t c summary opinion united_states tax_court louis m gachette petitioner v commissioner of internal revenue respondent docket no 9472-16s filed date louis m gachette pro_se monica e koch for respondent summary opinion panuthos chief special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not 1unless otherwise indicated subsequent section references are to the continued reviewable by any other court and this opinion shall not be treated as precedent for any other case in a notice_of_deficiency dated date respondent determined a deficiency of dollar_figure in petitioner’ sec_2013 federal_income_tax after concessions the issues for decision are whether petitioner is entitled to a dependency_exemption deduction a child_tax_credit an earned_income_tax_credit eitc and head_of_household filing_status background some of the facts have been stipulated and we incorporate the stipulation of facts by this reference petitioner was a resident of new york when the petition was timely filed petitioner married mary desvarieux in and together they had a daughter k g who was a minor at the close of sometime around april continued internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure 2petitioner conceded that he failed to report a taxable individual_retirement_account distribution of dollar_figure for and that he is liable for the additional tax on early withdrawal under sec_72 3it is the policy of this court not to identify minors we refer to minor children by their initials see rule a petitioner came home to discover that ms desvarieux had moved out of the house although petitioner and ms desvarieux have lived apart since they never initiated legal_separation or divorce proceedings and remain married in petitioner resided in a one-bedroom apartment during the year in issue petitioner was working as a security guard for allied barton security services petitioner worked the night shift from midnight to a m monday through thursday petitioner filed a timely income_tax return form_1040 u s individual_income_tax_return for the taxable_year petitioner filed the return as head_of_household and claimed a dependency_exemption deduction for k g an eitc and an additional_child_tax_credit petitioner reported wages of dollar_figure respondent disallowed the claimed deduction and credits and changed petitioner’s filing_status to single petitioner filed a timely petition in response to the notice_of_deficiency ms desvarieux timely filed a form_1040 filing as head_of_household and also claiming a dependency_exemption deduction for k g it does not appear that respondent made any adjustments to ms desvarieux’ sec_2013 return at trial petitioner introduced copies of the following documents purporting to substantiate that k g qualifies as his dependent a letter from dr kesler dalmacy dated date stating that petitioner and k g are his patients and that his records indicate that they have lived together at petitioner’s home address since a report card for k g for the school year and an undated document that petitioner prepared reflecting k g ’s name petitioner’s home address and the signatures of five individuals whom he asserts were k g ’s teachers during the school year discussion i burden_of_proof in general the commissioner’s determination as to a taxpayer’s tax_liability is presumed correct and the taxpayer bears the burden of proving otherwise rule a 290_us_111 deductions and credits are a matter of legislative grace and the taxpayer bears the burden of proving that he is entitled to any deduction or credit claimed 308_us_488 292_us_435 taxpayers must comply with specific requirements for any deductions claimed see 503_us_79 new colonial ice co v helvering u s pincite taxpayers must also maintain adequate_records to substantiate the amounts of any credits and deductions see sec_6001 sec_1_6001-1 income_tax regs likewise the taxpayer is obliged to demonstrate entitlement to an advantageous filing_status such as head_of_household see smith v commissioner tcmemo_2008_229 ii dependency_exemption deductions sec_151 allows deductions for personal exemptions including exemptions for dependents of taxpayers see sec_151 sec_152 defines the term dependent as a qualifying_child or a qualifying_relative generally a qualifying_child must bear a specified relationship to the taxpayer eg be the taxpayer’s child have the same principal_place_of_abode as the taxpayer for more than one-half of the taxable_year meet certain age requirements not have provided over one-half of his or her own support for the taxable_year and not have filed a joint_return for that year sec_152 all of these requirements must be satisfied if any one is not then the individual is not the taxpayer’s qualifying_child sec_152 generally defines a qualifying_relative as an individual who bears a specified relationship to the taxpayer eg is the taxpayer’s child whose gross_income is less than the exemption_amount with respect to whom the taxpayer provides over one-half of the individual’s support and who is not a qualifying_child of such taxpayer or any other taxpayer all of these requirements must be satisfied the record reflects and respondent does not dispute that k g satisfies the age and relationship requirements of sec_152 respondent does not agree however that k g had the same principal_place_of_abode as petitioner for more than one-half of the taxable_year or that petitioner provided more than one-half of k g ’s support a principal_place_of_abode petitioner testified that k g lived with him during the year in issue and that when he worked the night shift k g would stay the night at her grandmother’s house4 because he did not want her to be alone in the apartment overnight in the evenings petitioner would walk k g to the bus station from which she would take a bus to her grandmother’s house the following morning k g would leave her grandmother’s house by bus and go directly to school when school was in session if school was not in session k g would return to petitioner’s house petitioner testified that k g stayed with him except during school days and nights that he worked 4petitioner testified that he could not remember where ms desvarieux was living during the year in issue or whether ms desvarieux was living with her mother k g ’s grandmother it is further unclear from his testimony whether k g spent nights only at her grandmother’s house or alternated between ms desvarieux’s house and her grandmother’s house for the sake of simplicity we will refer only to k g ’s grandmother’s house other than his testimony petitioner did not provide evidence that k g had the same principal_place_of_abode as petitioner for more than one-half of the year petitioner testified that k g spent approximately nights at her grandmother’s house because he worked nights monday through thursday5 and that k g spent the remaining nights at his house petitioner did not provide other evidence to support his assertions petitioner failed to establish that k g had the same principal_place_of_abode as petitioner for more than one-half the year it follows that k g was not petitioner’s qualifying_child within the meaning of sec_152 b support the term ‘support’ includes food shelter clothing medical and dental care education and the like sec_1_152-1 income_tax regs for a taxpayer to prove that he provided more than one-half of an individual’s support 5petitioner testified that he had two weeks of vacation in four nights per week weeks ' days per year 6although petitioner provided a few documents none of them establishes that k g shared his principal_place_of_abode for more than one-half of the year in issue the letter from dr dalmacy reflects only the address for petitioner and k g in his records and does not indicate how long k g resided with petitioner in assuming that the document which petitioner prepared was signed by k g ’s teachers it also does not indicate k g’s principal_place_of_abode in finally the only document petitioner provided from k g ’s school her report card did not reflect an address or other such information relevant to our inquiry he must establish by competent evidence the total amount of support that the individual received from all sources and that he provided more than one-half of that amount id see also 56_tc_512 webb v commissioner tcmemo_2011_124 wl at petitioner asserts that he provided more than one-half of k g ’s support for testifying that he paid her food transportation and school expenses and that he paid the rent utilities and other expenses for the apartment the court notes that the total of these amounts allegedly expended exceeds petitioner’s reported income for the year further petitioner testified that he did not know or could not recall the amounts that ms desvarieux or her mother had paid to support k g or any other sources of financial support available to the child petitioner did not provide any documentation or other evidence outside of his testimony to support these assertions as we are unable to make a finding as to k g ’s total support from all sources we cannot reach a conclusion as to whether petitioner provided over one-half of that amount for to this extent petitioner has again failed in his burden_of_proof see sec_152 blanco v commissioner t c pincite- webb v commissioner wl at sec_1_152-1 income_tax regs because petitioner failed to show that he provided more than one-half of k g ’s support in it follows that k g was not his qualifying_relative within the meaning of sec_152 thus petitioner has failed to prove that k g was either his qualifying_child or his qualifying_relative consequently we sustain respondent’s determination disallowing the dependency_exemption deduction iii child_tax_credit sec_24 provides a tax_credit with respect to each qualifying_child of the taxpayer for whom the taxpayer is allowed a deduction under sec_151 sec_24 defines the term qualifying_child as a qualifying_child of the 7the court notes that it appears that petitioner also failed to prove that k g was not the qualifying_child of another taxpayer since neither ms desvarieux nor k g ’s grandmother testified or provided other evidence we do not make a finding as to whether k g was the qualifying_child of ms desvarieux 8the court further notes that sec_152 permits a noncustodial_parent to claim a dependency_exemption if certain conditions are satisfied when parents are legally_separated or divorced sec_152 generally awards the dependency_exemption to the custodial_parent that is the parent having custody of the child for the greater portion of the year sec_152 an exception to this rule is set forth in sec_152 the two conditions of that exception are that the custodial_parent sign a written declaration releasing her claim to the exemption and the noncustodial_parent attach the declaration to the noncustodial parent’s return for the taxable_year sec_152 and b petitioner has not asserted nor is there any other evidence that he complied with this provision taxpayer as defined in sec_152 who has not attained age as previously discussed k g was not petitioner’s qualifying_child as defined in sec_152 for the taxable_year and therefore petitioner is not entitled to the child_tax_credit in dispute iv earned_income_tax_credit sec_32 allows an eligible_individual an eitc sec_32 defines an eligible_individual as an individual who has a qualifying_child for the taxable_year the term qualifying_child is defined in sec_32 to mean a qualifying_child of the taxpayer as defined in sec_152 determined without regard to paragraph d thereof and sec_152 consistent with the preceding discussion k g was not petitioner’s qualifying_child as defined in sec_152 for the taxable_year it follows that petitioner is not eligible for an eitc an individual who does not have a qualifying_child may also be an eligible_individual if certain other requirements are satisfied sec_32 however for such latter individual the amount of the eitc is not as generous and the credit is phased out at a much lower income level see sec_32 and b the eitc is completely phased out for a taxpayer who does not have a qualifying_child and whose earned_income equals or exceeds dollar_figure for see revproc_2013_15 sec_2 2013_5_irb_444 since petitioner’s earned_income for dollar_figure exceeds this amount he is not eligible for the eitc see id v head_of_household sec_1 prescribes a relatively favorable tax schedule for a taxpayer who qualifies as a head_of_household sec_2 defines a head_of_household as relevant herein as an individual taxpayer who is unmarried9 and is not a surviving_spouse and maintains a home which is the principal_place_of_abode for more than one-half of the year for either a qualifying_child defined 9for federal_income_tax purposes an individual’s marital status is determined at the close of the taxable_year sec_7703 a married individual may nonetheless be considered unmarried for federal_income_tax purposes where the following four-part test is met the individual files a separate_return for more than one-half of the taxable_year the individual maintains as his home a household that serves as the principal place or abode of a child who is the individual’s tax dependent the individual furnishes more than one-half of the cost of maintaining such household during the taxable_year and the individual’s spouse was not a member_of_the_household during the last six months of the taxable_year id subsec b these requirements are in the conjunctive each element must be met before a married individual will be treated as unmarried for federal_income_tax purposes petitioner was married to ms desvarieux during the year in issue but he filed hi sec_2013 return as head_of_household and ms desvarieux was not a member of his household during the last six months of id as previously discussed petitioner is not entitled to a dependency_exemption deduction under sec_151 because he does not meet all the requirements of sec_7703 petitioner is not considered unmarried for federal_income_tax purposes under sec_152 or any other person who is the individual’s dependent under sec_151 as previously discussed we have concluded that petitioner is not entitled to a dependency_exemption deduction for k g under sec_151 therefore petitioner does not qualify for head_of_household filing_status for sec_2 we have considered all of the parties’ arguments and to the extent not addressed herein we conclude that they are moot irrelevant or without merit to reflect the foregoing decision will be entered for respondent


department of the treasury employer_identification_number contact person - id number contact telephone number uil internal_revenue_service p o box cincinnati oh release number release date date date legend x name y name b c d e f quantity quantity time span quantity time span dear description of your request your letter indicates that you will operate an educational grant program you asked for advance approval of your educational grant procedures under internal_revenue_code sec_4945 this approval is required because you are a private_foundation that is exempt from federal_income_tax our determination we approved your procedures for awarding educational grants based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding educational grants meet the requirements of code sec_4945 as a result expenditures you make under these procedures won't be taxable your purpose is to undertake programs and provide financial support and assistance to charitable organizations that are exclusively charitable educational and scientific in nature and shall include environmental and cultural programs you accomplish your charitable purposes by making grants and conducting activities in the areas of conservation environmental protection environmental and outdoor education as well as conducting cultural and historical programs the purpose of your grant program is to support and encourage research and the development of innovative ideas by enabling recipients to conduct scholarly residencies each grant recipient will receive housing and study space at y a house you own located in the state of x as well as transportation between locations participants will not receive funds in connection with the program and will be responsible for all other costs connected with staying at and traveling to and from y information about your program will be publicized on your website and through a brochure you produce eligible individuals will include scholars professionals and other individuals affiliated with charitable and academic institutions who have specialized skills experience or knowledge in areas of your interests and that come within your exempt purposes you anticipate that grant recipients will use these residencies for activities such as the conduct of scholarly research and writing and the development of scholarly projects as well as for conferences among scholars and specialists in the areas of environmental science conservation education and historical and cultural studies you currently anticipate awarding approximately b residencies per year with up to c grant recipients in residence at a time each grant recipient may be accompanied by his her spouse or partner you hope that by permitting participants to bring their spouses or partners will create an atmosphere of comfort and community in which participants can think freely and creatively the program is being conducted in an isolated area far from densely populated areas that should serve as a catalyst for creativity however you have acknowledged that on occasion isolation can cause stagnation of thought and dialogue is often necessary to the development of ideas thus in order to strike a balance between separation and community you determined it would be helpful to permit spouses or partners to accompany program participants if desired determination of eligibility for the grant program will include consideration of the following factors a demonstration of exceptional scholarly or professional ability b involvement in the fields of environmental science conservation education or cultural and historical studies c d history of work that engages with important social or environmental issues and interest in working in interdisciplinary and collaborative environments eligible individuals will be required to apply directly to you and will be required to submit a personal resume a description of their proposed activities and a description of how their proposed activities furthers your mission there is no formal application form the selection committee shall consist of the members of your board_of directors however given your staff's proficiency in grant review and selection and your board’s historic participation in your grant making you have determined the selection committee will follow a two-step process for selecting program participants your staff including your program grants associate and your vice president of finance and administration will conduct the initial review of application packages and ensure that it contains all of the above elements and will make an initial determination as to whether the activities described in the application sufficiently and appropriately further your mission if your staff needs more information from a particular applicant they may require such applicant letter catalog number 58222y to submit additional information or to participate in an in-person or telephonic interview once the staff has determined whether to recommend approval or rejection of an application they will send their recommendation in writing accompanied by all application materials to the selection committee for a final_determination however in the event that any members of the selection committee have particular expertise in an applicant’s field of work or study the selection committee may meet to review and approve or reject the application directly without the prior involvement of the staff in the event that the selection committee conducts the initial review the selection committee will follow those procedures you anticipate that a majority of applications will be initially reviewed by the staff the number of grant recipients selected and the amount awarded to each recipient will be determined by your selection committee this will be based on the number of qualified candidates the resources and time needed for each residency and your budget for the program grants of any duration will be considered and will be evaluated by the nature of the proposed objectives within the context of the proposed project time frame however it is currently anticipated that most grants will be for residencies for the length of d and that such residencies will take place between the period f of each year the grant will be awarded on the basis of the intrinsic interest of the proposed project its relevance to your exempt purposes and the candidate’s prior experience and contributions to the field or demonstrated academic achievement you will strive to provide grants to individuals from diverse geographic regions in order to further your global mission of fostering appreciation and protection of the natural world grant recipients will be eligible to participate in the grant program for two consecutive years following the second year grant recipients will not be eligible to participate in the grant program for at least one year grant recipients may not be disqualified persons with respect to you within the meaning of code sec_4946 grant recipients may not be related to any of your officers directors or substantial contributors nor may they be persons whose selection would result in private benefit to any of your officers directors or substantial contributors grants will be made pursuant to written grant agreements all participants will be required to use the facilities for the charitable purposes specified you will require that within e days after the conclusion of each individual's participation in the program each person must deliver a written report to you detailing his or her use of time spent participating in the program and how such use furthered your mission participants in the program will not receive monetary grants thus you do not intend to account for funds received in connection with the program since such funds will not be granted in the event that grant recipients misuse the facilities you will terminate the participant's involvement in the grant program letter catalog number 58222y you will maintain case histories showing recipients of your grants including names addresses purposes of awards amount of each grant manner of selection and relationship if any to officers trustees or donors of funds to you you represent that you will maintain all records relating to individual grants including information obtained to evaluate grantees whether a grantee is a disqualified_person establish the amount and purpose of each grant and establish that you undertook the supervision and investigation of grants basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that meets all of the following requirements of code sec_4945 is not a taxable_expenditure e e e the foundation awards the grant on an objective and nondiscriminatory basis the irs approves in advance the procedure for awarding the grant the grant is - - - ascholarship or fellowship subject_to sec_117 and is to be used for study at an educational_organization described in sec_170 or a prize or award subject_to the provisions of sec_74 if the recipient of the prize or award is selected from the general_public or to achieve a specific objective produce a report or similar product or improve or enhance a literary artistic musical scientific teaching or other similar skill or talent of the recipient to receive approval of its educational grant procedures sec_53_4945-4 requires that a private_foundation show e e e the grant procedure includes an objective and nondiscriminatory selection process the grant procedure results in the recipients performing the activities the grants were intended to finance the foundation plans to obtain reports to determine whether the recipients have performed the activities that the grants were intended to finance other conditions that apply to this determination e e e this determination covers only the grant program described above this approval will apply to succeeding grant programs only if their standards and procedures don't differ significantly from those described in your original request this determination applies only to you it may not be cited as precedent you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you may report any significant changes to your program by letter catalog number 58222y completing form_8940 and sending it to the cincinnati office of exempt_organizations at internal_revenue_service exempt_organizations determinations p o box cincinnati oh e e e you cannot make grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives all funds distributed to individuals must be made on a charitable basis and must further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 you should keep adequate_records and case histories so that you can substantiate your grant distributions with the irs if necessary we've sent a copy of this letter to your representatives as indicated in your power_of_attorney please keep a copy of this letter in your records if you have any questions please contact the person listed at the top of this letter sincerely director exempt_organizations letter catalog number 58222y


t c summary opinion united_states tax_court robert e and louise l mumy petitioners v commissioner of internal revenue respondent docket no 18976-04s filed date harland m britz for petitioners bryan e sladek for respondent dean special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code unless otherwise indicated section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority respondent determined a deficiency in petitioners’ federal_income_tax of dollar_figure the sole issue for decision is whether the amount received by petitioner louise mumy petitioner from daimlerchrysler her employer is excludable from income under sec_104 the stipulated facts and the exhibits received into evidence are incorporated herein by reference at the time the petition in this case was filed petitioners resided in temperance michigan petitioners’ employment background during petitioners were full-time_employee sec_1 at a large automobile manufacturing plant daimlerchrysler the daimlerchrysler plant is located in toledo ohio petitioner was a secretary in the body shop petitioner robert mumy was a factory worker petitioner’s injuries petitioner was harassed by a coworker in her workplace starting in the coworker made inappropriate statements to her stared at her and visited her office when there was no 1no explanation was given for the unemployment_compensation received during by both petitioners petitioner testified that she had been continuously employed by daimlerchrysler for years the basis for these payments however does not affect the court’s decision as the unemployment_compensation was appropriately reported business_purpose daimlerchrysler responded to petitioner’s complaints by advising the coworker to stop bothering petitioner petitioner suffered anxiety embarrassment and humiliation as a result of the harassment on date the same coworker pinched petitioner on her upper arm petitioner and her coworker along with his supervisor were in petitioner’s office when this occurred petitioner did not seek medical_care for her battery the incident was not reported to the police the pinch inflicted by the coworker resulted in a small contusion which lasted approximately to days this contusion was just sore to the touch for a couple days after the coworker pinched petitioner daimlerchrysler issued a written warning to the coworker the coworker was later dismissed for unrelated reasons but was subsequently rehired petitioner’s settlement with daimlerchrysler petitioner’s complaint for damages was filed in lucas county ohio on date the complaint alleged that she suffered anxiety embarrassment and humiliation as well as pain from the physical injury as a result of the harassment the complaint alleged that daimlerchrysler was responsible for the harassment as well as the assault and battery on petitioner the action was brought pursuant to section ohio revised code as well as ohio common_law ohio rev code ann sec dollar_figure lexisnexi sec_2001 provides for damages injunctive relief or any other appropriate relief for violation of the ohio civil rights statute petitioner requested dollar_figure in compensatory_damages and dollar_figure for punitive_damages in date petitioner settled her claims against daimlerchrysler for dollar_figure petitioner directly accepted dollar_figure from daimlerchrysler and approved dollar_figure to be paid to her attorney these amounts were paid in full settlement of any claims by petitioner the settlement agreement agreement referenced the harassment personal injury and emotional distress allegations in a preliminary whereas clause the agreement specifically stated in clause that settlement is made only to buy peace and to compromise disputed claims and to avoid the expense and inconvenience of trial the parties agreed that the amounts were paid in consideration for the release and covenant not to sue given by employee no allocation was made with regard to the amount of damages paid if any in consideration of the pinch and for the harassment daimlerchrysler intended the agreement to encompass settlement of all claims 2despite commissioner v banks u s 125_sct_826 respondent has not determined that the dollar_figure paid to petitioner’s attorney in date be included in petitioners’ taxable_income therefore the court will not consider it the agreement between petitioner and daimlerchrysler was finalized in date it was signed by petitioner on date and by a daimlerchrysler agent on date by signing the agreement petitioner agreed with the description of her allegations in the complaint that during petitioner’s employment with employer she was harassed by a fellow employee and that as a result she has suffered personal injury and emotional distress the agreement specifically stated daimlerchrysler would issue forms and that petitioner would hold daimlerchrysler harmless with respect to withholding or any applicable income and employment_taxes in connection with the consideration paid hereunder petitioner attested that she was given weeks to review the agreement and encouraged to seek counsel petitioner did receive legal advice3 regarding the settlement but she did not follow that advice deficiency respondent determined a deficiency in petitioners’ federal_income_tax of dollar_figure respondent received from daimler- chrysler a form 1099-misc miscellaneous income issued to 3petitioner’s counsel for the lawsuit and settlement negotiations with daimlerchrysler is also representing petitioners in this case he recommended that petitioner not accept the settlement petitioner that reported the payment of income in the amount of dollar_figure petitioners did not report the dollar_figure payment as income on their form_1040 u s individual_income_tax_return for discussion the commissioner’s deficiency determinations are presumed correct and taxpayers generally have the burden of proving these determinations are incorrect rule a 290_us_111 under certain circumstances sec_7491 may shift the burden to the commissioner this shifting of the burden however applies only where the taxpayer has introduced such credible_evidence regarding their liability that if unopposed would show by a preponderance_of_the_evidence that respondent’s determination is erroneous petitioners have not introduced such evidence the court decides this case on the record before it and without regard to the burden_of_proof taxpayers are required under sec_61 to include all income from whatever source derived unless such income has been specifically excepted from inclusion see 348_us_426 congress’s intent under sec_61 was to tax unless specifically excluded exclusions to sec_61 must be narrowly construed 4a copy of the form 1099-misc issued to petitioner by daimler-chrysler was not provided to the court 515_us_323 citing 504_us_229 exclusion of certain damages sec_104 allows taxpayers to exclude from income the amount of any damages other than punitive_damages received whether by suit or agreement on account of personal physical injuries or physical sickness the flush language of sec_104 specifies that emotional distress shall not be treated as a physical injury or physical sickness treasury regulations provide that this exclusion is limited to those damages received through litigation or settlement that are based on tort or tort type rights sec_1_104-1 income_tax regs damages are excludable from income under sec_104 if they meet the two prong test set out in commissioner v schleier supra that payments received in settlement be received for claims based upon tort or tort type rights and received on account of personal injuries or sickness commissioner v schleier supra pincite both requirements must be satisfied for the damages to be excluded from income id pincite sec_104 was amended in to include the requirement that damages be received for physical injuries or sickness small_business job protection act of publaw_104_188 110_stat_1755 however this does not alter the analysis of the schleier test see tamberella v commissioner tcmemo_2004_47 nature of the claim to determine whether the settlement payment is excludable under sec_104 and schleier the court must determine whether the settlement amount was received for claims based upon tort or tort type rights as well as paid on account of personal physical injuries or sickness the nature of the claim that was the basis of the settlement is determinative united_states v burke supra pincite the key question to be answered is ‘in lieu of what were the damages awarded ’ 102_tc_116 citations omitted affd in part revd in part and remanded 70_f3d_34 5th cir this determination is factual and is generally made by reference to the settlement agreement in light of the surrounding circumstances id citation omitted additionally the determination depends on the nature of the claim without regard to the validity of the claim 88_tc_834 affd without published opinion 845_f2d_1013 3d cir both prongs of the schleier test are applied in light of the nature of the claim underlying the settlement united_states v burke supra pincite tort or tort type rights to be excludable under sec_104 and the first prong of schleier the damages must have been received for tort or tort type rights the supreme court in united_states v burke supra pincite stated that for purposes of sec_102 analysis a tort is a ‘civil wrong other than breach of contract for which the court will provide a remedy in the form of an action for damages ’ an action for damages is an essential characteristic for a tort as is a broad range of damages id pincite citation omitted to determine whether the damages were in fact received for tort or tort type rights the court must look to the nature of the claim underlying the settlement id pincite for purposes of sec_104 we look to state law in determining the nature of the claim 180_f3d_859 7th cir citing 287_us_103 petitioner’s complaint against daimlerchrysler was based on sec dollar_figure of the ohio revised code and ohio common_law violations of ohio’s civil rights statute are redressable through a civil_action for damages injunctive relief or any other appropriate relief ohio rev code ann sec dollar_figure lexisnexi sec_2001 petitioner’s harassment claim is therefore 5no specific ohio common_law cases were identified within the burke definition of a tort and would satisfy the first prong of the schleier test additionally ohio rev code ann sec a allows anyone injured in person or property by a criminal act to recover full damages in a civil_action unless specifically excepted by law although not cited in petitioner’s complaint this section governs civil actions for assault or battery additionally ohio rev code ann sec b lexisnexis defines a tort action as a civil_action for damages for injury death or loss to person or property other than a civil_action for damages for a breach of contract or another agreement between persons petitioner’s claim for assault based on the pinch would also satisfy the burke definition of tort and the first prong of the schleier test therefore whether the settlement was based on the harassment or the assault claims petitioner’s damages were received for claims based upon tort or tort type rights as ohio law provides for damages for violations of the ohio civil rights statute and for injuries resulting from a criminal act the first prong of the schleier test is satisfied personal physical injuries or physical sickness to be excludable under sec_104 and the second prong of the schleier test the damages must have been received on account of personal physical injuries or physical sickness this analysis is also guided by the nature of the claim underlying the settlement united_states v burke supra pincite the question before us is whether the damages paid to petitioner by daimlerchrysler were for a personal physical injury petitioner’s complaint alleged that she suffered anxiety embarrassment and humiliation as a result of the harassment and pain from the pinch however mental anguish humiliation and embarrassment are not personal physical injuries or physical sickness but are most akin to emotional distress shaltz v commissioner tcmemo_2003_173 anxiety is also part of emotional distress restatement tort sec_2d sec_905 under the flush language of sec_104 damages resulting from emotional distress are not excludable from income therefore if the damages paid to petitioner are to satisfy the second prong of schleier they must have been paid solely as a result of the pinch the mere mention of a physical injury in a complaint does not determine the nature of the claims emerson v commissioner tcmemo_2003_82 in the case before the court the agreement referenced the harassment personal injury and emotional distress allegations albeit in a preliminary whereas clause the document however does not contain any language which specifically states that the amount_paid was to settle the harassment claim the emotional stress claim or the assault and battery claim rather the parties agreed that the amount was paid in consideration for the release and covenant not to sue given by employee the parties also agreed that the settlement is made only to buy peace and to compromise disputed claims and to avoid the expense and inconvenience of trial the nature of the underlying claims cannot be determined by a general release that is broad and inclusive 835_fsupp_744 s d n y affd 35_f3d_93 2d cir such a release was included in the agreement in the case before the court the agreement released daimler- chrysler and all related entities from any and all known or unknown grievances disputes actions causes of action claims at law or in equity or sounding in contract or tort arising under common_law any federal state or local statute or ordinance this release included age discrimination disability discrimination any claims arising from title vii of the civil rights act of as well as claims regarding wages and overtime and health_insurance_coverage where the agreement does not address what portion if any of a settlement payment should be allocated towards damages excludable under sec_104 the courts will not make that allocation for the parties taggi v united_states supra pincite if the settlement agreement lacks express language regarding what the payment was for then the most important fact in determining how sec_104 is to be applied is ‘the intent of the payor’ as to the purpose in making the payment metzger v commissioner t c pincite quoting 349_f2d_610 10th cir affg t c memo see also whitehead v commissioner tcmemo_1980_508 general release found to indicate that payor regarded the settlement payment as compensation_for all of the claims which may have been brought by petitioner rather than as compensation_for one particular type of claim in the case before us the intent of the payor is evidenced in trial testimony and the agreement the daimlerchrysler counsel with settlement authority for petitioner’s claims and who executed the settlement for daimlerchrysler testified at trial daimlerchrysler did not allocate the payment between the causes of action in the agreement but rather intended the agreement to encompass settlement of all claims in the agreement daimlerchrysler specifically referenced the forms that would be issued regarding the payments as well as the withholding or any applicable income and employment_taxes in connection with the consideration paid id emphasis added by referring to the income and employment_taxes the forms and their intention that the agreement include settlement of all claims without specific allocation to any particular claim daimlerchrysler demonstrated that its purpose for the payment was not as damages on account of physical injury or physical sickness the ultimate character of the proceeds depends on the payor’s dominant reason for making the payment 363_us_278 accord 290_f2d_283 2d cir affg per curiam tcmemo_1960_21 petitioner did not file her lawsuit against daimlerchrysler until after the pinch instead of the pinch being the basis for a separate and stand-alone cause of action however the complaint treats the pinch as a symptom of the harassment similarly the agreement also references the personal injury as resulting from the harassment from the evidence the court concludes that it was not daimlerchrysler’s intention to compensate petitioner for the physical injury in other words the pinch rather their purpose and intention was to compensate for the primary cause of action stated by petitioner in her complaint the harassment the court must consider the entire amount taxable when the agreement settles claims for different types of damages does not allocate the damages and there is no other evidence that a specific claim was meant to be singled out morabito v commissioner tcmemo_1997_315 the court finds that the settlement amounts were not paid on account of personal physical injuries or sickness commissioner v schleier u s pincite and are not excludable from gross_income under sec_104 conclusion respondent’s determination that the settlement payment is includable in petitioners’ income for is sustained reviewed and adopted as the report of the small_tax_case division decision will be entered for respondent


t c memo united_states tax_court david soward petitioner v commissioner of internal revenue respondent docket no filed date martin a schainbaum and esther w chang for petitioner gerald a thorpe and paul r zamolo for respondent memorandum opinion cohen judge this case is before us on respondent’s motion to dismiss for lack of jurisdiction on the ground that the notice_of_deficiency is invalid and prohibited by sec_6225 unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue background petitioner resided in san francisco california at the time that he filed his petition a notice of final_partnership_administrative_adjustment fpaa was issued by respondent for the tax_year ended date with respect to alverstone strategic investment fund l l c alverstone sif on date because alverstone sif is a purported partnership with more than partners and its first taxable_year commenced after date it is subject_to the unified_audit and litigation procedures of sections commonly known as tefra the validity of the partnership is a matter of dispute between the parties the use of terms in this opinion for purposes of the pending motion does not express any view on the validity of any of the entities mentioned see oceanic leasing v commissioner tcmemo_1996_458 see also sec_6233 sec_301_6233-1t temporary proced admin regs fed reg date voltaire l l c voltaire is a notice_partner of alverstone sif within the meaning of sec_6231 because voltaire held an interest in alverstone sif during therefore a copy of the fpaa was sent to and received by voltaire a petition was filed with respect to the fpaa by presidio growth l l c presidio tax_matters_partner of alverstone sif in sixty-three strategic inv funds v united_states at case no 05-cv-01123-vrw in the u s district_court for the northern district of california san francisco on date district_court case petitioner on behalf of voltaire filed a petition with respect to the fpaa in the tax_court on date titled alverstone strategic inv fund l l c voltaire l l c a partner other than the tax_matters_partner v commissioner docket no the government filed a motion to dismiss for lack of jurisdiction in the district_court case presidio filed a notice of election to intervene and a motion to dismiss for lack of jurisdiction in the tax_court case at docket no on date the district_court case has been stayed until at least date because of the pendency of a criminal tax case in the district_court for the southern district of new york involving certain principals of presidio the tax_court case at docket no has been held in abeyance pending resolution of the related district_court litigation a statutory_notice_of_deficiency with respect to his tax_year was sent to petitioner on date respondent determined a deficiency of dollar_figure for that year in the notice_of_deficiency respondent made adjustments to petitioner’s income as follows a capital_gain or loss per return per exam adjustment dollar_figure dollar_figure dollar_figure a it is determined that cash distributions you received as a result of the liquidation of the interest owned by voltaire trust and or ampersand management company inc hereinafter ampersand through voltaire llc in alverstone strategic investment fund llc hereinafter sif llc partnership during the taxable_year from the sif llc partnership exceeded your basis by the amount of dollar_figure this results in a short-term_capital_gain b we have adjusted your flow through net_capital_loss from the sif llc partnership c alternatively you have failed to establish that your losses meet the requirements of the irc including but not limited to sec_165 and sec_465 b itemized_deductions per return per exam adjustment big_number big_number big_number we have adjusted your itemized_deductions overall_limitation an individual whose adjusted_gross_income exceeds a threshold_amount must reduce the amount of allowable itemized_deductions by three percent of the excess over the threshold_amount the threshold is dollar_figure for filing_status head_of_household investment_interest expense from sif llc partnership_interest expense claimed in the amount of dollar_figure for the taxable_year date did not meet the requirements for deduction under the internal_revenue_code miscellaneous_itemized_deductions certain expenses deducted as miscellaneous_itemized_deductions are only deductible to the extent that they exceed a percentage of your adjusted_gross_income since we have made other changes in this report which affect your adjusted_gross_income we have also adjusted these expenses c interest_income earned by voltaire llc per exam dollar_figure per return dollar_figure adjustment dollar_figure interest_income from deutsche bank earned by voltaire llc is taxable to you per sec_61 per exam d per return adjustment ordinary_income dollar_figure dollar_figure dollar_figure loss from ampersand management company inc schedule_k-1 line we have adjusted your net gain_or_loss from the sale_or_exchange of assets shown on ampersand management company inc form_1120s as shown in the accompanying computation amount_realized basis gain loss gain loss adjustment per exam per exam per exam per return big_number a sale of euros you have not established your basis in the euros sold and in any asset you received from sif llc partnership big_number big_number big_number a it is determined that the ordinary_loss for the taxable_year from the sale of euros that you received as a result of the liquidation of the interest owned by the taxpayer the voltaire trust ampersand and or voltaire llc in sif llc partnership is disallowed because you overstated your basis in the asset s sold in the amount of dollar_figure per exam e other income loss dollar_figure from ampersand management company inc schedule_k-1 line per return adjustment dollar_figure dollar_figure sif llc partnership losses claimed by you for the hong kong dollar forward_contract argentine peso forward_contract and japanese yen option in the amount of dollar_figure for the taxable_year did not meet the requirements for deduction under the irc including but not limited to sec_165 and sec_465 per exam dollar_figure f other deductions from ampersand management company inc schedule_k-1 line - management fee per exam dollar_figure g other deductions from ampersand management company inc schedule_k-1 line - loan breakage fee per exam dollar_figure h other deductions from ampersand management company inc schedule_k-1 line - guaranteed_payment per return adjustment dollar_figure dollar_figure per return dollar_figure adjustment dollar_figure per return adjustment dollar_figure dollar_figure per exam dollar_figure per return adjustment dollar_figure dollar_figure i other deductions from ampersand management company inc schedule_k-1 line - bank fee the items were treated as reductions to your basis in assets distributed to you by sif llc partnership since these expenses did not meet the requirements for a deduction under the irc including but not limited to the requirements under sec_162 sec_164 sec_165 sec_183 sec_212 or any other irc section they are not allowed as other deductions on date petitioner filed his petition in response to the notice_of_deficiency on date respondent filed a motion to dismiss for lack of jurisdiction on the ground that the statutory_notice_of_deficiency was invalid and prohibited by sec_6225 respondent’s position is that jurisdiction exists in either the district_court case or in docket no but not both and not in this case discussion the tax_court is a court of limited jurisdiction and we may exercise our jurisdiction only to the extent provided by congress see sec_7442 see also 114_tc_519 we have jurisdiction to redetermine a deficiency if a valid notice_of_deficiency is issued by the commissioner and if a timely petition is filed by the taxpayer gaf corp subs v commissioner supra pincite we have jurisdiction in this case only if the notice_of_deficiency sent to petitioner was valid the partnership-level procedures prescribed in sec_6221 through require that all challenges to adjustments of partnership items are to be made in a single unified proceeding under these procedures the tax treatment of any partnership_item shall be determined at the partnership level sec_6221 under sec_6226 the tax_matters_partner of a partnership may file a petition for a readjustment of the partnership items for such taxable_year with the tax_court the district_court of the united_states for the district in which the partnership’s principal_place_of_business is located or the claims_court now court of federal claims within days after the day on which a notice of an fpaa is mailed to the tax_matters_partner sec_6226 if the tax_matters_partner does not file a readjustment petition under subsection a of sec_6226 with respect to any fpaa any notice_partner may within days after the close of the 90-day period set forth in subsection a file a petition for a readjustment of the partnership items for the taxable years involved with any of the courts described in subsection a sec_6226 the 90-day period for the tax_matters_partner to file a petition in regard to the fpaa issued on date expired on date the 60-day period for the notice_partner to file a petition in regard to the fpaa issued on date expired on date the dates of the petitions relating to the fpaa fall within the required periods in which a tax_matters_partner or a notice_partner would need to file sec_6226 and b however the unresolved jurisdictional issues in those partnership cases are not determinative of the jurisdictional issue presented in this case petitioner argues that in the event the district_court action is dismissed this tax_court action will be the only viable action under sec_6226 he then acknowledges that he filed the subject tax_court petition as a protective measure to ensure that he is not denied a due process forum in which to contest each of the proposed adjustments to his taxable_income sec_6226 pertains to petitions filed in response to an fpaa issued to a partnership therefore in the event that the district_court case is dismissed for lack of jurisdiction jurisdiction in the alverstone sif and voltaire tax_court case at docket no may survive as a sec_6226 proceeding because that petition was filed in response to the fpaa issued on date see sec_6226 this case however would not be authorized under sec_6226 because this case was filed in response to the notice_of_deficiency sent to petitioner not in response to the fpaa the commissioner generally must wait until a partnership- level proceeding is over to determine a liability attributable to a partnership_item see sec_6225 87_tc_783 sec_6225 states sec_6225 restriction on assessment and collection -- except as otherwise provided in this subchapter no assessment of a deficiency attributable to any partnership_item may be made and no levy or proceeding in any court for the collection of any such deficiency may be made begun or prosecuted before-- the close of the 150th day after the day on which a notice of a final_partnership_administrative_adjustment was mailed to the tax_matters_partner and if a proceeding is begun in the tax_court under sec_6226 during such 150-day period the decision of the court in such proceeding has become final additionally the commissioner generally must follow the deficiency procedures before assessing a liability related to a nonpartnership item such as an affected_item that requires a partner-level determination see sec a under sec_6231 and partnership_item nonpartnership item and affected_item are defined as follows the term partnership_item means with respect to a partnership any item required to be taken into account for the partnership’s taxable_year under any provision of subtitle a to the extent regulations prescribed by the secretary provide that for purposes of this subtitle such item is more appropriately determined at the partnership level than at the partner level the term nonpartnership item means an item which is or is treated as not a partnership_item the term affected_item means any item to the extent such item is affected by a partnership_item because the tax treatment of affected items depends on partnership-level determinations affected items cannot be tried as part of a partner’s personal tax case until the resolution of the partnership proceeding gaf corp subs v commissioner supra pincite citing 99_tc_325 thus the court does not have jurisdiction to consider partnership items or affected items while a partnership proceeding is pending gaf corp subs v commissioner t c pincite maxwell v commissioner supra pincite petitioner acknowledges that pursuant to sec_6226 the court does not have jurisdiction over disputes regarding ‘partnership items’ and ‘affected items’ as those terms are defined by section a petitioner then states that there has been no determination supporting respondent’s allegation that all of the items at issue in the case at bar are such partnership or partnership affected items but he has provided neither reason nor authority to conclude that any items in the notice_of_deficiency are nonpartnership_items or are not affected items requiring partnership-level determinations the adjustments made in the notice_of_deficiency as quoted above are all attributable to adjustments to partnership items or are affected items such as miscellaneous_itemized_deductions that are deductible only to the extent that they exceed a percentage of petitioner’s adjusted_gross_income see sec_67 petitioner claims that dismissal of this case at this time would subject petitioner to the possibility of immediate collection action without a prior adjudicative hearing however respondent has conceded and we hold that the notice_of_deficiency is invalid it cannot support assessment or collection the notice_of_deficiency is invalid under sec_6225 because it adjusts partnership items that may not be determined in a deficiency proceeding gaf corp subs v commissioner supra pincite maxwell v commissioner supra pincite additionally the notice_of_deficiency is further prohibited by sec_6225 because it determines affected items as defined in sec_6231 prior to the completion of the related partnership proceeding gaf corp subs v commissioner supra pincite therefore there is no jurisdictional basis upon which the court may consider the adjustments in this case to reflect the foregoing an order will be entered granting respondent’s motion to dismiss for lack of jurisdiction


internal_revenue_service number release date index number --------------------------------------------- ------------------------------------- --------------------------------------------------- --------------------------------- --------------------------------------- --------------------------------------------- ----------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no -------------- telephone number --------------------- refer reply to cc psi plr-151587-05 date december legend legend trust company will decedent taxpayer foundation ---------------------------------- -------------------------------------------------------- -------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------ ---------------------------------------------------------------------- date ------------------------------- -------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -- --------------------------------------------------------------------------------- state -------- state code dear ---------------- ------------------------------------------ --------------------- --------------- dollar_figurex this letter is in response to a letter dated date from your authorized representative requesting a ruling concerning the federal tax consequences of a proposed disclaimer the facts and representations submitted are summarized as follows decedent a resident of state died testate on date decedent was survived by one child taxpayer who is decedent’s only living descendant in accordance with article vi of will trust company and taxpayer were appointed as co-executors of will and co-trustees of any trusts created under will plr-151587-05 pursuant to article iv of will decedent’s residuary_estate passes to decedent’s descendants who survive him per stirpes subject_to the provisions of article v of will if none of decedent’s descendants survive decedent the residuary_estate passes to foundation foundation is an organization described in sec_501 of the internal_revenue_code and a private_foundation within the meaning of sec_509 taxpayer is director and president of foundation article v of will provides generally that the trustees are to hold and administer any property given to taxpayer or to any other descendants subject_to article v in separate trusts trust for the benefit of taxpayer and such other descendants the trustee is directed to distribute to the beneficiary of such trust or any descendant of such beneficiary such amounts of trust income and principal as shall be necessary to provide for the health support maintenance and education of the distributee in general the separate trust is to last for the lifetime of the beneficiary on the beneficiary’s death the trust corpus is to be distributed pursuant to the beneficiary’s exercise of a special testamentary_power_of_appointment as noted taxpayer is decedent’s only living descendant taxpayer proposes to disclaim all of his interest in the article v trust trust with respect to a pecuniary amount of the residuary_estate passing to trust the disclaimer provides pursuant to section of state code and sec_2046 and sec_2518 of the internal_revenue_code i hereby irrevocably and without qualification disclaim and renounce all of my beneficial_interest in the trust with respect to or in any way attributable to dollar_figurex of the residuary_estate otherwise passing to the trust the dollar_figurex of the residuary_estate otherwise passing to the trust but with respect to which i am disclaiming all of my beneficial_interest is hereinafter referred to as the pecuniary amount and all of my beneficial_interest in the trust with respect to or in any way attributable to the pecuniary amount is hereinafter referred to as the disclaimed interest i hereby declare i have not accepted any interest in or any of the benefits of the pecuniary amount or the disclaimed interest prior to the time that taxpayer executes the proposed disclaimer directors of foundation propose to amend the bylaws of foundation pursuant to article sec_4 of the proposed bylaws the property passing to foundation pursuant to taxpayer’s disclaimer will at all times during taxpayer’s lifetime be segregated from the other_property of the foundation and be maintained as a separate fund of foundation and such disclaimed property will not be commingled with any other_property of foundation in addition at all times during the lifetime of taxpayer while the foundation has any interest in the disclaimed property the foundation will be required to have two separate classes of directors the general directors and the special directors only the special directors will have the power to make decisions related to the distribution of the disclaimed property a majority of the then serving general directors other than plr-151587-05 taxpayer will be authorized to appoint special directors and remove special directors taxpayer can not participate in any vote to appoint or remove special directors there must at all times be at least three special directors and taxpayer may not serve as a special director the executors of decedent’s estate request the following rulings the proposed disclaimer by taxpayer will constitute a qualified_disclaimer under sec_2518 assuming that the disclaimer is a qualified_disclaimer for purposes of sec_2518 the property passing to foundation as a result of the disclaimer will be eligible for the estate_tax charitable deduction under sec_2055 issue sec_2046 provides that disclaimers of property interests passing upon death sec_2518 provides that if a person makes a qualified_disclaimer with sec_2518 provides that a qualified_disclaimer means an irrevocable and are treated as provided in sec_2518 respect to any interest in property the disclaimed interest is treated as if it had never been transferred to the person making the qualified_disclaimer for purposes of the federal estate gift and generation-skipping_transfer_tax provisions unqualified refusal by a person to accept an interest in property but only if the disclaimer is in writing the writing is received by the transferor of the interest his legal_representative or the holder of the legal_title to the property to which the interest relates not later than months after the date on which the transfer creating the interest in the person making the disclaimer is made or the date on which the person making the disclaimer attains age the person making the disclaimer has not received the interest or any of its benefits and as a result of the disclaimer the interest passes without any direction on the part of the person making the disclaimer to the decedent's spouse or to a person other than the person making the disclaimer sec_25_2518-2 of the gift_tax regulations provides that if a beneficiary who disclaims an interest in property is also a fiduciary that person cannot retain a wholly discretionary power to direct the enjoyment of the disclaimed interest for example a disclaimer by a beneficiary who is also a fiduciary would not meet the requirements of a qualified_disclaimer if the fiduciary retains a discretionary power to allocate enjoyment of that interest among members of a designated class disclaimer will not be satisfied if the disclaimant either alone or in conjunction with another directs the redistribution or transfer of the property or interest in property to sec_25_2518-2 provides that the requirements of a qualified plr-151587-05 another person or has the power to direct the redistribution of the property or interest in property to another person unless such power is limited by an ascertainable_standard sec_25_2518-3 provides that a disclaimer is not a qualified_disclaimer under sec_2518 if the beneficiary disclaims income derived from specific property transferred in trust while continuing to accept income derived from the remaining properties in the same trust unless the disclaimer results in such property being removed from the trust and passing without any direction on the part of the disclaimant to persons other than the disclaimant or to the spouse of the decedent a disclaimer of both an income_interest and a remainder_interest in specific trust assets is not a qualified_disclaimer if the beneficiary retains interests in other trust property unless as a result of the disclaimer such assets are removed from the trust and pass without any direction on the part of the disclaimant to persons other than the disclaimant or to the spouse of the decedent sec_25_2518-3 provides that a disclaimer of a specific pecuniary amount out of a pecuniary or nonpecuniary bequest or gift that satisfies the other requirements of a qualified_disclaimer under sec_2518 and the corresponding regulations is a qualified_disclaimer provided that no income or other benefit of the disclaimed amount inures to the benefit of the disclaimant either prior to or subsequent to the disclaimer thus following the disclaimer of a specific pecuniary amount from a bequest or gift the amount disclaimed and any income attributable to such amount must be segregated from the portion of the gift or bequest that was not disclaimed such a segregation of assets making up the disclaimer of a pecuniary amount must be made on the basis of the fair_market_value of the assets on the date of the disclaimer or on a basis that is fairly representative of value changes that may have occurred between the date of the transfer and the date of the disclaimer in revrul_72_552 1972_2_cb_525 the decedent who was the president and a director of a corporation organized under sec_501 transferred property to the corporation in his capacity as president and a director the decedent in conjunction with the other directors of the corporation had the power to direct the disposition of the corporation's funds for charitable purposes the ruling holds that because the decedent retained the right in conjunction with others to designate the entities that would possess or enjoy the property transferred to the corporation the property transferred by the decedent to the corporation was included in the decedent's gross_estate at his death under sec_2036 under state code any person without prior court approval who may be entitled to receive any property as a beneficiary may disclaim the property interest a disclaimer is effective as of the death of decedent and relates back for all purposes to the death of the decedent unless the decedent’s will provides otherwise the property subject_to the disclaimer passes as if the person disclaiming had predeceased the decedent and a future_interest that would otherwise take effect in possession or enjoyment after the termination of the interest that is disclaimed takes effect as if the disclaiming beneficiary had predeceased the decedent plr-151587-05 in the present case taxpayer proposes to disclaim a pecuniary amount of the value of property passing to trust it is represented that taxpayer has not and will not have accepted any of the benefits from the disclaimed amount prior to executing the disclaimer it is also represented that after the disclaimer the amount disclaimed and any income attributable to that amount will be segregated from the portion of the property that was not disclaimed as required under sec_25_2518-3 under state code taxpayer is treated as predeceasing the decedent with respect to the disclaimed property accordingly pursuant to will the disclaimed property will pass to foundation pursuant to the terms of the proposed amendments to foundation's bylaws the disclaimed property will be held in a segregated separate fund separate and apart from the other foundation assets the power to make distributions of income and or principal from the separate fund and to select the recipients of such distributions will be held exclusively by the special directors taxpayer is precluded from serving as a special director further taxpayer is precluded from participating in any decision to appoint or remove any special director based on the facts presented and representations made and assuming the disclaimer is executed and delivered to the appropriate parties within months of the date of decedent’s death we conclude that taxpayer’s disclaimer of a pecuniary amount of dollar_figurex will be a qualified_disclaimer issue sec_2055 provides that the value of the taxable_estate shall be determined by deducting from the value of the gross_estate the amount of all bequests legacies devises or transfers to or for a corporation or certain other organizations organized and operated exclusively for religious charitable scientific literary or educational_purposes a foundation organized under sec_501 is one that is organized and operated exclusively for these purposes sec_20_2055-2 of the estate_tax regulations provides that in the case of a bequest devise or transfer made by a decedent dying after date the amount of a bequest devise or transfer for which a deduction is allowable under sec_2055 includes an interest which falls into the bequest devise or transfer as the result of a qualified_disclaimer under sec_2518 in this case it is represented that foundation is a federally tax-exempt_organization described in sec_501 as noted above under state code taxpayer is treated as predeceasing the decedent with respect to the disclaimed property consequently pursuant to will the disclaimed property will pass to foundation accordingly based on the representations noted above the property passing to foundation as a result of taxpayer’s disclaimer will qualify for an estate_tax charitable deduction under sec_2055 provided that taxpayer’s disclaimer is a qualified_disclaimer under sec_2518 the bylaws of foundation are amended as proposed and the terms of foundation's bylaws as amended are effective under state law plr-151587-05 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely george l masnik chief branch passthroughs special industries enclosure copy for sec_6110 purposes cc


office_of_chief_counsel internal_revenue_service memorandum number release date cc ita b01 ----------- postf-114404-09 uilc date date to supervisory internal revenue_agent ---------------------------------- natural_resources construction large_and_mid-size_business_division from chief branch associate chief_counsel income_tax accounting subject ------------------------------------------------------------------ postf-114404-09 this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent legend taxpayer subsidiary subsidiary year sec_1 - country region region bureau region power region commission partnership state foreign region company product a b ------------------------------------------------------------------ ---------------------------------- ------------------------------------------------------------------- ---------------- ---------------------------------------- ---------------------------------------------------------- -------------------------------------------------- -------------------------------------------------------- ------------------------------------------------------------------------------- -------------------------------------------------------- --------- -------------------------- --------------------------------------------------------------------------- ------ ------ ------ postf-114404-09 c d dollar_figurem issue ------ ------ ------------- whether the loss sustained with respect to taxpayer’s partnership_interest was a seizure by region or country within the meaning of sec_1231 thus resulting in an involuntary_conversion and an ordinary_loss conclusion taxpayer’s partnership_interest was not seized by region or country within the meaning of sec_1231 facts taxpayer through its related companies supplies power to the state electric utility market prior to year facing a relatively slow economy taxpayer began looking for new growth avenues as a result taxpayer formed subsidiary which was charged with expanding taxpayer’s power generation operations into the international market and the foreign region in particular company is a state-owned producer of product located in region in country company wanted to build a power plant to supply its energy needs in year company and a group of investors entered into a contract providing for formation of a joint_venture company partnership with the investor group owning a and company owning b to construct and operate a power plant the project in region in year taxpayer entered into a preliminary agreement to purchase a majority interest in the project through subsidiarie sec_1 and by year taxpayer effectively owned a c interest in partnership an investor group owned d and company continued to own b under country law the joint_venture was required to pass through an approval process involving both regional and national government authorities final approval was obtained in year in year partnership and company also executed a power purchase contract the ppc this agreement obligated company to purchase specified electric energy exclusively from the partnership at retail prices and required that company buy a the taxpayer argues in the alternative that it sustained an ordinary_loss because either its partnership interest-or the partnership assets within the partnership-became worthless or were abandoned for salvage_value see revrul_93_80 1993_2_cb_239 equity planning corp v commissioner t c memo this memorandum addresses only the sec_1231 issue we express no opinion with respect to this alternative argument postf-114404-09 substantial minimum quantity from the partnership each year regardless of whether company needed all of it under the ppc company was responsible for all interfaces with the region power grid as a result of taxpayer’s involvement it was necessary to seek reapproval of the joint_venture which was granted in year in order for the project to be operational however an interconnection agreement with the region power grid was needed shortly after taxpayer invested in the project in year there were significant organizational changes in the regulation and operation of region’s power grid prior to these changes region bureau had been responsible for control and operation of the grid and in addition had had governmental regulatory authority over electric power in region as a result of a reorganization in year however i region bureau’s regulatory function was transferred to region commission ii region bureau’s responsibility for control and operation of the grid was transferred to a new entity named region power and iii region bureau ceased to exist thus region power emerged in year as a state-owned commercial entity which was without regulatory power but which had responsibility for electric power in region from a commercial business perspective when the project was first conceived and for a number of years thereafter region experienced a shortage of reliable power by year however the market had shifted and region faced excess power capacity this left region power in a difficult position with regard to the project since region power was responsible for the business aspects of region power and since the oversupply of power meant that the project would be supplying company with power which region power would have liked to sell to company region power was soon expressing positions adverse to the project in year region power formally announced its opposition to the project and most importantly said it would not interconnect the project to the grid on terms sought by company both company and taxpayer wrote to the region government stating that region power’s position violated a prior commitment and asking the government to direct region power to enter into an interconnection agreement region and county government officials expressed their support of the project in year taxpayer bought out the investor group and increased its share in partnership to a although region power initially seemed to retreat from its opposition in year it issued a letter purporting to agree to interconnection but with restrictions on pricing and project operation hours company and taxpayer again appealed to region and country officials postf-114404-09 frustrated by region power’s position taxpayer informed the region government in year that it intended to withdraw from the project taxpayer advised company a few days later that it was withdrawing from the project and that company was in default under the ppc for failure to meet its obligation to secure interconnection later in year at taxpayer’s suggestion company the partnership and region power met several times to try to resolve the interconnection dispute finally signing an agreement on principles under which region power would serve some of company’s needs while partnership would serve new power load in a meeting in year however region power asserted a definition of new power load that would have minimized the project’s participation later in year company notified taxpayer that since the new load issue had not been resolved it would buy power from region power taxpayer rejected this and reverted to the original ppc agreement under which company would buy exclusively from the project region power in turn reverted to its position that the project could only sell to the grid not to company at wholesale rates and in limited amounts a planned meeting with region government officials and the principals of company region power and taxpayer fell through after a few sporadic efforts to resuscitate the project in late year taxpayer’s board declared its foreign power operations a discontinued business taxpayer announced in a press release that it was exiting international business and wrote off its investment in project on its financial statements in year taxpayer had purchased political risk insurance for the project in year taxpayer claimed reimbursement under the policy for the total loss of its investment in the project in year the insurance carrier denied taxpayer’s claim in year taxpayer sought arbitration in year taxpayer transferred its interest in the partnership to company and a new foreign investor in exchange for dollar_figurem taxpayer waived all claims against company and the region government taxpayer’s insurance claim was ultimately denied by the arbitration panel in year the panel ruled that while the lack of an interconnection agreement caused the end of the project there was no expropriation by a host government under the policy because region power acted as a commercial entity in control of the grid not as a government_entity with regulatory powers and region commission’s decision not to get directly involved in the controversy did not amount to a passive expropriation because among other reasons region commission was not legally obligated to intervene taxpayer filed an amended_return in year claiming an ordinary_loss for tax_year since in year taxpayer was actively seeking recovery for its loss through insurance and by its own admission considering possible legal action against company and other parties no loss deduction would be allowable under any theory in year see sec_1_165-1 in this memorandum we assume postf-114404-09 law and analysis sec_165 of the internal_revenue_code provides that there is allowed as a deduction any loss sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise sec_1231 provides that if the sec_1231 gains for a tax_year exceed the sec_1231 losses those gains and losses are not treated as capital_gains_and_losses under sec_1231 sec_1231 losses include losses from the compulsory or involuntary_conversion into other_property or money as a result of among other events seizure of a capital_asset that is held for more than one year in connection with a trade_or_business or a transaction entered into for profit sec_1231 provides that an uncompensated loss on the seizure of a capital_asset held for more than one year is treated as a loss from an involuntary_conversion see also sec_1_1231-1 of the income_tax regulations a partnership_interest in a going concern is a capital_asset 125_f2d_532 6th cir the sale of a partnership_interest at a loss generally results in a capital_loss sec_741 provides that in the case of a sale_or_exchange of an interest in a partnership the resulting gain_or_loss is considered as gain_or_loss from the sale_or_exchange of a capital_asset except as provided in sec_751 relating to unrealized_receivables and inventory_items however taxpayer argues that it is entitled to an ordinary_loss deduction pursuant to sec_1231 because the actions of the local foreign governmental agents and instrumentalities-in particular region power and region commission-effectively deprived taxpayer of the economically beneficial or productive use of its property to the benefit of region and country and thus resulted in a taking by country not a sale in taxpayer’s view sec_741 does not apply because the dollar_figurem that it received in year was not in substance consideration for the sale of its partnership_interest to company rather the purported sale was a means whereby region or country indirectly compensated taxpayer for the involuntary_conversion of taxpayer’s investment in partnership and the project the field counters that no identifiable property was expropriated by region or country that region power and company were acting in their capacities as commercial entities not as instrumentalities of region or country and that taxpayer has not established as a factual matter that the year sale transaction was a disguised payment of compensation by region or country we conclude that taxpayer has not established that its loss was a loss from the seizure of its interest in partnership primarily because taxpayer has not shown that region that the correct year of deduction was year when taxpayer’s insurance arbitration concluded and address solely the capital or ordinary character of that loss postf-114404-09 power whose actions in refusing to enter into an interconnection agreement on terms acceptable to taxpayer were the primary cause of taxpayer’s withdrawal from the project was exercising governmental powers or otherwise acting on behalf of the government of region or country rather the facts indicate that region power was acting in its own economic_interest in its capacity as a commercial enterprise because it wished to sell power to company generally a seizure for federal tax purposes occurs when a governmental authority enters into physical possession of property without authority of a court order with compensation to be determined later and is limited to the taking of property for public use revrul_79_269 1979_2_cb_297 an act of confiscation whether by way of seizure intervention in expropriation or similar taking of property occurs when a foreign government deprives a taxpayer of ownership of property or the normal attributes of ownership such as receipt of income and control_over the operation or use of the property with little or no chance of being compensated therefor revrul_62_197 1962_2_cb_66 clarified by revrul_64_149 1964_1_cb_233 modified by revrul_69_498 1969_2_cb_31 the expropriation or confiscation of property by a foreign government is considered a loss under sec_165 and an involuntary_conversion for purposes of sec_1231 see revrul_72_1 1972_1_cb_52 see also revrul_62_197 situation at the outset we note that taxpayer and the field differ with respect to whether there was an asset that constituted property subject_to possible seizure taxpayer argues that the partnership held substantial rights in the ppc in the project rights that had been approved by the region and country officials and in partnership itself and was effectively deprived of those rights by the actions of region power and region commission the field in contrast argues that taxpayer’s interest in the ppc never rose to the level of a property interest that could be seized since it was the continuing subject of negotiation and points out that the government approvals were permissive not mandatory and did not amount to fixed rights that were then taken away we find it unnecessary to resolve this dispute because even if we assume that taxpayer is correct and there existed property rights that could be seized under these facts they were not taxpayer asserts several propositions in support of its position first since region power was a state-owned enterprise it was an instrumentality of region and country capable of an act of seizure for federal tax law purposes similarly since we conclude that taxpayer’s property was not taken by government action we do not reach the question whether if so the property was taken for public use postf-114404-09 second the findings of the insurance arbitration panel that the loss did not result from an expropriation by a host government under the insurance_policy do not determine the federal tax consequences third seizure need not involve a physical tangible asset fourth a seizure need not involve an official direct act of expropriation whereby a government obtains or a taxpayer is deprived of legal_title to property rather a seizure may occur indirectly when government actions effectively deprive a taxpayer of the beneficial attributes of ownership in an asset fifth a purported sale may be in substance a means of compensating a taxpayer for a seizure in connection with the last two points taxpayer cites authorities holding that while a voluntary sale is not an involuntary_conversion in certain circumstances an involuntary_conversion of one asset may result in an involuntary_conversion of another asset that together form a single economic unit even if the second asset is sold to a third party although there is support for all these propositions they do not establish that there was in fact a seizure on any given set of facts we will discuss each proposition in turn and their application to this specific situation in support of the proposition that region power was a government instrumentality taxpayer cites the 276_br_360 a contract dispute in which the parties conceded that for purposes of the foreign sovereign immunities act of u s c et seq fsia the taiwan power company was an agency_or_instrumentality of the republic of china taiwan as all of its shares were held on behalf of taiwan’s ministry of economic affairs we agree that in appropriate circumstances actions by an entity such as region power may be construed as government actions however we do not agree that state ownership by itself necessarily converts all actions by a state-owned company into government actions if a company is acting in its own commercial interest rather than as an agent of the government the federal tax result should not differ based solely on who owns the company or the economic system in which the transactions occur thus the inquiry here is whether region power was acting in a governmental or commercial capacity similarly the fact that a utility or other company has control of a limited resource such as a power grid and is therefore subject_to government regulation does not in our view render all its actions government actions while the shaw group case cited by taxpayer is of limited usefulness in interpreting federal tax law we note that it illustrates this basic distinction as the court observed the fsia provides for an exception to immunity if a foreign government or instrumentality is engaged in essentially private commercial activities that have an impact on the united_states see b r pincite postf-114404-09 in the present case the facts indicate that region power in refusing to enter into an interconnection agreement on terms satisfactory to taxpayer was not exercising regulatory or other governmental powers or otherwise acting on behalf of region or country rather as the insurance arbitration panel found it was acting pursuant to its economic self-interest because it wished to sell power to company itself after the reorganization of region bureau regulatory supervision was separated and vested in region commission region power had the responsibility for electric power in region solely from a commercial business perspective region power’s role was to serve as a market-oriented independent competitor as such region power’s role was to act in its own commercial interest thereby having autonomy over its own commercial operations and was responsible for its own profits and losses region power was subject_to suit for its actions and enjoyed commercial independence from governmental entities region power’s actions were motivated by the fact that it wished to sell to company itself because the market had shifted and region faced excess power capacity with respect to the second point taxpayer asserts that the specific holdings of the insurance arbitration panel involve interpretation of the terms of an insurance_contract and are not determinative of the federal tax consequences of course this is true however the thorough analysis in the arbitration decision based on a detailed and extensive record generally supports the conclusion that taxpayer’s loss resulted from market forces business setbacks and parties acting in a commercial capacity not government actions with respect to whether seizure is restricted to takings of physical assets we agree that an involuntary_conversion due to seizure does not necessarily involve the physical confiscation of a tangible asset and that in appropriate circumstances there may be a seizure of an intangible asset such as corporate stock or a partnership_interest see eg revrul_72_1 situation seizure of stock see also rev ruls and stock cf 48_tc_711 interest in nationalized partnership the taxpayer has not established however that a nationalization or other government seizure such as occurred in the cited rulings and cases occurred here taxpayer’s last three points are related inasmuch as they bear on the possibility that the facts and circumstances in a given case may indicate that there is an indirect de_facto government seizure of property even though title to property is not formally transferred to the government and the transaction may involve a seemingly voluntary sale we do not question this general proposition see eg revrul_82_147 1982_2_cb_190 federal designation of wilderness area coupled with provision authorizing purchase of affected properties resulted in taking of resort under sec_1033 because resort postf-114404-09 was no longer suitable for intended commercial use similarly where two properties form a single economic unit a government taking of one may be an involuntary_conversion of the other see 30_tc_741 acq revrul_59_361 1959_2_cb_183 however we believe that such an indirect seizure did not occur here and that the taxpayer’s authorities and analogies are distinguishable for example revrul_82_147 is distinguishable because it involved the exercise of the federal government’s power to legislate in the present case taxpayer’s loss was not the result of legislation or other regulatory or governmental action taxpayer argues that the ppc in this case was crucial to the success of the joint_venture and that in certain circumstances the termination of a contract may result in an involuntary_conversion for tax purposes citing several private letter rulings that held that a state electric utility’s threat to condemn a power generator’s plant unless the generator terminated a power purchase agreement caused the termination of the contract and the sale of the plant to be an involuntary_conversion see eg plr plr lexis under federal_law informal documents such as private letter rulings are without value as precedent sec_6110 in any case these documents are distinguishable because the utilities in those cases were exercising the uniquely governmental power of eminent_domain which had been delegated to them by the state see eg revrul_74_8 1974_1_cb_200 in the present case by contrast region power was not vested with regulatory or other governmental powers and neither region commission nor any other region or country government body with such powers asserted them to thwart the project if anything they expressed continuing support for the project taxpayer argues that expropriation or seizure can be covert citing an arbitration decision under the north american free trade agreement nafta metalclad corporation v the united mexican states i l m in which a mexican municipality denied the claimant a landfill permit after the claimant had obtained all mexican federal and state approvals for the project the tribunal held that this action was an expropriation under nafta assuming that the metalclad decision is useful precedent for the current question under federal tax law we find it distinguishable since it involved an action by a governmental body a mexican municipality in the present case taxpayer has not demonstrated that its loss resulted from governmental action covert or otherwise the approvals by country officials allowed partnership to undertake construction of the project as a joint_venture these approvals however were permissive and not mandatory in nature and did not require or promise that region power would in fact enter into agreements that might be necessary for the project to go forward such as the in this discussion we do not stress the distinctions between various forms of government action such as seizure taking condemnation and requisition or the fact that certain tax provisions may be triggered by the threat of requisition or condemnation these distinctions may be relevant in other contexts postf-114404-09 interconnection agreement with the partnership the governmental approvals simply authorized the parties to connect to the grid on commercial terms which of course would have to be worked out with and agreed to by region power the parties negotiated about an agreement but an agreement was never reached taxpayer has not shown that region or country officials covertly revoked binding approvals they had issued similarly the fact that region commission and other region or country officials did not force region power to interconnect did not amount to a passive seizure even assuming that such an event is possible under sec_1231 taxpayer argues that the sale of its interest in partnership should be treated as an involuntary_conversion rather than a sec_741 capital_loss under one of two theories first it argues that under the single economic unit theory of masser and revrul_59_361 the seizure of the ppc rendered the sale of the partnership part of an involuntary_conversion this theory fails however because as discussed above even if we assume that taxpayer had property rights in the ppc the ppc was not seized by a government body or instrumentality second the taxpayer argues that the purported purchase was in fact a payment of compensation by region or country officials however taxpayer has not shown this to be the case taxpayer points to evidence indicating that in connection with the sale taxpayer waived certain rights and actions it may have had against company region power and other parties it is common however for parties who have negotiated a sale to waive rights of recovery and other potential actions with respect to the transferred property such waivers do not typically convert the sale into something else for tax purposes please call -------------- at -------------------- if you have any further questions