internal_revenue_service number release date index number ------------------------- ---------------------------- ---------------------------------- ------------------------------------------- -------------------------------- in re ---------------------------------- ------------------------------------------- -------------------------------- ------------------------------------------- -------------------------------- department of the treasury washington dc person to contact -------------------------- id no ------------- telephone number --------------------- refer reply to cc corp bo6 - plr-147077-03 date december ----------------------------------------------------------------------- ---------------------------------------------------------------------- ----------------------- ------------------- ------------------------------------------------------ ---------------------------------------------------- legend distributing controlled controlled sub -------------------------------------------------------------------- controlled -------------------------------------------------------------------- state aa date date date individual --------------------- ------------------- ----------------- ---------------- ------------- ---------------------------------------------------------- ------------------------------------------------------------ ------------------------------------------------------------- -------------------------------------------- ---------------------------------------- ---------------------------------- --------------------- --------------------- ------------------------- plr-147077-03 shareholder a shareholder b ----------------------- ---------------------------------------------------------------------- shareholder c ---------------------------------------------------------------------- business d business e business f operation property partnership g h i dollar_figurej dollar_figurek m n q dear mr ------------ ------------- ------------- ---------- -------- ------- ------ ------ -- this letter responds to a letter dated date submitted on your behalf by your authorized representative requesting rulings on the federal_income_tax plr-147077-03 consequences of a proposed transaction additional information was submitted in a letters dated date and date the information submitted for consideration is summarized below summary of facts distributing a calendar_year taxpayer is a state aa corporation that was incorporated on date by individual distributing is engaged in business d both directly and indirectly through its subsidiaries and on date elected to be taxed as an s_corporation within the meaning of sec_1361 of the internal_revenue_code distributing maintains its books using the accrual_method of accounting distributing has one class of stock outstanding its voting common_stock distributing common_stock distributing has issued and outstanding g shares of distributing common_stock which are owned equally by shareholder a shareholder b and shareholder c each owns h shares representing n of the outstanding distributing common_stock shareholder a shareholder b and shareholder c are siblings and are children of individual shareholder a is the director of distributing individual is the president of distributing but owns no stock in distributing on date distributing formed controlled sub and controlled both state aa corporations and filed the election under sec_1361 to treat both controlled sub and controlled as qualified subchapter_s subsidiaries qsubs as a result controlled sub and controlled have been considered disregarded entities for federal_income_tax purposes since their respective formations and have not filed federal_income_tax returns their income and expenses have been reported on distributing’s return controlled sub has one class of stock outstanding its voting common_stock controlled sub common_stock controlled sub has issued and outstanding i shares of controlled sub common_stock all of which is owned by distributing controlled sub is engaged in business e shareholder b is the president and director of controlled sub controlled has one class of stock outstanding its voting common_stock controlled common_stock controlled has issued and outstanding i shares of controlled common_stock all of which is owned by distributing controlled is engaged in business f shareholder c is the president and director of controlled plr-147077-03 financial information has been received that indicates that business d business e and business f have had gross_receipts and operating_expenses representative of the active_conduct_of_a_trade_or_business for each of the past years controlled will be formed by distributing as a state aa corporation to facilitate the proposed transaction defined below controlled will have one class of stock outstanding its voting common_stock controlled common_stock controlled will have issued and outstanding i shares of controlled common_stock all of which will be owned by distributing prior to the distributions defined below controlled will be a calendar_year taxpayer and will maintain its books using the accrual_method of accounting proposed transaction serious disputes have arisen among the distributing shareholders which have adversely affected the business operations of distributing controlled sub and controlled in order to alleviate the problems caused by the disputes among the shareholders and pursuant to the agreement and plan of corporate separation the agreement the following steps are proposed collectively the proposed transaction i distributing will form controlled and will contribute all of the stock of controlled sub property its q interest in partnership and cash to controlled in exchange for all of the stock of controlled distributing will contribute cash to controlled to equalize values ii iii distributing will distribute all of the stock of controlled to shareholder b in exchange for all of the distributing stock owned by shareholder b distribution iv distributing will distribute all of the stock of controlled to shareholder c in exchange for all of the distributing stock owned by shareholder c distribution distributing and distributing shall be hereinafter referred to collectively as the distributions following the distributions controlled and controlled will each elect to be treated as an s_corporation pursuant to sec_1362 controlled will then elect to treat controlled sub as a qualified_subchapter_s_subsidiary pursuant to sec_1361 v on or prior to the completion of the proposed transaction and pursuant to the plr-147077-03 as a result of the proposed transaction shareholder a will own of the stock of distributing shareholder b will own of the stock of controlled and shareholder c will own of the stock of controlled there will be no cross- ownership of stock following the proposed transaction and no agreements or arrangements will exist to give any shareholder a right to acquire an interest in any other corporation agreement distributing controlled and controlled will each transfer dollar_figurej to an interest-bearing account established as a_trust for the benefit of distributing controlled and controlled for the sole purpose of funding contingent_liability claims for work performed by distributing with respect to operation an aspect of distributing’s business d for periods prior to the proposed transaction the claim account the initial trustee of the claim account will be individual upon individual’s resignation inability or refusal to act as trustee the shareholders will upon unanimous consent appoint a third party trustee if at any time the total funds in the claim account are less than dollar_figurek distributing controlled and controlled are required to make additional deposits the claim account will generally terminate m years after the completion date of the proposed transaction however in the event there are pending claims at the end of the aforementioned m-year period the claim account will remain open until these claims are settled upon termination of the claim account all remaining funds in the claim account will be distributed equally to distributing controlled and controlled representations the following representations have been made in connection with the proposed transaction a the fair_market_value of the stock of controlled and controlled to be received by shareholder b and shareholder c respectively will be approximately equal to the fair_market_value of the stock of distributing surrendered by each of shareholder b and shareholder c in the exchanges b no part of the consideration to be distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than as that of a shareholder of distributing the five years of financial information submitted on behalf of distributing controlled sub and controlled is representative of the corporations’ present operation and with regard to such corporations there have been no substantial operational changes since the date of the last financial statement submitted c plr-147077-03 d the gross assets of the trades_or_businesses that will be relied upon by distributing controlled and controlled to satisfy the active_trade_or_business_requirement of sec_355 will in the aggregate have a fair_market_value that is not less than five percent of the total fair_market_value of the gross assets of the company directly operating such trades_or_businesses following the proposed transaction distributing controlled and controlled will each continue independently and with separate employees the active_conduct of its share of all the integrated activities of each business conducted by distributing controlled sub and controlled prior to the consummation of the proposed transaction the distributions will be carried out for the following business_purpose to enhance the success of each business of distributing controlled and controlled by enabling the corporations to resolve management problems that have arisen and are exacerbated by the operation of the three businesses under the current structure the distributions are motivated in whole or substantial part by this corporate business_purpose distributing is an s_corporation within the meaning of sec_1361 controlled and controlled will each elect to be an s_corporation pursuant to sec_1362 and controlled will elect to treat controlled sub as a qsub pursuant to sec_1361 on the first available date after the distributions and there is no plan or intent to revoke or otherwise terminate the s_corporation_election of distributing controlled or controlled there is no plan or intention by the shareholders of distributing to sell exchange transfer by gift or otherwise dispose_of any of their stock in distributing controlled or controlled after the proposed transaction there is no plan or intention by distributing controlled or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the proposed transaction there is no plan or intention to liquidate distributing controlled or controlled to merge any of these corporations with any other corporation or to sell or otherwise dispose_of the assets of any of these corporations after the proposed transaction except in the ordinary course of business the total adjusted bases and the fair_market_value of the assets to be transferred to controlled and controlled by distributing each equals or exceeds the sum e f g h i j k plr-147077-03 l of the liabilities assumed as determined under sec_357 by controlled and controlled the liabilities assumed as determined under sec_357 in the proposed transaction were incurred in the ordinary course of business and are associated with the assets being transferred m no investment_tax_credit under the internal_revenue_code has been or will be claimed with respect to any of the assets of the controlled sub or controlled business being transferred by distributing to controlled and controlled respectively n distributing neither accumulated its receivables nor made extraordinary payment of its payables in anticipation of the transaction no intercorporate debt will exist between distributing and controlled controlled sub or controlled or between controlled sub and controlled or between controlled and controlled at the time of or subsequent to the distributions except for obligations to fund the claim account payments made in connection with all continuing transactions if any among distributing controlled and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm s length no parties to the proposed transaction are investment companies as defined in sec_368 and iv distributing controlled controlled and the distributing shareholders will each pay their own expenses if any incurred in connection with the proposed transaction the cash and investment_assets held by distributing and to be held by controlled and controlled are related to the reasonable needs of the conduct of the active trade_or_business of each corporation or to equalize values the distributions are not part of a plan or series of related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing percent or more of the total combined voting power of all classes of stock entitled to vote of either distributing controlled or controlled or stock possessing percent or more of the total value of all classes of stock of either distributing controlled or controlled o p q r s t plr-147077-03 u for purposes of sec_355 immediately after the distributions no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the distribution date for purposes of sec_355 immediately after the distributions no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of stock entitled to vote of either controlled or controlled or percent or more of the total value of all classes of stock of either controlled or controlled that was either i acquired by purchase as defined in sec_355 and during the five- year period determined after applying sec_355 ending on the distribution date or ii attributable to distributions on distributing stock that was acquired by purchase as defined in sec_355 and during the five- year period determined after applying sec_355 ending on the distribution date rulings based solely on the information submitted and on the representations set forth above we rule as follows distributing’s contribution of all of its controlled sub stock to controlled will cause the termination of the qsub election of controlled sub because controlled sub will cease to be a wholly owned subsidiary of an s_corporation because controlled sub is a qsub of distributing before distribution and controlled will elect to be an s_corporation and elect to treat controlled sub as a qsub of controlled with both elections to be effective on the first available date after distribution controlled sub will not be treated as a separate corporation before or after distribution sec_1_1361-5 example distributing’s distribution of all of its controlled stock to shareholder c will cause a termination of the qsub election of controlled because controlled will cease to be a wholly owned subsidiary of an s_corporation as a result of the termination controlled will be treated as a new corporation acquiring all of its assets and assuming all of its liabilities immediately before the distribution of the controlled stock by distributing sec_1_1361-5 plr-147077-03 the transfer by distributing of assets to controlled solely in exchange for all of the common_stock of controlled and the assumption of related liabilities by controlled followed by the distribution by distributing of all of its controlled stock to shareholder b solely in exchange for all of the distributing common_stock owned by shareholder b will qualify as a reorganization within the meaning of sec_368 distributing and controlled will each be a aparty to a reorganization within the meaning of sec_368 the transfer by distributing of assets to controlled solely in exchange for all of the common_stock of controlled and the assumption of related liabilities by controlled followed by the distribution by distributing of all of its controlled stock to shareholder c solely in exchange for all of the distributing common_stock owned by shareholder c will qualify as a reorganization within the meaning of sec_368 distributing and controlled will each be a aparty to a reorganization within the meaning of sec_368 no gain_or_loss will be recognized by distributing on its transfer of assets to controlled in exchange for common_stock of controlled and the assumption of related liabilities sec_361 and sec_357 no gain_or_loss will be recognized by distributing on its transfer of assets to controlled in exchange for common_stock of controlled and the assumption of related liabilities sec_361 and sec_357 no income gain_or_loss will be recognized by controlled upon the receipt of the assets from distributing in exchange for all of the common_stock of controlled and the assumption of related liabilities sec_1032 no income gain_or_loss will be recognized by controlled upon the receipt of the assets from distributing in exchange for all of the common_stock of controlled and the assumption of related liabilities sec_1032 the basis of the assets to be received by controlled will be the same as the basis of such assets in the hands of distributing immediately prior to the transfer to controlled sec_362 the basis of the assets to be received by controlled will be the same as the basis of such assets in the hands of distributing immediately prior to the transfer to controlled sec_362 plr-147077-03 the holding_period of the distributing assets to be received by controlled will include the period during which such assets were held by distributing sec_1223 the holding_period of the distributing assets to be received by controlled will include the period during which such assets were held by distributing sec_1223 no gain_or_loss will be recognized by and no amount will be included in the income of shareholder b upon its receipt of the stock of controlled in exchange for all its stock in distributing sec_355 no gain_or_loss will be recognized by and no amount will be included in the income of shareholder c upon its receipt of the stock of controlled in exchange for all its stock in distributing sec_355 no income gain_or_loss will be recognized by distributing upon the distribution of all of the stock of controlled sec_361 no income gain_or_loss will be recognized by distributing upon the distribution of all of the stock of controlled sec_361 the basis of the stock of controlled in the hands of shareholder b will be the same as the basis of the distributing stock exchanged therefor sec_358 the basis of the stock of controlled in the hands of shareholder c will be the same as the basis of the distributing stock exchanged therefor sec_358 the holding_period of the stock of controlled to be received by shareholder b will include the holding_period of shareholder b’s stock in distributing provided that such shares of distributing stock were held as a capital_asset on the date of the distributions sec_1223 the holding_period of the stock of controlled to be received by shareholder c will include the holding_period of shareholder c’s stock in distributing provided that such shares of distributing stock were held as a capital_asset on the date of the distributions sec_1223 plr-147077-03 as provided in sec_312 proper allocation of earnings_and_profits among distributing controlled and controlled will be made in accordance with sec_1_312-10 distributing’s accumulated_adjustments_account aaa immediately before the proposed transaction will be allocated among distributing controlled and controlled in a manner similar to the manner in which distributing’s earnings_and_profits will be allocated under sec_312 and sec_1_1368-2 distributing s momentary ownership of the stock of controlled as part of the reorganization under sec_368 will not cause controlled to have an ineligible shareholder for any portion of its first taxable_year under sec_1361 if controlled otherwise meets the requirements of a small_business_corporation under sec_1361 controlled will be eligible to make a subchapter_s_election under sec_1362 for its first taxable_year additionally if controlled sub otherwise meets the requirements of a qsub controlled will be eligible to make a qsub election for controlled sub under sec_1361 provided such election is made effective immediately following the termination of controlled sub’s original qsub election distributing s momentary ownership of the stock of controlled as part of the reorganization under sec_368 will not cause controlled to have an ineligible shareholder for any portion of its first taxable_year under sec_1361 if controlled otherwise meets the requirements of a small_business_corporation under sec_1361 controlled will be eligible to make a subchapter_s_election under sec_1362 for its first taxable_year provided such election is made effective immediately following the termination of controlled 2’s original qsub election no opinion is expressed about the tax treatment of the proposed transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings procedural statements caveat plr-147077-03 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination this ruling is directed only to the taxpayer requesting it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent a copy of this letter must be attached to the federal_income_tax return of each taxpayer involved regarding the taxable_year in which the transaction is consummated pursuant to a power_of_attorney on file in this office we have sent copies of this sincerely yours steven j hankin steven j hankin senior technician reviewer branch office of associate chief_counsel corporate letter to your authorized representatives cc


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-104377-14 date date re --------------------------------------------- ----------------------------------------------------------- legend date decedent trust date date spouse accountant trust a son accounting firm accountant date ------------------------ -------------------------------- --------------------------------------------------------------- --------------------------- ------------------ ------------------------- ----------------------- ---------------------------------------- --------------------------------- -------------------------------------- -------------------- ---------------------- dear -------------------- this letter responds to your authorized representative’s letter of date and other submissions requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to sever a_trust into a qualified terminable_interest qtip_trust and non-qtip trust under sec_20_2056_b_-7 of the estate_tax regulations and for additional rulings with respect to the severed trusts plr-104377-14 facts the facts and representations submitted are as follows on date decedent executed a revocable_trust trust on date decedent executed a sixth amended and restated declaration of trust decedent died on date survived by spouse section of trust provides that if spouse survives decedent the entire residue of the trust estate is to be held administered and distributed in accordance with the provisions of article marital trust the co-trustees of marital trust are spouse and accountant article provides in relevant part that the trustee is to distribute all of the net_income of marital trust to or for the benefit of spouse in convenient intervals but not less often than monthly during spouse’s lifetime the trustee may also distribute to spouse or for her benefit so much of the principal of marital trust for her health maintenance and support in reasonable comfort upon the death of spouse after the payment of certain expenses the balance of marital trust will be distributed to trust a for the benefit of decedent’s son son if son does not survive decedent but leaves descendants surviving him then the balance of the trust estate is to be divided among several grandchildren’s trusts as stated in section section provides that i t is decedent’s intention that this marital trust qualify to the extent an election is made for the federal estate_tax_marital_deduction if the federal estate_tax is applicable to decedent’s estate section provides in part that the trustee may elect to have a specific_portion or all of the marital trust which portion is referred to as the qualified share treated as qualified_terminable_interest_property for federal estate_tax purposes section c provides that the division of marital trust is to be made with such formalities and in the manner as will comply with the requirements of sec_20_2056_b_-7 section d provides in part that the trustee may also divide any trust created for the qualified share into separate sub-trusts as of the decedent’s death and each such trust shall be subject_to the identical dispositive and administrative provisions during the lifetime of spouse however the trustee may make different tax elections including the allocation of the gst_exemption with respect to each separate trust any sub-trust to which a portion of decedent’s gst_exemption has been allocated shall be referred to as a gst exempt marital trust any sub-trust to which no gst_exemption has been allocated shall be referred to as a non gst-exempt marital trust plr-104377-14 spouse and accountant are the co-executors of decedent’s estate spouse engaged accounting firm to prepare decedent’s form_706 united_states estate and generation-skipping_transfer_tax return although accountant is a principal at accounting firm accountant and spouse represent that they relied on the estate_planning expertise of accountant to prepare decedent’s form_706 on date the form_706 was timely filed on behalf of the estate the form_706 did not evidence any intent to divide marital trust into two separate trusts a qualified share qtip_trust and a non-qualified share non-qtip trust on schedule m accountant mistakenly listed marital trust as property not subject_to the qtip_election thus no qtip_election was made with respect to marital trust also schedule r was not completed for form_706 it is represented that decedent had not allocated any of his gst_exemption to lifetime transfers you have requested the following rulings an extension of time under sec_301_9100-3 of the procedure and administration regulations and sec_20_2056_b_-7 to sever the marital trust into a qtip_trust and a non-qtip trust effective as of the date of decedent’s death an extension of time to make a qtip_election with respect to the qtip_trust portion of the marital trust under sec_2056 of the internal_revenue_code code an extension of time to sever the qtip_trust into a gst exempt qtip_trust and a non gst-exempt qtip_trust pursuant to sec_26_2654-1 of the generation- skipping transfer_tax regulations an extension of time to make a reverse_qtip_election under sec_2652 with respect to the gst exempt qtip_trust an extension of time to allocate decedent’s available gst_exemption to the gst exempt qtip_trust and to the non-qtip trust portion of marital trust law and analysis ruling sec_1 and sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2056 provides that for purposes of the tax imposed by sec_2001 the value of the taxable_estate shall be determined by deducting from the value of the gross_estate an amount equal to the value of any interest in property that passes or has plr-104377-14 passed_from_the_decedent to the surviving_spouse but only to the extent that such interest is included in determining the value of the gross_estate sec_2056 provides that in the case of qualified_terminable_interest_property for purposes of sec_2056 such property shall be treated as passing to the surviving_spouse and for purposes of sec_2056 no part of such property shall be treated as passing to any person other than the surviving_spouse under sec_2056 a marital_deduction is allowed for qualified_terminable_interest_property qtip which is defined as property i which passes from the decedent ii in which the surviving_spouse has a qualifying_income_interest_for_life and iii to which an election under sec_2056 applies sec_2056 provides that an election with respect to any property shall be made by the executor on the return of tax imposed by sec_2001 such an election once made shall be irrevocable sec_20_2056_b_-7 provides that the qtip_election may relate to all or any part of property that meets the requirements of sec_2056 provided that any partial election must be made with respect to a fractional or percentage share of the property the fraction or percentage may be defined by a formula sec_20_2056_b_-7 provides that in general a_trust may be divided into separate trusts to reflect a partial election that has been made or is to be made if authorized under the governing instrument or otherwise permissible under local law any such division must be accomplished no later than the end of the period of estate administration if at the time of the filing of the estate_tax_return the trust has not yet been divided the intent to divide the trust must be unequivocally signified on the estate_tax_return sec_20_2056_b_-7 provides that in general the election referred to in sec_2056 and v is made on the return of tax imposed by sec_2001 or sec_2101 for purposes of this paragraph the term return of tax imposed by sec_2001 means the last estate_tax_return filed by the executor on or before the due_date of the return including extensions or if a timely return is not filed the first estate_tax_return filed by the executor after the due_date under sec_301_9100-1 of the procedure and administration regulations the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do plr-104377-14 not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election in the present case section of trust specifically authorizes the trustee of trust to elect to have a specific_portion or all of marital trust treated as qtip this portion is to be referred to as the qualified share decedent’s form_706 did not evidence any intent to divide marital trust into two separate trusts a qtip_trust and a non-qtip trust moreover accountant mistakenly listed marital trust as property not subject_to the qtip_election thus no qtip_election was made on decedent’s schedule m based on the facts presented and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly decedent’s estate is granted days from the date of this letter to sever marital trust into two trusts a qtip_trust and a non-qtip trust the severance will be effective as of the date of decedent’s death for estate_tax purposes the severance should be made on a supplemental form_706 within days from the date of this letter unequivocally signifying the severance of marital trust moreover we conclude that after marital trust has been severed into a qtip_trust and non-qtip trust an extension of time of days from the date of this letter is granted to make a qtip_election with respect to the qtip_trust portion of the marital trust under sec_2056 ruling sec_3 through sec_2601 imposes a tax on every generation-skipping_transfer sec_2611 provides that the term generation-skipping_transfer means a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the gst tax is determined by multiplying the taxable_amount by the applicable_rate sec_2641 provides that the term applicable_rate means with respect to any gst transfer the product of the plr-104377-14 maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption amount which may be allocated by the individual or his executor to any property with respect to which the individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual’s estate determined with regard to extensions regardless of whether such a return is required to be filed sec_2642 provides that generally the inclusion_ratio with respect to any property transferred in a gst is the excess of over the applicable_fraction determined for the trust sec_2642 provides that in general the applicable_fraction is a fraction the numerator of which is the amount of the gst_exemption allocated to the trust and the denominator of which is the value of the property transferred to the trust reduced by the sum of any federal estate_tax or state death_tax actually recovered from the trust attributable to such property and any charitable deduction allowed under sec_2055 or sec_2522 with respect to such property sec_2652 provides that for purpose of chapter the term transferor means a in the case of any property subject_to the tax imposed by chapter the decedent and b in the case of any property subject_to the tax imposed by chapter the donor an individual shall be treated as transferring any property with respect to which such individual is the transferor sec_2652 provides in pertinent part that in the case of any trust with respect to which a deduction is allowed to the decedent under sec_2056 the estate of the decedent may elect to treat all of the property in such trust for gst tax purposes as if the election to be treated as qualified_terminable_interest_property had not been made reverse_qtip_election sec_26_2652-2 provides in part that a reverse_qtip_election is not effective unless it is made with respect to all of the property in the trust to which the qtip_election applies sec_26_2652-2 provides that an election under sec_2652 is made on the return on which the qtip_election is made sec_26_2654-1 provides in part that the severance of a_trust that is included in the transferor’s gross_estate or created under the transferor’s will into two or more trusts is recognized for purposes of chapter if the trust is severed pursuant to a direction in the governing instrument providing that the trust is to be divided upon the death of the transferor and the terms of the new trusts provide in the aggregate for plr-104377-14 the same succession of interests and beneficiaries as are provided in the original instrument and the severance occurs prior to the date prescribed for filing the federal estate_tax_return including extensions actually granted for the estate of the transferor and the new trusts are severed on a fractional basis based on the facts submitted and representations made we conclude that the requirements of sec_301_9100-3 are satisfied therefore decedent's_estate is granted an extension of time of days from the date of this letter to file a supplemental form_706 to sever the qtip_trust into a gst exempt qtip_trust and a non gst-exempt qtip_trust to make a reverse_qtip_election with respect to the gst exempt marital trust and allocate decedent's available gst_exemption to the gst exempt qtip_trust and to the non-qtip trust portion of marital trust the allocation will be effective as of decedent's date of death date the supplemental form_706 should be filed with the cincinnati service_center at the following address internal_revenue_service center cincinnati oh a copy of this letter should be attached to the supplemental form_706 a copy is enclosed for this purpose except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely lorraine e gardner senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures


internal_revenue_service number info release date march cc psi 1-genin-103801-03 uilc dear we are responding to correspondence requesting late s_corporation relief in order to establish as the effective taxable_year for your election the information provided by the internal_revenue_service indicates that you have been granted late s_corporation relief pursuant to revproc_98_55 for an effective date of date within the next days you should receive a letter from the service confirming your election effective date if you fail to receive an acknowledgment within this specified period please call the contact person reflected at the top of this page in addition the irs has developed two new cd-roms to help educate small_business owners on their tax responsibilities introduction to federal taxes for small_business self-employed and a virtual small_business workshop these two cd- roms are free and can be ordered by calling the irs also provides a special website www irs gov smallbiz which is dedicated to providing information to small_business taxpayers please keep this letter with your tax records and feel free to provide a copy of it to your authorized representative we hope that the above information proves helpful sincerely yours s dianna k miosi dianna k miosi chief branch associate chief_counsel passthroughs and special industries


t c memo united_states tax_court scott l lafavre and shari l lafavre petitioners v commissioner of internal revenue respondent docket no filed date jeffrey w starbird for petitioners bric w johnson for respondent memorandum opinion laro judge this case is before the court fully stipulated see rule 122' respondent determined a deficiency in petitioners' federal_income_tax in the amount of dollar_figure and a penalty of dollar_figure pursuant to sec_6662 after rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated section references are to the internal_revenue_code in effect for the year in issue - concessions’ the sole issue we must decide is whether petitioners are entitled to the dollar_figure casualty_loss claimed on their federal_income_tax return the stipulation of facts and attached exhibits are incorporated herein the stipulated facts are hereby found background when the petition was filed petitioners resided in lakeville minnesota in petitioners were the only partners in the chateau deville partnership the chateau deville partnership owned a group of apartment buildings located in slidell louisiana the apartment buildings were damaged by flooding in before the flood the apartment buildings' basis was dollar_figure the fair_market_value of the apartment buildings immediately prior to the flood was dollar_figure million the fair_market_value of the apartment buildings immediately after the flood was dollar_figure petitioners received insurance proceeds of dollar_figure as compensation_for the flooding damage to the apartment buildings respondent has conceded that petitioners are not liable for the sec_6662 accuracy-related_penalty and are entitled to a reduction of capital_gains of dollar_figure as opposed to the amount of dollar_figure stated in the notice_of_deficiency we note that the property suffered damage in however petitioners assert on brief that the surrounding area was subsequently declared a disaster_area by president clinton allowing the deduction to be taken in under sec_165 respondent does not dispute this assertion in his brief reply brief or mention the issue in the notice_of_deficiency these insurance proceeds were reinvested in the reconstruction of the apartment buildings additionally petitioners invested dollar_figure in the reconstruction of the damaged apartments on their income_tax return for the petitioners claimed a casualty_loss of dollar_figure this loss was calculated by subtracting an after casualty fair_market_value of dollar_figure from a precasualty fair_market_value of dollar_figure million discussion respondent determined that petitioners are not entitled to the casualty_loss claimed on their federal_income_tax return because petitioners’ adjusted_basis in the property was less than the insurance proceeds received by petitioners for the loss petitioners argue that since the insurance proceeds were reinvested in gualifying property under sec_1033 the full amount of the economic loss should be deductible petitioners calculate their loss as follows fair_market_value prior to casualty dollar_figure fair_market_value after casualty --750 gross casualty_loss big_number less insurance proceeds --767 net_casualty_loss big_number casualty_loss less than basis sec_165 provides for the deduction of a loss and in pertinent part provides - - a general_rule ---there shall be allowed as a deduction any loss sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise disaster losses --- election to take deduction for preceding year --notwithstanding the provisions of subsection a any loss attributable to a disaster occurring in an area subsequently determined by the president of the united_states to warrant assistance by the federal government under the disaster relief and emergency assistance act may at the election of the taxpayer be taken into account for the taxable_year immediately preceding the taxable_year in which the disaster occurred for casualty losses the calculation of the amount of the loss is defined in sec_1_165-7 income_tax regs as follows b amount deductible --- general_rule --in the case of any casualty_loss whether or not incurred_in_a_trade_or_business or in any transaction entered into for profit the amount of loss to be taken into account for purposes of sec_165 shall be the lesser_of either-- the amount which is equal to the fair_market_value of the property immediately before the casualty reduced by the fair_market_value of the property immediately after the casualty or the amount of the adjusted_basis prescribed in sec_1_1011-1 for determining the loss from the sale_or_other_disposition of the property involved emphasis added the calculation of a casualty deduction under sec_165 a proceeds as follows first the loss is determined as the lesser_of the difference between the fair_market_value of the - - property before the casualty and the fair_market_value of the property after the casualty without consideration of insurance received and the adjusted_basis of the property before the casualty in this case the difference in fair market values is dollar_figure and the adjusted_basis was dollar_figure the lesser amount of dollar_figure is the amount of petitioners’ loss second the amount of the loss deductible under sec_165 is the loss not compensated for by insurance i1 e reduced by the insurance received see sec_1 b examples through income_tax regs in this case the insurance received exceeds the loss adjusted_basis of the property prior to the casualty and therefore there is no allowable casualty deduction we hold that petitioners are not entitled to the dollar_figure casualty_loss claimed on their federal_income_tax return accordingly decision will be entered under rule


department of the treasury internal_revenue_service commerce dallas texas release number release date org address legend org name of org aug -uil person to contact identification_number contact telephone number in reply refer to te_ge review staff this is a final adverse determination as to yout exempt status under sec_501 of the intemal revenue code our adverse determination was made for the following reasons failute to provide records of the otganization and failure to meet the reporting requirements under sec_6001 and sec_6033 of the internal_revenue_code oe a matter of legislative grace and taxpayers have the burden of exemption from income_tax is establishing their entitlement to exemptions sec_6033 requites organizations exempt from tax to keep such records and render such statements as ate tequited by such rules and regulations as the secretary may prescribe sec_1_6033-2 h requites organizations exempt from tax to submit such additional information as may be requited by the intemal revenue setvice for the purpose of inquiring into the organization's exempt status despite numerous requests to you to ptovide information to conduct an examination of your form_990 for the year ended 20xx and 20xx no requested information has been provided to us to meet the requirement for exemption under sec_501 and section org fail sec_1_501_c_4_-1 of the income_tax regulations which states an organization is opetated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the community based on the above we ate revoking your otganization's exemption from federal_income_tax under sec_501 of the internal_revenue_code effective january 20xx you ate required to file federal_income_tax returns on form_1120 these returns should be filed with the appropriate service_center for all years beginning after december 20xx you are required to file form_1120 u s_corporation income_tax retum form_1120 must be filed by the day of the third month after the end of your annual_accounting_period a penalty of dollar_figure a day is charged when a return is filed late unless there is reasonable_cause for the delay however the maximum penalty charged cannot exceed dollar_figure or percent of your gross_receipts for the year whichever is less this penalty may also be chatged if a return is not complete so please be sure your return is complete before you file it you have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number ate shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or you can contact the taxpayer_advocate from the site where the tax_deficiency was determined by writing to internal revenue setvice local taxpayer_advocate taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically cortect tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely marsha a ramirez director eo examinations attached copy of 886-a department of the treasury internal_revenue_service tax_exempt_and_government_entities_division date legend org nameoforg address address of org form s taxpayer_identification_number org address tax_year s ended person to contact id number contact numbers telephone fax certified mail -return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your organization's exempt status is necessary if you do not agree with our position you may appeal your case the enclosed publication the examination process explains how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process if you request a conference we will forward your written_statement of protest to the appeals_office and they will contact you for your convenience an envelope is enclosed if you and appeals do not agree on some or all of the issues after your appeals_conference or if you do not request an appeals_conference you may file suit in united_states tax_court the united_states court of federal claims or united_states district_court after satisfying procedural and jurisdictional requirements as described in publication letter rev catalog number 34801v you may also request that we refer this matter for technical_advice as explained in publication exempt_organization appeal procedures for unagreed issues if a determination_letter is issued to you based on technical_advice no further administrative appeal is available to you within the irs on the issue that was the subject of the technical_advice if you accept our findings please sign and return the enclosed form_6018 consent to proposed adverse action we will then send you a final letter revoking your exempt status if we do not hear from you within days from the date of this letter we will process your case on the basis of the recommendations shown in the report of examination and this letter will become final in that event you will be required to file federal_income_tax returns for the tax period s shown above file these returns with the ogden service_center within days from the date of this letter unless a request for an extension of time is granted file returns for later tax years with the appropriate service_center indicated in the instructions for those returns you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely marsha ramirez director eo examinations enclosures publication publication form 6018-a report of examination envelope letter rev catalog number 34801v form 886-a rev date schedule number or exhibit report of examination name of taxpayer org december 20xx december 20xx tax identification_number year period ended issue name tax exempt status per return per exam december 20xx 20xx legend org name of organization president name of president date xx issue whether the organization's tax-exempt status under sec_501 should be revoked because it failed to provide necessary information to complete the examination of its form_990 for the tax periods shown above facts the organization failed to respond to the internal_revenue_service attempts to obtain information to perform an examination of form_990 for the tax period s ending december 20xx the service requested information as follows e march 20xx - the organization was sent an examination letter letter with form_4549 information_document_request idr and was contacted by phone revenue_agent called the president at the time to discuss the parameters of the examination the rights of the organization outlined in publication were also discussed at that time president stated that the treasurer secretary would be the primary contact person for the organization during the examination e march 20xx - treasurer called to discuss the ongoing examination the idr which was sent with e e the examination letter was discussed with treasurer she agreed to provide the documents and information requested of the organization she indicated that the information would be provided by march 20xx april 20xx - the organization did not respond or provide the information and documents that were requested of it the organization was contacted by phone president answered the phone and indicated that treasurer would return the phone call shortly by latest the next day april 20xx - the organization did not reply to the phone message left on april 20xx the irs agent called treasurer to discuss the status of the examination she indicated that she had left a voice message with the agent on april 20xx no such message was received treasurer committed to faxing the documents and information requested by april 20xx may 20xx - no information or documents were received from the organization the irs agent called the organization and left a message with the receptionist form 886-a rev januarv report of examination schedule number or exhibit name of taxpayer org december 20xx december 20xx tax identification_number year period ended e may 20xx - the organization did not reply to the message left on may 20xx the organization was called and a second message was left with the receptionist the receptionist indicated that would return the call may 20xx - the organization did not reply to the messages left on may and may 20xx the organization was called to discuss the status of the examination treasurer indicated that she had not compiled any of the information because she was attending to the needs of her sick uncle she requested an extension of time to provide the information she committed to faxing the information by may 20xx june 20xx - the organization did not provide the information or documents requested of it the organization - _ si was contacted by phone _ treasurer committed to provide the documents and information by june 20xx the importance of providing the information was emphasized to june 20xx -- the organization did not provide the information or documents requested of it the organization was contacted by phone when the revenue_agent asked to sneak with __ treasurer the receptionist held her hand over the phone and it appeared that she was talking to _ treasurer the individual told the receptionist to tell the revenue_agent that she was not there a message was then left with the receptionist to have _ treasurer call the revenue_agent treasurer - - june 20xx - the organization did not reply to the message left on june 20xx the organization was e e __ president once again contacted by phone and a message was left with the receptionist june 20xx - the organization did not reply to the messages left on june and june 20xx the revenue_agent then attempted to contact president to discuss with her the status of the examination and the lack of cooperation that the organization was providing when the revenue_agent asked the receptionist if he could speak with _ treasurer answered the phone _ treasurer indicated that she was put in as the new president of the organization and that all correspondence should go through her she also indicated that she would not provide the documents that were requested of the organization and that she felt that the irs had no rights to those documents june 20xx -- a follow-up letter was sent certified mail the c ganization was informed that the scope of the examination had been broadened the organization was given until july 20xx the certified receipt was signed july 20xx - the organization faxed a request to extend the due_date from july 20xx to july 20xx to provide the information requested of it from the june 20xx information_document_request july 20xx - the organization failed to provide the information and documents requested of it the treasurer indicated that she had organization was contacted by phone to discuss the status of the examination mailed all of the information requested from the organization on july 20xx august 20xx - the package that _ treasurer indicated that she mailed on july 20xx was not received the irs agent called the organization and left a message with the receptionist august 20xx - the organization failed to respond to the message left on august 20xx the irs agent called the organization and left a second message with the receptionist october 20xx - the organization failed to respond to the message left on august and august 20xx the irs agent called the organization and left a third message with thes form 886-a rev date report of examination schedule number or exhibit name of taxpayer org december 20xx december 20xx tax identification_number year period ended receptionist october 20xx -- the organization failed to respond to the message left on august august and october 20xx the organization was contacted by phone the revenue_agent asked to speak with an officer of the organization other than treasurer the organization's current treasurer indicated that treasurer is the only individual authorized to discuss tax matters november 20xx - the organization has failed to provide any of the documents the examination the irs agent called the organization and left a message with the receptionist january 20xx- the organization was issued a draft report of examination proposing a revocation of their exempt status due to lack of response the report was sent certified mail the certified mail was signed for on february 20xx the organization failed to respond to the draft report of examination and has not provided any of the documents that were requested of it during the examination that were requested of it during law sec_6033 of the code provides except as provided in sec_6033 a every organization exempt from tax under sec_501 shall file an annual return stating specifically the items of gross_income receipts and disbursements and such other information for the purposes of carrying out the internal revenue laws as the secretary may by forms or regulations prescribe and keep such records render under oath such statements make such other returns and comply with such rules and regulations as the secretary may from time to time prescribe sec_6001 of the code provides that every person liable for any_tax imposed by the code or for the collection thereof shall keep adequate_records as the secretary_of_the_treasury or_his_delegate may from time to time prescribe sec_1_6001-1 of the regulations states that the books_or_records required by this section shall be kept at all time available for inspection by authorized internal revenue officers or employees and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law sec_1_6033-1 of the regulations provides that every organization which has established its right to exemption from tax whether or not it is required to file an annual retum of information shall submit such additional information as may be required by the district_director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter_f sec_501 and the following chapter of the code and sec_6033 revrul_59_95 1959_1_cb_627 concerns an exempt_organization that was requested to produce a financial statement and statement of its operations for a certain year however its records were so incomplete that the organization was unable to furnish such statements the service held that the failure or inability to file the required information_return or otherwise to comply with the provisions of section form 886-a schedule number or exhibit rev january name of taxpayer org report of examination december 20xx december 20xx tax identification_number year petiod ended of the code and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status government's position in accordance with the above-cited provisions of the code and regulations under sec_6001 and sec_6033 organizations recognized as exempt from federal_income_tax must meet certain reporting requirements these requirements relate to the filing ofa complete and accurate annual information and other required federal tax forms the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated_business_income_tax and the availability of these records for inspection by authorized internal revenue officers or employees the organization failed item to make available the records for inspection by authorized internal revenue officers or employees by refusing to provide the necessary information as requested and refusing to respond to the efforts of the service to obtain necessary information therefore item and are also failed in that they could not be determined to have been met it is the irs's position that the organization's exempt status should be revoked based on according to revrul_59_95 1959_1_cb_627 as stated above the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status taxpayer's position the organization was issued a draft report of examination proposing a revocation of their exempt status due to lack of response the organization failed to respond to the draft report and has not provided its position conclusion the government concludes that the organization does not qualify for exemption from federal_income_tax under sec_501 c as a result of this finding the organization will be subject_to the income_tax imposed by sec_11 file forms for all tax periods ending after january 20xx and is required to form 886-a catalog number 20810w page publish no irs cov department of the treasuty-internal revenue service


internal_revenue_service department of the treasury index nos number release date p o box ben franklin station washington dc person to contact telephone number refer reply to cc dom p si -- plr-119320-98 date feb in re request for private_letter_ruling under sec_118 and b of the internal_revenue_code legend taxpayer subsidiary government state x district a b c d dear this letter responds to your letter dated date requesting a ruling regarding whether the transfers of electrical distribution systems and other_amounts by plr-119320-98 the government to subsidiary under a privatization program constitute contributions in aid of construction under sec_118 of the internal_revenue_code the taxpayer has made the following representations subsidiary is a wholly owned subsidiary of the taxpayer and a member of the taxpayer’s affiliated_group the taxpayer is a holding_company subsidiary is a regulated_public_utility within the meaning of sec_7701 and is in the business of generating transmitting and distributing electric power in state x and other states the members of the taxpayer affiliated_group file a consolidated federal_income_tax return on a calendar_year basis using the accrual_method of accounting the taxpayer affiliated_group is subject_to the audit jurisdiction of the district_director for the district subsidiary provides electrical services including distribution services to customers in its service territory a limited number of large customers including the army installations consisting of the government maintain their own distribution systems they purchase power from the local utility and then distribute the power within their facilities the local utility provides power to a master metering point where the customer takes title and responsibility for the electrical energy the taxpayer represents that the government’s master metering service arrangement evolved for a number of reasons when first operational many of the installations were located in rural or remote areas that did not yet have extensive local public_utility distribution infrastructures the army’s ownership of the systems was needed to assure the provision of safe and reliable utility_services to meet an installation’s important national defense requirements many of the installations were either opened or greatly expanded during or just after world war ii and then expanded again during the early years of the cold war according to the taxpayer during these sensitive times government ownership of utility distribution systems was preferred in order to reduce an installation’s vulnerability to sabotage and other threats the rationale for continued government ownership of utility systems changed in the 1990s due to a combination of a changing defense mission with the end of the cold war and limited financial and other resources according to the taxpayer the consequences of government ownership of utility distribution systems were the habitual under funding of operation and maintenance requirements difficulty in obtaining equipment repair parts for specialized equipment not being stocked and difficulty in finding skilled staff deferred system maintenance created a risk to the military’s mission and to the public safety in a the department of the army decided that ownership and operation of the utility systems should be privatized the army describes privatization as the transfer of ownership operation and maintenance and system upgrade responsibilities to the non- federal sector because ownership of utility systems is not a core function of the army plr-119320-98 transferring utility distribution system ownership to the non-federal sector would secure the financial and other resources necessary to upgrade and properly maintain the systems related efficiencies were expected to result in cost savings and improved reliability in b the department of defense announced a program of privatization reform the defense reform initiative calls for the privatization by c of all electric natural_gas water and wastewater utility systems except those need for unique security reasons or when privatization is not economical the department of defense obtained statutory approval for its privatization policy section a of the national defense authorization act for fiscal_year the act provides that the secretary of a military department may convey a utility system or part of a utility system under the jurisdiction of the secretary to a municipal private regional district or cooperative utility company or other entity the conveyance may consist of all right title and interest of the united_states in the utility system or such lesser estate as the secretary considered appropriate to serve the interests of the united_states section c of the act provides that the secretary concerned shall require as consideration for a conveyance under section a an amount equal to the fair_market_value as determined by the secretary of the right title or interest of the united_states conveyed the consideration may take the form of a a lump sum payment or b a reduction in charges for utility_services provided by the utility or entity concerned to the military installation at which the utility system is located section e of the act provides that the secretary concerned may not make a conveyance under section a until the secretary submits to the committee on armed services and the committee on appropriations of the senate and the committee on national security and the committee on appropriations of the house of representatives an economic analysis based upon accepted life-cycle costing procedures approved by the secretary of defense demonstrating that a the long-term economic benefit of the conveyance to the united_states exceeds the long-term economic cost of the conveyance to the united_states and b the conveyance will reduce the long-term costs of the united_states for utility_services provided by the utility system concerned the army installations consisting of the government own operate and maintain electrical distributions systems the government purchases electricity for these installations from subsidiary the installations are all located in state x and within subsidiary’s service territory the army is pursuing privatization of its electric installations to comply with the defense reform initiative because additional base realignment and closure initiatives plr-119320-98 may occur the cost of utility_services are a factor in determining the mission of the bases and which bases will remain operational the army installations consisting of the government are considered vital to the economies of the surrounding areas the taxpayer emphasizes that privatization is viewed as providing for the public safety within the installations under funding of maintenance has posed a hazard to the public the taxpayer asserts that public safety was a major impetus for privatization particularly after ineffective maintenance at one installation caused a natural_gas explosion pursuant to the defense reform initiative and the act the army will transfer ownership of the army installations consisting of the government electrical distribution systems facilities to subsidiary for the nominal price of dollar_figured subsidiary will assume responsibility for operating the systems by distributing electricity to each of the buildings on the government installations subsidiary would continue to provide for electric commodity sales to a single master-metered delivery point the taxpayer represents that there would be no change in the nature price or volume of electrical services provided to the government installations subsidiary will not include the contributed facilities in its rate base subsidiary will recover its ongoing cost to provide electrical distribution services to the government installations pursuant to a special service agreement the taxpayer requests a ruling that the transfers of electrical distribution systems and other_amounts by the government to subsidiary under a program to privatize electrical distribution systems represent contributions to capital of subsidiary under sec_118 and are not contributions in aid of construction ciac under sec_118 of the code sec_118 provides that in the case of a corporation gross_income does not include any contribution_to_the_capital_of_the_taxpayer sec_118 provides that for purposes of sec_118 except as provided in sec_118 the term contribution to the capital of taxpayer does not include any ciac or any other contribution as a customer or potential customer sec_1_118-1 of the income_tax regulations provides in part that sec_118 also applies to contributions to capital made by persons other than shareholders for example the exclusion applies to the value of land or other_property contributed to a corporation by a governmental_unit or by a civic group for the purpose of enabling the corporation to expand its operating facilities however the exclusion does not apply to any money or property transferred to the corporation in consideration for goods or services rendered or to subsidies paid to induce the taxpayer to limit production the legislative_history to sec_118 states that the exclusion_from_gross_income for nonshareholder contributions to capital of a corporation was intended to apply to those contributions that are neither gifts because the contributor expects to derive indirect plr-119320-98 benefits nor payments for future services because the anticipated future_benefits are too intangible the legislative_history also states that the provision was intended to codify the existing law that had developed through administrative and court decisions on the subject h_r rep no 83rd cong 2d sess s rep no 83d cong 2d sess in general the amendment made by of the tax_reform_act_of_1986 the act to sec_118 was intended to require a regulated_public_utility to include in income the value of any ciac made to encourage the provision of services by the utility to a customer as a result under the act all ciacs even those received by a regulated_public_utility such as subsidiary are includible in the gross_income of the receiving corporation the house ways_and_means_committee report the house report states that property including money is a ciac rather than a contribution_to_capital if it is contributed to provide or encourage the provision of services to or for the benefit of the person making the contribution h_r rep no 99th cong 1st sess vol c b a utility is considered as having received property to encourage the provision of services if any one of the following conditions are met the receipt of the property is a prerequisite to the provision of the services the receipt of the property results in the provision of services earlier than would have been the case had the property not been received or the receipt of the property otherwise causes the transferor to be favored in any way the house report also states that the repeal of the special exclusion does not affect transfers of property that are not made for the provision of services including situations where it is clearly shown that the benefit of the public as a whole was the primary motivating factor in the transfers house report pincite vol c b pincite notice_87_82 1987_2_cb_389 provides additional guidance on the treatment of ciacs notice_87_82 follows the language from the house report and states that a payment received by a utility that does not reasonably relate to the provision of services by the utility or for the benefit of the person making the payment but rather relates to the benefit of the public at large is not a ciac in notice_87_82 an example of a payment benefitting the public at large is a relocation payment received by a utility under a government program to place utility lines underground in that situation the relocation is undertaken for either reasons of community aesthetics or in the interest of public safety and does not directly benefit particular customers of the utility the taxpayer argues that the proposed transfers of the government electrical distribution systems to subsidiary should not be treated as ciacs under sec_118 because the transfers are not a prerequisite to the provision of services the army is already receiving electrical services from subsidiary the transfers will not cause the army to be favored in any way because subsidiary does not anticipate an increase in electric commodity sales attributable to the transfers the taxpayer concludes that the plr-119320-98 house report and notice_87_82 stand for the proposition that transfers which do not result in new or expanded utility_services are not ciacs under sec_118 the taxpayer also strongly contends that the proposed transfers will benefit the public at large because the primary motive for the transfers is for public safety the army is making the transfers because it lacks the resources to properly operate the government distribution systems without creating a risk to the army contractor personnel and the general_public that routinely visit the government installations the taxpayer has enumerated instances were the under funding of operation and maintenance_costs have created hazardous conditions the taxpayer concludes that the proposed transfers are not ciacs because the transfers satisfy the public benefit exception contained in the house report and notice_87_82 in order for the proposed transfers not to be treated as ciacs under sec_118 the army must not be receiving new or expanded utility_services and the transfer by the army must satisfy the public benefit exception contained in the house report and notice_87_82 we do not agree with the taxpayer that the army will not be receiving new or expanded utility_services from subsidiary the army is a customer of subsidiary that is making contributions to subsidiary in its capacity as a customer though subsidiary will not provide increased electric commodity sales to the army for the government installations subsidiary will be providing new and expanded electrical distribution services on the installations for which it will receive separate compensation under a special service agreement in addition we do not agree with the taxpayer that the proposed transfers satisfy the public benefit exception the taxpayer and the army have provided numerous examples where the under funding of operation and maintenance have created safety problems on army installations however section e of the act clearly demonstrates that congress intended that the privatization must be for the long-term economic benefit of the united_states which is defined as reducing long-term costs to the united_states for utility_services the taxpayer has been unable to find any authority in the legislative_history of the act demonstrating that the congress’ primary motive in enacting the act was safety concerns not economic benefits to the united_states it appears that the army had the choice of spending more money for operation and maintenance or contracting with subsidiary for those services subsidiary may perform those services more efficiently with or without owning the distribution systems however the army is making the contributions in its capacity as a customer and will be receiving subsidiary’s distribution services accordingly based on the representations of the taxpayer we rule that the proposed transfers of the government electrical distribution systems to the subsidiary are ciacs under sec_118 therefore the contributions of the government electrical distribution systems do not qualify as nonshareholder contributions to capital to subsidiary under sec_118 plr-119320-98 except as specifically set forth above no opinion is expressed or implied concerning the federal_income_tax consequences of the above described facts under any other provision of the code or regulations this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours s walter h woo walter h woo senior technician reviewer office of assistant chief_counsel passthroughs and special industries enclosure copy


t c memo united_states tax_court patricia g mcculley petitioner v commissioner of internal revenue respondent docket no filed date ronald w blasi tracey d mason and robert kiser for petitioner bonnie l cameron for respondent memorandum findings_of_fact and opinion parr judge respondent determined deficiencies in petitioner's federal income taxes and additions to tax for the taxable years and as follows additions to tax_year deficiency sec_6653 sec_6653 sec_6661 dollar_figure dollar_figure big_number big_number big_number dollar_figure big_number big_number percent of the interest due on the deficiency in tax after concessions by the parties the sole issue for decision is whether petitioner who failed to report embezzlement income is liable for additions to tax for fraud we hold she is not findings_of_fact some of the facts have been stipulated and with one exception are so found the stipulated facts and the accompanying exhibits are incorporated into our findings by this reference petitioner resided in duluth georgia at the time of filing her petition in this case for the taxable years and petitioner timely filed federal_income_tax returns form sec_1040 as a head_of_household and as married_filing_jointly respectively on her tax returns for and petitioner reported total income of dollar_figure and dollar_figure respectively respondent determined deficiencies all section references are to the internal_revenue_code in effect for the taxable years in issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated all dollar amounts are rounded to the nearest dollar unless otherwise indicated in february of petitioner married her second husband byron k griffith and the couple filed a joint_return for that year against petitioner of dollar_figure for and dollar_figure for in determining the deficiencies for the taxable years in issue respondent made adjustments for the following items unreported rental income embezzlement income and improper real_estate tax and mortgage interest deductions background petitioner was raised in a poor neighborhood in memphis tennessee in a low-income family at the age of she married her first husband charles edward mcculley mcculley the next year petitioner became pregnant and dropped out of high school petitioner's daughter and son were born in june of and july of respectively in october of petitioner and mcculley were divorced in petitioner completed the requirements for a general equivalency diploma ged the highest degree she has attained in petitioner took courses as a non-matriculated student at memphis state university for which she received an a a b and two failing grades petitioner has had no education or training in business or tax matters during the years in issue petitioner became involved in a relationship with byron kelly griffith griffith a man she married in griffith physically mentally and emotionally abused petitioner during their separation a neighbor once called police who arrested griffith when they caught him choking petitioner and beating her head against the garage wall petitioner divorced griffith in december of from june of through june of petitioner was employed by republic airlines republic in memphis tennessee petitioner was responsible for collecting liquor sales money from a safe at the memphis airport where flight attendants made cash deposits after landing in november of a month before petitioner's divorce from griffith was final he notified republic that petitioner had in the past embezzled funds republic did not press charges but did inform the internal_revenue_service irs thereafter in may of the criminal investigation department cid of the irs began auditing petitioner's tax returns for and in june of special agents robert johnson agent johnson or the agent and catherine parr went to petitioner's current work place agent johnson told petitioner that he was conducting a criminal investigation of her tax_liability and that he needed to question her regarding such matter petitioner agreed to meet with him to review her tax and bank records provided her attorney kemper durand durand was present thereafter agent johnson and durand spoke on several occasions regarding the investigation but johnson did not try again to speak with petitioner in july of the agent requested a power_of_attorney from durand on behalf of petitioner which he received the embezzlement had stopped years before in fact petitioner had left republic in good graces in week later on august agent johnson contacted durand to set up an appointment during their conversation durand made certain statements that agent johnson took as seeking a complete concession thereafter the agent decided to proceed on with his investigation without ever meeting face to face with either durand or petitioner the agent’s final report the report in which he recommended prosecuting petitioner for tax_evasion under sec_7201 was based primarily on statements made by petitioner's hostile and estranged husband as well as information supplied by people other than petitioner to establish her intent in failing to report the embezzled funds despite the report petitioner was not prosecuted under sec_7201 for tax_evasion on date she was indicted instead for the lesser offense of willfully filing a false tax_return for count one and count two in violation of sec_7206 petitioner entered into a negotiated plea plea in the united_states district_court for the northern district of georgia wherein she pleaded guilty to count one of the indictment count two was dismissed petitioner was sentenced to years’ probation hours of community service and was ordered to pay dollar_figure plus interest and penalties in restitution this amount appears to represent the deficiency plus then-accrued interest petitioner ha sec_4 although the parties stipulated without any explanation that the restitution was based on the deficiencies for the two years in issue we do not see how this is mathematically continued paid the full restitution amount and served all of the community hours required of her petitioner's probation was terminated early because she completed the terms of her probation in an exceptional manner opinion respondent pursuant to sec_6653 determined that petitioner is liable for additions to tax for fraud and interest thereon for failing to report embezzled income on her and tax returns petitioner admits that she embezzled money from her former employer and that she did not report the income she asserts however that she did not intend to evade taxes rather petitioner claims that she did not know that embezzlement income is taxable if petitioner prevails respondent is barred by the sec_6501 limitations_period from assessing and collecting any_tax and additions thereto from her for the years in issue respondent argues that petitioner's failure to report the embezzlement income in and her guilty plea under sec_7206 combined with withholding bank records from tax preparers and respondent and refusing to sign an amended_return reporting the embezzled funds establishes petitioner's requisite intent to commit fraud for the reasons discussed below we agree with petitioner continued possible we therefore disregard the stipulation as clearly erroneous under sec_6653 respondent has the burden of proving by clear_and_convincing evidence that there is an underpayment_of_tax and that some part of the underpayment was due to fraud see sec_7454 rule b respondent must show that petitioner intended to evade taxes known to be owing by conduct intended to conceal mislead or otherwise prevent the collection of such taxes 80_tc_1111 where a taxpayer claims ignorance of the law or a good-faith belief that he was not violating any of the provisions of the tax laws the commissioner must negate that claim by clear_and_convincing evidence 498_us_192 see also 99_tc_202 for purposes of the sec_6653 interest computation respondent must also prove the portion of the underpayment attributable to fraud sec_6653 96_tc_858 affd 959_f2d_16 2d cir the existence of fraud is a question of fact to be resolved upon consideration of the entire record 67_tc_181 affd without published opinion 578_f2d_1383 8th cir fraud will never be presumed 55_tc_85 fraud may however be proved by circumstantial evidence because direct proof of the taxpayer's intent is rarely available rowlee v commissioner supra the taxpayer's entire course of conduct may establish the requisite fraudulent intent 56_tc_213 the intent to conceal or mislead may be inferred from a pattern of conduct see 317_us_492 guilty plea under sec_7206 a conviction5 under sec_7206 does not collaterally estop a taxpayer from denying fraud under sec_6653 84_tc_636 see also 683_f2d_1285 9th cir cox v commissioner tcmemo_1985_324 wheadon v commissioner tcmemo_1992_633 under sec_7206 it is a crime to willfully make and submit any return verified by a written declaration that is made under penalties of perjury which the taxpayer does not believe to a guilty plea is equivalent to a conviction after trial for the purpose of collateral_estoppel see eg 47_f3d_716 5th cir sec_7206 provides in relevant part any person who-- declaration under penalties of perjury-- willfully makes and subscribes any return statement or other document which contains or is verified by a written declaration that it is made under the penalties of perjury and which he does not believe to be true and correct as to every material matter shall be guilty of a felony and upon conviction thereof shall be fined not more than dollar_figure or imprisoned not more than years or both together with the costs of prosecution be true and correct as to every material matter the intent to evade taxes is not an element of the crime charged under sec_7206 wright v commissioner supra pincite see also 572_f2d_340 2d cir 484_f2d_670 7th cir 377_f2d_469 n 1st cir thus although petitioner’s conviction under sec_7206 may be some evidence of fraudulent intent it does not establish as a matter of law that she intended to evade taxes wright v commissioner supra badges_of_fraud a pattern of consistent underreporting of income especially when accompanied by other circumstances showing an intent to conceal justifies the inference of fraud see 348_us_121 the mere failure however to report income is not sufficient to establish fraud 301_f2d_484 5th cir affg tcmemo_1959_179 781_f2d_1566 11th cir affg t c memo fraud may not be found under circumstances which at the most create only suspicion 90_tc_1130 besides failure to report income other badges_of_fraud which may be taken into account include the making of false and inconsistent statements to revenue agents grosshandler v petitioner's plea did not specifically mention the embezzlement income commissioner 75_tc_1 the filing of false documents 79_tc_995 affd 748_f2d_331 6th cir understatement of income inadequate records failure_to_file tax returns implausible or inconsistent explanations of behavior concealment of assets and failure to cooperate with tax authorities 796_f2d_303 9th cir affg tcmemo_1984_601 korecky v commissioner supra the taxpayer's education and sophistication are also relevant to the determination of fraud 175_f2d_500 2d cir affg 7_tc_245 99_tc_202 petitioner admits that she failed to report income of dollar_figure in and dollar_figure in accordingly pursuant to sec_6653 respondent has proven that an underpayment_of_tax exists for each of the years in issue thus we now must decide whether petitioner intended to conceal mislead or otherwise prevent the collection of such taxes rowlee v commissioner t c pincite and cases cited therein petitioner testified that she did not know until the irs investigation began that embezzlement income was taxable and at that point she cooperated fully with respondent respondent points to petitioner's failing to report the embezzlement income withholding bank records from tax preparers and respondent and refusing to sign an amended_return reporting the embezzled funds as evidence of attempts to conceal the problem with respondent’s scenario is that--except for the failure to report the embezzlement income--it is not supported by the facts first the evidence does not show that petitioner withheld any information from respondent or refused to cooperate in any way with respondent during the months agent johnson spent investigating petitioner he never interviewed her in an effort to establish her state of mind in failing to include the illegal income on her returns in fact agent johnson testified that on the only occasion when he met with petitioner she was pleasant cooperative and willing to review her tax and bank records with him if her attorney were present this was perfectly reasonable since agent johnson was conducting a criminal investigation durand petitioner's attorney did in fact speak with the agent on several occasions about the ongoing investigation and promptly provided a power_of_attorney when requested at trial agent johnson acknowledged that petitioner cooperated with the investigation and that he did not intend in his report to indicate otherwise it was agent johnson who severed all contact with petitioner after durand allegedly gave agent johnson the impression that he durand was looking for a letter from the irs forgiving someone for stealing money from the airlines from that point forward agent johnson made no further effort to schedule an appointment with petitioner even though she consistently expressed a willingness to meet at trial and in his report agent johnson indicated that petitioner withheld bank statements from the preparers of petitioner's and returns patricia montague montague and louis traylor traylor respectively however montague and traylor testified that they never asked petitioner for any bank records that she was cooperative and provided them with all of the tax information that they requested and that she did not in any way hinder them in preparing the returns moreover the evidence specifically rebuts respondent's claim that petitioner failed to furnish agent johnson with her bank records and that summonses had to be served on petitioner's banks to obtain them at trial agent johnson himself admitted that he never asked petitioner for any bank statements or for that matter any other documentary information relating to her tax_liability for the years in issue respondent’s case is based almost entirely on allegations made by griffith petitioner's ex-husband to agent johnnson however griffith was not a reliable source at the time he was interviewed griffith had a strong motive to lie he and the bias of witnesses giving contradictory evidence must be considered see 470_us_564 835_f2d_850 11th cir affg in part revg in part and remanding tcmemo_1986_303 ishijima v commissioner tcmemo_1994_353 griffith who was suffering from liver cancer did not testify at trial petitioner were in the midst of a fractious divorce apparently in an effort to hurt petitioner or at least to gain the upper hand griffith reported petitioner to the authorities griffith physically mentally and emotionally abused petitioner during the entire course of their relationship moreover griffith had other credibility issues in griffith a securities broker was fined and barred from the national association of securities dealers nasd for converting the funds of three different clients to his own use we also note that respondent afforded griffith innocent spouse protection for despite the fact that he co-signed the joint_return with full knowledge of the embezzled funds if the agent had spoken to petitioner he would have known that griffith knew petitioner was stealing before he married her that the stealing continued throughout their marriage and that griffith never asked petitioner to stop we also find misleading respondent's characterization of petitioner's refusal to sign an amended_return prepared by her ex-husband's accountant as further evidence of her intent to willfully evade her federal_income_tax for the years in issue it was griffith not agent johnson who asked petitioner to sign the amended_return at that time the couple was in the middle of a difficult divorce and her refusal to trust griffith was not unreasonable moreover griffith's accountant testified that he had prepared the amended_return exclusively on information supplied by griffith and that he had no contact with petitioner during the preparation process petitioner testified that her attorneys advised her not to sign the amended_return based on the testimony of petitioner the tax preparers and agent johnson himself we disagree with respondent's assertion that petitioner's failure to sign the amended_return shows her intent to evade taxes finally in addressing the other so-called badges_of_fraud we find that agent johnson's own testimony exonerates petitioner he testified that petitioner never denied receipt of the embezzled funds nor did she attempt to conceal the money from the irs she made no false entries on any book or records she did not backdate or postdate any documents she did not maintain two sets of books nor did she claim fictitious deductions she did not hide any bank accounts she did not maintain a safe deposit box or otherwise hoard any funds nor did she keep accounts under false names she did not make any false statements related to the preparation and examination of her and tax returns nor in any other way did she hinder the examination of those returns in addition we had an opportunity to closely observe petitioner's demeanor at trial she answered questions freely and without evasion and we found her testimony credible in light of the foregoing we find that respondent has not proven by clear_and_convincing evidence that petitioner engaged in conduct intended to conceal mislead or otherwise prevent the collection of her and taxes accordingly respondent is barred by the sec_6501 limitations_period from assessing a deficiency against petitioner for the years in issue to reflect the foregoing decision will be entered for petitioner