tcmemo_1995_521 united_states tax_court harry d bledsoe and annie l bledsoe petitioners v commissioner of internal revenue respondent docket no filed date ted m riseling and jeff k rhodes for petitioners elizabeth downs for respondent memorandum findings_of_fact and opinion gerber judge respondent determined deficiencies in petitioners' federal income taxes additions to tax and a penalty as follows year deficiency additions to tax penalty sec sec sec_6653 a b dollar_figure dollar_figure dollar_figure sec sec sec_6651 a big_number dollar_figure big_number sec_6662 dollar_figure percent of the interest due on dollar_figure all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated after concessions the issues remaining for our consideration are whether petitioners are entitled to a bad_debt deduction in the amount of dollar_figure whether petitioners are entitled to schedule e deductions for legal fees for and in the amounts of dollar_figure and dollar_figure respectively whether petitioners are entitled to sec_1244 stock loss deductions for and in the amounts of dollar_figure and dollar_figure respectively whether petitioners received dividend distributions from their s_corporation in and in the amounts of dollar_figure dollar_figure and dollar_figure respectively whether petitioners are liable for additions to tax for and and an accuracy-related_penalty for for negligence or intentional disregard of rules or regulations whether petitioners are liable for an addition_to_tax for the late filing of their tax_return and whether petitioners are liable for additions to tax for and and an accuracy-related_penalty for for substantially understating their income_tax_liability petitioners also claim that they had an overpayment_of_tax for due to an error made in the notice_of_deficiency because as the parties now agree petitioners' basis in resthaven should not be reduced by the amount of dividend distributions findings of fact2 petitioners who during the years in issue were husband and wife filed joint federal_income_tax returns for the years and petitioners resided in wichita kansas at all times relevant to this case harry d bledsoe petitioner a high school graduate began his career in the cemetery business in he started as a this court has jurisdiction to determine the amount of a potential overpayment to which this petition relates sec_6512 the stipulation of facts and the exhibits are incorporated by this reference salesman and became a sales or division manager where he learned to hire and train salesmen to sell cemetery plots in advance of need eventually petitioner became a sales manager for four small cemeteries where he was responsible for all of their sales in advance of need desiring to build his own cemetery operation petitioner saved his earnings and organized incorporated resthaven gardens of memory inc resthaven in during the years at issue petitioner was the sole shareholder president and chairman of the board_of resthaven in resthaven entered into certain land option contracts with petitioner and his then wife mary louise bledsoe ms bledsoe together they held an undivided three-fourths interest in land adjoining the resthaven cemetery wichita developers inc an affiliated_corporation held the remaining one-fourth interest the land option contracts granted petitioner and ms bledsoe an interest in the gross_sales of resthaven in petitioner filed for divorce from ms bledsoe the two owned considerable property during their marriage in petitioner was granted a divorce and property division was the principal issue in the divorce proceedings the divorce decree granted ms bledsoe the right to receive payments from resthaven on the land option contracts which had previously been payable to both petitioner and ms bledsoe and she was granted the entire three-fourths interest in the adjacent land she was thus required to assume liability for a note and mortgage on that land which was payable to resthaven in after ms bledsoe did not make certain payments resthaven sued her to recover the dollar_figure due on the note and to foreclose the mortgage she counterclaimed alleging that resthaven had not paid her certain amounts to which she was entitled under the land option contracts and that she was not provided with her annual accounting to which she was entitled in its petition with the district_court of sedgwick county kansas resthaven based its claim on the divorce decree and alleged that ms bledsoe had failed to comply with the divorce decree resthaven's proceeding was ultimately consolidated with the divorce proceeding both cases were resolved in the state appellate proceedings to which the legal fees relate concerned the property division between petitioner and ms bledsoe for instance the court was to determine the value of certain property awarded to ms bledsoe and her rights under the divorce decree during and resthaven paid the consolidated litigation legal costs in the amounts of dollar_figure and dollar_figure respectively the legal costs included payments for the divorce case settlement of dollar_figure and the resthaven note case settlement of dollar_figure the remaining amounts were paid to the attorneys in petitioner as president and chairman of the board caused resthaven to lend dollar_figure to albert kamas kamas a personal friend the loan was to help kamas finance the construction of a gasohol plant petitioner on occasion asked kamas to make payments on the loan in kamas informed petitioner that he could not repay make payments on the loan because the project had lost its government backing kamas received a discharge_in_bankruptcy in approximately on date diamond inn enterprises inc diamond was incorporated on or about date diamond authorized the issuance of big_number shares of sec_1244 stock and it received a total of dollar_figure from its three incorporators seventy-five percent of diamond's stock was issued to petitioner initially petitioner paid dollar_figure to diamond and for deducted a sec_1244 loss in the amount of dollar_figure in order to support the claimed loss petitioner relied on each shareholder's postincorporation payments in amounts proportionate to his diamond stock ownership percentage from its incorporation through its failure in diamond recorded loans from shareholders in the total amount of dollar_figure petitioner's accountant subsequently determined that the dollar_figure should not have been reflected on diamond's books as loans from shareholders the postincorporation amounts contributed by diamond shareholders were capital contributions which were not in payment of sec_1244 stock on date resthaven's parent_corporation developer and management inc developer ceased operation and merged with resthaven on date resthaven became an s_corporation during when s_corporation treatment was elected for resthaven the deferred gross_profits of the prior c_corporation were picked up and included in resthaven's income over the next years this occurred because resthaven changed from the installment to the cash_method of tax_accounting resthaven included these built-in gains in income dollar_figure dollar_figure and dollar_figure in and respectively respondent determined that resthaven paid some of petitioners' personal expenses and that the amount of those expenditures should be treated as dividend income to petitioners during the administrative_proceeding petitioner's accountant discovered that resthaven had unrecorded liabilities for big_number burial vaults he conducted a sampling of invoices and determined that dollar_figure was the average cost of a burial vault and that dollar_figure was the cost of putting the vault into the ground petitioner's accountant accordingly determined that resthaven had dollar_figure of unrecorded liabilities which should have been offset against the s corporation's earnings_and_profits respondent did not reduce the earnings_and_profits by any portion of the unrecorded liabilities in the notice_of_deficiency determination petitioners filed their joint federal_income_tax return after date and they had not requested an extension of time in which to file their return petitioners conceded the following adjustments resthaven's travel and entertainment_expenses of dollar_figure dollar_figure and dollar_figure for and respectively a dollar_figure reduction in resthaven's cost_of_goods_sold resthaven's equipment lease expense of dollar_figure dollar_figure and dollar_figure for and respectively resthaven's vehicle insurance expense of dollar_figure dollar_figure and dollar_figure for and respectively disallowed medical expense for and an adjustment to miscellaneous_itemized_deductions for bad_debt opinion resthaven lent petitioner's friend mr kamas dollar_figure in date petitioner caused his corporation to lend kamas dollar_figure so that kamas could participate in the building of a gasohol plant respondent agrees that this loan would be deductible to the extent that it became worthless in we must decide whether any part of resthaven's loan to kamas became worthless in sec_166 petitioners bear the burden of proving that resthaven's loan to kamas became worthless in rule a respondent argues that there were no identifiable events in that would support a finding that dollar_figure of the dollar_figure debt was worthless respondent contends that the only event which would have evidenced the loan's worthlessness was kamas' bankruptcy discharge in and that the events relied on by petitioners are speculative we disagree in the gasohol plant project did not proceed because it lost its government backing petitioner asked kamas to pay the loan back and kamas could not pay the principal or the interest during petitioner also discovered that kamas had substantial financial obligations to a bank because the bank could not collect its debt from kamas petitioner believed that resthaven would not collect its debt by late the loan to kamas was approximately year old and no payments had been made after discussions with his accountant petitioner expected that resthaven would collect only half of the dollar_figure debt a bad_debt is deductible only in the year that it becomes worthless 32_tc_43 affd 279_f2d_368 10th cir petitioner has shown that in kamas' debt to resthaven became partially worthless we hold that petitioner's judgment and conclusion about worthlessness were reasonable and are supported by the record respondent argues that if the loan became worthless it happened in ie when kamas' bankruptcy discharge occurred we believe however that kamas' bankruptcy discharge was simply the result of his financial troubles and resulted in the worthlessness of the remainder of the loan petitioners are entitled to a dollar_figure bad_debt deduction for legal expenses petitioners claimed professional fees of dollar_figure for and dollar_figure for respondent disallowed dollar_figure and dollar_figure for and respectively determining that petitioners had not established that these amounts were ordinary and necessary legal expenses of the cemetery business respondent contends that these payments were made in connection with petitioner's divorce proceedings petitioners bear the burden of showing that these expenses were ordinary and necessary business_expenses of resthaven rule a petitioner's litigation began in when he sought a divorce from his former wife ms bledsoe this litigation required the division of extensive property that had been acquired during their marriage after the divorce was granted in ms bledsoe appealed the decision claiming that the court abused its discretion regarding the property division the divorce decree was affirmed in resthaven sued ms bledsoe for dollar_figure plus interest for the balance due on the note that she had assumed resthaven's claim was based in large part on the divorce decree ms bledsoe counterclaimed and argued that petitioner and resthaven had failed to fulfill their obligations to her under the divorce decree in ms bledsoe confessed judgment on the note and mortgage and in this litigation ended sec_162 provides taxpayers with deductions for all ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business sec_212 allows deductions for all ordinary and necessary expenses paid_or_incurred during the taxable year-- for the production_or_collection_of_income for the management_conservation_or_maintenance_of_property_held_for_the_production_of_income we must decide whether any of the claimed legal expenses which petitioners deducted were attributable to resthaven's cemetery business and therefore deductible under either sec_162 or sec_212 in 372_us_39 the supreme court held that the proper time for characterizing an expense as either business or personal is when the expense is incurred the u s court_of_appeals for the tenth circuit based on the supreme court's holding formulated the origin_of_the_claim_test that test must be separately applied to the divided parts the divorce action and the action in which the corporation was a party 605_f2d_1146 10th cir hence we must decide the origin of the expenditures as they apply to petitioners and to resthaven 56_tc_624 this court has held that when appropriate litigation expenses should be allocated between personal and business costs 12_tc_17 such an allocation between deductible and non-deductible expenses is not unusual although 'a rough approximation is all that can be expected ' 698_f2d_575 2d cir quoting 302_f2d_481 2d cir revg and remanding t c memo the evidence regarding the legal expenses consists of two joint exhibits and the testimony of petitioners' witnesses one exhibit is the petition for enforcement of resthaven's rights under the divorce decree between petitioner and ms bledsoe the other exhibit is the memorandum opinion from an appeal by petitioner and resthaven which the court notes represents the aftermath of the divorce granted to the parties in at the trial here petitioner's witness edwin carpenter an attorney who was personally involved with the divorce litigation explained that the litigation was consolidated in order to address the rights and obligations of both ms bledsoe and resthaven it is evident that resthaven had an interest in protecting and conserving its corporate assets which were at risk in the consolidated litigation resthaven was a party to a portion of these proceedings and it had financial interests in protecting its assets independent of petitioner specifically it claimed rights to the proceeds of the note on which ms bledsoe was liable if ms bledsoe had prevailed in her counterclaim resthaven and its cemetery might have suffered substantial economic hardship although the proceedings were an aftermath of the divorce as the court which entertained petitioner's and resthaven's appeal noted resthaven had a financial stake in a part of the proceedings accordingly we find that the part of these proceedings in which resthaven had an interest originated with respect to resthaven after examining the evidence and analyzing the breakdown of the legal fees we hold that in and percent of the amount disallowed by respondent was in fact incurred to maintain the property held by resthaven and is deductible see sec_212 burch v united_states supra sec_1244 stock ordinary_loss treatment is available to those individuals with sec_1244 stock in a corporation with total equity of dollar_figure million or less the sec_1244 stock must have been originally issued to them for money or property by a domestic small_business_corporation sec_1244 c sec_1244 stock loss deductions cannot exceed dollar_figure or dollar_figure if a joint_return was filed per annum sec_1244 for and petitioners claimed sec_1244 losses on their diamond stock petitioners assert that they were entitled to an ordinary_loss deduction of dollar_figure the amount of their claimed basis in diamond due to the sec_1244 we note that dollar_figure of the fees paid to carpenter hein carpenter was paid in but has not been placed in issue for limitation petitioners deducted dollar_figure in and the dollar_figure remainder as an ordinary_loss carryover for respondent determined that petitioners' ordinary sec_1244 loss deduction was limited to dollar_figure which respondent contends was the amount that petitioners paid for the stock when it was issued if a shareholder owns sec_1244 stock and makes additional capital contributions and receives no additional shares of stock then the basis in the stock increases however such an increase in basis shall be treated as allocable to stock which is not sec_1244 stock sec_1244 any additional contributions to capital for which one receives no additional stock are not eligible for sec_1244 ordinary_loss treatment id the parties here agree that the stock at issue is sec_1244 stock as defined in sec_1244 we must decide whether petitioner's payments subsequent to the initial dollar_figure were for the issuance of additional sec_1244 stock or were capital contributions to be treated as allocable to stock which is not sec_1244 stock id at trial petitioners acknowledged that should they prevail on this issue their sec_1244 ordinary_loss deduction should have been limited to dollar_figure in with the balance as a capital_loss_carryover see sec_1212 sec_1244 diamond was incorporated on date on date diamond held its first shareholders' meeting the minutes of this meeting specified that on date diamond was authorized to issue big_number shares of sec_1244 common_stock the sec_1244 plan stated that the maximum amount of consideration that could be received by diamond for the issuance of this stock would be dollar_figure million accordingly even though dollar_figure million was authorized only dollar_figure was paid for the big_number shares issued in that regard the minutes of diamond's first meeting on date reflect that petitioner as one of the incorporators contributed dollar_figure of the initial dollar_figure of the big_number shares of stock that diamond had issued on date petitioner received percent or big_number shares although additional_amounts over dollar_figure were later paid to the corporation those payments were not designated as payment for the big_number shares issued on date petitioner relies heavily on miller v commissioner tcmemo_1991_126 in that case the taxpayer formed a corporation with another individual for the purpose of constructing a water amusement park the articles of incorporation provided for the issuance of big_number shares of common_stock at dollar_figure par_value per share the taxpayer and another individual were the directors and each paid one-half of the fees for incorporation or dollar_figure a stock certificate was issued which represented that the taxpayer owned big_number shares of stock the taxpayer and the other shareholders paid debts of the corporation subsequently a new stockholder was brought in and paid dollar_figure in exchange for big_number shares in miller v commissioner supra this court cited 46_tc_878 where it was reasoned that when stock is paid for it is normally considered issued in fact irrespective of the manual issuance of the certificate the taxpayer in miller v commissioner supra believed that by paying one-half of the corporate expenses such payments would be applied towards the purchase of his stock the taxpayer's only monetary contribution at the time of incorporation was a dollar_figure incorporation fee because big_number shares of stock were authorized as a 50-percent owner the taxpayer in miller would have received big_number shares this along with the fact that the new_shareholder paid dollar_figure for her big_number shares evidenced the fact that the dollar_figure initial payment was not consideration for the stock while morgan v commissioner supra does not require the issuance of a certificate to evidence the fact that stock was issued in the instant case the minutes of diamond's meeting clearly state that big_number shares were authorized and were issued on date big_number shares to petitioner for dollar_figure and big_number shares to the other shareholders for dollar_figure petitioner recalled virtually no details regarding the issuance of the diamond stock when asked about the stock he did state that his dollar_figure payment was made to start the financial_corporation moreover he remembered that he was to own percent of the corporation yet he could not remember when and if he received shares of stock finally petitioner did state that the other shareholders and he would calculate what additional funds diamond needed and they would contribute based on their original ownership percentage there is no evidence that petitioner or the other shareholders sought to issue additional stock that these payments were part of the original issue of stock or that the shareholders intended to somehow change their ownership percentage the premise of petitioners' position is that there was an understanding that the big_number authorized shares were being issued for an amount in excess of dollar_figure or dollar_figure per share while as a practical matter such a premise would appear logical and reasonable ie the business needed more than dollar_figure capital and possibly petitioner intended all payments to be in exchange for sec_1244 stock the record here does not support petitioners' premise accordingly we find that petitioner's additional contributions to diamond made after the issuance of its big_number shares constituted contributions to capital which while increasing the basis of the stock are treated as allocable to stock which is not sec_1244 stock sec_1244 dividend income in date resthaven merged with its parent and converted from a c_corporation to an s_corporation the s_corporation included deferred gross_profit of the former c_corporation in its income over the next years through because resthaven changed from the installment_method to the cash_method_of_accounting see sec_481 sec_1_1374-4 income_tax regs the gross_profit of the former c_corporation constituted earnings_and_profits to resthaven respondent determined that resthaven had made expenditures_for the personal benefit of petitioner and members of his family and therefore petitioners realized dividend income in and in the amounts of dollar_figure dollar_figure and dollar_figure respectively sec_1368 provides that distributions from an s_corporation with accumulated_earnings_and_profits are dividends to the extent that such distributions exceed the corporation's accumulated_adjustments_account aaa and do not exceed earnings_and_profits respondent contends that resthaven paid certain personal expenses of petitioner during the years at issue and that these payments were dividends to petitioner petitioners do not dispute that resthaven paid these expenses see eg 279_us_716 they claim however that resthaven's earnings_and_profits should be reduced by certain unbooked liabilities of the c_corporation and that the expense payments were not dividends petitioners claim that big_number previously sold burial vaults which should have been recorded on resthaven's books in were not the unrecorded liabilities would have reduced the income reported for sales in advance of need petitioners have the burden of proving that these liabilities existed and that they should have been recorded rule a the unrecorded liabilities were discovered in connection with a proposal to purchase resthaven in correspondence the undisclosed liabilities were expressed as the reason the proposal did not come to fruition the failure to record the liability if an s_corporation has earnings_and_profits distributions generally to the extent of the shareholder's basis can be made tax free to the extent of the corporation's accumulated_adjustments_account aaa to the extent of the shareholder's basis sec_1_1368-2 income_tax regs promulgated in provides that an aaa is relevant for all tax years beginning on or after date for which the corporation is an s_corporation for the vaults was discovered after the returns in question were filed and it was raised during the administrative audit the accountant conducted a random sampling of the universe of invoices and was able to arrive at an average cost of dollar_figure per vault he also was able to determine that the average cost to install the vaults should have been dollar_figure each through this methodology it was established that the corporation had an dollar_figure big_number x dollar_figure unrecorded liability petitioners have carried their burden of showing the existence of resthaven's unrecorded burial vault liability of dollar_figure consequently petitioners did not receive dividend income in the amounts determined by respondent during the years in issue negligence respondent determined that petitioners are liable for additions to tax and a penalty for negligence or intentional disregard of rules or regulations during the years at issue under their respective sections in and petitioners have the burden of showing that they were not negligent with respect to their tax returns at issue rule a 58_tc_757 negligence is a lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances marcello v commissioner 380_f2d_499 5th cir affg in part and remanding in part 43_tc_168 and tcmemo_1964_299 regarding the sec_1244 loss and loss carryover petitioners claimed for and respectively the evidence produced was insufficient for us to conclude that they had paid more than dollar_figure for their sec_1244 stock petitioners' argument that the subsequent payments were in exchange for sec_1244 stock may be a plausible one but is an untested concept petitioners had met the other requirements of sec_1244 but failed solely because the subsequent payments could not be factually linked to the big_number shares of sec_1244 stock issued in consequently we find that petitioners were not negligent with respect to their sec_1244 loss deduction respondent disallowed legal fees in and asserting that these were personal expenses of petitioners rather than business_expenses of resthaven we have found that percent of the disallowed expenses were in fact incurred by resthaven in the ordinary course of its cemetery business however our determination required that we make a reasonable estimate as petitioners' records were quite difficult to analyze in this case with respect to the disallowed portion of legal fees which we sustain and regarding the other disallowed items conceded by petitioners petitioners failed to produce adequate_records from which to sustain their deductions therefore to the extent that the amount petitioners claimed for legal fee deductions was excessive and to the extent petitioners conceded some items we find that they were negligent late filing respondent determined that petitioners are liable for an addition_to_tax for filing their return past its due_date the addition_to_tax applies unless it is shown that the failure to timely file is due to reasonable_cause and not due to willful neglect sec_6651 because petitioners have not shown that they had reasonable_cause or that their failure to timely file was not due to willful neglect we find that they are liable for the addition_to_tax for failing to timely file their tax_return substantial_understatement respondent determined that petitioners are liable for additions to tax for substantially understating their income_tax income_tax is substantially understated if in any year the amount of the understatement exceeds the greater of percent of the tax required to be shown on the return or dollar_figure sec_6661 and sec_6662 any such understatements are reduced by that portion for which there is substantial_authority or where the transaction has been adequately disclosed for and there were several items determined by respondent some of which were sustained by this court petitioners have not shown that factually or legally there was substantial_authority for the items composing the understatements furthermore petitioners did not adequately disclose their legal fee deductions through resthaven regarding the sec_1244 stock sale however we do find adequate_disclosure in petitioners' tax_return through an attached statement petitioners fully disclosed the identity of the corporation their proposed sec_1244 basis and the date that the corporation closed therefore for purposes of the sec_6661 addition_to_tax petitioners' understatement is reduced by that portion which relates to petitioners' sec_1244 stock deduction for respondent seeks the accuracy-related_penalty under sec_6662 as we have already discussed the issue of petitioners' negligence with respect to their year we shall address only the substantial_understatement aspect of sec_6662 respondent determined that petitioners' deficiency was dollar_figure the amount of income_tax required to be shown on their return was over dollar_figure for petitioners' understatement of dollar_figure neither exceeded percent of the amount required to be shown nor was over dollar_figure hence the understatement was not substantial as defined by sec_6662 petitioners' claim_for_refund the parties agree that the notice_of_deficiency contains an error in the calculation of petitioners' basis in resthaven they have further agreed that petitioners' basis in resthaven should not be reduced by the amount of dividend distributions the parties are to reflect their agreement in the rule computation to reflect the foregoing decision will be entered under rule


tcmemo_2008_101 united_states tax_court george and hazelann tateosian petitioners v commissioner of internal revenue respondent docket no filed date thomas e brever for petitioners lisa r woods for respondent memorandum opinion kroupa judge respondent determined a dollar_figure deficiency in petitioners’ federal_income_tax and a dollar_figure accuracy-related_penalty for two issues are presented for our decision the first is whether certain payments that petitioner received from the public employees retirement association of minnesota pera are disability payments and excludable from gross_income or pension payments and includable we hold that they are includable in income the second issue is whether petitioners are liable for the accuracy-related_penalty under sec_6662 we hold that they are not background this case was submitted fully stipulated pursuant to rule the stipulation of facts and the accompanying exhibits are incorporated by this reference petitioners resided in st paul minnesota at the time their petition was filed george tateosian petitioner was born on date and became a member of the saint paul police department in by reason of an injury sustained in the line of duty he was permanently disabled on date after fewer than years_of_service the st paul police relief association sppra awarded petitioner an on-duty-disability pension on date initially petitioner’s disability payment was determined without regard to his age or length of service petitioner began receiving disability benefits in the sum of units per month under this regimen in a unit was defined as one- hundredth of the current maximum monthly pay of a police officer 1all section references are to the internal_revenue_code in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated in the police service of the city petitioner’s units were not recalculated but they were increased for cost-of-living adjustments petitioner initially received his payments from his local relief association sppra at some point sppra began treating petitioner’s payments as taxable sppra then consolidated with pera in at the time of the consolidation petitioner signed a form electing pera to provide his future payments under the public employees police and fire fund benefit plan pepff benefit plan as set forth by minn stat ann ch west petitioner received dollar_figure from pera in pera issued petitioner a form 1099-r distributions from pensions annuities retirement or profit-sharing_plans iras insurance contracts etc indicating that petitioner received dollar_figure in taxable_income for petitioners did not report this amount on their tax_return for discussion2 the question we consider is whether the payments received are includable in petitioners’ income for petitioner contends that the disputed distributions are excludable from gross_income as disability payments in the same manner a sec_2there has been no question raised in this case concerning which party bears the burden_of_proof or the burden of going forward with the evidence worker’s compensation respondent argues that the payments are includable in petitioner’s income because they had been converted to pension payments gross_income includes all income from whatever source derived unless excludable by a specific provision of the internal_revenue_code see sec_61 amounts received as compensation_for personal injuries under worker’s compensation acts and statutes in the nature of a worker’s compensation act are excluded from gross_income see sec_104 sec_1_104-1 income_tax regs courts have strictly construed this exclusion so as to conform with the general_rule that income is taxable unless specifically excluded mcdowell v commissioner tcmemo_1997_500 see also 43_f3d_1446 fed cir a statute is in the nature of a worker’s compensation act only if it provides disability payments solely for service- related personal_injury_or_sickness 82_tc_630 affd 804_f2d_553 9th cir a retirement pension that is determined by reference to the employee’s age or length of service even though the employee’s retirement is occasioned by injury is includable in income wiedmaier v commissioner tcmemo_1984_540 affd 774_f2d_109 6th cir sec_1_104-1 income_tax regs this court has previously considered the nature of payments under certain state disability and or pension programs levesque v commissioner tcmemo_1999_57 picard v commissioner tcmemo_1997_320 revd 165_f3d_744 9th cir mabry v commissioner tcmemo_1985_328 wiedmaier v commissioner supra mabry and wiedmaier involved payments to disability retirees that were initially excludable but became includable in income when the disabled taxpayers would have qualified for a service retirement if they had continued in active work status this court held in both instances that payments under those circumstances did not meet the requirements for exclusion under sec_104 because benefits were formally transformed into service retirement when the disabled_employee reached a certain age and or completed a certain number of years_of_service it 3in one instance the taxpayer’s pension_plan labeled his benefits a reduced disability allowance wiedmaier v commissioner tcmemo_1984_540 affd 774_f2d_109 6th cir the court nevertheless held that the reduced disability allowance was taxable id petitioner’s disability retirement fund treated his payments during as taxable and nothing in the record indicates that the fund labeled them disability payments in another case the court_of_appeals for the ninth circuit considered whether certain payments were taxable 165_f3d_744 9th cir revg tcmemo_1997_320 the court_of_appeals distinguished the holdings in mabry v commissioner tcmemo_1985_328 and wiedmaier v commissioner supra in reversing this court that situation involved an oakland police officer who sustained injuries while on duty picard v commissioner supra pincite the disability retirement_plan provided that the amount the taxpayer received would be reduced on the date on which he would have completed continued was explained in mabry that to be excludable payments may be based only on disability and that when other factors including age and length of service are taken into account the payments will not fall within sec_104 determination of petitioner’s benefits we look to state law in our consideration of whether the payments received are disability or retirement payments accordingly we must examine the bylaws of petitioner’s local relief association and the applicable minnesota statutes to determine whether petitioner must include the payment in income the sppra bylaws define a duty disability pensioner as a member who has been permanently disabled so as to render necessary his retirement from active police service because of an injury received while on duty a duty disability pensioner receive sec_40 units per month if the retirement occurs during the first years_of_service under this regimen petitioner began continued years_of_service which was when he would have qualified for retirement if he had never become disabled id the court_of_appeals held that the payments were disability benefits and excludable reasoning that at the time the police officer’s pension was reduced he was not transferred from a disability pension to a general pension id pincite the court_of_appeals also distinguished picard from mabry and wiedmaier because the taxpayer’s benefits were determined by the date of hire rather than reference to age or length of service 4the provision states in part as follows if the date of such retirement for physical continued receiving disability benefits in the sum of units per month in the same bylaws define a service pensioner as a member who retires after having attained a minimum age of and having at least years_of_service in the police department notably service pensioners also receive a basic pension of units per month under the sppra bylaws the bylaws do not provide for the conversion of disability benefits into retirement benefits legislative changes affecting sppra in minnesota enacted statutes that affected many recipients of disability pensions minn stat ann sec_423a 423adollar_figure west minn stat ann sec_423adollar_figure affects individuals receiving a disability benefit from a local relief association on date minn stat ann sec_423a this provision terminated the disability benefit of a member of a local police relief association when that member’s years_of_service credited for active_duty coupled with his her years of receipt of a disability benefit equaled the number of continued or mental_disability because of injury received or suffered while on duty is subsequent to date he she shall receive the sum of units per month if the retirement is necessary during the first years of his her service 5the texts of minn stat ann sec_423adollar_figure and sec_423adollar_figure west are reproduced in the appendix to this opinion years_of_service that would entitle him her to a service pension of the disability benefit see minn stat ann sec_423a subd b this provision applies if the member does not have enough active-duty credit to entitle him her to a service pension in an amount equal to the disability benefit when he she attains the minimum age for retirement provided by the relief association’s bylaws see id the disabled member is deemed a service pensioner after the disability benefit terminates and is entitled to receive a service pension in an amount equal to the disability benefit minn stat ann sec_423a subd the disability benefit that was transformed into a service pension is then subject_to any annual automatic adjustments applicable to any other service pension payable by the relief association id relief association members who meet the age and service requirements for termination of their disability benefits become ineligible for a disability benefit minn stat ann sec_423a subd petitioner was receiving disability payments from sppra a local relief association on date therefore minn stat ann sec_423adollar_figure and sec_423adollar_figure applied to him minn stat ann sec_423a subd b 423a by date the length of time that petitioner worked combined with the length of time that he received disability benefits was long enough to entitle him to a service pension in the amount of units under minn stat ann sec_423a he also had reached years of age the minimum age for receipt of retirement as provided by the sppra bylaws accordingly and consistent with the provisions of minn stat ann sec_423adollar_figure and sec_423a petitioner’s disability benefits terminated on date moreover the same statute that terminated his disability benefit specifically deemed him to be a service pensioner see minn stat ann sec_423a subd because minn stat ann sec_423adollar_figure terminated petitioner’s disability benefits and deemed him a service pensioner his payments could no longer be characterized as compensation_for personal injuries under a statute in the nature of a worker’s compensation act see sec_104 sec_1 b income_tax regs petitioner’s benefits became taxable when they were legally and formally transformed into a service retirement upon petitioner’s attaining a certain age and or completing a certain number of years_of_service see mabry v commissioner tcmemo_1985_328 wiedmaier v commissioner tcmemo_1984_540 these circumstances offer more persuasive support for treating petitioner’s payments as retirement payments than the circumstances presented in picard mabry or wiedmaier minn stat ann sec_423adollar_figure explicitly terminates the disability benefit and deems the payments a retirement pension moreover petitioner’s benefits were determined by reference to his age and length of service as distinguished from those at issue in picard see picard v commissioner f 3d pincite minn stat ann sec_423adollar_figure changed petitioner’s payment from a disability benefit into a retirement benefit which was determined with respect to his age and length of service because petitioner elected pera coverage under minn stat ch in we now address the effect if any of that election in an attempt to overcome the effects of minn stat ann sec_423a petitioner makes three arguments with respect to his pera election petitioner first argues that his benefits are not within the statutory scheme of minn stat ann sec_423adollar_figure because his benefits are under the statutory scheme of pera petitioner’s argument is not factually or legally supported by the record petitioner elected pera coverage in after his annuity payments had already been deemed to be retirement payments under minn stat ann sec_423adollar_figure in see minn 6petitioner’s election was consistent with the terms of minn stat ann sec 353adollar_figure and minn stat ann sec west which were enacted in to allow for a benefit recipient to elect to have his plan administered by the public employees police and fire fund benefit plan pepff benefit plan under pera or to continue coverage with his local relief association petitioner chose to have his plan administered by pepff and pera in because that is when his local relief association consolidated with pera stat ann sec accordingly as of when he elected pera coverage under minn stat ann ch petitioner’s payments were retirement payments and neither party has presented any evidence or law that the characterization changed after petitioner next argues that his payments were normal disability benefits as described by minn stat ann sec subd 6a to that end petitioner relies upon the language of minn stat ann sec subd 6a which provides that a member receiving a disability benefit may continue to receive a normal disability benefit if he she is living at age to thoroughly address this argument we look to the complete text of minn stat ann sec two provisions within minn stat ann sec provide for members receiving disability payments to make an election to continue to receive disability payments in lieu of other forms of payment minn stat ann sec subd 1a provides that a disabled member of the pepff may elect to receive a normal 7the text of minn stat ann sec is reproduced in the appendix to this opinion 8the text of minn stat ann sec west is reproduced in the appendix to this opinion 9petitioner has not suggested that there exists nor have we found any statutory directive automatically converting his post- payments from retirement into disability payments disability benefit minn stat ann sec subd 6a allows a member who receives a disability benefit to elect to continue to receive a normal disability benefit if he or she is living at age petitioner provided no evidence that he made such an election minn stat ann sec subd 6a allows a member who receives a disability benefit to elect to continue to receive that benefit at age petitioner presented no evidence of an election under this subdivision either also minn stat ann sec subd 6a would not have applied to him because he was not receiving a disability benefit at the time this statute became applicable to pera members he was already receiving a retirement benefit moreover pera treated petitioner’s benefits as taxable and presumably pera would not have done so had he made an election to receive normal disability benefits petitioner’s third argument is that minn stat ann sec_423adollar_figure is being retroactively applied to him because he began receiving payments earlier than the only tax_year in this case is petitioner’s retroactivity argument thus misses the mark we are sympathetic to petitioner a police officer disabled in the line of duty under the facts and circumstances of this case however petitioner’s payments remained retirement payments once he elected pera and they are treated as retirement payments under pera and minn stat ann ch accordingly we must hold that the payments are subject_to tax whether petitioner is liable for the accuracy-related_penalty respondent determined that petitioners are liable for the accuracy-related_penalty under sec_6662 with respect to the underpayment attributable to petitioners’ omission of the payments from pera from their income petitioners contend that they should not be liable for this penalty we agree with petitioners respondent has the burden of production and must come forward with sufficient evidence that it is appropriate to impose the penalty see sec_7491 116_tc_438 sec_6662 imposes an accuracy-related_penalty on any portion of an underpayment_of_tax required to be shown on a return if that portion is attributable to negligence or disregard of rules or regulations or any substantial_understatement_of_income_tax see sec_6662 and b and sec_1_6662-2 and income_tax regs negligence is the lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the same circumstances 85_tc_934 disregard is characterized as any careless reckless or intentional disregard see sec_6662 sec_1_6662-3 income_tax regs negligence is strongly indicated where a taxpayer fails to include on an income_tax return an amount of income shown on an information_return see sec_1_6662-3 income_tax regs there is a substantial_understatement_of_income_tax if the amount of the understatement exceeds the greater of either percent of the tax required to be shown on the return or dollar_figure sec_6662 sec_1_6662-4 income_tax regs petitioners failed to include as income the amount shown on the information_return sent by pera therefore respondent has met his burden of production with respect to this penalty the accuracy-related_penalty does not apply however to any portion of an underpayment for which there was reasonable_cause and where the taxpayer acted in good_faith with respect to that portion see sec_6664 sec_1_6664-4 income_tax regs the determination of whether the taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all pertinent facts and circumstances sec_6664 sec_1_6664-4 income_tax regs circumstances that may indicate reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in light of all the facts and circumstances including the experience knowledge and education of the taxpayer sec_1_6664-4 income_tax regs we have chosen not to impose penalties in instances where an area of law is novel or the statute is unclear see eg 123_tc_144 hitchens v commissioner 103_tc_711 facq v commissioner tcmemo_2006_111 petitioner a disabled policeman received a disability annuity for many years minnesota law then changed so that petitioner’s annuity would at a time defined in the statute become a retirement annuity further confusing this situation petitioner’s annuity changed from one payment plan to another and came under the provisions of a different minnesota statute that used the term disabled in a manner that led petitioner to believe that his annuity continued as one subject_to the disability provisions considering petitioner’s education background and the complexity of the statutory scheme in this case we hold that petitioner acted with reasonable_cause and in good_faith based on his understanding of minnesota law his misunderstanding was reasonable in light of the facts and circumstances here petitioners have established that they had reasonable_cause and acted in good_faith when they failed to include the dollar_figure in pension payments on their return accordingly we hold that petitioners are not liable for the accuracy-related_penalty to reflect the foregoing decision will be entered for respondent with respect to the deficiency and for petitioners with respect to the penalty under sec_6662 appendix provisions of chapter 423a 423a recomputation of a disability benefit as a service pension subdivision termination of disability benefit the disability benefit of any disabled member of a local police or salaried firefighters relief association whichever is applicable shall terminate when the disabled member attains a the minimum age for the receipt of a service pension specified in the articles of incorporation or the bylaws of the relief association if the disabled member has credit for at least the number of years_of_service for active_duty which would entitle the disabled member to a service pension in an amount equal to the amount of the disability benefit or b the age attained by the disabled member when the total number of years_of_service credited for active_duty and of years of receipt of a disability benefit equals the number of years_of_service credit which would entitle the disabled member to a service pension in an amount equal to the amount of the disability benefit if the disabled member has credit for less than the number of years_of_service for active_duty which would entitle the disabled member to a service pension in an amount equal to the amount of the disability benefit when the disabled member attains the minimum age for the receipt of a service pension specified in the articles of incorporation or the bylaws of the relief association subd amount of disability benefit recomputed as a service pension after the disability benefit terminates the disabled member shall be deemed to be a service pensioner and shall be entitled to receive a service pension in an amount equal to the disability benefit without any benefit offset required pursuant to any applicable_provision of law articles of incorporation or bylaws which was payable by the relief association immediately prior to the date when the disability benefit terminated pursuant to this section or the service pension otherwise payable based on the service_credit for active_duty of the person whichever amount is greater the disability benefit recomputed as a service pension shall be subject_to any annual automatic post retirement adjustments or escalation applicable to any other service pension payable by the relief association subd limitation on disability benefit coverage no relief association member who has attained the age and acquired the service_credit for termination of a disability benefit specified in subdivision shall be eligible for a disability benefit after that date if a relief association member who is ineligible for a disability benefit solely pursuant to the limitation set forth in this subdivision becomes permanently unable to perform the duties of a police officer or a firefighter whichever is applicable by virtue of a medically determinable illness or injury the member shall be eligible to a service pension in an amount equal to the amount of the disability benefit which would have been paid had the person been entitled to a disability benefit or the amount of the service pension otherwise payable based on the service_credit for active_duty of the person whichever is greater 423a effect of provisions for existing disability benefit recipients the provisions of sec_423adollar_figure shall apply to any member of any applicable local relief association in active_service on or after date the provisions of sec_423adollar_figure shall apply to any person receiving a disability benefit from a local relief association on or after date the provisions of sec_423adollar_figure shall apply to any person who returns to active employment as a police officer or firefighter whichever is applicable after receipt of a permanent disability benefit the provisions of sec_423adollar_figure shall apply to any person who first commences receipt of a disability benefit after date provisions of chapter pera disability benefits subdivision in line of duty computation of benefits a member of the police and fire plan who becomes disabled and physically unfit to perform duties as a police officer firefighter or paramedic as defined under section subdivision as a direct result of an injury sickness or other disability incurred in or arising out of any act of duty which has or is expected to render the member physically or mentally unable to perform the duties as a police officer firefighter or paramedic as defined under section subdivision for a period of at least one year shall receive disability benefits during the period of such disability the benefits must be in an amount equal to percent of the average salary as defined in section subdivision plus an additional percent specified in sec_356 subdivision of that average salary for each year_of_service in excess of years if the disability under this subdivision occurs before the member has at least five years of allowable service_credit in the police and fire plan the disability benefit must be computed on the average salary from which deductions were made for contribution to the police and fire fund subd 1a optional annuity election a disabled member of the police and fire fund may elect to receive the normal disability benefit or an optional annuity as provided in section subdivision the election of an optional annuity may be made prior to commencement of payment of the disability benefit or as specified under subdivision 6a the optional annuity shall begin to accrue on the same date as provided for the disability benefit if the person who is not the spouse of the member is named as beneficiary of the joint and survivor optional annuity the person is eligible to receive the annuity only if the spouse on the disability application form prescribed by the executive director permanently waives the surviving_spouse benefits under section subdivision sec_2 and 2a if the spouse of the member refuses to permanently waive the surviving_spouse coverage the selection of a person other than the spouse of the member as a joint annuitant is invalid if the spouse of the member permanently waives survivor coverage the dependent_child or children if any continue to be eligible for survivor benefits including the minimum benefit under section subdivision the designated optional annuity beneficiary may draw the monthly benefit however the amount payable to the dependent_child or children and joint annuitant must not exceed the percent maximum family benefit under section subdivision if the maximum is exceeded the benefit of the joint annuitant must be reduced to the amount necessary so that the total family benefit does not exceed the percent maximum family benefit amount if the spouse is named as the beneficiary of the joint and survivor optional annuity the spouse may draw the monthly benefit however the amount payable to the dependent_child or children and the joint annuitant must not exceed the percent maximum family benefit under section subdivision if the maximum is exceeded each dependent_child will receive ten percent of the member's specified average monthly salary and the benefit to the joint annuitant must be reduced to the amount necessary so that the total family benefit does not exceed the percent maximum family benefit amount the joint and survivor optional annuity must be restored to the surviving_spouse plus applicable postretirement adjustments under sec_356 as the dependent_child or children become no longer dependent under section subdivision subd benefits paid under workers'_compensation law if a member as described in subdivision is injured under circumstances which entitle the member to receive benefits under the workers'_compensation law the member shall receive the same benefits as provided in subdivision with disability benefits paid reimbursed and future_benefits reduced by all periodic or lump sum amounts paid to the member under the workers'_compensation law after deduction of amount of attorney fees authorized under applicable workers'_compensation laws paid_by a disabilitant if the total of the single_life_annuity actuarial equivalent disability benefit and the workers'_compensation benefit exceeds the salary the disabled member received as of the date of the disability or the salary currently payable for the same employment position or an employment position substantially_similar to the one the person held as of the date of the disability whichever is greater the disability benefit must be reduced to that amount which when added to the workers'_compensation benefits does not exceed the greater of the salaries described in clauses and subd 2a reduction restored overpayment a disabled member who is eligible to receive a disability benefit under subdivision as of date and whose disability benefit amount had been reduced prior to date as a result of the receipt of workers'_compensation benefits must have the disability benefit payment amount restored as of date calculated in accordance with subdivision however a disabled member is not entitled to receive retroactive repayment of any disability benefit amounts lost before date as a result of the reduction required before that date because of the receipt of workers'_compensation benefits any disability benefit overpayments made before date and occurring because of the failure to reduce the disability benefit payment to the extent required because of the receipt of workers'_compensation benefits may be collected by the association through the reduction of disability benefit or annuity_payment made on or after date until the overpayment is fully recovered subd nonduty disability benefit any member of the police and fire plan who becomes disabled after not less than one year of allowable service because of sickness or injury occurring while not on duty as a police officer firefighter or paramedic as defined under section subdivision and by reason of that sickness or injury the member has been or is expected to be unable to perform the duties as a police officer firefighter or paramedic as defined under section subdivision for a period of at least one year is entitled to receive a disability benefit the benefit must be paid in the same manner as if the benefit were paid under section if a disability under this subdivision occurs after one but in less than years of allowable service the disability benefit must be the same as though the member had at least years service for a member who is employed as a full-time firefighter by the department of military affairs of the state of minnesota allowable service as a full-time state military affairs department firefighter credited by the minnesota state retirement_system may be used in meeting the minimum allowable service requirement of this subdivision subd limitation on disability benefit payments a no member is entitled to receive a disability benefit payment when there remains to the member's credit unused annual leave or sick leave or under any other circumstances when during the period of disability there has been no impairment of the person's salary as a police officer or a firefighter whichever applies b if a disabled member resumes a gainful occupation with earnings less than the disabilitant reemployment earnings limit the amount of the disability benefit must be reduced as provided in this paragraph the disabilitant reemployment earnings limit is the greater of the salary earned at the date of disability or percent of the salary currently paid_by the employing governmental subdivision for similar positions the disability benefit must be reduced by one dollar for each three dollars by which the total amount of the current disability benefit any workers'_compensation benefits and actual earnings exceed the greater disabilitant reemployment earnings limit in no event may the disability benefit as adjusted under this subdivision exceed the disability benefit originally allowed subd proof of disability a disability benefit payment must not be made except upon adequate proof furnished to the association of the existence of such disability and during the time when disability benefits are being paid the association has the right at reasonable times to require the disabled member to submit proof of the continuance of the disability claimed a person applying for or receiving a disability benefit shall provide or authorize release of medical evidence including all medical records and information from any source relating to an application_for disability benefits subd 5a cessation of disability benefit the association shall cease the payment of an in-line-of-duty or nonduty disability benefit the first of the month following the reinstatement of a member to full time or less than full-time service in a position covered by the police and fire fund subd repealed by laws c art sec_54 subd 6a disability survivor benefits if a member who is receiving a disability benefit under subdivision or a dies before attaining age or within five years of the effective date of the disability whichever is later the surviving_spouse shall receive a survivor benefit under section subdivision or 2a unless the surviving_spouse elected to receive a refund under section subdivision the joint and survivor optional annuity under subdivision 2a is based on the minimum disability benefit under subdivision or or the deceased member's allowable service whichever is greater b is living at age or five years after the effective date of the disability whichever is later the member may continue to receive a normal disability benefit or the member may elect a joint and survivor optional annuity under section the optional annuity is based on the minimum disability benefit under subdivision or or the member's allowable service whichever is greater the election of this joint_and_survivor_annuity must occur within days of age or the five-year anniversary of the effective date of the disability benefit whichever is later the optional annuity takes effect the first of the month following the month in which the person attains age or reaches the five-year anniversary of the effective date of the disability benefit whichever is later c if there is a dependent_child or children under paragraph a or b the association shall grant a dependent_child benefit under section subdivision local relief association consolidation account benefits for any person who has prior service covered by a local police or firefighters relief association which has consolidated with the public employees retirement association and who has elected the type of benefit coverage provided by the public employees police and fire fund benefit plan under section 353adollar_figure following the consolidation any retirement benefits payable are governed by the applicable provisions of this chapter for any person who has prior service covered by a local police or firefighters relief association which has consolidated with the public employees retirement association and who has not elected the type of benefit coverage provided by the public employees police and fire fund benefit plan under section 353adollar_figure following the consolidation any retirement benefits payable are governed by the provisions of sections 353bdollar_figure to 353bdollar_figure which apply to the relief association


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division may uniform issue list t ep fat legend company a company b plana planb dear this letter is in response to your request dated date submitted on your behalf by your authorized representative in which company a requests a private_letter_ruling that the minimum distribution_requirements of sec_401 of the internal_revenue_code the code do not affect company a’s ability to offer a lump sum payment option during a limited window period to participants beneficiaries and alternate payees who are currently receiving annuity benefits under two defined benefit pension plans maintained by the company a company a is a wholly owned subsidiary of company b company a sponsors two tax- - qualified_pension plans the pension plans under sec_401 of the code which page are the subject of this ruling_request the pension plans are plan a and plan b each of the pension plans has a favorable determination_letter payment forms under plan a generally include in addition to the qualified_joint_and_survivor_annuity qjsa’ and beginning date the qualified_optional_survivor_annuity ‘qosa’ a single_life_annuity joint and and survivor annuities a life and 10-year certain annuity as well as a lump sum payment option for active employees retiring on or after specified dates or under specific plan designs _ payment forms under plan b generally include in addition to the qusa and effective date' a qosa a single-life annuity a joint-and-100 annuity a life and 10-year certain annuity and since a lump sum payment for certain employees despite the current funded status of the pension plans for erisa funding purposes the pension liabilities weigh heavily on company b’s balance_sheet the company over the past years has taken steps to reduce the size of the pension plans on company b’s balance_sheet despite these efforts the size of company a’s defined benefit pension obligations continues to be disproportionately large administrative costs for participants in pay status for these reasons company a desires to offer retired employees already receiving an annuity stream of payments the opportunity to convert the annuity into a lump sum payment also the plans continue to incur significant company a proposes to further reduce its obligations under the pension plans by amending plan a and plan b to implement a one-time window program that makes a lump sum payment option available to participants retiring after a certain date and who are in pay status these include participants who are currently receiving their pension benefits in annuity form alternate payees who are currently receiving pension benefits in annuity form under a qualified_domestic_relations_order and beneficiaries who are currently receiving either pre-retirement or post-retirement survivor benefits collectively covered individuals’ the company represents that this window program which provides an opportunity to select a lump sum payment will be offered on a one time basis to covered individuals under the amendment the covered individuals would have a specified limited window period of no more than days during which they could elect to receive in lieu of their current annuity what company a represents is the actuarial present_value of their remaining benefits under the aforementioned plans in the form of a single lump sum payment the window period may consist of multiple phases such as an opt-in phase under the pension_protection_act of ppa the qosa was not required to be included in plan b unti january certain subsets of these groups in objectively determined and nondiscriminatory categories may be excluded on account of administrative practicalities for administrative reasons the window program may be offered in tranches to portions of the covered individual population over time page during which covered individuals would have the opportunity to proceed through the remainder of the window program and an election phase‘ during which covered individuals could elect to receive in lieu of their current annuity the actuarial present_value of their remaining annuity payments in the form of an immediate lump sum and to the extent the law requires a qualified_joint_and_survivor_annuity including a single_life_annuity for retirees who are not married or a qualified_optional_survivor_annuity any such elections to receive a new distribution option would be subject_to applicable spousal consent which would include where the law requires both the current spouse and a former spouse if the covered individual has remarried since the original annuity_starting_date covered individuals who elect a new distribution option would be treated as having a new annuity_starting_date on the first day of the month as of which their new benefit is payable for purposes of sec_415 and sec_417 of the code the value of the new distribution option will be based on the discounted stream of payments under the particular annuity form that the participant is receiving each covered individual will be offered optional individualized financial counseling provided by a qualified and reputable financial advisor before making his or her election decision company a represents that funding levels of plan a and plan b are expected to be more than sufficient such that the proposed lump sum window benefits would not trigger benefit restrictions under sec_436 of the code in addition the company represents that the amendment will not change the ability of covered individuals to elect during the window period to receive qualified joint and survivor annuities or qualified optional annuities in accordance with sec_401 and sec_417 of the code based on the facts and representations stated above company a requests a ruling that the minimum distribution_requirements of sec_401 will not be violated if company a amends plan a and plan b to offer the proposed lump sum window to certain participants beneficiaries and alternate payees for whom annuity payments have commenced under the plans applicable law sec_401 of the code and the regulations thereunder regulations provide rules relating to required minimum distributions from qualified_plans sec_401 of the code was enacted to ensure that the amounts contributed to qualified_retirement_plans were used for retirement by requiring that retirement payments begin no later than a certain date with no less than a certain amount being distributed each year of retirement the legislative_history of the original version of sec_401 of the code in stated that its purpose is in preventing lifetime accumulations which might escape income_taxation altogether cong rec statement of sen smathers covered individuals who opt in would be under no obligation to change their current form of payment page in general sec_401 of the code states that a_trust shall not constitute a qualified_trust under this subsection unless the plan provides that the entire_interest of each employee - i ii will be distributed to such employee not later than the required_beginning_date or will be distributed beginning not later than the required_beginning_date in accordance with regulations over the life of employee or over the lives of such employee and a designated_beneficiary or over a period not extending beyond the life expectancy of such employee or the life expectancy of such employee and a designated_beneficiary sec_401 of the code generally provides that a defined_benefit_plan will not be considered a qualified_plan unless vested benefits with respect to a married participant who dies before the annuity_starting_date are payable in the form of a qualified_preretirement_survivor_annuity and with respect to a married participant who dies after the annuity_starting_date a qualified_joint_and_survivor_annuity sec_415 of the code provides that a_trust which is a part of a pension_plan will not constitute a qualified_trust if the pension_plan provides for the payment of benefits which exceed the limitation of sec_415 sec_415 of the code generally provides that if the benefit under a defined_benefit_plan is payable in any form other than a straight life_annuity the determination as to whether the sec_415 limit has been satisfied shall be made by adjusting the benefit so that it is equivalent to a straight life_annuity sec_417 of the code provides that a plan meets the requirements of sec_401 if among other requirements each participant may elect during the applicable_election_period to waive the qualified_joint_and_survivor_annuity form of benefit or the qualified_preretirement_survivor_annuity form of benefit or both sec_417 _of the code defines the applicable_election_period as meaning in part in the case of an election to waive the qualified_joint_and_survivor_annuity form of benefit the 180-day period ending on the annuity_starting_date sec_1_401_a_9_-6 q a-1 a in pertinent part states that in order to satisfy sec_401 of the code distributions of the employee's entire_interest under a defined benefit pension_plan must be paid in the form of periodic annuity payments for the employee's life or the joint lives of the employee and beneficiary or over a period certain that does not exceed the maximum length of the period certain determined in accordance with a-3 of this section once payments have commenced over a period the period may only be changed in accordance with a-13 or a-14 of this section except as otherwise provided in this section such as permitted increases described in a-14 of this section all payments whether paid over an employee's life joint lives or a period certain also must be nonincreasing page sec_1_401_a_9_-6 q a-13 a states that an annuity_payment period may be changed in accordance with the provisions set forth in paragraph b of this a-13 or in association with an annuity_payment increase described in a-14 of this section sec_1_401_a_9_-6 q a-14 a states that except as otherwise provided in this section all annuity payments whether paid over an employee's life joint lives or a period certain must be non-increasing or increase only in accordance with one or more of the following - with an annual percentage increase that does not exceed the percentage increase in an eligible cost-of-living index as defined in paragraph b of this a-14 for a 12-month_period ending in the year during which the increase occurs or the prior year with a percentage increase that occurs at specified times eg at specified ages and does not exceed the cumulative total of annual percentage increases in an eligible cost-of-living index as defined in paragraph b of this a-14 since the annuity_starting_date or if later the date of the most recent percentage increase however in cases providing such a cumulative increase an actuarial increase may not be provided to reflect the fact that increases were not provided in the interim years to the extent of a reduction in the amount of the employee's payments to provide for a survivor benefit but only if there is no longer a survivor benefit because the beneficiary whose life was being used to determine the period described in sec_401 over which payments were being made dies or is no longer the employee’s beneficiary pursuant to a qualified_domestic_relations_order within the meaning of sec_414 to pay increased benefits that result from a plan amendment to allow a beneficiary to convert the survivor portion of a joint_and_survivor_annuity into a single sum distribution upon the employee’s death or to the extent increases are permitted in accordance with paragraph c or d of this a-14 sec_1 b - b iii provides that if a participant will have distributions commencing at more than one annuity_starting_date the limitations of sec_415 of the code must be satisfied as of each of the annuity starting dates analysis sec_401 of the code provides a tax_deferral for retirement benefits accumulated page in a qualified_pension plan sec_401 of the code and the regulations ensure that these tax-deferred accumulations are in fact used during retirement and do not escape taxation sec_1_401_a_9_-6 sets forth the rules governing required distributions from defined benefit plans and annuity_contracts sec_1_401_a_9_-6 q a-13 a states that an annuity_payment period may be changed in association with an annuity_payment increase described in a-14 of this section sec_1_401_a_9_-6 q a- a provides that annuity payments from a qualified_plan may increase if the payment of increased benefits results from a plan amendment company a's proposed amendment to plan a and plan b adds a lump sum option for covered individuals under which covered individuals will have the opportunity to elect during a specified window period of no more than days to receive in lieu of their current annuity the actuarial present_value of their remaining annuity payments in the form of an immediate lump sum payment and to the extent the law requires a qualified_joint_and_survivor_annuity including a single_life_annuity for retirees who are not married or a qualified_optional_survivor_annuity elections by covered individuals to receive a new distribution option will be subject_to applicable spousal consent the proposed amendment will result in a change in the annuity_payment period the annuity_payment period will be changed in association with the payment of increased benefits as a result of the addition of the lump sum option in addition covered individuals who wish to change their current_distribution option will be considered to have a new annuity_starting_date as of the first date of the month in which their new benefit is payable because the ability to select a lump sum will only be available during a limited window the increased benefit payments will result from the proposed plan amendment and as such are a permitted_benefit increase under sec_1_401_a_9_-6 q a-14 a in order for a plan to remain qualified under sec_401 of the code the calculation of the value of the benefit elected under the lump sum window option must comply with the requirements of sec_417 and the regulations thereunder under section dollar_figure of revproc_2014_4 subject_to certain exceptions the irs generally does not issue letter rulings on matters involving qualification issues under sec_401 through of the code qualification matters are generally handled by the employee_plans determination_letter program as provided in revproc_2014_6 accordingly we have not considered among other matters whether the lump sum window benefits comply with the requirements of sec_417 and the regulations thereunder with respect to the amount of the distribution and minimum present_value requirement that is applied based on the present_value of the normal_retirement_benefit instead this letter_ruling is based on your representations that the lump sum window option satisfies sec_417 of the code and sec_1_417_e_-1 of the regulations spousal consent must include where the law requires both the current spouse and a former spouse if the annuitant has remarried since the annuity_starting_date _ page ruling therefore in this circumstance the minimum distribution_requirements of sec_401 of the code will not be violated if company a amends pian a and plan b to offer a lump sum payment option during a limited window period of no more than days to covered individuals for whom annuity payments have already begun except as specifically ruled above no opinion is expressed as to the federal tax consequences of the transaction above under any other provision of the code including sec_401 sec_411 sec_415 sec_417 and sec_436 or of title of erisa no opinion is expressed regarding the qualification of the plan in addition no opinion is expressed on whether the method for valuing benefits under the lump sum window option satisfies the requirements of sec_417 and the regulations thereunder this letter is directed only to the taxpayer who requested it section k of the code provides that it may not be used or cited as precedent if you wish to inquire about this ruling please contact please address all correspondence to se t ep ra t2 sincerely mths be pe william b hulteng manager employee_plans technical enclosures deleted copy of letter_ruling notice of intention to disclose cc


department of the treasury internal_revenue_service washington d c l q commissioner tax exempt and jul government entities division uniform issue list legend ira x amount m dear this is in response to your letters dated date date date date date date and date in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a age represents that he received a distribution of amount m from his individual_retirement_account ira ira x taxpayer a asserts that his failure to accomplish a rollover of amount m within the 60-day period prescribed by sec_408 of the code was due to his medical_condition the following facts and representations have been submitted under penalty of perjury in support of the ruling requested on date taxpayer a withdrew amount m from ira x and deposited the funds in a non-ira account with the intention to re-deposit amount m into another ira within days of the withdrawal on date within the 60-day period taxpayer a met with his physician and was diagnosed with an extremely aggressive malignancy and immediately began medical treatments taxpayer a represents that he was mentally shocked and mentally depressed by the diagnosis and all financial plans for retirement became moot in his mind further taxpayer a represents that the effect of the page diagnosis overwhelmed his ability to complete the rollover within the 60-day rollover period taxpayer a has submitted medical documentation showing the nature of the diagnosis the date of the diagnosis and the dates of his treatments based on the facts and representations you request a ruling that the internal_revenue_service waive the 60-day rollover requirement contained in sec_408 of the code with respect to the distribution of amount m sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the 60' day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers page sec_408 of the code provides that the secretary may waive the day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement revproc_2003_16 2003_4_irb_359 date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer a consistent with his assertion that the failure to accomplish a rollover of amount m within the 60-day period prescribed by sec_408 of the code was due to his medical_condition is therefore pursuant to sec_408 of the code the internal_revenue_service hereby waives the 60-day rollover requirement with respect to the distribution of amount m from ira x pursuant to this ruling letter taxpayer a granted a period of days from the date of the issuance of this letter_ruling to make a rollover_contribution of amount m to a rollover ra provided all other requirements of code sec_408 except the 60-day requirement are met with respect to such contribution amount m will be considered a valid rollover_contribution within the meaning of sec_408 of the code is no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent page if you have any questions please contact phone at or fax at d by sincerely yours laura b warshawsky manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose


internal_revenue_service number release date index number ------------------------------------ --------------------------------------- ------------------------------- ----------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------ id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-139553-11 date date legend p q ----------------------------------------------------------------------------------------------------- ----------------------- ----------------------------------------------------------------------------------------------------- ------------------------ state ------------- date date date x ----------------------- ------------------- -------------------------- ---- dear --------------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of p by p's authorized representative requesting that p be granted an extension of time under sec_301_9100-3 of the procedure and administration regulations to make an election under sec_754 of the internal_revenue_code the information states that p was formed as a limited_liability_company in state on date on date q acquired an x percent ownership_interest in p p’s tax advisor plr-139553-11 inadvertently failed to timely make an election under sec_754 for the taxable_year ending date sec_754 provides that if a partnership files an election in accordance with the regulations prescribed by the secretary the basis of the partnership property is adjusted in the case of a transfer of a partnership_interest in the manner provided in sec_743 such an election shall apply with respect to all distributions of property by the partnership and to all transfers of interests in the partnership during the taxable_year with respect to which the election was filed and all subsequent taxable years sec_1_754-1 of the income_tax regulations provides that an election under sec_754 to adjust the basis of partnership property under sec_734 and sec_743 with respect to a distribution_of_property to a partner or a transfer of an interest in a partnership shall be made in a written_statement filed with the partnership return for the taxable_year during which the distribution or transfer occurs for the election to be valid the return must be filed not later than the time prescribed by sec_1 e including extensions thereof for filing the return for that taxable_year sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301 b defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-3 provides that the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result p is granted an extension of time of days from the date of this letter to make an election under sec_754 effective for the taxable_year ending date the election should be made in a written_statement filed with the appropriate service_center for association with p's return for the taxable_year ending date a copy of this letter should be attached to the statement filed as a condition for this late election relief p and any affected taxpayers must file within days of the date of this letter any amended federal_income_tax returns for the taxable_year ending date and subsequent years consistent with p having made a plr-139553-11 timely sec_754 election effective for the taxable_year ending date copies of this letter should be attached to any such amended returns except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the internal_revenue_code and the regulations thereunder specifically no opinion is expressed or implied concerning whether p was or is a partnership for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to p's authorized representative sincerely charlotte chyr senior technician reviewer branch passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes