percentage to be distributed must be no less than five percent and no greater than percent and the remainder_interest in such property must be at least percent of the fair_market_value of such property as of the date of the gift pub_l_no sec no amount other than the unitrust_amount may be paid to or for_the_use_of any person other than an organization described in sec_170 sec_664 sec_1_664-3 the trust may not be subject_to a power to invade alter amend or revoke for the beneficial use of a person other than an organization described in sec_170 sec_1_664-3 a charitable_remainder_unitrust is subject_to tax only with respect to unrelated_business_taxable_income sec_664 accordingly c did not pay any capital_gains_tax upon the sale of the stock contributed to c by t an individual is entitled to a charitable_contribution for the present_value of the remainder_interest of the trust sec_170 sec_1_170a-6 accordingly in year t claimed a charitable_contribution equal to the remainder_interest in c a five percent excise_tax on the amount_involved is imposed on each act of self- dealing between a disqualified_person and a charitable_remainder_unitrust sec_4941 sec_4947 a ½ percent excise_tax is imposed on the participation of the trustee in any act of self-dealing between a disqualified_person and the charitable_remainder_unitrust unless such participation is not willful and due to reasonable_cause sec_4941 sec_4947 additional taxes are imposed on disqualified persons or the trustee if the act of self-dealing is not corrected sec_4941 sec_4947 self-dealing includes any direct or indirect transfer to or use by or for the benefit of a disqualified_person of the income or assets of a charitable_remainder_trust sec_4941 sec_4947 a tax of ten percent of the amount_involved is imposed on a charitable_remainder_trust for each taxable_expenditure sec_4945 sec_4947 a tax of ½ percent is imposed on the agreement of any trustee to the making of an expenditure knowing it is a taxable_expenditure to the extent of the amount thereof unless such agreement is not willful and is due to reasonable_cause sec_4945 additional taxes are imposed under sec_4945 a taxable_expenditure includes any amount_paid or incurred by a charitable_remainder_trust for any purpose other than one specified in sec_170 sec_4945 a charitable_remainder_trust which complies with sec_664 and for which a deduction was allowed under sec_170 is a split interest trust described in sec_4947 and subject_to sec_4941 and sec_4945 with respect to the charitable_remainder interest sec_4947 as a result of the creation of c t irrevocably gave a contingent_remainder interest to e and retained only the interest in the unitrust_amount only this interest and not the entire trust corpus is currently property of the bankruptcy_estate because the trust is a separate taxpayer from t and has an independent legal existence the bankruptcy trustee cannot disregard the trust as an entity and invade the interest t relinquished in creating the trust any invasion alteration amendment or revocation of the trust for the benefit of any person other than an organization described in sec_170 is prohibited sec_1_664-3 in addition because e has a vested contingent_remainder interest in the trust any invasion of the trust corpus without adequately providing for the vested_remainder interest would be invalid in addition a distribution of assets from c to settle t’s tax_liabilities would constitute an act of self-dealing as any distribution of an amount in excess of the unitrust_amount would use c’s assets for the benefit of t sec_4941 a distribution would also constitute a taxable_expenditure as a distribution of charitable assets for a purpose not described in sec_170 sec_4945 accordingly the bankruptcy trustee cannot invade the corpus of c without triggering the penalties for self-dealing and taxable_expenditures this result is inconsistent with the proposed settlement agreement effect of the administrative stay of collection on september year the united_states filed an action to reduce tax assessments to judgment set_aside fraudulent_conveyances and foreclose federal tax_liens the action alleged that t’s transfer of stock to c was intended to hinder delay or defraud the united_states of present and future lawful taxes and that the transfers were made without fair consideration or in exchange for reasonably equivalent value and rendered t insolvent thus the transfers were fraudulent and of no effect as to the united_states accordingly the united_states seeks to foreclose on t’s interest in the annuity_contract held by c the bankruptcy trustee insofar as the trustee assumes control_over the trust corpus would literally fall within the definition of foundation_manager participation in a court-supervised settlement of the case likely would be viewed as reasonable_cause so that the bankruptcy trustee would not be liable for the sec_4941 and sec_4945 taxes on foundation managers on february year the chief operations officer issued a memorandum suspending collection action against investors for assessments flowing from adjustments to partnerships promoted by b except for jeopardy situations on may year the chief operations officer issued a memorandum clarifying the february year memorandum because the administrative stay only applies to notices of levy and seizures and not to actions such as defending and filing suits the government’s suit to set_aside the fraudulent conveyance is not affected by the service’s administrative stay of collection in addition the administrative stay of collection does not invalidate or nullify collection actions taken prior to issuance of the memorandum establishing the voluntary stay consistency with resolution of fraudulent conveyance cases in year sec_1 through and year sec_15 and t participated in a tax_shelter promoted by b on september year t created c a charitable_remainder_unitrust and on october year funded it with stock pursuant to adjustments made on account of t’s participation in the tax_shelter deficiencies were determined and on december year t and the government entered into a closing_agreement on april year an assessment was made against t california follows the uniform fraudulent transfer act act the government’s complaint to set_aside the fraudulent conveyance alleges actual intent to defraud pursuant to california’s state civil code section a section a provides as follows a transfer made or obligation incurred by a debtor is fraudulent as to a creditor whether the creditor’s claim arose before or after the transfer was made or the obligation incurred if the debtor made the transfer or incurred the obligation as follows a with actual intent to hinder delay or defraud any creditor of the debtor b without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction or intended to incur or believed or reasonably should have believed that he or she would incur debts beyond his or her ability to pay as they became due for purposes of this analysis it is assumed that the government can prove that the transfer of t’s stock to c was a fraudulent transfer and that the government can trace the purchase of the annuity_contract and the proceeds therefrom to the stock transfer a successful suit to set_aside the fraudulent transfer and to foreclose the federal tax_liens would have the effect of voiding the transfer including the transfer of the contingent charitable_remainder interest thus the government could foreclose its tax_liens against the annuity_contract or proceeds therefrom in the ninth circuit whose law is controlling in this case the service became a creditor as of the close of the respective taxable_year at issue 829_f2d_828 9th cir service becomes a creditor at the close of the taxable_year cf 238_f2d_881 8th cir service becomes a creditor on the date the return is filed 334_fsupp_799 e d pa service becomes a creditor on the date the tax_return is due to be filed at a minimum the tax_liabilities had accrued before the transfer of stock from t to c and the fact that the transfer occurred prior to the tax_liens arising and prior to the filing of notices of federal_tax_lien is of no consequence moreover pursuant to section whether the claim arose before or after the fraudulent transfer was made is irrelevant if successful in its suit to set_aside the fraudulent conveyance t’s transfer of stock to c would be voided and therefore the united_states could invade c’s corpus to pay the service’s claim in the absence of the stock having been transferred to the trust the sale of the stock would have occurred in the hands of t there is no code provision that would release t from reporting capital_gain upon the sale of the stock in addition to the extent stock was not transferred to the trust t would not have been entitled to claim a charitable_contribution_deduction under the proposed settlement agreement t would not be liable for any capital_gain in addition the charitable_contribution_deduction claimed by t in year for the contribution of stock to c would be allowed finally the parties would agree that t committed no fraud the proposed settlement agreement is directly contrary to the tax result that should occur if the conveyance were considered fraudulent and the transfer voided in addition the inclusion in the proposed settlement agreement that t committed no fraud is directly contrary to the rationale upon which voiding the transfer must be based given these overarching and irreconcilable inconsistencies we recommend that you do not accept the proposed settlement offer case development hazards and other considerations please call if you have any further questions by patrick putzi special counsel natural_resources passthroughs special industries branch field service division


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 fip b04 plr-137924-12 date march legend insurance fund ------------------------------------------------------------ trust state ------------------------------------------- --------------------------------------------------- manager ------------------------------------------------------------ x -------------------------------------- dear ------------------- this is in response to your request for a ruling that insurance fund’s investment in the central fund will not cause contract holders to be treated as the owners of the shares of the insurance fund for federal_income_tax purposes facts insurance fund is registered with the securities_and_exchange_commission sec as a series of trust and its shares are registered with the sec under the securities act of as amended the securities act trust is a business_trust formed under the laws of state and is registered under the investment_company act of as amended the act as an open-end management investment_company pursuant to sec_851 of the internal_revenue_code the code insurance fund is treated as a separate corporation insurance fund has elected to be treated as a regulated_investment_company ric under subchapter_m part of the code and plr-137924-12 intends to qualify for the tax treatment afforded rics under the code for each of its taxable years shares of insurance fund are offered to insurance_company segregated_asset accounts collectively separate_accounts to serve as investment vehicles for variable life_insurance policies and variable_annuity contracts purchased by individuals collectively variable_contracts and the individuals holding the variable_contracts the contract holders except as otherwise permitted by sec_1_817-5 of the income_tax regulations all of the shares of insurance fund are held directly or indirectly by one or more separate_accounts of one or more insurance_companies and public access to insurance fund is available exclusively through the purchase of a variable_contract within the meaning of sec_817 currently the sole owners of the insurance fund shares are these separate_accounts however from time to time shares of insurance fund may also be offered to and held by i other permitted holders described in sec_1 f or ii one or more investment companies registered under the act that are funds of funds the shares of which except as otherwise permitted by sec_1_817-5 are offered exclusive to separate_accounts of insurance_companies each separate_account that holds or will hold shares of insurance fund will be a separate_account registered with the sec as a unit_investment_trust under the act or is exempt from registration under the act although the terms of each variable_contract may differ the applicable insurance_company generally will hold the premiums_paid by a contract holder net of any fees or commissions and any income earned on the net_premiums in a separate_account a contract holder generally is able to allocate amounts held in the separate_account among several different subaccounts that correspond to the variable investment options under his or her variable_contract at least one subaccount will correspond to an investment in insurance fund insurance fund is managed by manager a registered investment adviser under the investment advisers act of as amended subject_to the supervision of trust’s board_of trustees manager is responsible for managing insurance fund’s investments by executing transactions in accordance with insurance fund’s investment objectives policies and restrictions which are set forth in insurance fund’s prospectus and statement of additional information as filed periodically with the sec and providing related administrative services and facilities under an investment advisory agreement between insurance fund and manager insurance fund seeks to achieve its investment objective by investing primarily in various types of debt instruments in addition insurance fund may invest from time to time in an affiliated market fund for purposes of investing any cash that remains uninvested by manager on any given day eg due to investor purchases and receipt of interest on portfolio securities or for temporary defensive purposes in response to adverse market political economic or other conditions plr-137924-12 manager currently proposes to establish a pooled investment vehicle that would invest in x a particular segment of the debt markets the central fund insurance fund will invest a portion of its assets in the central fund in place of investing such assets directly in x the central fund is organized as a series of a business_trust formed under the laws of state and such trust is registered under the act as an open-end management investment_company the shares of the central fund will be registered with the sec under the securities act pursuant to sec_851 of the code the central fund will be treated for federal_income_tax purposes as a separate corporation the central fund will elect to be treated as a ric under subchapter_m part of the code and intends to qualify for the tax treatment afforded rics under the code for each of its taxable years manager will act as the investment adviser to the central fund similar to insurance fund subject_to the supervision of the applicable trust’s board_of trustees manager will be responsible for managing the central fund’s investments by executing transactions in accordance with the central fund’s investment objectives policies and restrictions which are set forth in the central fund’s prospectus and statements of additional information as will be filed periodically with the sec and providing related administrative services and facilities under an investment advisory agreement between the central fund and manager the central fund will be established for exclusive use by certain entities and accounts for which manager acts as investment adviser therefore shares of the central fund will be available for purchase only by certain manager-advised entities and accounts including without limitation insurance fund some of these entities and accounts that will invest in the central fund are directly available to investors other than through the purchase of variable_contracts including certain publicly available manager-advised mutual funds that are treated as rics subchapter_m part of the code for federal_income_tax purposes in this respect public access to the central fund is available indirectly to investors other than contract holders initially insurance fund expects to set an internal target allocation for its investment in the central fund any such target allocation will not be set out in insurance fund’s registration_statement or otherwise made available to insurance fund shareholders rather the registration_statement will indicate only that insurance fund can achieve exposure to certain debt securities either directly or indirectly through another mutual_fund advised by manager accordingly insurance fund would not provide notice to insurance fund shareholders of a change in an internal target allocation manager in its capacity as investment adviser to insurance fund and subject_to the supervision of trust’s board_of trustees may determine to change insurance fund’s internal target allocation to the central fund from time to time in its sole and absolute discretion depending on among other factors insurance fund’s investment strategy changes in market conditions and manager fund’s market outlook as such the percentage of insurance fund’s assets invested in central fund will not be plr-137924-12 fixed in advance of any contract holder’s investment and could be changed at any time by manager fund insurance fund represents that its investment in the central fund will be made in accordance with the investment diversification requirements of sec_817 of the code and the income_tax regulations thereunder the central fund is not eligible for the look- through treatment provided for certain investment companies partnerships and trusts under sec_1_817-5 because not all beneficial interests in the central fund will be held by one or more segregated accounts of one or more insurance_companies or other permitted holders under sec_1 817-f f thus for purposes of these requirements insurance fund’s investment in the central fund will be treated as a single investment pursuant to sec_817 and sec_1_817-5 no more than of the value of insurance fund’s total assets will be represented by any one investment no more than of the value of insurance fund’s total assets will be represented by any two investments no more than of the value of insurance fund’s total assets will be represented by any three investments and no more than of the value of insurance fund’s assets will be represented by any four investments other than a contract holder’s ability to allocate the variable_contract premiums and transfer amounts in a separate_account to and from the insurance_company subaccount corresponding to insurance fund all investment decisions concerning insurance fund are made by manager in its sole and absolute discretion subject_to supervision by trust’s board_of trustees the contract holders do not have and will not have any current knowledge of insurance fund’s specific assets or insurance fund’s specific allocation to the central fund insurance fund’s portfolio holdings however are made available on a delayed basis in monthly postings on manager’s website in quarterly filings with the sec and in annual and semi-annual reports to shareholders the contract holders cannot and will not be able to direct insurance fund’s investment in any particular asset or recommend a particular investment or investment strategy and there is not and will not be any agreement or plan between manager and a contract holder regarding a particular investment of insurance fund no contract holder can or will be able to communicate directly or indirectly with manager concerning the selection quality or rate of return on any specific investment or group of investments held by insurance fund the contract holders do not have and will not have any legal equitable direct or indirect ownership_interest in any of insurance fund’s assets rather the contract holders have and will have only a contractual claim against the insurance_companies offering the variable_contract to collect from the insurance_companies under the terms of their specific variable_contracts insurance fund represents that the foregoing statements in this paragraph will remain true as it invests in the central fund except as otherwise permitted by sec_4982 all shares of insurance fund will be held directly or indirectly by the separate_accounts of life_insurance_companies that are held in connection with variable_contracts and insurance fund therefore will qualify for plr-137924-12 the exception from federal excise_tax provided by sec_4982 unless a contract holder is treated as a shareholder of insurance fund pursuant to the investor_control requirements of revrul_81_225 1981_2_cb_12 and revrul_82_54 1982_1_cb_11 requested ruling insurance fund a ric that is offered to separate_accounts and other permitted holders under sec_1_817-5 requests the service to rule that its investment in the central fund a publicly available ric will not cause the contract holders to be treated as the owners of the shares of insurance fund for federal_income_tax purposes law and analysis sec_61 of the code provides that the term gross_income means all income from whatever source derived including gains derived from dealings in property interest and dividends sec_817 and sec_1 set forth diversification requirements for segregated_asset accounts on which variable_contracts are based sec_817 and sec_1 f provide a look-through_rule for determining whether the diversification requirements are met the look-through_rule applies to a regulated_investment_company partnership or trust but only if a all the beneficial interests in the investment_company partnership or trust are held by one or more segregated_asset accounts of one or more insurance_companies and b public access to the investment_company partnership or trust is available exclusively through the purchase of a variable_contract under sec_1 f the following four categories of beneficial_interest are ignored for purposes of determining whether these two requirements are satisfied interests held by the general account of a life_insurance_company or a corporation related to a life_insurance_company but only if the return of such interest is computed in the same manner as the return on an interest held by a segregated_asset_account is computed there is not intent to sell such interests to the public and a segregated_asset_account of such life_insurance_company also holds or will hold a beneficial_interest in the investment_company partnership or trust interest held by a manager or a corporation related to the manager of the investment_company partnership or trust the return on such interest is computed in the same manner as the return on an interest held by a segregated_asset_account is computed and there is not intent to sell such interests to the public interests held by the trustee of a qualified_pension or retirement_plan or plr-137924-12 interests held by the public or treated as owned by the policyholders pursuant to revrul_81_225 but only if a the investment_company partnership or trust was closed to the public in accordance with revrul_82_55 1982_1_cb_12 or b all the assets of the segregated_asset_account are attributable to premium payments made by policyholders before date to premium payments made in connection with a qualified_pension or retirement_plan or to any combination of such premium payments a long standing doctrine_of taxation provides that taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed-the actual benefit for which the tax is paid 281_us_376 the incidence of taxation attributable to ownership of property is not shifted if the transferor continues to retain significant control_over the property transferred without regard to whether such control is exercised through specific retention of legal_title the creation of a new equitable but controlled interest or the maintenance of effective benefit through the interposition of a subservient agency 435_us_561 333_us_591 309_us_331 749_f2d_513 8th cir reversing 578_fsupp_398 n d iowa revrul_77_85 1977_1_cb_12 considers a situation in which the individual purchaser of a variable_annuity contract retains the right to direct the custodian of the account supporting that variable_annuity to sell purchase and exchange securities or other assets held in the custodial_account the purchaser also is able to exercise an owner’s right to vote account securities either through the custodian or individually the service concludes that the purchaser possesses significant incidents_of_ownership over the assets held in the custodial_account the service reasons that if a purchaser of an investment annuity_contract can select and control the investment_assets in the separate_account of the life_insurance_company issuing the contract then the purchaser is treated as the owner of those assets for federal_income_tax purposes thus any interest dividends or other income derived from the investment_assets is included in the purchaser’s gross_income in revrul_80_274 1980_2_cb_27 the service applying revrul_77_85 concludes that if a purchaser of an annuity_contract can select and control the certificates of deposit supporting the contract then the purchaser is considered the owner of the certificates of deposit for federal_income_tax purposes similarly revrul_81_225 1981_2_cb_12 concludes that investments in mutual_fund shares to fund annuity_contracts are considered to be owned by the purchaser of the annuity if the mutual_fund shares are available for purchase by the general_public revrul_81_225 also concludes that if the mutual_fund shares are available only through the purchase of an annuity_contract then the sole function of the fund is to provide an investment vehicle that allows the issuing insurance_company to meet its obligations under its plr-137924-12 annuity_contracts and the mutual_fund shares are considered to be owned by the insurance_company in revrul_82_54 1982_1_cb_11 the purchaser of certain annuity_contracts can allocate premium payments among three funds and has an unlimited right to reallocate contract value among the funds prior to the maturity_date of the annuity_contract interests in the funds are not available for purchase by the general_public but are instead only available through purchase of an annuity_contract the service concludes that the purchaser’s ability to choose among general investment strategies for example between stock bonds or money market instruments either at the time of the initial purchase or subsequent thereto does not constitute control sufficient to cause the contract holders to be treated as the owners of the mutual_fund shares in christoffersen v u s the eighth circuit considered the federal_income_tax consequences of the ownership of the assets supporting a segregated_asset_account the taxpayers in christoffersen purchased a variable_annuity contract that reflected the investment return and market_value of assets held in an account that was segregated from the general_asset_account of the issuing insurance_company the taxpayers had the right to direct that their premium payments be invested in any one of six publicly traded mutual funds the taxpayers could reallocate their investment among the funds at any time the taxpayers also had the right upon seven days notice to withdraw funds surrender the contract or apply the accumulated value under the contract to provide annuity payments the court_of_appeals held that the taxpayer not the insurance_company that issued the annuity_contract owned the mutual_fund shares for federal_income_tax purposes thus the taxpayers were required to include in gross_income any gains dividends or other income derived from the mutual_fund shares in revrul_2003_91 2003_2_cb_347 a variable_contract holder does not have control_over segregated account assets sufficient to be deemed the owner of the assets the variable_contracts at issue are funded by a separate_account that is divided into sub-accounts the issuing insurance_company can increase or decrease the number of sub-accounts at any time but there will never be more than sub-accounts available under the contracts each sub-account offers a different investment strategy interests in the sub-accounts are available solely through the purchase of a contract the investment activities of each sub-account are managed by an independent investment_advisor there is no arrangement plan contract or agreement between the contract holder and the issuing insurance_company or between the contract holder and the independent investment_advisor regarding the availability of a particular sub account the investment strategy of any sub-account or the assets to be held by a particular sub- account other than a contract holder’s right to allocate premiums and transfer funds among the available sub-accounts all investment decisions concerning the sub- accounts are made by the issuing insurance_company or the independent investment_advisor in their sole and absolute discretion a contract holder has no legal equitable direct or indirect interest in any of the assets held by a sub-account but has only a contractual claim against the issuing insurance_company to collect cash in the form of plr-137924-12 death_benefits or cash surrender values under the contract the service concludes that based on all the facts and circumstances the contract holder does not have direct or indirect control_over the separate_account or any sub-account asset and therefore the contract holder does not possess sufficient incidents_of_ownership over the assets supporting the variable_contracts to be deemed the owner of the assets for federal_income_tax purposes in revrul_2003_92 2003_2_cb_350 the purchasers of variable_annuity and variable life_insurance contracts are able to allocate their premiums among different sub-accounts each sub-account invests in a partnership none of the partnerships is a publicly_traded_partnership under sec_7704 of the code and all the partnerships are exempt from registration under the federal securities laws interests in each partnership are sold in private_placement offerings and are sold only to qualified purchasers that are accredited investors or to no more than accredited investors in the ruling the service holds that the purchasers of the variable_annuity and variable life_insurance contracts are the owners for federal_income_tax purposes of the partnership interests that fund the variable_contracts if interests in the partnerships are available for purchase by the general_public the service further holds that if the purchasers of the variable_annuity and variable life_insurance_contract are considered the owners of the partnership_interest that fund the variable_contracts the contract purchasers must include any interest dividends or other income derived from the partnership_interest in gross_income in the year in which the income is earned in revrul_2007_7 2007_1_cb_468 which clarified and amplified revrul_81_225 and revrul_2003_92 the service held that the holder of a variable_contract is not treated as the owner of an interest in a ric that funds the variable_contract solely because interest in the same ric are also available to investors described in sec_1 f analysis the determination of whether the contract holders have sufficient incidents_of_ownership over insurance fund’s shares to be deemed the owners of those shares depends on all of the relevant facts and circumstances except as otherwise permitted by sec_1_817-5 shares of insurance fund are available exclusively through the purchase of variable_contracts a contract holder cannot and will not be able to direct insurance fund’s investment in any particular asset or recommend a particular investment or investment strategy other than a contract holder’s ability to allocate the variable_contract premiums and transfer amounts in the applicable separate_account to and from the insurance_company subaccount corresponding to insurance fund all investment decisions concerning insurance fund are and will be made by manager in its sole and plr-137924-12 absolute discretion subject_to supervision by trust’s board_of trustees there is not and there will not be any arrangement plan contract or agreement between manager and a contract holder regarding the availability of insurance fund through a subaccount available under the contract holder’s variable_contract or the specific assets to be held by insurance fund no contract holder can or will be able to communicate directly or indirectly with manager concerning the selection quality or rate of return on any specific investment or group of investments held by insurance fund a contract holder does not have and will not have any legal equitable direct or indirect ownership_interest in any of the assets of the insurance fund but rather has and will have only a contractual claim against the life_insurance_company offering the variable_contract to receive cash from the insurance_company under the terms of his or her variable_contract the investment strategy of insurance fund is sufficiently broad to prevent the contract holders from making particular investment decisions through investment in insurance fund the percentage of insurance fund’s assets invested in the central fund will not be fixed in advance of any contract holder’s investment and will be subject_to change by manager at any time in addition a contract holder does not have and will not have any current knowledge of insurance fund’s specific assets or insurance fund’s specific allocation to the central fund ruling based on all the facts and circumstances insurance fund’s investment in the central fund will not give rise to an impermissible level of investor_control by the contract holders of variable_contracts that are funded by separate_accounts that invest in insurance fund and will not cause the contract holders to be treated as owners of the shares of insurance fund for federal_income_tax purposes except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination 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 plr-137924-12 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 donald j drees jr senior technician reviewer branch financial institutions products


t c memo united_states tax_court gregory dean owens petitioner v commissioner of internal revenue respondent docket no filed date gregory dean owens pro_se rebecca dance harris for respondent memorandum findings_of_fact and opinion thornton judge respondent determined the following deficiencies in and additions to petitioner’s federal income taxes addition_to_tax year deficiency sec_6651 dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number the issues for decision are whether petitioner underreported gross_receipts from his dental practice for taxable years through as determined by respondent whether for taxable years and petitioner substantiated his claimed wage expense deductions and whether for each year in issue petitioner is liable for the sec_6651 addition_to_tax for fraudulent_failure_to_file an income_tax return findings_of_fact the parties have stipulated some of the facts which we incorporate herein by this reference when he petitioned the court petitioner resided in abingdon virginia petitioner’s dental practice from through the years in issue petitioner was sole_proprietor of his general dental practice in abingdon virginia the dental practice the town of abingdon virginia abingdon required petitioner to file on or before january each year a business license application the application 1’ all section references are to the internal_revenue_code in effect for the relevant taxable years all rule references are to the tax_court rules_of_practice and procedure reporting among other things gross_receipts from the dental practice for the previous calendar_year abingdon used this information to calculate petitioner’s business license tax petitioner timely filed applications reporting gross_receipts from the dental practice as follows year gross_receipts dollar_figure big_number big_number big_number big_number on each application petitioner affirmed under penalty of perjury that the amount reported as gross_receipts was true and correct the criminal investigation petitioner initially failed to file federal_income_tax returns for the years through on date following an investigation by respondent’s criminal_investigation_division petitioner executed a plea agreement wherein he agreed to plead guilty to five counts of violating sec_7203 for willful failure_to_file federal_income_tax returns--one count for each of the subject years on date judgment was entered by the united_states district_court for the western district of virginia accepting petitioner’s guilty plea pursuant to the terms of his plea agreement petitioner stipulated that this plea agreement does not settle compromise or otherwise affect in any way any federal tax interest civil penalty or other obligation for which i may now be or in the future become liable under title_26 united_states_code q4e- petitioner’s federal_income_tax returns pursuant to the terms of the plea agreement petitioner agreed to file a true complete and correct federal_income_tax return for each of the subject years on date petitioner filed these federal_income_tax returns attached to each return is a schedule c profit or loss from business sole_proprietorship schedule c showing among other things gross_income from the dental practice and wage expense deductions in the following amounts year gross_income wage expenses dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number petitioner maintained no books_or_records of his income and expenses he does not know how he arrived at either the gross_receipts or wage expense deductions shown on the schedules c respondent’ s determinations in the notice_of_deficiency respondent determined that petitioner’s dental practice gross_income and allowable wage expense deductions were as follows year gross_income wage expense dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number -- - opinion unreported gross_income respondent determined that petitioner had unreported gross_income from his dental practice based on the excess of the amounts petitioner reported on his applications for the subject years over the amounts he reported on his delinquent federal_income_tax returns petitioner’s admissions on the applications provide at least a minimal evidentiary foundation if any be required supporting respondent’s determinations of unreported income cf 999_f2d_760 4th cir affg tcmemo_1992_153 the burden_of_proof is on petitioner to show that respondent’s determinations are incorrect see rule a 290_us_111 williams v commissioner supra in his petition petitioner states that respondent’s determinations are in error because the gross_receipts reported to town of abingdon have been determined to be incorrect petitioner has offered no testimony or other evidence to support in certain circumstances if the taxpayer introduces credible_evidence with respect to any factual issue relevant to ascertaining the proper tax_liability sec_7491 places the burden_of_proof on respondent see sec_7491 rule a sec_7491 is effective with respect to court proceedings arising in connection with examinations commencing after date see internal_revenue_service restructuring and reform act of publaw_105_206 sec c 112_stat_726 petitioner does not contend nor is there evidence that his examination commenced after date or that sec_7491 applies in this case -- - this contention petitioner has not attempted to controvert the admissions he made under penalties of perjury on each application that he filed shortly after the end of each year in issue indeed these contemporaneous applications seem more reliable than petitioner’s federal_income_tax returns which were filed years after the fact especially given that petitioner has admitted that he kept no books_or_records and has stipulated that he does not know how he arrived at the gross_receipts reported on his tax returns therefore we sustain respondent’s determination of the amount of petitioner’s unreported income wage expense deductions petitioner offered no evidence to substantiate the wage expense deductions he claimed on his federal_income_tax returns accordingly petitioner has not established that he is entitled to wage expense deductions greater than those allowed by respondent additions to tax pursuant to sec_6651 respondent has determined that petitioner is liable for sec_6651 additions to tax for fraudulently failing to file his tax returns for each of the subject years respondent must establish by clear_and_convincing evidence that petitioner’s for respondent determined that petitioner is entitled to wage expense deductions greater than petitioner claimed on his federal_income_tax return this determination is not in issue - failure_to_file was an intentional attempt to evade tax believed to be owing see sec_7454 rule b 102_tc_632 67_tc_181 affd without published opinion 578_f2d_1383 8th cir the existence of fraud is a question of fact to be resolved upon consideration of the entire record gajewski v commissioner supra pincite because fraudulent intent can seldom be established by direct proof it may be proved by circumstantial evidence clayton v commissioner supra pincite 92_tc_661 petitioner pleaded guilty to five counts of violating sec_7203 for willful failure_to_file federal_income_tax returns one count for each taxable_year and willful failure_to_file even over an extended time does not conclusively establish the fraudulent intent required under sec_6651 see 75_tc_1 wilkinson v commissioner tcmemo_1997_410 petitioner’s guilty plea however is evidence of fraud that coupled with other affirmative indications of the requisite fraudulent intent warrants imposition of the addition_to_tax for fraud see grosshandler v commissioner supra as evidenced by his admissions in the plea agreement petitioner knew that he was required to file a federal_income_tax return for each year in issue and he willfully failed to do so --- - until faced with the prospect of criminal prosecution as evidenced by the applications he filed with abingdon petitioner was aware that he had substantial gross_income from his dental practice when petitioner finally did file tax returns for the years in issue he understated his aggregate gross_income by approximately dollar_figure petitioner maintained no books_and_records of his income and expenses according to undisputed testimony of respondent’s special_agent petitioner indicated during the criminal investigation that he had avoided investing in assets such as real_estate that he believed the internal_revenue_service irs could seize in collection of back taxes instead he invested in assets such as gold and silver bars anda swiss annuity that he believed the irs could not seize such statements are inconsistent with any good-faith misunderstanding of the tax laws that could negate fraud cf 99_tc_202 although petitioner attended trial he declined the opportunity to testify and failed to introduce any evidence we draw an adverse inference from petitioner’s silence and take it into account as a factor to be considered in combination with all the other evidence in the record see sherrer v commissioner tcmemo_1999_122 on the basis of all the evidence we conclude that petitioner is liable for the sec_6651 addition_to_tax for --- - each year in issue accordingly we need not address respondent’s alternative arguments that petitioner is liable for sec_6651 additions to tax or sec_6662 accuracy- related penalties to reflect the foregoing decision will be entered under rule schedules attached to the notice_of_deficiency indicate that for each year in issue respondent determined the sec_6651 additions to tax based on petitioner’s total corrected tax_liability calculated as the sum of the total_tax shown on petitioner’s return plus the amount determined to be a deficiency for each year with adjustments for additions to tax previously assessed under sec_6651 our jurisdiction over respondent’s determination under sec_6651 extends only to so much of the addition_to_tax as is attributable to the deficiency cf 115_tc_142 estate of nemerov v commissioner tcmemo_1998_186 in the rule_155_computations we expect the amount of the deficiency for each year in issue to be calculated by including only those amounts of the sec_6651 additions to tax that are attributable to the deficiencies for the years in issue


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi plr-164352-02 date date company property state a b c d e f g h i j dear this letter responds to your letter dated date as well as subsequent correspondence submitted on behalf of company requesting a ruling that the rental income received by company from the property is not passive_investment_income within the meaning of sec_1362 of the internal_revenue_code facts company was incorporated under the laws of state on a and anticipates electing under sec_1362 to be an s_corporation effective b company has accumulated_earnings_and_profits company owns leases and manages commercial real_estate the property from an on-site office through its c officers and d staff members and with the assistance of property managers and independent contractors company provides various services in its real_estate leasing and management business these services include daily property visits maintenance and repair of common areas building exterior and roofing hvac and electrical systems and sidewalks maintenance of fire and life safety systems janitorial services for all interior common spaces such as lobbies elevators and hallways exterior window washing rubbish removal snow removal extermination services key and lock services utilities lobby security consultation on and supervision of tenant improvements and a 24-hour on-call service in addition to the services provided to tenants company handles the usual leasing and administrative functions involved in managing rental real_estate company received or accrued approximately e in rents and paid_or_incurred approximately f in relevant expenses for g on the property the rental income and expense figures for h are i and j respectively law and analysis except as provided in sec_1362 sec_1362 provides that a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that an election under sec_1362 terminates whenever the corporation i has accumulated_earnings_and_profits at the close of each of three consecutive tax years and ii has gross_receipts for each of such tax years more than percent of which are passive_investment_income except as otherwise provided in sec_1362 sec_1362 provides that the term passive_investment_income means gross_receipts derived from royalties rents dividends interest annuities and sales or exchanges of stock_or_securities sec_1_1362-2 of the income_tax regulations provides that rents means amounts received for_the_use_of or the right to use property whether real or personal of the corporation sec_1_1362-2 provides that rents does not include rents derived in the active trade_or_business of renting property rents received by a corporation are derived in an active trade_or_business of renting property only if based on all the facts and circumstances the corporation provides significant services or incurs substantial costs in the rental business generally significant services are not rendered and substantial costs are not incurred in connection with net leases whether significant services are performed or substantial costs are incurred in the rental business is determined based upon all the facts and circumstances including the number of persons employed to provide the services and the types and amounts of costs and expenses_incurred other than depreciation conclusion based solely on the facts and representations submitted we conclude that the rents company receives from the property are not passive_investment_income under sec_1362 except for the specific ruling above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code specifically we express or imply no opinion regarding company's eligibility to elect to be treated as an s_corporation further the passive_investment_income rules of sec_1362 are completely independent of the passive_activity rules of sec_469 unless an exception under sec_469 applies the rental_activity remains passive for purposes of sec_469 under a power_of_attorney on file with this office we are sending the original of this letter to you and a copy to company this ruling is directed only to the taxpayer who requested it according to sec_6110 this ruling may not be used or cited as precedent sincerely mary beth collins senior technician reviewer branch office of associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes cc


t c memo united_states tax_court max m and joan e greenberg petitioners v commissioner of internal revenue respondent docket no filed date andrew m glatt for petitioners christine v olsen for respondent memorandum findings_of_fact and opinion jacobs judge respondent determined an dollar_figure deficiency in petitioners’ federal_income_tax and a dollar_figure sec_6662 accuracy-related_penalty for such year the principal issue for decision concerns the proper characterization of payments petitioners received from or through an entity known as pioneer mortgage in totaling dollar_figure viz whether said payments should be characterized as interest_income as respondent contends or as a return_of_capital as petitioners contend in the event we accept respondent’s characterization of these payments then we must further decide whether petitioners are liable for the sec_6662 accuracy-related_penalty all section references are to the internal_revenue_code for the year in issue all rule references are to the tax_court rules_of_practice and procedure and all dollar amounts have been rounded some of the facts have been stipulated and are found accordingly the stipulation of facts and the attached exhibits are incorporated herein by this reference findings_of_fact at the time they filed their petition petitioners max m and joan e greenberg husband and wife resided in san diego california they timely filed a joint federal_income_tax return for pioneer mortgage inc pioneer mortgage inc pioneer mortgage or the company was incorporated by morrie naiman m naiman on date in m naiman died thereafter his nephew gary naiman g naiman continued the business previously conducted by his uncle viz the secondary mortgage market in the san diego area using the pioneer mortgage name for several interrelated companies g g naiman operated and controlled the following continued naiman was president and chief_executive_officer of pioneer mortgage from the mid-1970's until the company filed for bankruptcy in date pioneer mortgage originated and serviced real_estate loans and sold investments purportedly related to these loans to third parties the loans originated by pioneer mortgage generally were of a short-term duration and were secured_by real_estate the loans were commonly known as equity loans because they were based primarily on the borrower's equity in the real_estate securing the loan as opposed to the borrower’s creditworthiness the interest rate and origination fees on equity loans were commensurate to the relatively high degree of risk involved pioneer mortgage offered several types of investments related to the equity loans it originated the primary investment it offered was a purported fractionalized interest in a note and deed_of_trust from the borrower to pioneer mortgage this type of investment was portrayed to the investor as safe and conservative potential investors were advised that the borrower had sufficient equity in the collateralized property to support the loan another type of investment offered by pioneer mortgage was a mortgage pool investment known as a collateral mortgage obligation continued companies under the pioneer mortgage umbrella naiman financial corp naimpro inc naimco-clairemont inc naimco inc alvarado investment corp and frontier service corp as used hereinafter pioneer mortgage refers to pioneer mortgage and its interrelated companies cmo the company bundled different assets such as limited_partnership interests and subordinated deeds of trust and placed them in a_trust account to secure the cmo pioneer mortgage administered the cmo investment the investor received a cmo certificate which represented his proportionate ownership_interest in the bundled assets as well as a note from pioneer mortgage for his investment the investor received purported monthly interest payments drawn on pioneer mortgage's bank account pioneer mortgage paid interest at a rate higher than that obtainable from conventional savings accounts treasury bills or money market accounts pioneer mortgage forwarded monthly payments to the investors regardless of whether the borrower had at the time remitted its payment to the company the investors and pioneer mortgage typically entered into a loan service agreement pursuant to which the investor authorized pioneer mortgage to collect payments on and otherwise service the borrower's note the loan service agreement provided that pioneer mortgage could grant the borrower an extension of time to remit the required monthly payments if the borrower failed to make timely the interest payment pioneer mortgage could and normally did advance the borrower an amount equal to that which was due the loan service agreement further provided that if pioneer mortgage made a payment to the investor to cover the payment due from the borrower such payment would constitute an advance and would be repaid to pioneer mortgage upon receipt of the late payment from the borrower pioneer mortgage was required to inform the investor if any payment it remitted to the investor came from a source other than the borrower by designating on the check sent to the investor that such funds constitute a loan to the lender thus when pioneer mortgage advanced funds to the investor to cover the borrower's late interest payments pioneer mortgage labeled such payment with an l as of over big_number persons many of whom were elderly and counted on their investments through pioneer mortgage to provide a fixed income retirement had made investments through pioneer mortgage the amount of these investments totaled approximately dollar_figure million petitioners’ investments petitioners invested in several fractionalized interests in notes and deeds of trust through pioneer mortgage they also invested in a cmo the following is a list of petitioners’ investments with pioneer mortgage loan provided to a-440 enterprises inc foster scott wellington rudolph avion properties ltd naimco-clairemont inc sunnymead hermosa beach investment co cmo loan number investment investment_interest rate date of dollar_figure date big_number date big_number date big_number date big_number date --- big_number date petitioners received the following payments purportedly as interest in from pioneer mortgage with respect to the cmo check date payment sec_1 dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure total dollar_figure two of the statements for these payments have the notation l petitioners received the following payments purportedly as interest in with respect to their interests in notes and deeds through pioneer mortgage check date payment sec_2 dollar_figure dollar_figure in some documents this loan is referred to as loan no dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure total dollar_figure the monthly payment statements with respect to these investments indicate that the majority of the payments included an l notation the demise of pioneer mortgage in late pioneer mortgage acknowledged certain financial difficulties in date pioneer mortgage stopped advancing funds to the borrowers and failed to make interest payments for the first time on date pioneer mortgage and its interrelated companies filed for chapter bankruptcy protection shortly after pioneer mortgage’s bankruptcy filing the facts surrounding the company’s downfall became public apparently pioneer mortgage’s financial difficulties began as a result of the rapid expansion of the company into new types of products before the mid-1980's pioneer mortgage primarily arranged short-term loans that were secured_by first- or second-trust deeds on single- the bankruptcy court concluded that contrary to petitioners' belief they did not own a direct interest in borrower notes secured_by trust deeds but rather petitioners were unsecured creditors of pioneer mortgage in all of the pioneer mortgage investors including petitioners were required to relinquish their investments to a new entity called pioneer liquidating corporation family residences gradually the company shifted to junior deeds on larger residential and commercial loans including hotels resorts and undeveloped land in california and arizona accordingly in certain borrowers had not been making their monthly payments rather than foreclose on the properties or notify the pioneer mortgage investors g naiman used new investors’ money to fund the continued flow of purported interest payments the end result was a financial house of cards dependent on the influx of new investment dollars the house of cards could not survive in the long run on date petitioners filed a civil lawsuit against g naiman and other defendants for among other things intentional misrepresentation fraudulent concealment breach of fiduciary duty and aiding_and_abetting conspiracy a jury verdict was rendered in favor of petitioners on date the jury also awarded punitive_damages on date g naiman was indicted in federal court on charges of mail fraud and money laundering g naiman pleaded guilty to a scheme to defraud pioneer mortgage newspaper articles portray g naiman’s activities as a typical ponzi scheme such a scheme involves a pyramiding technique by which the earlier investors receive their returns from the principal of their own funds and from the principal of later investors petitioners’ suit was consolidated with some other lawsuits filed by pioneer mortgage investors seeking return of investment funds and damages in mertyle h owens trust v san diego trust savings bank consolidated case no in superior court of california county of san diego investors through illegal acts including mail fraud and money laundering promotion and concealment on date he is presently serving a year prison sentence at the time of trial herein petitioners had recovered approximately dollar_figure out of their total dollar_figure investment with pioneer mortgage forms in pioneer service co the trustee in bankruptcy issued to petitioners two forms 1099-int in the amounts of dollar_figure and dollar_figure with regard to the payments labeled interest on the cmo loan and the remaining loans respectively petitioners’ federal_income_tax return petitioners’ accountant kenneth b healey prepared petitioners' federal_income_tax return because of the document matching program that the internal_revenue_service employed mr healey determined that petitioners should report as interest_income the amount dollar_figure reported on the two forms 1099-int from pioneer service co and wash that amount out by claiming dollar_figure as negative income on line other income of their form_1040 the parties acknowledge that this amount is dollar_figure more than the dollar_figure petitioners actually received from pioneer mortgage in the dollar_figure comprises the sum total of the amounts reported on the forms 1099-int issued to petitioners for petitioners attached a statement to their tax_return which read the taxpayers are holders of notes receivable whose principal repayment is in doubt due to bankruptcy proceedings therefore the taxpayers are allocating payments received in to repayment of principal the amount of the payments is dollar_figure notice_of_deficiency respondent disallowed the dollar_figure negative income on petitioners’ return on the premise that petitioners failed to establish that any amount is deductible under the provisions of the internal_revenue_code this disallowance resulted in a dollar_figure increase in petitioners’ taxable_income opinion respondent claims that because the trustee in bankruptcy labeled the payments to petitioners as interest on forms 1099-int such payments constitute income petitioners posit that the money they received from pioneer mortgage in does not represent interest_income but rather payments made to conceal a fraud as such petitioners take the position that the payments constitute a return of their capital the issue involved is purely factual in their post-trial briefs petitioners argue beginning on or about date and continuing until approximately date g naiman and others devised a scheme to defraud and obtain money and property from investors by means of false and fraudulent pretenses representations and promises and the concealment of material facts as part of the scheme to defraud in the year preceding pioneer mortgage's bankruptcy filing on date g naiman and others created and maintained the illusion that pioneer mortgage was financially stable when in fact it was not pioneer mortgage maintained this illusion in order to attract new investor funds these new funds were applied to the monthly interest payments due previous pioneer mortgage investors prior financial obligations of the various pioneer mortgage companies and bank over-drafts at several financial institutions due to the nature of the fraud perpetrated on petitioners there was no agreement between petitioners and pioneer mortgage petitioners believed that they were investing directly in specific promissory notes which were adequately secured_by trust deeds however as the facts in this case clearly indicate what petitioners ended up with was instead some sort of undivided_interest as a creditor of pioneer mortgage's successor which is being liquidated via a bankruptcy proceeding the payments received by petitioners during did not originate from investments of a character and quality in which petitioners believed they had invested rather the evidence clearly demonstrates that the petitioners were defrauded as to the character and quality of the investment instruments owned by them we agree with petitioners' characterization of the payments in question interest is compensation_for the use or forbearance of money 308_us_488 we conclude that the payments petitioners received through their investment with pioneer mortgage in were not for the use and forbearance of their money but rather such payments were made to conceal g naiman's fraudulent misappropriation of petitioners' investment accordingly the payments represented a return of petitioners' investment and should not be included in income as interest simply because the payments were reported as interest on forms 1099-int cf 283_us_404 the interest label given to these payments was patently erroneous petitioners' money was not invested in the manner promised by pioneer mortgage because the payments petitioners received from or through pioneer mortgage in represented a return_of_capital and not interest_income respondent's determination that petitioners are liable for the accuracy-related_penalty falls by the wayside consequently decision will be entered for petitioners were we required to decide this issue we would rule in favor of petitioners


department of the treasury employer_identification_number contact person - id number contact telephone number uil internal_revenue_service p o box cincinnati oh release number release date date date legend m organization n organization p organization q organization x scholarship program y organization z dollars dollar amount dear you asked for advance approval of your scholarship grant procedures under internal_revenue_code sec_4945 this approval is required because you are a private_foundation that is exempt from federal_income_tax you requested approval of your scholarship program to fund the education of certain qualifying students our determination we approved your procedures for awarding scholarships based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding scholarships meet the requirements of code sec_4945 as a result expenditures you make under these procedures won't be taxable also awards made under these procedures are scholarship or fellowship grants and are not taxable to the recipients if they use them for qualified_tuition_and_related_expenses subject_to the limitations provide in code sec_117 description of your request you support a number of initiatives involving the educational advancement of youth as part of your charitable programs to expand on these programs you plan to award scholarship grants to individuals under a program titled x the purpose of x is to make letter catalog number 58263t grants to college seniors specifically student athletes interested in pursuing their - education after graduation in the first year of the program you anticipate making scholarship grants to six college seniors graduating from eligible colleges and universities throughout the country the six scholarships will be awarded to one male and one female student athlete in each of three selected sports who intend to further their education post-graduation the sports selected will be non-revenue sports you may increase or decrease the actual number of scholarships from time to time scholarships must be used to attend an accredited college or university for post graduate study it is anticipated that in the first year scholarships will be awarded in the amount of z dollars to be used during the recipient's first year of post-graduation educational activities the dollar amount granted each year will be at your discretion scholarships will only be awarded for one year and are not renewable the selection criteria for the scholarship consist of e e e e e the student -athlete must be a member of a p volleyball soccer or lacrosse team one female and one male athlete from each sport will be selected the student -athlete must demonstrate he or she intends to pursue an advanced degree or otherwise further his or her education at an accredited college or university after graduation the student -athlete must be a graduating senior or recently graduated senior who has exhausted all eligibility to play an n collegiate sport aneligible student-athlete must have a strong undergraduate academic record generally with at least a ‘b average participants will be required to submit transcripts to you for your consideration the student-athlete must have demonstrated leadership teamwork and good character during his or her athletic career this may include recommendations from y and the individual athletic directors of the appropriate schools you will strive to award scholarships to student-athletes who represent the whole range of diversity of n athletes and athletic programs and selection will not be made on the basis of race religion nationality or ethnic origin no employees or directors of m or any of its subsidiaries nor any members of their immediate families will be eligible to receive scholarships in addition no officer director or employee of you or of m nor any member of their immediate families will be eligible to receive scholarships you will distribute scholarship applications to y who will then distribute them to the athletic directors of its member schools who can provide them to interested athletes completed applications will then be submitted by student athletes to y for consideration a scholarship committee of y will nominate for consideration three or four individuals both men and women in each of the three non-revenue sports selected the nominations will be based on recommendations from the athletic directors from y’s member schools and will be based on a good record of scholarship leadership and teamwork nominations should also reflect geographic diversity racial ethnic diversity and diversity among q schools the nominations will be sent to your selection committee which will be letter catalog number 58263t made up of at least three individuals nominated by your board_of directors your selection committee will then select the final scholarship recipients from the recommendations from y you will select recipients using objective criteria related to undergraduate scholastic record leadership and teamwork and good citizenship you may take into account the full range of diversity among q and their student-athletes one male and one female from each sport will be selected you will verify each recipient’s admission and enrollment in a college or university prior to awarding the scholarships the recipient must be enrolled in an educational_institution that is an educational_organization described in code sec_170 or a state college or university described in code sec_511 upon verification and approval you will send a check to the college or university with instructions to deposit the money into the student's account with the school to defray the costs of tuition and fees the recipient's educational_institution will send semester or quarter reports to you detailing courses taken and grades received for the period covered by the scholarship where the required reports are delinquent or indicate any possible diversion of funds follow-up requests will be submitted if satisfactory reports are not received after a reasonable_time you will attempt to recover the funds while conducting an investigation you will withhold further payments until delinquent reports have been submitted if a diversion is determined to have occurred no further payments will made to the grantee you will obtain all records of the y scholarship nominating committee which will include all of the information used to evaluate potential grantees you will retain records identifying the recipients and demonstrating that no recipient is an individual who is a disqualified_person with respect to you the records will specify the amount and purpose of each grant and will retain all follow up information regarding progress reports any suspension of grants and any investigations of possible diversions of grant funds basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that meets all of the following requirements of code sec_4945 is not a taxable_expenditure e e e e the foundation awards the grant on an objective and nondiscriminatory basis the irs approves in advance the procedure for awarding the grant the grant is a scholarship or fellowship subject_to the provisions of code sec_117 the grant is to be used for study at an educational_organization described in code sec_170 letter catalog number 58263t other conditions that apply to this determination this determination only covers the grant program described above this approval will apply to succeeding grant programs only if their standards and procedures don't differ significantly from those described in your original request this determination applies only to you it may not be cited as a precedent you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you must report any significant changes to your program to the cincinnati office of exempt_organizations at internal_revenue_service exempt_organizations determinations p o box cincinnati oh you cannot award grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives all funds distributed to individuals must be made on a charitable basis and further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 you should keep adequate_records and case histories so that you can substantiate your grant distributions with the irs if necessary please keep a copy of this letter in your records if you have questions please contact the person listed at the top of this letter sincerely director exempt_organizations letter catalog number 58263t


o f f i c e o f t h e c h i e f c o u n s e l department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date number release date conex-124287-16 uil the honorable chuck grassley united_states senate washington dc ------------------- attention dear senator grassley i am responding to your inquiry dated date on behalf of one of your constituents your constituent expressed a concern that the taxes imposed on self- employed persons under the self-employment contributions act seca are not the same as the taxes imposed on employees and employers under the federal_insurance_contributions_act fica generally under the fica the employer and employee each pay a social_security_tax of percent and a medicare_tax of dollar_figure percent of the employee wages for a total of percent when the congress extended coverage under social_security and medicare to the self-employed a different tax structure under seca was required since no employer-employee wage paying structure existed in general under seca the self- employed person pays the same percent rate as employers and employees pay under fica though under seca the tax_rate is based on net self-employment_income rather than wages the congress recognized that some differences between the taxes under seca and fica existed to achieve parity between self-employed persons and employers and employees the congress enacted deductions under sec_164 and sec_1402 of the internal_revenue_code code under sec_1402 a self-employed_person may deduct dollar_figure percent when computing net_earnings_from_self-employment subject_to seca this deduction reflects that an employee does not pay fica tax on their employer’s portion of fica tax for wages paid to an employee additionally under sec_164 self-employed persons conex-124287-16 can deduct one-half of the seca_tax when computing their income subject_to income taxes this deduction reflects that an employee does not pay income_tax on the value of the employer’s portion of fica tax for wages paid to an employee i hope this information is helpful please contact me or if we can be of further assistance -------------------- ----------------- at sincerely michael swim senior technician reviewer employment_tax branch office of the associate chief_counsel tax exempt and government entities