internal_revenue_service number release date index number ----------------------------- ---------------------- ------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc psi plr-105062-10 date date in re -------------------------------------------- ---------------------------------------------------------- --------------------- legend ---------------------------- testator -------------------------------------- child a ----------------------------- child b --------------------------------------- child c -------------------------------- stock ------------------------------------------------------------------------------ stock trust ------------------------------------------------------------------------------ residuary_trust children’s agreement ------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------- state state a date date date date date date a b c d stock trust a residuary_trust a cite --------------------------------------------------------------------------------------------------- cite -------------------------------------------------------------------------------------------------------- ------------------ ---------- -------------------- ------------------- -------------------------- ------------------------- ------------------------- ----------------------- ------ ------ ------ ------ ------------------------------------------------------------------------ --------------------------------------------------------------------------------- ------------------------------------------------------------------------ --------------------------------------------------------------------------------- plr-105062-10 ------------------------------------------------------------------------ ------------------------------------------------------ cite cite ------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------------------------- cite ------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------ cite ------------------------------------------------------------------------ ------------------------------------------------------- cite cite ------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------- highest court highest court of state a state court state statute ------------------------------------------------------------------------------------------ state governing statute a --------------------------------------------- --------------------------------------------------- state governing statute b --------------------------------- state a statute ---- q r ---- ---- s ---- t u -------- -------- v --------- x ------ y z ------------ ------------------------------------------- ----------------------------------- ------------------------------------------------------------------------ --------------------------------------------------------------------------------- dear -------------- this responds to the date letter from your authorized representative requesting rulings on the income gift estate and generation-skipping_transfer gst tax consequences of a proposed settlement agreement the facts and representations are as follows testator died a resident of state on date he was survived by three children child a child b and child c the children five grandchildren the five grandchildren were then living there were no great-grandchildren at the time under articles third and eighth of testator’s will the will his shares of stock were to be held in trust the stock trust trust income was to be divided equally among the children on a child’s death the child’s income share was to be divided equally plr-105062-10 among the child’s then living children testator’s grandchildren the stock trust was to terminate twenty-one years after the death of testator’s last surviving grandchild when the principal would be divided equally per capita among testator’s then living great-grandchildren and deceased great-grandchildren whose then living descendants would take by representation under article twenty-second of the will the residue of testator’s estate was to be held in another trust the residuary_trust the residuary_trust provisions were identical to those of the stock trust except that the residuary_trust was to terminate when testator’s youngest great-grandchild reached age twenty-one the rule_against_perpetuities under the state rule_against_perpetuities in effect at testator’s death a bequest of a future_interest was void if considered prospectively at the testator’s death there was a possibility that the interest would not vest by the end of twenty-one years after the death of a life or lives in being at the testator’s death the permissible period a bequest to a class was void if there was a possibility that all the members of the class would not be ascertained and take vested interests within the permissible period a void specific_bequest passed to the testator’s residuary_estate if the testator’s disposition of the residuary_estate was void as well the residuary_estate passed as a reversion by intestacy cite in this case at testator’s death it was possible for the children to have additional children so that there could be grandchildren whose lives were not then in being this was the pivotal factor in determining whether his bequests of stock trust and residuary_trust income and remainders to his grandchildren and great-grandchildren violated the rule_against_perpetuities testator’s bequest of lifetime income interests to the grandchildren was to all of his grandchildren as a class a grandchild born after testator’s death would be part of the grandchildren’s class and would receive stock trust income_for_life based on this it was considered possible that not all of the grandchildren’s income interests would vest during lives in being at testator’s death testator’s bequests of remainders to his great-grandchildren were to vest only after all of testator’s grandchildren died the life of a grandchild born after testator’s death would also be a measuring life therefore at testator’s death it was possible that the certain annuities were also created that have since terminated each trust considered herein ie stock trust and residuary_trust in the will and stock trust a and residuary_trust a under the children’s agreement provided for distribution of the remainder at the end of twenty-one years following the death of the last survivor of the persons whose lives measured the duration of that trust because the perpetuities issue in this case centers on the lives measuring a respective trust’s duration and not on the twenty-one year period following the death of the last survivor the twenty-one year period is hereafter assumed to be a part of each trust’s duration even though it is plr-105062-10 time for vesting of the great-grandchildren’s remainders would be based on a life not in being at testator’s death accordingly the validity of these bequests was in doubt the bequests in the stock trust if void passed to the residuary_trust at testator’s death the bequests in the residuary_trust if void passed to testator’s intestate estate as a reversionary_interest the children’s agreement the children were testator’s heirs at law they acquired his property passing by intestacy consequently on date shortly after testator died the children entered into an agreement the children’s agreement revising the time when the great-grandchildren’s remainders were to vest under the children’s agreement the trusts were to terminate and the great-grandchildren’s remainders were to take effect on the death of the survivor of the children and five grandchildren that is lives in being at testator’s death the children’s agreement also changed the will’s pro_rata distribution of the stock trust and residuary_trust remainder to a per stirpes distribution on termination trust principal would be divided into three equal parts and distributed per stirpes under this revision the great-grandchildren descended from child a would share one third of the principal per stirpes those descended from child b would share a second third per stirpes and those descended from child c would share the last third per stirpes in all other respects the terms of the revised stock trust stock trust a and residuary_trust residuary_trust a were the same as those provided in testator’s will on a date before date testator’s shares of stock were transferred to stock trust a residuary_trust a was not funded it is represented that no additions have been made since then the litigation over more than x decades the trust beneficiaries and others have instituted actions for state court determinations regarding testator’s will and the children’s agreement specifically in cite the highest court of state highest court considered testator’s bequests of income interests to the grandchildren the court reasoned that under testator’s will a grandchild’s income_interest would vest when his or her parent child a child b or child c died thus the grandchildren’s class would necessarily close at the death of the last survivor of the children who were in being at testator’s death highest court held that therefore the bequest of lifetime income interests to the grandchildren as a class did not violate the rule_against_perpetuities the court held the stock trust created in the will to be valid through the lives of the grandchildren not specifically stated testator’s bequest to the grandchildren though valid did not provide for distribution of a grandchild’s income share when the grandchild died before the trust ended on the death of the first grandchild to plr-105062-10 highest court then considered testator’s bequest of remainders to his great-grandchildren the court reasoned that the grandchildren’s life estates preceded the remainders and the grandchildren’s class was not limited to lives in being at testator’s death because the remainders would take effect only after all of those including afterborn grandchildren died it was possible that the remainders would not vest within lives in being at testator’s death therefore highest court held the stock trust remainders to be void and illegal as violating the rule_against_perpetuities cite state statute the wait and see rule nearly y decades after highest court rendered its decision in cite the state legislature enacted state statute state statute provides a wait and see rule in determining whether a future_interest satisfies the rule_against_perpetuities or is void under the wait and see rule a future_interest does not violate the rule_against_perpetuities if actual events demonstrate that the interest did in fact vest by the end of the permissible period state statute applies retroactively to all interests heretofore created following the enactment of state statute highest court considered the statute’s retroactivity cite in the case before the court the trust was created many decades before state statute was enacted at the time of creation certain interests were void as violating the rule_against_perpetuities however highest court applied state statute’s wait and see rule to conclude in retrospect that the interests were not void and did not violate the rule_against_perpetuities as a result the courts of state now apply the wait and see rule retroactively to conclude that a future_interest that was void when created many years before state statute was enacted is not void because in hindsight it vested before the permissible period ended accordingly such otherwise void interests are retroactively sustained as not violating the rule_against_perpetuities cite however highest court has not yet addressed due process issues that may be presented die on date the trustees petitioned the state court for instructions the state court held that based on testator’s intent a deceased grandchild’s children succeeded to the income share for the duration of the trust cite by inference highest court also considered testator’s bequest of the residuary_trust remainders highest court in effect confirmed that the stock trust remainder and residuary_trust remainder passed by intestacy to the children however the court did not rule on how the remainder would pass to the great-grandchildren in contrast the legislature of state a enacted state a statute which like state statute retroactively applies a wait and see rule to determine whether a future_interest that was void at the time it was created before the state a statute was enacted did in fact vest during the permissible period highest court of state a refused to apply the wait and see rule retroactively despite the relevant language in plr-105062-10 the actualities in this case no additional grandchildren were born after testator’s death the lives of the children and the five grandchildren were all in being at testator’s death all of the children have died the last survivor of the five grandchildren died on date at the time there were z great-grandchildren of testator the trust will terminate twenty-one years after date which is date of testator’s z great-grandchildren a descended from child a b descended from child b and c descended from child c if the wait and see rule is applied to validate testator’s bequest of remainders to his great-grandchildren the principal would be divided into z equal shares and distributed under the will alternatively if testator’s disposition of the remainders is considered void the principal would be divided into three equal shares and distributed per stirpes under the children’s agreement the portion of a one-third share distributable to a great-grandchild would depend on the framework of the family line ie child a’s child b’s or child c’s to which that great-grandchild belongs great-grandchildren’s litigation there is a substantial difference between what a great-grandchild would receive in a per capita distribution and what he or she would receive in a per stirpes distribution on date the great-grandchildren benefitting from a per capita distribution the per capita parties instituted their action in state court for adjudication on the distribution of the stock trust remainder the great-grandchildren benefitting from a per stirpes distribution the per stirpes parties opposed the suit and also requested adjudication in addition an action was instituted concerning the distribution of income during the twenty-one year period state court combined the proceedings to consider the income and principal issues together cite over a d-year period guardians ad litem were appointed there was extensive discovery counsel filed three voluminous sets of briefs and the court heard two days of oral arguments the per capita parties argued that the wait and see test of state statute now applies under that test testator’s the will’s disposition of the stock trust remainder does not violate the rule_against_perpetuities therefore the stock trust principal is distributable per capita to testator’s living great-grandchildren and deceased great-grandchildren whose living descendants would take by representation the per stirpes parties argued that the highest court’s determinations were final and state a statute instead that court addressed issues of constitutionality and held that state a statute could not be applied retroactively to destroy vested or substantive rights created before state a statute was enacted cite plr-105062-10 those rulings can not now be constitutionally impaired by a later-in-time state statute or judicial_ruling because highest court determined the remainders in the will to be void they passed as reversionary interests by intestacy to the children as such the remainders passed per stirpes under the children’s agreement some parties argued that trust income should be distributed per stirpes through the roots of the children for the duration of the stock trust others argued that the income is distributable per capita the court encouraged the parties to explore ways to resolve their differences through negotiation and compromise rather than through continued litigation among the potential outcomes regarding trust principal was a judicial_ruling that i ii iii principal is distributable per capita on date under the terms of the stock trust in the will or principal is distributable per stirpes on date under the terms of the children’s agreement or principal was distributable as of the last surviving grandchild’s death under the residuary_trust in the will which vested or will vest in the takers under the residuary_trust among the potential outcomes regarding trust income was a judicial_ruling that iv v vi income is distributable per stirpes from the death of the last surviving grandchild to date under either the will or the children’s agreement or income is distributable per capita from the death of the last surviving grandchild to date under the will or the children’s agreement or all rights to receive stock trust income terminated when the last surviving grandchild died at which time the stock trust principal was distributable under the residuary_trust of the will the great-grandchildren’s settlement agreement the parties negotiated extensively at the outset they agreed that the issues could be settled using a fractional difference settlement based on an assessment of the relative strengths of their adverse positions under the general framework of the compromise the great-grandchildren’s settlement agreement the ggc agreement provides for the stock trust principal to be divided into z separate shares based on the number of testator’s then living plr-105062-10 great-grandchildren and deceased great-grandchildren with then living children the share of a deceased great-grandchild will be divided per stirpes among that great-grandchild’s living descendants the stock trust assets will be divided in accordance with certain percentages the formula of the compromise provides for a q per stirpes r per capita fractional difference as to income and an s per stirpes t per capita fractional difference as to principal after the division into separate shares u of each great-grandchild’s share will be distributed outright to the great-grandchild if living or if the great-grandchild is deceased to his or her living descendants per stirpes the remaining v of each share will continue in trust for such great-grandchild or such descendants until the termination_date date each share will be a separate trust the respective great-grandchild or deceased great-grandchild’s descendants will be the sole beneficiary of the share for distributions of income and principal a sophisticated algorithm taken to thirteen decimal places will be used in the pro_rata division and outright distributions the division will take into account both the market_value and respective tax bases of the assets the ggc agreement was presented to state court for consideration the state court approved the settlement and ordered the division and distribution of the stock trust as set forth in the ggc agreement the ggc agreement is subject_to a favorable ruling from the internal_revenue_service you have asked for the following rulings the terms of the ggc agreement will not cause distributions from the stock trust or the continuing separate settlement trusts to become subject_to the generation-skipping_transfer_tax the terms of the ggc agreement will not cause any party to the agreement to make a gift to any other party to the ggc agreement the terms of the ggc agreement will not cause any party to the agreement to be required to include trust assets in his or her gross_estate unless such assets are distributable or have been distributed to such party prior to his or her death the terms of the ggc agreement will not cause any party to the agreement to realize income from the sale_or_exchange of any trust assets or interests ruling generation-skipping_transfer gst tax for purposes of describing the ggc agreement the stock trust and stock trust a are considered to be the same trust plr-105062-10 sec_2601 of the internal_revenue_code imposes a tax on every generation-skipping_transfer which is defined under sec_2611 as a taxable_distribution a taxable_termination or a direct_skip under of the tax_reform_act_of_1986 the act gst tax is generally applicable to generation-skipping transfers made after date however under b a of the act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the tax does not apply to a transfer under a_trust that was irrevocable on date except to the extent the transfer is made out of corpus added to the trust by an actual or constructive_addition after date sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax under sec_26_2601-1 will not cause the trust to lose its exempt status these rules are applicable only for purposes of determining whether an exempt trust retains exempt status for gst tax purposes the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 sec_26_2601-1 provides that a court-approved settlement of a bona_fide issue regarding the administration of the trust or the construction of terms of the governing instrument will not cause an exempt trust to be subject_to chapter if the settlement is the product of arm's length negotiations and the settlement is within the range of reasonable outcomes under the governing instrument and applicable state law addressing the issues resolved by the settlement a settlement that results in a compromise between the positions of the litigating parties and reflects the parties' assessments of the relative strengths of their positions is a settlement that is within the range of reasonable outcomes in this case the stock trust was irrevocable on date further it is represented that there have been no actual or constructive additions to the stock trust after date accordingly the stock trust is exempt from gst tax under sec_26_2601-1 the terms of the ggc agreement including the proposed division of the stock trust into separate shares and partial distributions of principal are the result of a settlement of substantial issues between the per capita parties and the per stirpes parties these issues have been tenaciously litigated over more than x decades highest court rendered opinions regarding these trusts many years ago however state statute has since been enacted with retroactive effect and highest court has affirmed state statute’s retroactive application to a similarly-created trust in light of this that court’s earlier determinations of the issues in this case are now in question plr-105062-10 we conclude that the ggc agreement constitutes a settlement of bona_fide issues concerning the provisions of the stock trust and its administration we also conclude that the terms of the ggc agreement are the product of arm's length negotiations they represent a compromise between the positions of the parties and reflect the parties' assessments of the relative strengths of their positions we further conclude that the ggc agreement is within the range of reasonable outcomes under the governing instruments and the applicable state law addressing the issues resolved in the ggc agreement accordingly based upon the facts submitted and the representations made we rule that the division of the stock trust into the z separate great-grandchildren’s trusts and the distributions to the living great-grandchildren and the descendants by representation of a deceased great-grandchild made in accordance with the ggc agreement will not cause the stock trust the continuing separate stock trusts or the distributions as described above to be subject_to the generation-skipping_transfer_tax ruling gift_tax issue sec_2501 provides that a tax is imposed for each calendar_year on the transfer of property by gift during such calendar_year sec_2511 provides that the gift_tax applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-1 of the gift_tax regulations provides that as to any property or part thereof or interest therein of which the donor has so parted with dominion and control as to leave in him or her no power to change its disposition whether for his or her own benefit or for the benefit of another the gift is complete sec_25_2511-1 provides that any transaction in which an interest in property is gratuitously passed or conferred upon another regardless of the means or device employed constitutes a gift subject_to tax whether an agreement settling a dispute is effective for gift_tax purposes depends on whether the settlement is based on a valid enforceable claim asserted by the parties and to the extent feasible produces an economically fair result see 674_f2d_761 9th cir citing 387_us_456 thus state law must be examined to ascertain the legitimacy of each party's claim if it is determined that each party has a valid claim the service must determine that the distribution under the settlement reflects the result that would apply under state law if there is a difference it is necessary to consider whether the difference may be justified because of the uncertainty of the result if the question were litigated plr-105062-10 the proposed settlement is a mediated settlement and is based on arm's length negotiations among all the parties all interested parties who hold or may hold an interest in the trusts including any minors and unborn heirs have been represented in the negotiations as discussed above the ggc agreement represents the resolution of a bona_fide controversy between the parties the terms of the ggc agreement are the product of arm's length negotiations and represent i a compromise between the positions of the per capita parties and the per stirpes parties and ii reflect the parties' assessments of the relative strengths of their positions we further conclude that the ggc agreement is within the range of reasonable outcomes under the governing instruments and applicable state law accordingly based on the facts submitted and representations made we conclude that the terms of the ggc agreement as described above will not cause any of the beneficiaries to have made a taxable gift_for purposes of the federal gift_tax under sec_2501 ruling estate_tax issue sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2033 provides that the value of the gross_estate includes the value of all property to the extent of the interest therein of the decedent at the time of death sec_2035 provides that if the decedent transferred an interest in property or relinquished a power with respect to any property during the 3-year period ending on the date of death and the value of the property or interest therein would have been included in the gross_estate under sec_2036 sec_2037 sec_2038 or sec_2042 if the interest or power had been retained by the decedent on the date of death then the value of the gross_estate includes the value of the property or interest that would have been so included sec_2036 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in the case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise under which he has retained for his life or for any period not ascertainable without reference to his death or for any period that does not in fact end before his death possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income from the property sec_2037 provides that the value of the gross_estate includes the value of all plr-105062-10 property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise if possession or enjoyment of the property can through ownership of such interest be obtained only by surviving the decedent and the decedent has retained a reversionary_interest in the property and the value of such reversionary_interest immediately before the death of the decedent exceed sec_5 percent of the value of such property sec_2038 provides that the value of the gross_estate includes the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona fine sale for adequate_and_full_consideration in money_or_money's_worth by trust or otherwise where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power either by the decedent alone or in conjunction with any person to alter amend or revoke or where the decedent relinquished any such power during the 3-year period ending on the date of the death sec_2041 provides that the value of the gross_estate shall include the value of all property with respect to which the decedent possessed a general_power_of_appointment at the time of death sec_2041 defines the term general_power_of_appointment as a power that is exercisable in favor of the decedent the decedent's_estate the decedent's creditors or the creditors of the decedent's_estate in order for sec_2035 through to apply a decedent must have made a transfer of property or an interest therein except in the case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth under which the decedent retained an interest in or power over the income or corpus of the transferred property as discussed above the ggc agreement represents the resolution of a bona_fide controversy between the parties it is a settlement of bona_fide issues and is the product of arm's length negotiations it reflects the parties' assessments of the relative strengths of their positions no great-grandchild or deceased great-grandchild’s descendants by representation has made a transfer to the stock trust or to any other great-grandchild by reason of the settlement agreement accordingly based upon the facts submitted and representations made we conclude that the terms of the ggc agreement will not cause any party to the agreement to have made a transfer within the meaning of sec_2035 through however once the ggc agreement becomes effective any trust property actually distributed or receivable by a beneficiary or his or her assignee would generally be included in the beneficiary’s federal transfer_tax base see eg sec_2033 sec_2041 sec_2501 ruling income_tax issue plr-105062-10 sec_61 provides that gross_income includes gains derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized sec_1001 provides that the amount_realized from the sale_or_other_disposition of property shall be the sum of any money received plus the fair_market_value of the property other than money received under sec_1001 except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1_1001-1 of the income_tax regulations provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained 499_us_554 addresses the issue of whether a sale_or_exchange that has taken place results in the realization of gain_or_loss under sec_1001 in cottage savings a financial_institution exchanged its interests in one group of residential mortgage loans for another lender's interests in a different group of residential mortgage loans the two groups of mortgages were considered substantially identical by the agency that regulated the financial_institution the supreme court in cottage savings u s pincite concluded that sec_1_1001-1 reasonably interprets sec_1001 and stated that an exchange of property gives rise to a realization event under sec_1001 if the properties exchanged are materially different in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material to the code so long as their respective possessors enjoy legal entitlements that are different in_kind or extent cottage savings u s pincite the court held that mortgage loans made to different obligors and secured_by different homes did embody distinct legal entitlements and that the taxpayer realized losses when it exchanged interests in the loans cottage savings u s pincite in the present case state governing statute a allows the court for cause shown to authorize the division of a_trust into two separate trusts on such terms and conditions and with such notice as the court directs in addition state governing statute b gives trustees the power to distribute in cash or in_kind or partly in each and allocate particular assets in proportionate or disproportionate shares in this case the court order approving the ggc agreement orders the division and distribution of the stock trust as set forth in the ggc agreement accordingly the plr-105062-10 court approved the non-pro rata distributions called for in the ggc agreement and further authorized the trustees to make the necessary transfers and assignments of the unconverted investment securities t herein awarded in_kind accordingly the submission concludes that the distribution scheme in this case is authorized by state law we agree the stock trust will be divided into z trusts on a non pro-rata basis under the state statutes cited above the court has the authority to authorize the trustees to make this type of non pro-rata apportionment thus the proposed division and distribution of the stock trust assets among the z trusts will not result in a material difference in_kind or extent of the legal entitlements enjoyed by the beneficiaries within the meaning of cottage savings accordingly based upon the facts submitted and representations made we conclude that the division of the stock trust into the z great-grandchildren’s trusts will not result in the recognition of gain_or_loss under sec_1001 by the stock trust any beneficiary of the stock trust or any separate great-grandchild’s trust the rulings in this letter pertaining to the federal estate and or generation-skipping_transfer_tax apply only to the extent that the relevant sections of the internal_revenue_code are in effect during the period at issue except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely yours leslie h finlow acting senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosure copy for purposes


department of the treasury internal_revenue_service washington d c covennmen exes oct - se ter pats uniform issue list vt kkk k k legend taxpayer a company b company c amount d amount e ss es plan x profit sharing plan and trust plan y profit sharing plan and trust dear this is in response to your letter dated date supplemented by your letter dated date in which your authorized representative requested a ruling on your behalf concerning the required_minimum_distribution rule under sec_401 of the income_tax code code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a is an employee of company b and company c taxpayer a does not intend to separate from the service of or retire from company b is company b maintains plan x and company c maintains plan y taxpayer a an active_participant in both plans both plan x and plan y use the calendar_year ae as their plan_year your authorized representative asserts on your behalf that plans x and y meet the requirements of code sec_401 a taxpayer a’s account balances are amount d in plan x and amount e in plan y taxpayer a is a owner of company c but not in company b taxpayer a will attain in taxpayer a has reached his normal_retirement_date with respect to plan y plan y permits in-service distributions to participants who have reached their normal_retirement_date plan x permits participants to roll over eligible distributions received from other qualified_plans into plan x taxpayer a has represented that he is not a owner of company b as that term is defined in sec_416 of the code taxpayer a has also represented that plan y meets the requirements of sec_401 as a result it is excluded from having to comply with the joint and survivor and preretirement survivor annuity requirements found under sec_401 of the code taxpayer a intends to withdraw his calendar_year required_distribution from plan y prior to date after receiving his required_distribution for from plan y taxpayer a intends to withdraw the balance of his account from plan y and roll over said balance into plan x prior to date based on the facts and representations you request a ruling that taxpayer a not be required to receive a distribution from the amount rolled over from plan y into plan x until he reaches his required_beginning_date under plan x will sec_401 of the internal_revenue_code code states that a_trust created or organized in the united_states and forming part of a stock bonus pension or profit-sharing_plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified_trust under this section sec_401 of the code provides the rules governing required distributions specifically 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 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 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 defines required_beginning_date as april of the calendar_year following the later of i the calendar_year in which the employee attains age or il the calendar_year in which the employee retires sec_401 provides that in the case of an employee who is a owner as defined in sec_416 of the code the required_beginning_date is solely the april following the plan_year ending in the calendar_year in - which the employee attains age and not the later of the calendar_year in which the employee attains age or the calendar_year in which the employee retires sec_1_401_a_9_-7 of the final income_tax regulations regulations question and answer-2 states that if an amount is distributed by one plan distributing plan and is rolled over to another plan receiving plan the benefit of the employee under the receiving plan is increased by the amount rolled over for purposes of determining the required_minimum_distribution for the calendar_year immediately following the calendar_year in which the amount rolled over is distributed in other words the amount rolled over is subject_to the minimum_distribution_rules of the receiving plan in the calendar_year immediately following the calendar_year in which the amount was distributed from the distributing plan sec_416 of the code defines a owner in the case when the employer is a corporation as any person who owns or is considered as owning within the meaning of the constructive_ownership rules under sec_318 of the code substituting for more than of the outstanding_stock of the corporation or stock possessing more than of the total combined voting power of all stock of the corporation if the employer is not a corporation a owner is defined as any person who owns more than of the capital or profits interest in the employer the aggregation rules under sec_414 c and m of the code do not apply for purposes of determining ownership in the employer under sec_416 of the code sec_401 states in relevant part that a defined contribution planis - not required to provide a joint_and_survivor_annuity and hence does not require spousal consent for a distribution if the plan provides for all of the following requirements the participant’s nonforfeitable accrued_benefit is payable in full on the death of the participant to the participant's surviving_spouse or if there is no surviving_spouse or if the spouse consents thereto to a designated_beneficiary such participant does not elect a payment of benefits in the form of a life_annuity and with respect to such participant such plan is not a direct or indirect transferee of a defined_benefit_plan or a defined_contribution_plan subject_to the minimum_funding standards of sec_412 of the code the information presented by taxpayer a demonstrates that he is not a owner of company b as defined in sec_416 and that taxpayer a is not required to obtain spousal consent for the distribution from plan y because plan y is excluded from the joint_and_survivor_annuity and preretirement survivor annuity requirements of sec_401 of the code taxpayer a has asserted that he will take a calendar_year required_minimum_distribution from plan y by date and that this required_distribution will not be rolled over into plan x taxpayer a has also asserted that after receiving his calendar_year required_distribution he will withdraw the balance of his plan y account and roll said balance into plan x by date therefore based on the above facts the service concludes that taxpayer a will not be required to receive a distribution with respect to the amount distributed from plan y and rolled over into plan x until he reaches his required_beginning_date under plan x as determined under sec_401 of the code 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 if you wish to inquire about this ruling please contact at please address all correspondence to se t ep ra t3 sincerely yours rances v slodn manager employee_plans technical group enclosures deleted copy of this letter notice of intention to disclose notice cc kk e kee k krkk


department of the treasury internal_revenue_service washington d c contact person contact number fz o p c t2 jul date uniform issue list legend x y ze dear sir or madam this is in reply to your rulings request of date on x's proposed transfer of all of its assets to y x is exempt from federal_income_tax under sec_501 of the code and is a private_foundation under sec_509 of the code after its transfer x will notify the internal_revenue_service of its intent to terminate its private_foundation_status under sec_509 of the code pursuant to sec_507 of the code x has no expenditure_responsibility grants outstanding under sec_4945 of the code x will transfer all of its assets to y y is exempt from federal_income_tax under sec_501 c of the code and is not a private_foundation under sec_509 of the code because y is a supporting_organization under sec_509 of the code that supports z z is exempt from federal_income_tax under sec_501 of the code and is not a private_foundation under sec_509 of the code because z is a financially publicly_supported_organization under sec_509 and sec_170 a vi of the code that is also a community_foundation under sec_1_170a-9 of the income_tax regulations the following rulings are requested x's transfer of its assets to y will not be a termination under sec_507 of the code of x's private_foundation_status under sec_509 of the code and thus will not result in any private_foundation_status termination_tax under sec_507 of the code x's voluntary termination of its private_foundation_status by notice to the internal_revenue_service pursuant to sec_507 of the code after the transfer of all of its assets to y will be a termination under sec_507 a of the code however because x will have no assets when such termination occurs no termination_tax under sec_507 of the code will be due x's transfer of its assets to y will not result in tax under sec_4940 of the code the code x's transfer of its assets to y will not be an act of self-dealing or result in tax under sec_4941 of su x's transfer of its assets to y will be treated as qualifying distributions under sec_4942 a of the code and will not be taxable_expenditures under sec_4945 of the code of the code x's transfer of its assets to y will not be a jeopardizing investment or result in tax under section x’s transfer of all of its assets to y will not be a taxable_expenditure under sec_4945 of the code and under sec_1_507-3 of the regulations x will not be required to exercise expenditure_responsibility under sec_4945 of the code with respect to its transfer of all of its assets to y the legal accounting advising and other expenses if reasonable in amount incurred for x's transactions described in this ruling will be qualifying distributions under sec_4942 of the code and will not be taxable_expenditures under sec_4945 of the code after x transfers all of its assets and voluntarily terminates its private_foundation_status pursuant to sec_507 of the code x must file its annual return form_990-pf for its final tax_year in which the transfer and termination occur but will not be required to file such returns for any future tax years when it wil have no assets and no activities x's transfer and transactions described in this ruling will not adversely affect x's exemption from federal_income_tax under sec_501 c of the code sec_501 c of the code provides for the exemption from federal_income_tax of nonprofit_organizations organized and operated exclusively for the charitable and or other exempt purposes stated in that section sec_509 of the code describes organizations exempt from federal_income_tax under sec_501 of the code are private_foundations subject_to the provisions of chapter of the code sec_509 a of the code describes organizations exempt from federal_income_tax under sec_501 c of the code that are financially publicly supported and are not private_foundations sec_509 of the code provides that a supporting_organization under that section is not a private_foundation under sec_509 of the code sec_507 of the code and sec_1_507-1 b of the income_tax regulations provide that a private_foundation may voluntarily terminate its private_foundation_status by submitting to the internal_revenue_service a statement of its intention to voluntarily terminate its private_foundation_status pursuant to sec_507 and by paying any termination_tax under sec_507 of the code sec_507 of the code impose excise_tax on a private_foundation which voluntarily terminates its private_foundation_status under sec_507 this sec_507 tax is equal to the lower_of the aggregate tax benefits that have resulted from the private foundation's exempt status under sec_501 or the value of the net assets of the private_foundation sec_1_507-1 of the regulations provides that a private_foundation which transfers ail of its net assets is not required to file annual information returns required by sec_6033 of the code for subsequent tax years after its tax_year of such transfer when it has no assets or activities sec_1_507-3 of the regulations indicates that a transferor private_foundation is required to meet its charitable distribution_requirements under sec_4942 of the code even for any_tax year in which it makes a transfer of its assets to another private_foundation pursuant to sec_507 of the code ls sec_1_507-3 of the regulations provides that where a private_foundation has transferred all of is not required its assets to another private_foundation in a transfer under sec_507 of the code it to exercise expenditure_responsibility under sec_4945 of the code with respect to such transfer sec_1_507-3 of the regulations provides that a transfer of assets does not relieve the transferor private_foundation from filing its own final tax_year return as required by sec_6033 of the code sec_1_507-4 b of the regulations provides that the tax on termination of private_foundation_status under sec_507 of the code does not apply to a transfer of assets under sec_507 of the code sec_1_507-1 b and d of the regulations provide that a transferor foundation's transfer not constitute any termination of the transferor of assets under sec_507 of the code will foundation's private_foundation_status under sec_509 sec_4940 of the code imposes excise_tax on certain investment_income of a private_foundation sec_4941 of the code imposes excise_tax on any act of self-dealing between a private_foundation and any of its disqualified persons under sec_4946 of the code sec_53_4946-1 a of the foundation and similar excise_taxes regulations provides that for purposes of self-dealing under sec_4941 of the code an organization exempt from federal_income_tax under sec_501 of the code is not a disqualified_person under sec_4946 of the code sec_4942 of the code requires that a private_foundation must expend annual qualifying distributions under sec_4942 of the code for the conduct of exempt purposes sec_4942 g a of the code and sec_53 a i of the regulations provide that qualifying distributions include the reasonable administrative expenses_incurred to conduct exempt purposes sec_4942 of the code provides that a private_foundation does not make a qualifying_distribution under sec_4942 of the code where its distribution is a contribution to i an organization controlled by the transferor or by one or more of the transferar's disqualified persons under sec_4946 of the code or ii a private_foundation that is not an operating_foundation under sec_4942 of the code sec_4945 of the code imposes excise_tax on any private foundation's making of a taxable_expenditure under sec_4945 of the code sec_4945 d of the code requires that in order to avoid making a taxable_expenditure a transferor private_foundation must exercise expenditure_responsibility under sec_4945 of the code on its grants to another private_foundation sec_4945 of the code defines expenditure_responsibility in terms of the grantor private_foundation requiring pre-grant inquiry and post-grant reports as to the grantee foundation's uses of the grant sec_4945 of the code provides that a taxable_expenditure includes any amount expended by a private_foundation for purposes other than exempt purposes sec_53_4945-6 c allows a private_foundation to transfer its assets to exempt_organizations under sec_501 of the code pursuant to sec_507 of the code without the transfers being taxable_expenditures under sec_4945 of the code oo b x will transfer all of its assets to y your requested rulings are discussed below analysis i x's transfer of assets is to organization y which is exempt from federal_income_tax under sec_501 of the code and is not a private_foundation under sec_509 of the code because y is a supporting_organization under sec_509 a of the code x's transfer of its assets to y will not terminate x's private_foundation_status under sec_509 of the code and thus will not result in foundation termination_tax under sec_507 of the code under sec_507 of the code when x notifies the internal_revenue_service at least one day after it transfers all of its assets to y of its intent to voluntarily terminate its private_foundation_status under sec_509 of the code pursuant to sec_507 of the code x will thus terminate its private_foundation_status pursuant to that sec_507 of the code under sec_507 c of the code the value of x's assets after it has transferred all of its assets to y thus x‘s voluntary notice of termination of its private_foundation_status pursuant to section will be zero a of the code will not result in tax under sec_507 of the code x's transfer of its assets to y will not result in excise_tax on investment_income under sec_4940 of the code under sec_4941 of the code x's transfer of its assets to y will not be an act of self-dealing because the transfer will be made for exempt purposes to y which is exempt from federal_income_tax under sec_50t ch of the code and is not a disqualified_person under sec_4946 of the code for purposes of sec_4941 of the code pursuant to sec_53_4946-1 of the regulations x's transfer of its assets to y will be a qualifying_distribution under sec_4942 g a of the code because x's transfer will be paid for exempt purposes under sec_501 of the code to y which is exempt from federal_income_tax under sec_501 of the code and is not a private_foundation under sec_509 of the code because y is a supporting_organization under sec_509 a of the code x's qualifying_distribution to y for exempt purposes will not be a taxable_expenditure under sec_4945 of the code x's transfer of its assets for exempt purposes under sec_501 c of the code to y which is exempt from federal_income_tax under sec_501 of the code will not be a jeopardizing investment or result in tax under sec_4944 of the code under sec_4945 of the code a private_foundation can transfer assets to an organization which is exempt from federal_income_tax under sec_501 of the code and is not a private_foundation because it a supporting_organization under sec_509 of the code without the transfer being a taxable_expenditure under sec_4945 of the code thus x's transfer of its assets to y will not be a taxable_expenditure under sec_4945 of the code or subject x to tax under that section is also under sec_4945 a of the code where a private_foundation transfers assets to an organization which is exempt from federal_income_tax under sec_501 of the code and which is not a private_foundation because it a supporting ofganziation under sec_509 of the code the transferor private_foundation will have no expenditure_responsibility requirement under sec_4945 of the code thus x will not be required to exercise expenditure_responsibility under sec_4945 of the code with respect to its transfer of all of its assets to y is the legal accounting and other expenses if reasonable in amount incurred by x in connection with this ruling_request and in carrying out the transfer of assets will be qualifying distributions under sec_4942 a of the code because they are paid to achieve the charitable purpose of making the grant to y and also for that reason the payments of such expenses will not be taxable_expenditures under sec_4945 of the code under sec_1_507-1 of the regulations after x transfers all its assets and voluntarily terminates its private_foundation_status pursuant to sec_507 of the code x must file its annual return form_990-pf for its final tax_year in which its transfer and termination occur but will not be required to file such returns for any future tax years when x will have no assets and no activities of because x's transfer of its assets to y will be for exempt purposes under sec_501 of the code x's transfer of assets will not adversely affect x's exemption from federal_income_tax under sec_501 ch of the code accordingly we rule that x's transfer of all of its assets to y will not be a termination under sec_507 of the code of x's private_foundation_status under sec_509 of the code and will not result in termination_tax under sec_507 of the code x's voluntary termination of its private_foundation_status by notice to the internal_revenue_service pursuant to sec_507 of the code after x's transfer of all of its assets to y will be a termination under sec_507 of the code however because x will have no assets when its termination occurs no termination_tax under sec_507 of the code will be due x's transfer of its assets to y will not result in tax under sec_4940 of the code x's transfer of its assets to y will not be an act of self-dealing or result in tax under sec_4941 of the code x's transfer of its assets to supporting_organization y described in sec_509 a of the code will be treated as qualifying distributions under sec_4942 of the code and will not be taxable_expenditures under sec_4945 of the code olf x's transfer of its assets to y will not be a jeopardizing investment or result in tax under sec_4944 of the code x's transfer of all of its assets to y will not be a taxable_expenditure under sec_4945 of the code x will not be required to exercise expenditure_responsibility under sec_4945 of the code with respect to its transfer of all of its assets to y the legal accounting advising and other expenses if reasonable in amount incurred for x's transactions described in this ruling will be qualifying distributions under sec_4942 of the code and will not be taxable_expenditures under sec_4945 of the code after x transfers all of its assets to y and voluntarily terminates its private_foundation_status pursuant to sec_507 a of the code x must file its annual return form_990-pf for its final tax_year in which its transfer and termination occur but x will not be required to file such returns for any future tax years when x will have no assets and no activities x's transfer and transactions described in this ruling will not adversely affect x's exemption from federal_income_tax under sec_501 of the code because this ruling letter could help to resolve any questions about your status please keep it in your permanent records and include a copy in your annual return on form_990-pf this ruling letter is directed only to the organization that requested it sec_6110 k of the code provides that it may not be used or cited as precedent sincerely eigned geriand carter garland a carter manager exempt_organizations technical group 2lf


t c memo united_states tax_court cathy m and randy l crosson petitioners v commissioner of internal revenue respondent docket no filed date cathy m and randy l crosson pro sese thomas d yang for respondent memorandum findings_of_fact and opinion gerber judge respondent determined a dollar_figure federal_income_tax deficiency and a dollar_figure penalty under sec_6662 a for petitioners’ taxable_year the issues for our consideration are whether petitioners have shown their unless otherwise indicated all section references are to the internal_revenue_code in effect for the taxable_year at issue entitlement to certain business deductions whether petitioners are entitled to claim a bad_debt_loss and whether petitioners are liable for an accuracy-related_penalty findings_of_fact at all times pertinent to this case petitioners were married and resided in clarendon hills illinois petitioners filed a joint federal_income_tax return which they prepared themselves on that return they reported dollar_figure in wages and dollar_figure in interest_income they also claimed dollar_figure as a business loss that loss was shown on a schedule c profit or loss from business randy l crosson petitioner was reflected on the schedule c as a special trade contractor who operated the business on the cash_method for reported income and deductions no income was reported on the schedule c and the claimed dollar_figure loss comprised dollar_figure in bad_debts dollar_figure in car and truck expenses and the remainder in various expense categories as follows dollar_figure in legal and professional services dollar_figure in office expenses dollar_figure in vehicle or equipment rent dollar_figure in supplies dollar_figure in taxes and licenses dollar_figure in travel dollar_figure in meals and entertainment dollar_figure in utilities and dollar_figure in other expenses petitioners did not itemize deductions on the schedule a itemized_deductions instead they used the standard_deduction the wages and the claimed loss coupled with the standard_deduction and exemptions resulted in no taxable_income reflected on petitioners’ return petitioners claimed that the bad-debt loss resulted from thefts of equipment and unpaid obligations of clients which were evidenced by several proofs of claim filed in a debtor’s bankruptcy during during the early 1990s petitioner was a subcontractor who installed fire protection systems under the name industrial fire protection inc police reports dated date and date contained petitioner’s allegations that certain of his equipment had been stolen from jobsites duane o’malley was petitioner’s debtor and petitioner filed various claims in mr o’malley and his wife’s joint bankruptcy proceedings petitioner’s claims included claims for unpaid services rendered by petitioner and claims resulting from six legal actions during and petitioner had a contentious and convoluted relationship with the o’malleys petitioner sued the o’malleys twice during for breach of contract in one suit he received a dollar_figure judgment which was satisfied in the amount of dollar_figure including interest the other case was dismissed for want of prosecution and refiled in also during petitioner was convicted of grand theft and forgery on account of his wrongfully charging more than dollar_figure on mr o’malley’s business account as part of a plea bargain a restraining order was entered barring petitioner from contact with mr o’malley his family or his business likewise during mr o’malley was convicted for solicitation of petitioner’s murder during petitioner again sued mr o’malley for wages as an employee and subcontracting fees mr o’malley settled for dollar_figure during petitioner reportedly sued his own business_entity which was a corporation and a dollar_figure judgment plus costs was entered in his favor mrs o’malley was listed as a garnishee in that proceeding from to the time of trial of this income_tax case various police reports reflected that mrs o’malley and her children made complaints about petitioner on account of his alleged physical attacks or verbal threats the distribution report of the o’malley bankruptcy reflected that petitioners had filed claims in the amounts of dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure all of which were disallowed petitioner filed for bankruptcy during date in his bankruptcy filing petitioner designated that the value of the claims he had filed in the o’malley bankruptcy was zero and that his stolen equipment had a value in excess of dollar_figure petitioner was discharged from his bankruptcy on date respondent examined petitioners’ federal_income_tax return and requested substantiation of the deductions claimed on the schedule c petitioners failed to offer substantiation and on date respondent issued a statutory_notice_of_deficiency disallowing the schedule c deductions including the claimed bad_debts opinion petitioner on a schedule c attached to petitioners’ joint federal_income_tax return reported no income and claimed deductions nearly equaling the amount of their wages reflected on forms w-2 wage and tax statement the claimed deductions must be tested under sec_162 sec_165 and c and a we first address the sec_162 deductions sec_162 provides deductions for all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business deductions are strictly a matter of legislative grace and taxpayers must comply with specific requirements for any deduction claimed 503_us_79 respondent determined that petitioners failed to substantiate the claimed deductions and or to show that they were incurred_in_a_trade_or_business no question has been raised with respect to the burden_of_proof under sec_7491 a taxpayer is required to maintain sufficient records to establish the amounts of income and deductions sec_6001 116_tc_438 sec_1 a income_tax regs petitioners have failed to provide any substantiation to respondent or to this court in support of the claimed deductions for the dollar_figure in car and truck expenses dollar_figure in legal and professional services dollar_figure in office expenses dollar_figure in vehicle or equipment rent dollar_figure in supplies dollar_figure in taxes and licenses dollar_figure in travel dollar_figure in meals and entertainment dollar_figure in utilities and dollar_figure in other expenses in addition to failing to substantiate the above expenses petitioners have failed to show that any were incurred_in_a_trade_or_business see 276_us_145 91_tc_352 affd 972_f2d_150 7th cir petitioner was engaged in a trade_or_business in some years prior to but the record does not show that petitioner was engaged in a trade_or_business during in addition with respect to the dollar_figure in travel dollar_figure in car and truck expenses and dollar_figure in meals and entertainment petitioners are subject_to the requirements of sec_274 sec_274 provides that such deductions are not allowed unless the taxpayer substantiates by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement a the amount of such expense or other item b the time and place of the travel entertainment amusement c the business_purpose of the expense or other item and d the business relationship to the taxpayer of persons entertained as with the other business_expenses petitioners did not submit or offer any substantiation accordingly petitioners are not entitled to the sec_162 deductions claimed on the schedule c on their schedule c petitioners also claimed a dollar_figure sec_166 bad_debt_loss which allegedly includes the theft of business equipment and unpaid amounts owed to petitioner for his services the record does not reflect with any specificity the portion of the dollar_figure attributable to the theft or unpaid obligations for services any theft_loss would be covered under sec_165 whereas any business_bad_debt would be covered under sec_166 on their bankruptcy petition petitioners listed the loss from the equipment theft as an amount in excess of dollar_figure the record in particular the police reports reflects that the claimed equipment thefts occurred almost years before the taxable_year under consideration in that regard theft losses are allowable in the year sustained and are treated as sustained in the year the taxpayer discovers the loss sec_165 e sec_1_165-8 and income_tax regs accordingly petitioners would not be entitled to claim the losses described in the police reports there is no evidence in this record which shows a theft_loss was sustained during sec_166 authorizes a deduction for a business_bad_debt that becomes worthless during the year to be entitled to the deduction petitioners must prove that a bona_fide debt was created obligating the debtor to pay a fixed or determinable sum of money that the debt was created or acquired in proximate relation to a trade_or_business and that the debt became worthless in the year claimed 405_us_93 95_tc_257 a debt is bona_fide if it arose from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money sec_1_166-1 income_tax regs the debts petitioners claimed are for unpaid fees for petitioner’s services petitioners used the cash_method for reporting income and deductions therefore fees for services that remain unpaid have not been included in income such debts do not constitute bad_debts within the meaning of sec_166 for which a deduction for worthlessness may be claimed see 64_tc_598 with respect to any of the claimed bad_debts that are not attributable to unpaid claims for services petitioners have not shown that there were debt obligations or that they became worthless during 59_tc_195 flood v commissioner tcmemo_2001_39 although petitioners claimed the loss in the record shows that petitioners deemed the debt worthless as of date when petitioner filed his bankruptcy petition accordingly petitioners are not entitled to the business_bad_debt deduction as we have found that petitioners are not entitled to their claimed deductions we consider next whether petitioners are liable for a sec_6662 accuracy-related_penalty for negligence sec_6662 provides that if any portion of any underpayment is due to negligence then a taxpayer will be liable for a penalty equal to percent of the underpayment_of_tax required to be shown on the return that is attributable to the taxpayer’s negligence negligence is defined as the lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances 99_tc_202 negligence includes the failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code and also includes any failure to keep adequate books_and_records or to substantiate items properly id sec_1_6662-3 income_tax regs with respect to the accuracy-related_penalty respondent bears the burden of production sec_7491 higbee v commissioner pincite in that regard respondent must come forward with sufficient evidence indicating that it is appropriate to impose the accuracy-related_penalty id respondent contends that he has met that burden the record reveals that petitioners have failed to comply with the requirements of the internal_revenue_code including their failure to maintain adequate books_and_records and or to substantiate the claimed business deductions a taxpayer may avoid the accuracy-related_penalty by showing that there was reasonable_cause for the underpayment and he acted in good_faith with respect to such underpayment sec_6664 whether a taxpayer acted with reasonable_cause and in good_faith is determined by the relevant facts and circumstances and most importantly the extent to which he attempted to assess his proper tax_liability sec_1 b income_tax regs petitioners have offered no evidence to show that they kept adequate books or can substantiate their claimed deductions moreover petitioners have not shown that there was reasonable_cause for the underreporting of their tax_liability accordingly petitioners are liable for the sec_6662 accuracy-related_penalty to reflect the foregoing decision will be entered for respondent