t c memo united_states tax_court estate of virginia a bigelow deceased franklin t bigelow jr executor petitioner v commissioner of internal revenue respondent docket no filed date joseph f moore for petitioner donna f herbert for respondent memorandum findings_of_fact and opinion colvin judge respondent determined a dollar_figure deficiency in the federal estate_tax of the estate of virginia a bigelow virginia a bigelow decedent established a_trust decedent’s trust and transferred her residence to it in the trust exchanged the residence for other real_property in decedent’s trust and decedent’s children formed a family limited_partnership in when decedent was about age and a few months after she suffered a stroke and began living in an assisted-living facility decedent’s trust transferred the real_property but not the liability for a loan and a line of credit totaling dollar_figure which were secured_by the property to the partnership after the transfer decedent was left with an insufficient amount of income to meet her living_expenses or to satisfy her liability for the indebtedness decedent’s sole purposes in establishing the family limited_partnership were to facilitate gift giving and to reduce federal estate_tax the issue for decision is whether the real_property that decedent’s trust transferred to the partnership is included in decedent’s gross_estate under sec_2036 we hold that it is unless otherwise specified section references are to the internal_revenue_code in effect for the time of decedent’s death in and rule references are to the tax_court rules_of_practice and procedure in an amendment to the answer respondent asserted that the property is also includable in decedent’s estate under sec_2036 and sec_2038 because we hold that the property transferred to the partnership is included in decedent’s estate under sec_2036 we need not decide whether the property is included in decedent’s estate under sec_2036 or sec_2038 findings_of_fact some of the facts have been stipulated and are so found a decedent her family and decedent’s estate decedent died testate on date at the age of she resided in alhambra california at that time decedent’s son franklin t bigelow jr mr bigelow is the executor of decedent’s estate he was also her attorney in fact pursuant to a durable_power_of_attorney from until she died mr bigelow resided in altadena california when the petition in this case was filed decedent was survived by mr bigelow her daughter virginia l burke mrs burke and nine grandchildren decedent’s husband had died in and her daughter katharine b fitzgerald mrs fitzgerald had died in b the sand point road property in decedent and her husband purchased as their principal_residence a house on sand point road then called spindrift lane in carpinteria california the sand point road property decedent became the sole owner of that property in when her husband died she lived there until decedent gave each of her three children a 175th undivided_interest in the sand point road property in or the sand point road property was worth dollar_figure at that time c decedent’s trust in decedent executed a declaration and agreement of trust the trust agreement which created decedent’s trust and a deed transferring her remaining 2857-percent undivided_interest in the sand point road property to herself and to her son as cotrustees the trustees of decedent’s trust decedent had the power_to_revoke the trust during her lifetime the trust agreement required the trustees to distribute all of the income to or for the benefit of decedent and allowed the trustees to invade the trust corpus for decedent’s care maintenance or support the assets remaining in decedent’s trust when she died were to be distributed in equal shares to her three children decedent suffered a stroke and was hospitalized on date after she was released from the hospital she entered a rehabilitation center for about weeks she then moved to an assisted-living facility in alhambra california on date decedent withdrew a 5-percent interest in the sand point road property from the trust and gave each of her daughters a 75-percent undivided_interest in that property d the exchange of the sand point road property for the padaro lane property in the fall of the trustees of decedent’s trust listed the sand point road property for sale with a real_estate broker in date the trustees of decedent’s trust and decedent’s children collectively the bigelows entered into an exchange and leaseback agreement the exchange_agreement with peter and margaret seaman the seamans the seamans owned a residence on padaro lane in carpinteria the padaro lane property under the exchange_agreement the bigelows agreed to transfer to the seamans the sand point road property which was worth dollar_figure and the seamans agreed to pay the bigelows dollar_figure and to transfer to decedent’s trust the padaro lane property which was worth dollar_figure the seamans wanted to build a new house on the sand point road property as part of the agreement the bigelows agreed to lease the padaro lane property to the seamans until the new house was completed decedent’s trust obtained a dollar_figure loan from the great western bank evidenced by a promissory note and secured_by a first position deed_of_trust on the padaro lane property in favor of the bank decedent and mr bigelow personally guaranteed the performance of decedent’s trust under the purchase money promissory note decedent’s trust used the proceeds from the great western bank loan to repay two citibank loans secured_by the sand point road property decedent signed the exchange_agreement and the deed transferring the sand point road property to the seamans mr bigelow signed the other documents including the loan guaranties for himself and for decedent under the power_of_attorney the bigelows received dollar_figure from the transaction after payment of closing costs as consideration for the sale_or_exchange of their interests in the sand point road property decedent’s daughters each received dollar_figure mr bigelow received dollar_figure and decedent’s trust received dollar_figure and the padaro lane property subject_to the great western bank mortgage the bigelows executed deeds transferring the sand point road property to the seamans the trustees of decedent’s trust leased the padaro lane property back to the seamans the lease provided for an initial term of months and for rent of dollar_figure per month e the union bank line of credit in date decedent’s trust obtained a dollar_figure line of credit from union bank secured_by a second position deed_of_trust on the padaro lane property decedent guaranteed the performance of decedent’s trust under the line of credit decedent’s trust drew down dollar_figure on the union bank line of credit between date and date decedent’s children and grandchildren received gifts of money from the proceeds of the line of credit in amounts not specified in the record the amount owed on the union bank line of credit was dollar_figure in date f spindrift associates ltd decedent’s family limited_partnership in date the trustees of decedent’s trust and decedent’s three children executed a limited_partnership agreement the partnership_agreement which formed spindrift associates ltd a california limited_partnership spindrift or the partnership the partnership_agreement stated that the purpose of the partnership was to engage in the business of owning and operating residential_real_property initially the padaro lane property and it prohibited the partnership from engaging in any other principal business the partnership_agreement permitted the partnership to issue units with different rights and preferences each unit represented a contribution of cash or property of dollar_figure a units were issued to limited partners in exchange for cash or checks b units were issued to limited partners in exchange for contributions of property decedent’s trust was both the sole general_partner and a limited_partner decedent’s three children were limited partners in date decedent’s trust contributed dollar_figure to the partnership in exchange for a 1-percent interest as general_partner and decedent’s trust and decedent’s three children each contributed dollar_figure in exchange for one a unit on date decedent’s trust transferred the padaro lane property then worth dollar_figure but not the debt secured_by the property to the partnership in exchange for big_number b units decedent in her capacity as grantor and beneficiary of decedent’s trust agreed to hold the partnership harmless for the great western bank loan and the union bank line of credit the partnership_agreement required the capital_account of decedent’s trust to be reduced to the extent that partnership funds were used to pay any of the principal on the great western bank loan or the union bank line of credit the partnership_agreement allocated percent of the net operating profits and losses of the partnership to the general_partner and percent to the limited partners each of the big_number limited_partnership units was allocated an equal share big_number of the allocation made to the limited partners on date a certificate of limited_partnership for spindrift was filed with the california secretary of state around date decedent’s trust as the general_partner of the partnership opened a bank account for the partnership at the union bank of california g the partnership’s leasing and sale of the padaro lane property the partnership made repairs to the padaro lane property after the seamans moved out on date the partnership entered into a 24-month lease with michael h healy and tim f walsh the healy-walsh lease for the occupancy of the padaro lane property in date the partnership engaged real_estate brokers to sell the padaro lane property for dollar_figure on date the partnership agreed to sell the padaro lane property for dollar_figure the partnership received dollar_figure from the sale on date the partnership began distributing the proceeds to the partners including decedent’s trust by date h the partnership’s financial activity all of the rental receipts from the padaro lane property were deposited into partnership bank accounts and the expenses for the padaro lane property were paid from those accounts although decedent was obligated to make the monthly payments on the great western bank loan the partnership made those payments the partnership however did not adjust the capital_account of decedent’s trust for payment of principal as required by the partnership_agreement decedent’s trust made the monthly payments on the union bank line of credit from date to date when decedent died mr bigelow transferred funds between the partnership and decedent’s trust times when decedent died decedent’s trust owed spindrift dollar_figure mr bigelow transferred funds from decedent’s trust to the partnership soon after it was formed to pay the property taxes on the padaro lane property he transferred funds from the partnership to decedent’s trust to repay the earlier advances and later to pay decedent’s expenses i decedent’s gifts of partnership interests in date shortly after the partnership was formed mr bigelow under decedent’s power_of_attorney withdrew big_number b units from decedent’s trust and assigned units to himself and big_number units to each of decedent’s daughters and withdrew from decedent’s trust the income rights associated with b units and assigned the income rights associated with b units to each of decedent’s grandchildren except eliza k bigelow in date mr bigelow under decedent’s power_of_attorney withdrew b units from decedent’s trust and assigned of those units to each of decedent’s children and withdrew the income rights associated with b units and assigned the income rights associated with b units to eliza k bigelow and the income rights associated with b units to each of decedent’s other grandchildren in date mr bigelow under decedent’s power_of_attorney withdrew b units from decedent’s trust and assigned b units to himself and b units to mrs burke and withdrew income rights associated with b units and assigned the income rights with respect to b units to each of decedent’s grandchildren on date mr bigelow under decedent’s power_of_attorney withdrew b units from decedent’s trust and assigned those units to mrs burke he also withdrew the income rights associated with b units from decedent’s trust and assigned the income rights associated with b units to each of decedent’s grandchildren mr bigelow for himself and under decedent’s power_of_attorney acting as trustee of decedent’s trust signed a statement of ownership in which he certified that the ownership of spindrift limited_partnership units as of date was partner a units b units decedent’s trust estate of mrs fitzgerald deceased mrs burke mr bigelow total big_number big_number big_number big_number big_number he also certified that decedent’s grandchildren owned the income rights associated with big_number b units units each owned by the general_partner the grandchildren were not substituted as limited partners as a result of the gifts of income rights disregarding the limited_partnership interests associated with the income rights transferred to decedent’s grandchildren decedent’s trust owned a 1-percent general_partnership interest and a 45-percent big_number - big_number big_number limited_partnership_interest in the partnership when decedent died on date j termination of the partnership the partnership did not make any distributions to its partners with respect to their interests in the partnership before decedent died after decedent died decedent’s trust continued to act as the general_partner of the partnership until the partnership was terminated by date the partnership was terminated final distributions were made to the partners including decedent’s trust and the partnership’s dissolution documents were recorded in the office of the california secretary of state k decedent’s assets and sources of income after her husband died decedent received income from a_trust that she and her husband had established in the trust a california trust company served as the corporate trustee of the trust initially the corpus of the trust was an insurance_policy on the life of decedent’s husband when the partnership was formed in decedent had monthly income of dollar_figure from the following sources source amount residential care insurance policies fireman’s fund american express aarp prudential total rental income--padaro lane property other income1 total income dollar_figure big_number dollar_figure big_number big_number big_number veterans’ administration benefits social_security u s army retirement distributions from the trust and payments from the sale of her husband’s business when the partnership was formed in decedent’s monthly expenses were expense assisted living health insurance supplement pharmacy miscellaneous medical great western loan union bank line of credit flood and liability insurance property taxes storage phone and miscellaneous total amount dollar_figure big_number big_number big_number after spindrift was formed and the padaro lane property was transferred to the partnership decedent no longer received the rent from the property and her income was reduced to dollar_figure dollar_figure - dollar_figure her expenses were reduced by the property taxes and insurance to dollar_figure dollar_figure - dollar_figure creating a shortfall of dollar_figure dollar_figure - dollar_figure after the padaro lane property was transferred to the partnership the partnership paid the dollar_figure monthly payment on the great western bank loan the dollar_figure monthly benefit under decedent’s aarp prudential residential care insurance_policy expired in date and decedent’s income was reduced to dollar_figure dollar_figure - dollar_figure creating a shortfall of dollar_figure dollar_figure - dollar_figure the dollar_figure monthly benefit under the fireman’s fund american express policy expired in date and decedent’s income was reduced to dollar_figure dollar_figure - dollar_figure creating a shortfall of dollar_figure dollar_figure - dollar_figure after the benefits under decedent’s residential care insurance policies had expired mr bigelow told the trustee of the trust that decedent did not have enough income to pay her expenses as a result by date the trustee had distributed a total of dollar_figure to decedent and terminated the trust mr bigelow and his wife received dollar_figure from the funds distributed from the trust before decedent died in date decedent’s trust had accounts at citizens bank when spindrift was formed the total amount in those accounts was about dollar_figure decedent’s trust received more than dollar_figure early in when decedent died the combined balance was about dollar_figure all of the checks drawn on the citizens bank accounts were signed by mr bigelow as trustee of decedent’s trust l tax_return sec_1 decedent’s income_tax returns for on decedent’s form_1040 u s individual_income_tax_return decedent’s return decedent reported adjusted_gross_income of dollar_figure on form_8824 like-kind_exchanges decedent reported dollar_figure as boot from the exchange of the sand point road property for the padaro lane property on schedule e supplemental income and loss decedent reported dollar_figure of rental income and dollar_figure of expenses for the padaro lane property during that year on her return decedent reported adjusted_gross_income of dollar_figure on schedule e decedent reported dollar_figure of rental income and dollar_figure of expenses for the padaro lane property on her returns decedent reported adjusted_gross_income of dollar_figure in dollar_figure in and dollar_figure in decedent reported her shares of partnership income or loss on those returns partnership returns for the partnership reported no income or expenses for the padaro lane property on its form_1065 u s partnership return of income the partnership’s return the partnership’s balance sheets included in the returns reported the great western bank loan as a liability none of the partners’ schedules k-1 partner’s share of income credits deductions etc accurately reflect the partners’ capital accounts eg decedent’s capital_account as reported on the schedules k-1 never shows that decedent’s trust contributed the padaro lane property the partnership reported income or loss and decedent’s distributive shares of income and losses on its returns for as follows item partnership dollar_figure rent big_number expenses and depreciation big_number net_income loss decedent’s distributive_share the estate and gift_tax returns dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number on date mr bigelow as executor of decedent’s estate signed gift_tax returns for and decedent’s estate_tax_return the gift_tax returns were filed with the estate_tax_return the internal_revenue_service received decedent’s estate and gift_tax returns on date a the gift_tax returns on the gift_tax returns mr bigelow reported that decedent had made taxable_gifts of dollar_figure in dollar_figure in zero in and dollar_figure in mr bigelow reported that decedent had given limited_partnership interests in spindrift to her children and grandchildren valued at dollar_figure per unit in and dollar_figure per unit in and dollar_figure per unit in the valuation of the limited_partnership units reported on the gift_tax returns was made on the basis of a market approach using the appraised value of the padaro lane property ninety- nine percent of that value was assigned to the limited_partnership interests the value of each unit of limited_partnership_interest was calculated by dividing percent of the value of the padaro lane property by the number of limited_partnership units big_number and applying a 31-percent discount for lack of marketability no distinction was made in the appraisals or on those returns between the limited_partnership units given to decedent’s children and the income rights given to decedent’s grandchildren in the units retained by decedent’s trust mr bigelow reported on the gift_tax_return that decedent had made cash gifts of dollar_figure to mr bigelow and dollar_figure to his wife forgiven mr bigelow dollar_figure of indebtedness evidenced by a promissory note and assigned interests in a promissory note payable to decedent by mr bigelow to franklin t bigelow iii and anna d bigelow dollar_figure each he also reported on the gift_tax returns combined cash gifts to mr bigelow and his wife of dollar_figure in dollar_figure in and dollar_figure in b the estate_tax_return on the estate_tax_return mr bigelow reported a gross_estate of dollar_figure and taxable_gifts of dollar_figure the amount reported as the gross_estate included dollar_figure of personal_property the refund of a dollar_figure deposit owed to decedent by the assisted-living facility and dollar_figure of transfers during decedent’s life the amount reported as transfers during decedent’s life included dollar_figure for decedent’s limited_partnership in spindrift dollar_figure for her general_partnership interest in spindrift dollar_figure held by decedent’s trust dollar_figure in a merrill lynch cash account offset by an overdraft of dollar_figure in the checking account a dollar_figure cash payment due from boston co and dollar_figure in a savings account on the estate_tax_return mr bigelow reported that decedent’s limited_partnership_interest in the partnership was worth dollar_figure in computing that value decedent’s estate computed percent of dollar_figure the value of the padaro lane property ie dollar_figure subtracted dollar_figure ie the amount of the great western bank loan and the union bank line of credit secured_by the property and applied to the remainder a 37-percent discount for lack of marketability attached to the estate_tax_return was a document signed by mr bigelow called statement as to status of ownership of units the statement of status in which he certified that the ownership of the issued and outstanding spindrift limited_partnership units as of date was as follows partner a units b units decedent’s trust estate of mrs fitzgerald deceased mrs burke mr bigelow total big_number big_number big_number big_number big_number the statement of status also states that on the valuation_date decedent’s nine grandchildren owned the income rights associated with big_number b units units each owned by the general_partner mr bigelow reported that the value of decedent’s general_partnership interest was dollar_figure computed by taking percent of the value of the padaro lane property and applying a percent control premium opinion the value of an interest in property is included in a decedent’s gross_estate if the decedent made an inter_vivos transfer of the property the transfer was for less than adequate_and_full_consideration and the decedent retained the possession or enjoyment of or the right to the income from the transferred property sec_2036 however a decedent’s gross_estate does not include property transferred the estate does not contend that the transfer of the padaro lane property by decedent’s trust to spindrift was not an inter_vivos transfer by decedent for purposes of sec_2036 and we conclude that it was sec_2036 provides in pertinent part sec_2036 transfers with retained_life_estate a general_rule --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 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 which does not in fact end before his death-- the possession or enjoyment of or the right to the income from the property pursuant to a bona_fide sale for adequate_and_full_consideration sec_2036 the estate contends that the padaro lane property that decedent’s trust conveyed to spindrift is not includable in decedent’s estate by sec_2036 because decedent did not retain enjoyment of or the right to the income from the padaro lane property and the transfer of the property was a bona_fide sale for adequate_and_full_consideration we disagree for reasons discussed next a whether decedent retained possession or enjoyment of or the right to the income from the padaro lane property during her lifetime sec_2036 does not apply unless the decedent retains the possession or enjoyment of or the right to the income from the transferred property that requirement is met if there is an implied agreement among the parties to the transaction at the time of transfer that the transferor may retain the possession or enjoyment of or the right to the income from the transferred property 382_f3d_367 3d cir affg tcmemo_2002_246 3_f3d_591 2d cir affg 98_tc_594 114_tc_144 the estate contend sec_4 the burden_of_proof shifts to the commissioner in specified circumstances sec_7491 however our findings are not affected by the burden_of_proof that decedent did not retain or have an implied or express agreement to retain the possession enjoyment or right to the income from the padaro lane property after it was transferred to spindrift whether there was an implied agreement that decedent would retain the right to the income from the padaro lane property during her lifetime the estate contends that there was no implied agreement for decedent to retain the right to income from the padaro lane property we disagree the padaro lane property was generating monthly rent of dollar_figure the taxes and insurance on the property totaled dollar_figure after the partnership was formed decedent used dollar_figure of the dollar_figure net_income from the rental of the padaro lane property to make monthly payments on the great western loan after the aarp prudential residential care insurance_policy expired in date decedent’s expenses exceeded her income by dollar_figure the partnership continued to make the dollar_figure payments on the great western loan and mr bigelow transferred partnership funds to decedent’s trust to support decedent no distributions were made to any other partner before decedent’s death sec_2036 applies if a decedent retains the right to income from the property or if there was an implied agreement to that effect estate of reichardt v commissioner supra pincite estate of hillgren v commissioner tcmemo_2004_46 see estate of thompson v commissioner supra pincite decedent’s use of partnership income to replace the income lost because of the transfer of the padaro lane property to the partnership shows that there was an implied agreement between decedent and her children that she would retain the right to the income from the padaro lane property whether there was an implied agreement that decedent would retain the enjoyment of the padaro lane property during her lifetime the estate contends that there was no express or implied agreement for decedent to retain the enjoyment of the padaro lane property we disagree enjoyment includes present economic benefits 437_f2d_1148 4th cir estate of reichardt v commissioner supra pincite after the transfer of the padaro lane property to spindrift the property continued to secure decedent’s legal_obligation to pay the dollar_figure great western bank loan and the dollar_figure union bank line of credit thus decedent retained the economic benefit of ownership of the padaro lane property after it was transferred to the partnership we conclude that there was an implied agreement between decedent and her children that she would retain for her life the present economic benefit of the padaro lane property b whether the transfer of the padaro lane property by decedent’s trust for big_number b units in spindrift was a bona_fide sale for adequate_and_full_consideration sec_2036 does not apply if the transfer of property was part of a bona_fide sale for adequate_and_full_consideration the estate contends that the transfer by decedent’s trust of the fee simple interest in the padaro lane property to the partnership was a bona_fide and genuine transfer for which decedent’s trust received adequate_and_full_consideration ie big_number of the big_number limited_partnership units percent to constitute a bona_fide sale for adequate_and_full_consideration the transfer of the property must be made in good_faith estate of thompson v commissioner supra pincite sec_20_2043-1 estate_tax regs such a sale requires that the transfer be made for a legitimate nontax purpose estate of bongard v commissioner t c ___ ___ slip op pincite transactions between family members are subject_to heightened scrutiny to ensure that the transaction is not a disguised gift see 82_tc_239 affd without published opinion 786_f2d_1174 9th cir estate of stone v commissioner tcmemo_2003_309 cf estate of reichardt v commissioner supra as discussed next the transfer of the padaro lane property to spindrift was not made in good_faith impoverishment of decedent the estate contends that the transfer of the padaro lane property had no adverse financial effect on decedent because she received partnership interests in the partnership that held the padaro lane property which were when she received them equal in value to the transferred property the estate contends that decedent’s financial situation worsened only when her residential care insurance policies expired in and we disagree before the padaro lane property was transferred to the partnership decedent met her financial obligations after the transfer decedent no longer received rent from the property but she remained liable for both the great western bank loan and the union bank line of credit the transfer of the padaro lane property to the partnership left decedent unable to meet her financial obligations because her reduced income of dollar_figure was insufficient to pay her reduced expenses of dollar_figure after decedent’s residential care insurance benefits expired in date mr bigelow informed the trustee of the when decedent formed the partnership in she had monthly income of dollar_figure dollar_figure from two residential care insurance policies dollar_figure from rent paid on the padaro lane property and dollar_figure from other sources at that time her monthly expenses averaged dollar_figure dollar_figure for assisted living_expenses dollar_figure for the great western bank loan and union bank line of credit dollar_figure for property taxes and insurance and dollar_figure for other expenses trust that decedent did not have enough income to pay her expenses by date the trustee of the trust had distributed dollar_figure to decedent and terminated the trust although decedent’s financial needs prompted the distribution of the funds from the trust decedent gave dollar_figure to mr bigelow and his wife in when she died decedent had only dollar_figure of liquid_assets left to supplement her inadequate monthly income ie dollar_figure of assets held in decedent’s trust dollar_figure due from boston co and dollar_figure in a savings account failure to respect partnership formalities the parties’ failure to respect the provisions of the agreement governing their transaction tends to show that the transaction was not entered into in good_faith see estate of harper v commissioner tcmemo_2002_121 riverpoint lace works inc v commissioner tcmemo_1954_39 the estate points out that formalities to establish the partnership were met and contends that any lapses in complying with partnership formalities after formation were unimportant we disagree spindrift did not properly maintain records of partnership capital or the partners’ capital accounts the balance sheets included in the returns incorrectly show the great western bank loan as a liability of the partnership none of the partners’ schedules k-1 accurately reflect the partners’ capital accounts eg decedent’s capital_account reported on the schedules k-1 never reflects decedent’s trust’s contribution of the padaro lane property the bigelows did not comply with all of the terms of the partnership_agreement these facts suggest that the sale was not in good_faith no potential for nontax benefit to decedent the transfer did not provide and had no potential to provide any nontax benefit to decedent because management of the assets did not change as a result of the transfer and there was no pooling of assets a transfer of assets is not a bona_fide sale for estate_tax purposes unless the transfer provides the transferor some benefit other than estate_tax savings see 382_f3d_367 3d cir estate of harper v commissioner supra the estate contends that transferring the padaro lane property to the limited_partnership had three nontax purposes first the estate contends that one of those purposes was to provide legal protection from creditors we disagree transferring the padaro lane property to spindrift did not give decedent’s trust any additional protection from creditors because decedent’s trust was the sole general_partner as a general_partner decedent’s trust was not protected from liability arising from the ownership of the property limiting the liability of decedent’s trust was not a purpose for forming the partnership and transferring the padaro lane property to it second the estate contends that the partnership provided continuity of management for the padaro lane property we disagree there was no change in the continuity of management of the padaro lane property after decedent’s trust transferred it to spindrift under the partnership_agreement the partnership terminated if the general_partner terminated unless the remaining partners agreed to continue the partnership the partnership would terminate when decedent’s trust terminated because decedent’s trust was the general_partner transferring the padaro lane property to spindrift did not provide any additional continuity of management of the property the sole source of management was the trust third the estate contends that it was more efficient for decedent to give her children and grandchildren interests in the partnership than to withdraw small undivided interests in the padaro lane property from decedent’s trust and give them to her children and grandchildren by deed a transfer made solely to reduce taxes and to facilitate gift giving is not considered in this context to be made in good_faith or for a bona_fide purpose see estate of thompson v commissioner supra pincite comparison with the kimbell case the estate asserts that the transfer by decedent’s trust of the padaro lane property to spindrift was a bona_fide sale for adequate_and_full_consideration under 371_f3d_257 5th cir where the court stated in summary what is required for the transfer by mrs kimbell to the partnership to qualify as a bona_fide sale is that it be a sale in which the decedent transferor actually parted with her interest in the assets transferred and the partnership transferee actually parted with the partnership_interest issued in exchange in order for the sale to be for adequate_and_full_consideration the exchange of assets for partnership interests must be roughly equivalent so the transfer does not deplete the estate the estate’s reliance on kimbell is misplaced because the facts in that case differ substantially from those here first decedent’s trust did not part with all of its interest in the padaro lane property as shown by the fact that the property continued to secure the obligations of decedent and the trust to repay the great western bank loan and the union bank line of credit second because there was no potential benefit for decedent or her trust stemming from the transfer of the padaro lane property to spindrift the partnership_interest received by decedent’s trust was not equivalent to the padaro lane property third the general_partner of the kimbell partnership was a limited_liability_company not mrs kimbell’s trust when mrs kimbell’s trust transferred property to the partnership the trust shielded itself from liability in contrast decedent’s trust was the sole general_partner of spindrift the transfer of the padaro lane property from decedent’s trust to spindrift did not shield the trust from its liability as an owner of the property because decedent’s trust was spindrift’s general_partner fourth mrs kimbell retained more than dollar_figure in assets outside of the partnership for her support in contrast decedent did not retain enough assets to support herself finally mrs kimbell did not make continuous transfers between her personal assets and the kimbell partnership’s assets mr bigelow transferred funds between decedent’s trust and spindrift times from date to date decedent’s trust used partnership funds and the partnership used trust funds the facts supporting a finding of a bona_fide sale for adequate_and_full_consideration in kimbell are not present here c conclusion we conclude that decedent and her children had an implied agreement that decedent could continue during her lifetime to enjoy the economic benefits of and retain the right to the income from the padaro lane property after she conveyed the property to the partnership and that the transfer was not a bona_fide sale for adequate_and_full_consideration thus the value of the padaro lane property is included in decedent’s gross_estate see sec_2036 decision will be entered for respondent


t c memo united_states tax_court bea-jaye ware petitioner v commissioner of internal revenue respondent docket no filed date william j day and austin b barnes iii for petitioner alisha m harper for respondent memorandum findings_of_fact and opinion haines judge respondent determined that petitioner is not entitled to relief under sec_6015 for joint income_tax liabilities for through the years in issue the unless otherwise indicated all section references are to the internal_revenue_code as amended amounts are rounded to the nearest dollar issue for decision is whether respondent abused his discretion in denying petitioner’s request for equitable relief under sec_6015 findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference at the time she filed her petition petitioner resided in brunswick ohio petitioner and david c crouch mr crouch were married on date at the time of trial petitioner and mr crouch remained married and continued to reside in the same residence petitioner and mr crouch are graphic design artists during the years at issue mr crouch owned and operated dave crouch graphics mr crouch made no estimated_tax payments on income he received from dave crouch graphics during the years at issue petitioner was employed by advanstar communications inc advanstar advanstar withheld federal_income_tax from petitioner’s wages and had she filed her returns as married respondent reserved relevancy objections to three exhibits attached to the stipulation of facts and to all trial testimony on the basis that such information was not available to the appeals officer when she made her determination in this case while the relevance of some of the disputed exhibits and testimony is limited the court will give the evidence only such consideration as is warranted by its pertinence to the court’s analysis of the instant case filing separately petitioner would have been entitled to a refund petitioner and mr crouch filed their through tax returns as married_filing_separately petitioner and mr crouch filed a joint federal_income_tax return on date reflecting an amount owed of dollar_figure the amount owed was attributable solely to mr crouch’s business activities petitioner and mr crouch included a dollar_figure payment with their return and made an additional payment of dollar_figure in date in date petitioner received notice that her wages were to be garnished in order to pay her and mr crouch’s outstanding tax_liability for pay periods ending november and and december and advanstar withheld dollar_figure from petitioner’s pay as garnishment on date petitioner and mr crouch filed joint federal_income_tax returns for and reflecting amounts owed of dollar_figure and dollar_figure respectively the amounts owed were attributable solely to mr crouch’s business activities no payments accompanied the and returns petitioner voluntarily signed the returns on date at the time she signed the returns she knew there was an outstanding tax on date petitioner and mr crouch’s joint tax_liability was discharged under u s c sec by the u s bankruptcy court for the northern district of ohio respondent has conceded that he will no longer attempt to collect the discharged liability liability for that her wages were being garnished to pay the tax_liability and that petitioner and mr crouch could not pay the amounts due for and on or about date petitioner filed a form_8857 request for innocent spouse relief requesting equitable relief under sec_6015 along with the form_8857 petitioner submitted a letter explaining why she thought she was entitled to equitable relief the letter stated in part our tax matters have always been handled by david i had no knowledge that our joint tax returns for tax years and were not timely filed i became aware of this situation last summer when a revenue_officer placed her business card in the door of our residence i had no knowledge until this happened and then i only knew dave was behind for when the service levied my wages in date i became aware of the unfiled tax returns the underpaid taxes are attributable solely to david’s business i have never been involved in my husband’s business david maintained the books_and_records of his business david i retained the law firm of roni lynn deutch to negotiate a payment plan on the delinquent tax returns i was not offered nor received counsel with respect to my option of filing separately from david for the unfiled years if i had received knowledge of the tax situation by my husband our tax preparer or roni lynn deutch i would have elected to file separate federal state of ohio tax returns for on date respondent notified petitioner that the form_8857 had been received and requested additional information on date petitioner submitted to respondent a form 886-a innocent spouse questionnaire petitioner reported monthly gross_income of dollar_figure and monthly expenses of dollar_figure petitioner’s monthly expenses included among other things dollar_figure for clothing dollar_figure for vehicle expenses dollar_figure for pet care and dollar_figure in miscellaneous expenses on date respondent issued petitioner an initial determination_letter respondent determined that petitioner was not entitled to equitable relief under sec_6015 for the years at issue stating to qualify for relief under sec_6015 you must establish that you believed the tax would be paid at the time of filing the return_information in your case file does not establish that you had belief that the tax would be paid at the time of filing therefore your request for relief for the tax years at issue has been disallowed on date respondent received from petitioner a form statement of disagreement in which petitioner repeated her arguments set forth in her request for innocent spouse relief on date respondent advised petitioner that her case had been received for consideration and identified appeals officer denise neidermeyer ms neidermeyer as the person handling her case ms neidermeyer determined that the taxpayer knew or had reason to know that the tax would not be paid when she signed the and returns this is evidenced by the fact that her wages were garnished for prior-year joint liabilities before she signed the and returns ms neidermeyer recommended that petitioner be denied equitable relief under sec_6015 on date respondent issued petitioner a notice_of_determination denying her request for equitable relief under sec_6015 on date petitioner filed her petition with this court petitioner contended that respondent abused his discretion in denying her equitable relief under sec_6015 this case was called for trial on date on date this court issued 127_tc_7 holding that the court does not have jurisdiction to review the commissioner’s denial of relief under sec_6015 in a case where no deficiency has been asserted our holding in billings was in accord with the courts of appeal opinions in 446_f3d_785 8th cir affg in part and vacating tcmemo_2004_93 and 439_f3d_1009 9th cir revg 118_tc_494 on date respondent filed a motion to dismiss for lack of jurisdiction contending that in light of billings v commissioner supra the court lacked jurisdiction over this case in the tax relief and health care act of publaw_109_ div c sec_408 120_stat_3061 congress reinstated our jurisdiction to review the commissioner’s determinations under sec_6015 with respect to tax_liability remaining unpaid on or after date upon order of the court the parties certified that petitioner’s liability for tax years and remained unpaid as of date accordingly the court determined that it has jurisdiction over this case and denied respondent’s motion to dismiss for lack of jurisdiction opinion if a husband and wife file a joint federal_income_tax return they generally are jointly and severally liable for the tax due sec_6013 114_tc_276 however a spouse may qualify for relief from joint_and_several_liability under sec_6015 or c if various requirements are met the parties agree that petitioner does not qualify for relief under sec_6015 or c if relief is not available under sec_6015 or c the commissioner may relieve an individual of liability for any unpaid tax if taking into account all the facts and circumstances it would be inequitable to hold the individual liable sec_6015 this court has jurisdiction to review a denial of equitable relief under sec_6015 sec_6015 petitioner’s tax_year is no longer at issue see supra note see also farmer v commissioner tcmemo_2007_74 van arsdalen v commissioner tcmemo_2007_48 we review the commissioner’s denial of relief for abuse_of_discretion 118_tc_106 affd 353_f3d_1181 10th cir farmer v commissioner supra van arsdalen v commissioner supra the taxpayer seeking relief has the burden_of_proof 119_tc_306 affd 101_fedappx_34 6th cir to prevail the taxpayer must show that the commissioner’s determination was arbitrary capricious or without sound basis in fact or law butler v commissioner supra pincite farmer v commissioner supra van arsdalen v commissioner supra the commissioner promulgated a list of factors in revproc_2000_15 sec_4 2000_1_cb_447 that the commissioner considers in determining whether to grant equitable relief under sec_6015 first the commissioner will not grant relief unless seven threshold conditions have been met the taxpayer must have filed joint returns for the taxable years for which relief is sought the taxpayer does not qualify for respondent’s determination was subject_to revproc_2000_15 2000_1_cb_447 revproc_2000_15 supra was superseded by revproc_2003_61 2003_2_cb_296 for requests for relief under sec_6015 that were filed on or after date or if pending on date for which no preliminary determination_letter had been issued as of date while petitioner’s request was pending on date a preliminary determination_letter was issued before date relief under sec_6015 or c the taxpayer must apply for relief no later than years after the date of the commissioner’s first collection activity after date with respect to the taxpayer the liability must remain unpaid no assets were transferred between the spouses filing the joint returns as part of a fraudulent scheme by such spouses there were no disqualified assets transferred to the taxpayer by the nonrequesting spouse and the taxpayer did not file the returns with fraudulent intent revproc_2000_15 sec_4 c b pincite respondent concedes that petitioner meets these conditions revproc_2000_15 sec_4 c b pincite lists two factors which if true the commissioner treats as favoring relief the taxpayer is separated or divorced from the nonrequesting spouse and the taxpayer was abused by the nonrequesting spouse revproc_2000_15 sec_4 c b pincite also lists two factors which if true the commissioner treats as not favoring relief the taxpayer received significant benefit beyond normal support from the unpaid liability or the item giving rise to the deficiency and the taxpayer has not made a good_faith effort to comply with federal_income_tax laws in the tax years following the tax_year to which the request for relief relates see ferrarese v commissioner tcmemo_2002_249 the commissioner generally does not consider the absence of any of the factors or as weighing in favor of or against whether to grant relief under sec_6015 revproc_2000_15 sec_4 c b pincite revproc_2000_15 sec_4 lists the following four factors which if true the commissioner treats as favoring relief and which if not true the commissioner treats as not favoring relief the taxpayer would suffer economic hardship if relief were denied in the case of a liability that was properly reported but not paid the taxpayer did not know and had no reason to know that the liability would not be paid the liability for which relief is sought is attributable to the nonrequesting spouse and the nonrequesting spouse has a legal_obligation pursuant to a divorce decree or agreement to pay the outstanding tax_liability weighs against relief only if the requesting spouse has the obligation revproc_2000_15 sec_4 also states that no single factor is controlling all factors will be considered and weighed appropriately and the list of factors in revproc_2000_15 sec_4 is not exhaustive petitioner’s marital status petitioner and mr crouch were still married when petitioner sought relief this factor is neutral spousal abuse petitioner did not allege that she suffered from spousal abuse this factor is neutral significant benefit respondent determined that petitioner received significant benefit beyond normal support from the unpaid tax_liability during the years at issue petitioner and mr crouch failed to pay self-assessed taxes of nearly dollar_figure excluding any penalties or interest while the outstanding tax_liability arose solely from mr crouch’s business activities petitioner does not allege that mr crouch secreted his earnings that would otherwise have been used to pay the taxes due the record establishes that petitioner’s and mr crouch’s failure to pay the taxes due increased their expendable income further petitioner testified that her husband’s income allowed her to meet the monthly expenses in excess of her own income petitioner’s monthly expenses included dollar_figure for clothing dollar_figure for vehicle expenses dollar_figure for pet care and dollar_figure in miscellaneous expenses while neither petitioner nor respondent has elaborated on what normal support is in this case the above-described expenses certainly go beyond normal support because the underpayment_of_tax allowed petitioner to meet these expenses we find that petitioner received significant benefit beyond normal support from the unpaid liability this factor weighs against relief compliance with tax laws petitioner complied with federal_income_tax laws after the last year in issue this factor is neutral economic hardship a factor treated by the commissioner as weighing in favor of relief under sec_6015 is that paying the taxes owed would cause the requesting spouse to suffer economic hardship revproc_2000_15 sec_4 b c b pincite the commissioner considers the taxpayer to suffer economic hardship if paying the tax would prevent the taxpayer from paying reasonable basic living_expenses sec_301_6343-1 proced admin regs revproc_2000_15 sec_4 c and b c b pincite respondent determined that petitioner failed to allege that economic hardship would arise if she were denied relief petitioner did not allege in her request for innocent spouse relief at trial or in her opening brief that she would suffer economic hardship if denied relief petitioner’s first and only mention of economic hardship is in her reply brief where she states it is simply baffling that respondent cannot determine for itself that petitioner would suffer economic hardship if relief from joint_and_several_liability is not granted when it was garnishing dollar_figure from her paychecks leaving her a paltry dollar_figure for two weeks take home pay while the garnishment certainly reduced petitioner’s expendable income in november and december of it does not establish that payment of the outstanding tax_liability would prevent petitioner from paying reasonable basic living_expenses petitioner has presented no evidence either to respondent or to the court that she would suffer economic hardship if denied relief common sense suggests that payment of the outstanding tax_liability would put petitioner in a less-than-desirable financial situation however based on petitioner’s complete lack of proof we have no choice but to conclude petitioner would not suffer economic hardship if she were denied relief this factor weighs against relief knowledge or reason to know in determining whether a taxpayer qualifies for equitable relief under sec_6015 the commissioner considers whether the requesting spouse knew or had reason to know that the reported liability would be unpaid at the time the return was signed revproc_2000_15 sec_4 b c b pincite respondent determined that petitioner knew or had reason to know that the reported liability would be unpaid when the and returns were filed petitioner argues that she was unaware of the tax problems surrounding mr crouch’s business activities and that she had no reason to know their and reported tax_liabilities would be unpaid prior to signing and filing the and tax returns petitioner’s wages were garnished by respondent to pay petitioner’s and mr crouch’s joint tax_liability at the least this put petitioner on notice of the tax problems she and mr crouch were facing even more detrimental to her argument petitioner testified that she knew they could not pay the amount due when she signed the returns we find petitioner knew or had reason to know that the reported liability would be unpaid at the time she signed the returns this factor weighs against relief whether the underpayment_of_tax is attributable to the non-requesting spouse respondent concedes that the underpayment_of_tax was solely attributable to mr crouch’s business activities this factor favors relief legal_obligation to pay because there is no decree or agreement imposing such obligation this factor is neutral the only factor favoring relief is that the underpayment_of_tax was attributable to mr crouch this factor is strongly in support of her argument petitioner cites browda v commissioner t c summary opinion under sec_7463 summary opinions are not treated as precedent for any other case and we do not consider further petitioner’s argument as it relates to browda outweighed by the significant benefit petitioner received from the underpayment her knowledge or reason to know that the reported liability would be unpaid and her failure to demonstrate economic hardship based on the above we find that petitioner has failed to carry her burden of showing respondent abused his discretion in denying her equitable relief under sec_6015 in reaching our holding herein we have considered all arguments made and to the extent not mentioned above we conclude that they are moot irrelevant or without merit to reflect the foregoing and respondent’s concession regarding petitioner’s tax_year an appropriate decision will be entered


department of the treasury int ernal revenue service washington d c date o f f i c e o f c h i e f c o u n s e l number release date uilc cc pa cbs br1 gl-112355-01 memorandum for associate area_counsel richmond cc sb rch attn tbheavner from alan c levine chief branch collection bankruptcy summonses subject liquidated_damages this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent issue if the internal_revenue_service service sells real_property redeemed pursuant to sec_7425 and the sales contract does not provide for liquidated_damages for a defaulting purchaser may the service offset the bidder’s deposit to recover its actual damages conclusion when the sales contract does not provide for liquidated_damages the service may offset the bidder’s deposit against its actual damages arising from a defaulted sale facts the service redeemed real_property following a nonjudicial_sale and subsequently sold the property at public auction the notice of sale stated that the property would be sold to the highest bidder who would be required to pay of the highest bid price at the time of sale and would be required to pay the balance within days after the bid was accepted the purchaser defaulted on the remainder of the bid price the notice of sale made no mention of liquidated_damages gl-112355-01 law and analysis black’s law dictionary defines liquidated_damages as the sum which a party to a contract agrees to pay if he breaks some promise and which having been arrived at by a good_faith effort to estimate actual damage that will probably ensue from the breach is recoverable as agreed damages if a breach occurs sec_7506 provides the secretary shall have charge of all real_estate which is or shall become the property of the united_states or which has been redeemed by the united_states sec_7506 provides the secretary may at public sale and upon not less than days notice sell and dispose_of any real_estate owned or held by the united_states as aforesaid sec_301_7506-1 states in the event of the sale of redeemed property a notice of sale shall state whether in the case of a default in payment of the bid price any amount deposited shall be retained as liquidated_damages not to exceed dollar_figure sec_301_7506-1 limits the recovery_of liquidated_damages to a maximum amount of dollar_figure as discussed below the district_director may before giving notice of sale solicit offers from prospective bidders and enter into agreements with such persons that they will bid at least a specified amount in case the property is offered for sale in such cases the district_director may also require such persons to make deposits to secure the performance of their agreements any such deposit but not more than dollar_figure shall be retained as liquidated_damages in case such person fails to bid the specified amount and the property is not sold for as much as the amount specified in such agreement alternatively the service may choose not to insert a clause for liquidated_damages in that situation we have taken the position that the service may still recover its actual damages nothing in the regulations prohibit the service from recovering its actual damages and we see no reason why the service should not have the same right as any other seller to recover actual damages from a defaulting purchaser moreover it can be inferred from other sections of the internal_revenue_code and regulations that congress intended that the service not bear the economic burden resulting from the defaulted sales of property sec_6335 and the regulations thereunder which concern the sale of seized property rather than the sale of property that the government has redeemed provide that if the purchaser fails to pay the balance of the bid price the service can either institute suit for the balance of the purchase_price or readvertise and resell the property again and consider the deposit forfeited gl-112355-01 based upon the foregoing discussion if the service did not insert a liquidated_damages clause we think that the service may recover its actual damages in full given that the service has the defaulting purchaser’s deposit the service may exercise its common_law right of offset and recover its damages from the deposit in response to your inquiry concerning the discrepancy in pattern letters p-339 and p-637 referenced in irm we contacted the office of filing and payment compliance to ascertain why the letter used to give notice of sale of redeemed property p-637 contains a liquidated_damages provision but the pattern_letter for the sale of other than redeemed property p-339 does not apparently there is no explanation for the discrepancy and we were advised that it was probably just an oversight in drafting however to clarify matters that office will revise pattern_letter p-637 to delete any reference to liquidated_damages likewise they will revise pattern_letter p-340 notice of sealed bid sale other than redeemed property to delete any reference to liquidated_damages so that it will comport with pattern_letter p-1627 redeemed property which does not contain such a provision if you have any further questions please do not hesitate to call us on cc jeff basalla director filing payment compliance s c cp fp


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 b8 plr-157417-03 date date this responds to your letter dated date and supplemental legend taxpayer ------------------------------------------------------------ ---------------------------------------- dear --------------------- correspondence asking whether your organization qualifies as a nonprofit_educational_organization for purposes of exemptions refunds and payments related to federal excise_taxes under sec_4041 sec_4221 sec_4253 and sec_6421 of the internal_revenue_code facts income_tax under sec_501 as an organization described in sec_501 taxpayer’s purpose is to provide care and supports to persons with developmental disabilities including mental retardation while offering but not mandating instruction in religious doctrine taxpayer’s articles of incorporation define its charitable purpose as caring for developmentally disabled children and adults providing for their spiritual physical social mental and emotional needs developing their potential and increasing their knowledge and skills to enhance their ability to deal with their environment facilities group homes in-home services and day services taxpayer provides four basic categories of client service programs institutional taxpayer is a nonprofit charitable_organization that is exempt from federal in-home services are provided in the client’s own home typically to higher plr-157417-03 taxpayer serves about half of its clients in institutional facilities which are regulated by medicaid under c f_r sec_483 these facilities provide services to the most disabled clients with more involved medical and behavioral needs in these facilities taxpayer provides or arranges for all habilitation and support services required by the client including medical psychological dietetic active treatment direct care and social services taxpayer’s group homes typically house three to six clients each group homes service the whole spectrum of developmentally disabled clients even those with more involved medical and behavioral needs if appropriate staffing and supports are available functioning more independent clients these in-home support services are scheduled for specific and limited hours day services provide supports and services for limited periods as requested by the client or family guardian and are often available during business hours from monday through friday client training and education is a significant element of all services and supports offered by taxpayer such training and education does not occur in a group classroom- type instructional setting which is typical of the education of persons with developmental disabilities however taxpayer uses a standardized methodology for working with the developmentally disabled this methodology is an integrated and inherently inseparable part of the services taxpayer provides in all of its programs taxpayer develops goals and objectives specific to each client’s particular level of disability and personal growth needs including functional goals such as learning to dress behavioral goals such as learning appropriate mealtime behavior traditional academic functions such as reading and vocational skills for each client these goals are recorded in a written individual plan as required by federal and or state regulations that govern taxpayer’s developmental disabilities services staff members follow the plan while interacting with clients taxpayer does not maintain a separate faculty law analysis sec_4041 imposes a tax on special_motor_fuel that is sold for use or used as a fuel in a motor_vehicle or motorboat chapter imposes manufacturers excise_taxes on certain manufacturer’s sales sec_4081 imposes a tax on certain removals entries and sales of gasoline sec_4251 imposes a tax on amounts paid for certain communications_services including local_telephone_service defined in sec_4252 toll_telephone_service defined in sec_4252 and teletypewriter_exchange_service defined in sec_4252 organization for its exclusive use and the use of these fuels by a nonprofit educational sec_4041 exempts from tax special fuels sold to a nonprofit educational sec_1_170a-9 of the income_tax regulations provides that an for these exemptions or claims for payment the term nonprofit educational sec_6421 provides that if gasoline on which tax has imposed under sec_4081 plr-157417-03 organization similar exemptions apply to manufacturing taxes sec_4221 and communications taxes sec_4253 is sold to a nonprofit_educational_organization for its exclusive use then the ultimate_purchaser of the fuel is eligible for a payment with respect to the tax organization is defined under sec_4041 sec_4221 and sec_4253 and sec_48_4041-17 and sec_48_4221-6 of the manufacturers and retailers excise_taxes regulations as an educational_organization described in sec_170 that is exempt from federal_income_tax under sec_501 the term also includes a school operated as an activity of an organization described in sec_501 that is exempt from income_tax under sec_501 if the school normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on educational_organization is described in sec_170 if its primary function is the presentation of formal instruction and it normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on the regulations state that the term educational_organization does not include organizations engaged in both educational and non-educational activities unless the latter are merely incidental to the educational activities primarily a vocational rehabilitation center is not a nonprofit_educational_organization exempt from federal excise_taxes rev_rul further holds that the nonprofit corporation’s classroom training program is a school operated as an activity of an exempt_organization in general the nonprofit corporation provides employment and on-the-job training classroom training personal counseling vocational evaluation medical treatment and unemployment placement services the classroom training portion of the program consists of regularly scheduled classes taught by a staff of qualified instructors on a year-round basis provided to regularly enrolled student trainees in subjects such as merchandising welding shoe repair carpentry elementary english writing arithmetic reading braille using a cane sewing shopping and handling money the classes vary from three to nine months depending on the student’s level of competence revrul_80_20 reasons that the primary function of the organization was not the presentation of formal instruction but rather the operation of a vocational rehabilitation center involving employment educational and social service activities providing classroom training is insufficient in itself to bring the corporation’s primary purpose within the scope of sec_1_170a-9 and sec_48_4221-6 of the regulations the revrul_80_20 1980_1_cb_231 holds that a nonprofit corporation that is plr-157417-03 personal counseling vocational evaluation medical treatment and employment placement services do not satisfy the regulations because they relate to the corporation’s overall rehabilitation functions the revenue_ruling concludes that the classroom training portion of the center is a school operated as an activity of an exempt_organization in that its primary purpose is the presentation of formal instruction it has a curriculum and a regularly enrolled student body in attendance at a designated place where instruction is normally provided by a regular faculty at regular sessions although an organization furthers charitable and educational_purposes as described in sec_501 and engages in some educational activities it does not necessarily follow that such organization qualifies as an nonprofit_educational_organization within the meaning of sec_170 to satisfy the requirements of sec_170 an organization must have as its primary function the presentation of formal instruction and must have a regular faculty and curriculum and a regularly enrolled body of students or pupils in attendance at a place where the organization’s education are regularly carried on taxpayer’s primary function is providing care and supports to persons with developmental disabilities not the presentation of formal instruction taxpayer’s training and educational activities are not a carried out in a classroom-type instructional setting typical for developmentally disabled clients taxpayer does not maintain a separate faculty taxpayer’s client service programs are designed in part to train and educate its clients and to assist each client in developing to his or her maximum potential these aspects of taxpayer’s activities have been developed by using a standardized educational methodology to best meet the educational and training needs of clients with developmental disabilities the educational function relates to the many client support services that taxpayer provides therefore we conclude that taxpayer is not a nonprofit_educational_organization because its educational activities are incidental to its primary functions accordingly we conclude that taxpayer does not operate a school as an activity of an exempt_organization and does not qualify for the exemptions refunds and payments regarding federal excise_taxes under sec_4041 sec_4221 sec_4253 and sec_6421 plr-157417-03 this letter_ruling is directed only to the taxpayer who requested it sec_6110 provides that it shall not be used or cited as precedent sincerely associate chief_counsel passthroughs and special industries by barbara b franklin senior technician reviewer


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b02 - plr-143895-01 date date p country jurisdiction d1 gp lp x parent this is in reply to your letter dated date and subsequent correspondence submitted on behalf of p requesting a ruling that p be given an extension of time to elect under sec_301_7701-3 of the procedure and administration regulations to be classified as an association_taxable_as_a_corporation for federal tax purposes the information submitted states that p is a limited_partnership formed on d1 in jurisdiction in country the limited_partner of p is lp and the general_partner of p is gp lp and gp are single member entities that are disregarded for federal tax purposes x a domestic_corporation is the owner of gp and lp parent a domestic_corporation is the common parent of the affiliated_group_of_corporations that includes x p is a foreign eligible_entity that is not required to be classified as a corporation for federal tax purposes p intended to be classified as an association taxable as a plr-143895-01 corporation for federal tax purposes effective on d1 however a form_8832 entity classification election was not filed for p by the due_date for the election sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes a business_entity is any entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the internal_revenue_code sec_301_7701-2 sec_301_7701-3 provides that unless a foreign eligible_entity elects otherwise the entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owners if it has a single owner that does not have limited_liability to elect to be classified other than as provided in sec_301_7701-3 an eligible_entity must file form_8832 entity classification election with the designated service_center sec_301 c i an election will be effective on the date specified on the form_8832 or on the date filed if no such date is specified the effective date specified on the form_8832 cannot be more than days prior to the date the election is filed sec_301_7701-3 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 based solely on the facts submitted and representations made we conclude that the requirements of 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 file form_8832 with the appropriate service_center and elect under sec_301_7701-3 to be classified as an association_taxable_as_a_corporation for federal tax purposes effective for the taxable_year beginning on d1 a copy of this letter should be attached to the form_8832 except as specifically ruled above we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the code this ruling is directed only to the taxpayers who requested it sec_6110 provides that it may not be used or cited as precedent plr-143895-01 pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to p sincerely yours paul f kugler associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury index nos number release date washington dc person to contact telephone number refer reply to cc dom p si plr-113601-98 date date legend taxpayer apartment date trust x date date ein dear this letter responds to the letter dated and later correspondence from your authorized representative requesting rulings concerning the income and gift_tax consequences of the creation of a_trust in addition you have requested an extension of time under sec_301_9100-1 of the procedure and administration regulations to modify the trust in order to qualify as a qualified_personal_residence_trust under sec_2702 of the internal_revenue_code you represent the facts to be as follows taxpayer’s principal_residence apartment is located in a cooperative apartment building taxpayer acquired the cooperative stock shares and proprietary leases to the apartment on date taxpayer executed trust which was intended to qualify as a qualified_personal_residence_trust taxpayer had originally intended to transfer the legal_title to the shares and proprietary leases to the trust but the co-op association that governs the apartment disapproved her request to do so for this reason taxpayer instead transferred beneficial title to the shares and leases to the trust and continues to hold legal_title as a nominee on date the gift_tax_return for the transaction was filed on date which was within days after the due_date plr-113601-98 for filing the gift_tax_return your authorized representative requested a ruling that the trust as executed was a qualified_personal_residence_trust within the meaning of sec_2702 trust as executed did not meet the requirements for a qualified_personal_residence_trust under sec_2702 accordingly you propose certain amendments which are intended to meet the requirements of sec_2702 the reformation however was not completed prior to the due_date including extensions for filing the return under the provisions of the trust instrument as amended taxpayer has the right to reside in the apartment for three years the taxpayer will possess all the rights of a life_tenant and will be entitled to all the income during the three-year term the terms of the trust as amended provide that if taxpayer dies before the three-year term expires the balance of the principal of the trust will be distributed to the taxpayer’s estate her creditors the creditors of her estate or any other person as taxpayer may appoint by her will in default of this power_of_appointment the trust corpus will be distributed to certain family members as provided under the terms of the trust taxpayer represents that as determined under sec_7520 of the code the present_value of the reversionary_interest retained by taxpayer exceeds x of the value of the property transferred to trust which is greater than of the value of property transferred to the trust if taxpayer survives the three-year term the assets will continue in trust but taxpayer’s son and two grandchildren will become the beneficiaries at the end of the trust term taxpayer and the trustees shall at the option of taxpayer permit taxpayer to occupy the residence at a fair market rent for such period as the taxpayer wishes the trust as amended provides that the trustee is prohibited from holding any asset other than the residence during the retained three year term the trustee may accept cash contributions to permit the trust to satisfy specified trust expenses or to pay the cost of improvements to the residence any cash held in excess of the permissible amounts must be distributed to taxpayer not less frequently than quarterly the taxpayer’s interest in the trust may not be commuted the trust as amended further provides that the trustees may hold proceeds from the sale of the residence in a separate_account for a period not to exceed two years from the date of sale proceeds from insurance or as a result of damage destruction or involuntary_conversion may be held by the trustee for a period not to exceed two years if the trustee intends to plr-113601-98 use the proceeds for the purchase construction reconstruction and or repair of the personal_residence if the residence is damaged to such an extent that it cannot be used as a residence the trust will cease to be a qprt on the earlier of the date which is two years after the damage or destruction or the expiration of the retained term unless prior to this date the residence is replaced or repairs to the residence are completed the terms of the trust as amended provide that if for any reason the residence ceases to be held as taxpayer’s personal_residence during the retained term and prior to the taxpayer’s death the trust will either terminate with all assets being distributed to the taxpayer or the trustee may within days convert the qprt into a qualified annuity_trust trust as amended provides that the trustees may not sell or otherwise transfer the residence directly or indirectly to the grantor any spouse of the grantor or to any entity controlled by the grantor or any spouse of the grantor during the initial term or at any time after the initial term if the trust is a grantor_trust the amount of the annuity to be paid to the taxpayer at least annually after the conversion is determined by dividing the lesser_of the interests retained by the taxpayer in property transferred to the trust or the value of the trust assets as of the conversion date by the annuity factor for the taxpayer’s interest in the trust determined under sec_7520 as of the date of the transfer you have requested that we rule as follows trust as amended qualifies for the personal_residence exception to sec_2702 and taxpayer will be considered to be the owner of the entire corpus and income of the trust for income_tax purposes under sec_673 and sec_677 of the code an extension of time to amend trust to qualify as a qualified_personal_residence_trust is granted ruling_request sec_2702 of the code deals generally with the valuation for gift_tax purposes of an interest transferred in trust to or for the benefit of a member of the transferor’s family where the transferor retains an interest in the trust sec_2702 however provides that sec_2702 shall not apply to any transfer if such transfer involves the plr-113601-98 transfer of an interest in trust all the property in which consists of a residence to be used as a personal_residence by persons holding a term_interest in the trust sec_25_2702-5 of the gift_tax regulations states in part that a qualified_personal_residence_trust as defined in sec_25_2702-5 is treated as a personal_residence_trust sec_25_2702-5 contains the following provisions applicable to a qualified_personal_residence_trust in general a qualified_personal_residence_trust is a_trust meeting all the requirements of this paragraph c these requirements must be met by provisions in the governing instrument and these governing instrument provisions must by their terms continue in effect during the existence of any term_interest in the trust personal_residence - i in general for purposes of this paragraph c a personal_residence of a term holder is either a the principal_residence of the term holder within the meaning of sec_1034 b one other residence of the term holder within the meaning of sec_280a but without regard to sec_280a it is represented that the apartment is the principal_residence of the taxpayer and sec_1034 of the code provides that the residence of a taxpayer shall include stock held by a tenant-stockholder in a cooperative_housing_corporation therefore the apartment meets the definition of a personal_residence as set forth in sec_25_2702-5 of the regulations after a review of the governing instrument of the trust as amended we find that it contains the provisions required by sec_25_2702-5 of the regulations therefore the trust is a qualified_personal_residence_trust within the meaning of sec_25_2702-5 and as such is not subject_to the provisions of sec_2702 of the code ruling_request sec_671 of the code provides the general_rule that when the grantor or another person is treated as the owner of any portion of a_trust there shall then be included in computing the taxable_income and credits of the grantor or the other person plr-113601-98 those items of income deductions and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account in computing taxable_income or credits against the tax of an individual sec_673 through of the code specify the circumstances under which the grantor is treated as the owner of a portion of a_trust sec_1_671-3 of the income_tax regulations provides that when a grantor or other person is treated under subpart e sec_671 and following as the owner of any portion of a_trust there are included in computing his tax_liability those items of income deduction and credit against tax attributable to or included in that portion for example if a grantor or another person is treated as the owner of an entire trust corpus as well as ordinary_income the grantor takes into account in computing the grantor’s income_tax_liability all items of income deduction and credit including capital_gains_and_losses to which the grantor would have been entitled had the trust not been in existence during the period the grantor is treated as the owner sec_1_671-3 of the income_tax regulations provides that if a grantor or another person is treated as the owner of a portion of a_trust that portion may or may not include both ordinary_income and other income allocable to corpus sec_1_671-3 of the regulations provides that both ordinary_income and other income allocable to corpus are included by reason of an interest in or a power over both ordinary_income and corpus or an interest in or power over corpus alone that does not come within the provisions of sec_1_671-3 for example if a grantor is treated under sec_673 as the owner of a portion of a_trust by reason of a reversionary_interest in corpus both ordinary_income and other income allocable to corpus are included in the portion sec_673 of the code provides that the grantor shall be treated as the owner of any portion of a_trust in which the grantor has a reversionary_interest in either the corpus or the income therefrom if as of the inception of that portion of the trust the value of such interest exceed sec_5 percent of the value of such portion sec_673 provides that for purposes of sec_673 the value of the grantor’s reversionary_interest shall be determined by assuming the maximum exercise of discretion in favor of the grantor under the terms of trust grantor has retained a general_power_of_appointment over the trust property during the initial plr-113601-98 term that power constitutes a reversionary_interest for purposes of sec_673 of the code the value of the interest retained by grantor exceed sec_5 percent of the value of the property transferred to trust accordingly grantor will be considered the owner of the entire trust under sec_673 of the code ruling_request sec_25_2702-5 provides that a_trust that does not comply with one or more of the regulatory requirements under b or c of the regulations under sec_2702 will nonetheless be treated as satisfying these requirements if the trust is modified by judicial reformation or nonjudicial reformation if effective under state law to comply with the requirements sec_25_2702-5 further provides that in the case of a_trust created after date the reformation must be commenced within days after the due_date including extensions for the filing of the gift_tax_return reporting the residence under sec_6075 and must be completed within a reasonable_time after commencement if the reformation is not completed by the due_date including extensions for filing the gift_tax_return the grantor or grantor’s spouse must attach statement to the gift_tax_return stating that the reformation has been commenced or will be commenced within the 90-day period sec_301_9100-3 provides that requests for extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 must be made under this section requests for relief subject_to this section will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government based on the facts submitted and the representations made in this case we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been met an extension of time for meeting the requirements of sec_25_2702-5 is granted until days after the date of this letter the modification of the trust must comply with the requirements of sec_2702 and the regulations thereunder and the nonjudicial reformation must be effective under state law accordingly provided that the requirements of sec_25_2702-5 are met and the modifications are made as represented the trust will be a qualified_personal_residence_trust within the meaning of sec_25_2702-5 plr-113601-98 this ruling is based on the facts and applicable law in effect on the date of this letter if there is a change in material fact or law local or federal before the transactions considered in this ruling take effect the ruling will have no force or effect if the taxpayer is in doubt whether there has been a change in material fact or law a request for reconsideration of this ruling should be submitted to this office except as we have specifically ruled herein we express or imply no opinion about the tax consequences of the transaction under the cited provisions or under any other provision of the code specifically no opinion is expressed regarding the period following the first three years of trust this ruling 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 sincerely yours paul f kugler paul f kugler assistant chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes


internal_revenue_service number release date index number ------------------------------------------------------------ ----------------------------------------------- -------------------------- -------------------------------- - department of the treasury washington dc person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi - plr-157412-03 date date legend x ----------------------- ----------------------- a b ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ ------------------------ state ------------- ---------------- this letter responds to a letter dated date and subsequent d1 dear ------------------- correspondence by x’s authorized representative on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code facts shareholders a and b intended for x to be an s_corporation as of d1 the first day of x’s first taxable_year according to the information submitted x was formed on d1 in state x’s x requests a ruling under sec_1362 that its sec_1362 election will be treated sec_1362 provides that a small_business_corporation may elect to be an s sec_1362 provides the rule on when an s election will be effective plr-157412-03 as timely made for its taxable_year that began on d1 law and analysis corporation generally if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made sec_1362 provides that if an s election is made after the first two and one-half months of a corporation's taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for such taxable_year and sec_1362 shall not apply conclusion based on the facts submitted and representations made we conclude that x has established reasonable_cause for its failing to make a timely s_corporation_election and that x is eligible for relief under sec_1362 accordingly if x makes an election to be an s_corporation by filing with the appropriate service_center a completed form_2553 effective d1 within days following the date of this letter then such election will be treated as timely made a copy of this letter should be attached to the form_2553 filed with the service_center the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion concerning whether x is otherwise eligible to be an s_corporation for federal tax purposes this letter to your authorized representative pursuant to a power_of_attorney on file with this office we are sending a copy of except as expressly provided herein we express or imply no opinion concerning this ruling is directed only to the taxpayer who requested it sec_6110 plr-157412-03 provides that it may not be used or cited as precedent s sincerely jeanne sullivan senior technician reviewer branch office of associate chief_counsel passthroughs and special industries


department of the treasury internal_revenue_service washington d c date number info release date uilc memorandum for director internal_revenue_service center cincinnati oh attn technical unit from subject office of division counsel associate chief_counsel tax exempt and government entities cc tege eoeg et1 - genin-137395-03 railroad retirement act tax status in accordance with the coordination procedure established between the service and the railroad retirement board rrb the rrb has provided us with its opinion that the following business became an employer under the railroad retirement act and the railroad unemployment insurance act effective date we have reviewed the opinion of the rrb and based upon the information submitted to the rrb we also conclude that became an employer under the railroad_retirement_tax_act effective date please take the appropriate action regarding this business will e mcleod cc