department of the treasury internal_revenue_service washington d c office_of_chief_counsel number release date date cc psi b01 postf-148077-01 uilc internal_revenue_service national_office legal advice memorandum for robert h schorman jr attorney cc lm ctm la from william p o’shea acting associate chief_counsel cc psi fo subject leveraged partnership this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent legend taxpayer assets business x y z a postf-148077-01 b c d e f g h i j k l m date date date date date date date date date date postf-148077-01 time month year note note term term term term state dollar_figurea dollar_figureb dollar_figurec dollar_figured dollar_figuree dollar_figuref dollar_figureg dollar_figureh dollar_figurei dollar_figurej dollar_figurek dollar_figurel postf-148077-01 dollar_figurem dollar_figuren dollar_figureo dollar_figurep dollar_figureq dollar_figurer dollar_figures dollar_figuret dollar_figureu dollar_figurev dollar_figurew dollar_figurex dollar_figurey dollar_figurez dollar_figureaa dollar_figurebb dollar_figurecc a b c d e postf-148077-01 f g h issues whether the guaranty by y of the indebtedness of z may be disregarded pursuant to sec_1_752-2 of the income_tax regulations whether the contribution of taxpayer’s assets and the ensuing distribution should be recharacterized as a disguised sale by taxpayer to z pursuant to sec_707 and the regulations thereunder whether transaction can be recast as a sale between taxpayer and d pursuant to sec_1_701-2 of the income_tax regulations whether the form of the transaction should be disregarded and recharacterized as a sale between taxpayer and d whether z is a valid partnership for federal_income_tax purposes conclusions yes the guaranty by y of the indebtedness of z may be disregarded pursuant to sec_1_752-2 of the income_tax regulations yes provided the guaranty by y is disregarded the related contribution and distribution will be treated as a disguised sale under sec_707 yes it appears that the transaction is inconsistent with the intent of subchapter_k and was entered into with a principal purpose of tax_avoidance accordingly the transaction can be recast under sec_1_701-2 1y is a wholly-owned affiliate of taxpayer this transaction was structured with both taxpayer and y contributing assets to z in exchange for partnership interests but with taxpayer subsequently contributing its interest in z to y y is the putative partner of z for most of the transaction but the consequences of y’s transactions are recognized by taxpayer as a consolidated_group accordingly this memorandum will generally refer to taxpayer as the putative partner but will specifically identify y where it is significant for the analysis postf-148077-01 yes under the substance_over_form_doctrine it is appropriate to disregard the form of this transaction contribution and distribution and treat it in accordance with the underlying substance sale it does not appear that the taxpayer had the necessary intent to become a partner accordingly z should not be treated as a partnership for federal tax purposes and taxpayer should be treated as selling assets rather than making a contribution facts overview on date taxpayer announced that it planned to either spin-off or sell all of its business operations after an evaluation of bids from several companies on date taxpayer announced an agreement with x to dispose_of its united_states_assets to facilitate this taxpayer sold some of its assets to x and contributed other assets to a joint_venture with x later in month of year a a taxpayer subsidiary sold its membership interests in b a subsidiary llc of a and a interest in c to the x subsidiary d among the assets transferred to d was stock in e b owned b and c owned c of the stock of e in return for a d common equity_interest in a new limited_liability_company z d contributed these e interests as well as its interests in f and cash taxpayer transferred certain assets to g a single member llc taxpayer then contributed its membership interests in g to y a wholly-owned subsidiary in a sec_351 transaction taxpayer received partnership interests in z in exchange from the contribution of taxpayer’s interests in h a single member llc following this taxpayer contributed to y its membership interests in z y then contributed its membership interests in g to z thus y ended up with a e common equity_interest and a e preferred interest in z the reported fair_market_value of the property transferred to z from y was dollar_figurea finally z elected to be treated as a partnership for federal tax purposes z borrowed dollar_figureb from a syndicate of banks z received the funds on date and immediately made a special distribution of dollar_figurec to y on date y then distributed dollar_figurec as a dividend to taxpayer y guaranteed z’s dollar_figureb liability and increased its basis in its interest in z pursuant to sec_752 and sec_722 z also distributed dollar_figured of cash to y contributed by d y treated dollar_figuree of this distribution as a reimbursement of capital expenditures incurred in the two-year period preceding the contribution with respect to certain assets contributed by y the remaining dollar_figuref of the cash distribution was reported as a taxable sale of certain postf-148077-01 assets by y to z under the disguised sale regulations z assumed dollar_figureg of qualified_liability pursuant to sec_1_707-5 of the income_tax regulations taxpayer reported an additional dollar_figureh as consideration to y the total sales proceeds were reported as dollar_figurei less a basis of dollar_figurej this resulted in a taxable gain of dollar_figurek finally the sum of dollar_figureb plus dollar_figured plus dollar_figureg equals dollar_figurel which is approximately the fair_market_value of assets transferred to z the loan on date z entered into a dollar_figureb term_loan credit agreement agreement with i as administrative agent j as the syndication agent and k as the documentation agent the agreement provides for note evidencing z’s obligation to each lender in the syndicate the principal_amount of each note is due and payable on date thus the initial term of the loan is term the agreement also provides that z will only use the loan monies to finance a portion of the special distribution to y of dollar_figurec in addition the agreement acknowledges that the special distribution will be further distributed to taxpayer on or about the date of the agreement under the agreement i received a variety of security interests in z’s property z pledged note of x dated date in the principal_amount of dollar_figurem note is pledged as security for its subsidiary interests in a b c f g and h in addition note is also pledged as security funds to be deposited into a special escrow account kept by i lastly b and h were required to guarantee and become sureties for the loan to z the subsidiaries’ guaranty b and h were required to execute a continuing guaranty and suretyship agreement guaranty agreement regarding z’s loan the guaranty agreement contains language making it an absolute and unconditional guaranty of payment thus the lenders have the ability to require payment from the guarantors b and h without first trying to collect from z the primary debtor if z fails to make a payment or otherwise defaults under the agreement furthermore the guaranty agreement is also a continuing guaranty thus it is not limited to an isolated transaction but rather it contemplates a series of transactions often for an indefinite time period 2based on multiplication of the amount of qualified_liability by y’s net equity percentage postf-148077-01 the guaranty is unsecured and sets forth many waivers of possible defenses of the guarantors b and h thus few rights are given to b and h but many of the banks’ rights are preserved the y guaranty y’s guaranty is memorialized in a document entitled master guaranty of collection master guaranty dated date the master guaranty is a guaranty of collection as to the principal only on the indebtedness of z specifically it does not extend to any liability for interest premiums or any other_amounts payable in connection therewith thus it only covers the original aggregate principal_amount of dollar_figureb subject_to reduction due to payments of principal by z or another guarantor finally in addition to a maximum of dollar_figureb in liability to y under the master guaranty the guaranty is unsecured by the terms of the master guaranty y has no liability under the guaranty until the banks have exhausted their remedies against z furthermore the master guaranty is continuing during its period of effectiveness - date through the earlier of a the time at which the guaranty amount dollar_figureb is reduced to zero b time on date or c the time y ceases to be a member of z the master guaranty was expressly designed to have an effective period of term yet note has initial terms of term thus it appears that refinancing of the loan was contemplated by the parties as an option after term the purchase and sale agreement on date taxpayer x a and d were parties to a purchase and sale agreement that provided for the sale by a of its membership interests in b m and c to d for dollar_figuren the purchase and sale agreement also provided for the adjustment of the purchase_price based on financial information regarding taxpayer to be provided by the seller within ninety days of date the closing date a memorandum of agreement dated date between taxpayer and x evidences that the buyer d paid the seller an additional dollar_figureo thus the total consideration paid under the purchase and sale agreement was dollar_figurep taxpayer reported a taxable loss of dollar_figureq this is based on the sale proceeds of dollar_figurer less selling_expenses of dollar_figures and a taxable basis of dollar_figuret on the sale of these membership interests the contribution agreement on date d x y and z entered into a contribution agreement the contribution agreement provided for a the contribution to z by taxpayer of its membership postf-148077-01 interests in h b y’s contribution to z of its membership interests in g and c d’s contribution of its membership interests in b c f and a and dollar_figureu in cash to z the contribution agreement obligates z and the other parties to the contribution agreement to cause z to make a special distribution of dollar_figurec to y thus y has a contractual right under the contribution agreement to the special distribution furthermore the contribution agreement provides for an adjustment to the special distribution based on the financial results of taxpayer thus the special distribution is linked to the value of assets making it appear to be a payment for assets the memorandum of agreement dated date between x and taxpayer evidences that d agreed to pay dollar_figurev to z this amount plus the dollar_figureu contributed by d to z was reported as a cash distribution of dollar_figured from z to y the limited_liability_company agreement of z on date d and y entered into a limited_liability_company agreement llc agreement concerning z z was formed on date by d as a limited_liability_company under state law the assets contributed by y and taxpayer had a total value of dollar_figurew assets contributed by d were valued at dollar_figurex and in addition d also contributed dollar_figureu in cash thus taxpayer and y’s contributions represent f of all the assets and cash contributed to z however y’s common membership interest is only e the llc agreement provides that d is the managing member in its capacity as managing member d has the authority and power to manage and control the business affairs and property of z however z cannot without prior written consent of all of the member make distributions of cash or property to a member make a loan to a member or invest in a member or a member’s affiliate incur indebtedness sell lease abandon or otherwise dispose_of company assets except in the normal course of business or consolidate with or merge into another person if a minimal credit rating is not maintained by z thus y essentially maintains the right to veto any actions by z that might adversely affect z’s credit rating if the minimum required credit rating is not maintained by z y also maintains contractual rights given to it under the llc agreement_against the dilution of its e common interest thus if another party makes an additional capital_contribution to z y has the right to contribute in either cash or property an equal or lesser amount as is necessary to maintain its common percentage interest in z in addition the llc agreement contains both a put and a call option the put is structured as follows after term from date y has the right to require d to postf-148077-01 purchase all or part of y’s interest upon providing at least term advance written notice the purchase_price of the put is to be determined by the parties if the members cannot agree on a price a formula is provided for determining the purchase_price finally if the put option is exercised no damages are payable to y under the tax_sharing_agreement discussed below the parties also agreed that at any time after date d has the ability to issue a written notice at least term in advance of its intent to purchase or cause another to purchase all but not less than all of y’s membership interests at a price equal to the sum of the preferred capital amount3 and any accrued and unpaid preferred_return thereon and the net equity of the y common percentage interest4 determined as of the last day of the fiscal quarter immediately preceding the fiscal quarter in with the written notice was given together with damages determined as set forth in the tax_sharing_agreement discussed below if the call rights are exercised after date no damages or other_amounts are due under the tax_sharing_agreement the tax_sharing_agreement the parties to the tax_sharing_agreement tax agreement are d x y and z the tax agreement was dated date under the terms of the tax agreement x and d agreed to indemnify y for the loss of the anticipated tax_deferral on the special distribution that resulted from y’s guaranty if caused by x or d for term after date the tax agreement additionally provides that if any of the following takes place x must pay compensation to taxpayer a there is a final_determination of a federal tax_liability of taxpayer or an affiliate arising from the contribution of x’s assets or the distribution to y and d or b an x affiliate receives an actual cash tax_benefit law and analysis issue one y’s guaranty of z’s dollar_figureb liability 3the preferred capital amount is defined in the llc agreement as that portion of y’s original capital_contribution equal to dollar_figurey for which capital y is entitled to a preferential_distribution the preferred interest the preferred capital amount is to be reduced by any payments in excess of accrued preferred_return the preferred_return is an amount equal to g per annum compounded annually based on the preferred capital amount balance 4the common percentage interest means initially d for d and e for y or such other percentage determined by dividing the positive balance in the member’s capital_account less any preferred amount therein by the aggregate of the positive capital_account balances of all member’s capital accounts postf-148077-01 taxpayer claims that y’s guarantee of the loan creates a risk of loss for y so that the liability will be allocated to y under sec_752 it is taxpayer’s position that the increased basis associated with this liability under sec_752 and sec_722 allowed y to receive the special distribution without any gain recognition under sec_731 sec_1_752-2 presumes that partners and related_persons who have obligations to make payments will actually perform those obligations irrespective of their actual net_worth unless the facts and circumstances indicate a plan to circumvent or avoid the obligation sec_1_752-2 provides that the service may disregard an obligation of a partner or related_person if the facts and circumstances indicate that a principal purpose of the arrangement was to create the appearance of a partner or related_person bearing the economic risk of loss when the substance of the arrangement is otherwise sec_1_752-2 further provides for the disregard of an obligation to make payment if the facts and circumstances evidence a plan to circumvent or avoid the obligation sec_1_752-2 contains an example which illustrates this rule by providing that the guarantee of an undercapitalized subsidiary of a consolidated_group should be disregarded in the present case the purported value of y’s assets may have been as low as dollar_figurez at the time of the loan based on a valuation performed by l assuming this to be true y appears to be severely undercapitalized with respect to the loan guaranty y’s guarantee would normally establish a risk of loss under sec_1_752-2 however y’s relative lack of capital the restrictive prerequisites for y’s performance under the guarantee and z’s pledge of note from x all suggest a plan to avoid any performance obligation from y on the guarantee accordingly we believe that y’s guaranty should be disregarded when y’s guarantee is disregarded the liability is treated as a nonrecourse_liability under sec_752 sec_1_752-3 provides for a three-tier allocation of nonrecourse liabilities first liabilities are allocated in accordance with the partners’ shares of the partnership_minimum_gain second liabilities are allocated in accordance with the gain that partners would recognize under sec_704 if the property subject_to the liabilities were disposed of for no consideration other than the relief of the liability third excess nonrecourse liabilities are allocated in accordance with the partner’s share of partnership profits as determined by taking into account all facts and circumstances alternatively the partnership_agreement sec_1_752-2 prevents the pledge of x’s note from being treated as creating a risk of loss for d a related_party to x that section does not however prevent the pledge from being considered in evaluating whether y’s guarantee created a real risk of loss for y or merely created the appearance of a risk of loss postf-148077-01 may specify the partners’ interests in partnership profits for purposes of allocating excess nonrecourse liabilities provided the interests so specified are reasonably consistent with allocations that have substantial economic_effect under sec_704 regulations as a third alternative the excess nonrecourse liabilities may be allocated among the partners in accordance with the manner in which it is reasonably expected that the deductions to those nonrecourse liabilities will be allocated in the present case we anticipate that taxpayer will claim that even if the liability were nonrecourse sufficient amounts of the liability would be allocated to y under sec_1_752-3 so that the distribution would not have resulted in gain under sec_731 we will provide additional assistance evaluating the merits of such a claim when and if it is advanced issue two sec_707 disguised sale analysis the issue presented here centers on the question of whether the service can properly characterize taxpayer and y’s respective contributions on date followed by the special distribution of dollar_figurec to y on date by z as a disguised sale under sec_707 the purpose of the disguised sale provision is to prevent parties from characterizing a sale_or_exchange of property as a contribution to a partnership followed by or preceded by a distribution from the partnership with the object of deferral or avoidance of tax h_r rep no pincite reprinted in c b vol pincite under sec_707 when a partner transfers money or other_property directly or indirectly to a partnership where there is a related direct or indirect transfer of money or other_property by the partnership to such partner or another partner and if these transfers when viewed together are properly characterized as a sale_or_exchange of property such transfers will be treated either as a transaction between a partnership and a non-partner or as a transaction between two or more partners acting as outsiders sec_1_707-3 provides that if within a two-year period a partner transfers property to a partnership and the partnership transfers money or other consideration to the partner without regard to the order of the transfers the transfers are presumed to be a sale of the property to the partnership unless the facts and circumstances clearly establish otherwise in the present case taxpayer and y contributed approximately dollar_figurec worth of property to the partnership the partnership then incurred a liability of dollar_figureb and distributed the proceeds plus an additional dollar_figureu to taxpayer through y it is important to note that taxpayer reported the distribution that was not debt financed as consideration in a disguised sale thus on the return the taxpayer has conceded the application of sec_707 the issue presently in contention postf-148077-01 is whether the dollar_figureb debt-financed distribution should be treated as consideration as well sec_1_707-5 provides that for purposes of sec_1_707-3 if a partner transfers property to a partnership and the partnership incurs a liability and all or a portion of the proceeds of that liability are allocable under sec_1_163-8t to a transfer of money or other consideration to the partner made within days of incurring the liability the transfer of money or other consideration to the partner is taken into account only to the extent that the amount of money or the fair_market_value of the other consideration transferred exceeds that partner’s allocable share of the partnership_liability taxpayer argues that y’s guarantee causes y to be allocated the entire dollar_figureb share of the liability under the sec_1_707-5 rules for recourse_liabilities if this were the case then the distribution would not exceed y’s allocable share of the liability and no part of the distribution would be treated as consideration under sec_1_707-5 however as has been discussed the guarantee by y should be disregarded under sec_1_752-2 accordingly y’s allocable share of the nonrecourse_liability will be determined under sec_1_707-5 which requires partners to determine their allocable share of nonrecourse liabilities in accordance with their method of allocating excess nonrecourse_deductions under sec_1_752-3 the general default rule_of a is that a partner’s share of excess nonrecourse liabilities is determined in accordance with the partner’s interest in partnership profits determined under all facts and circumstances alternatively the partnership_agreement may specify the partners’ interests in partnership profits for purposes of allocating excess nonrecourse liabilities provided the interests so specified are reasonably consistent with allocations that have substantial economic_effect under the sec_704 regulations of some other significant item of partnership income or gain in the present case the partnership_agreement provides that h of the excess nonrecourse liabilities will be allocated to y however this allocation is not consistent with any significant partnership allocation of profits or losses accordingly it seems apparent that attempted allocation is not consistent with the regulations and should be disregarded leaving y’s share of the nonrecourse liabilities to be determined in accordance with its interest in partnership profits or e thus for purposes of sec_1_707-5 y’s allocable share of the partnership_liability is e dollar_figurebb and dollar_figurecc of the dollar_figureb debt financed distribution will be treated as consideration in a disguised sale issue three application of the anti-abuse regulations under the partnership anti-abuse regulation the commissioner can recast part or all of a transaction where a partnership is used or availed with a principal purpose postf-148077-01 of reducing the partners federal tax_liability in a manner that is inconsistent with the intent of subchapter_k sec_1_701-2 subchapter_k is intended to permit taxpayers to conduct joint business activity through a flexible economic arrangement without incurring an entity-level tax implicit in this intent are three requirements the partnership must be bona_fide and used for a substantial business purposes the transaction must be respected under a substance over form analysis and the resulting tax consequences must clearly reflect income or else the distortion must be clearly contemplated by the applicable_provision sec_1_701-2 whether there is a principal purpose of reducing the partners’ federal tax_liability is determined under all facts and circumstances sec_1 c in the present case taxpayer has monetized its equity in the approximately dollar_figurec worth of assets while transferring the benefits_and_burdens_of_ownership of those assets to d and the x group as z pays off the liability taxpayer should realize gain under sec_731 due to the sec_752 deemed distributions to y however that is future gain for a benefit that taxpayer has currently realized accordingly we do not believe that this transaction can be respected under either a substance over form analysis or a clear_reflection_of_income standard this transaction is therefore inconsistent with the intent of subchapter_k furthermore we are comfortable that this transaction was entered into with a principal purpose of reducing the partners’ federal tax_liability we believe taxpayer’s direct sale of its high basis high value assets to x is a strong indicator that a principal purpose of contributing its low basis high value assets to z was the reduction of taxpayer’s federal tax_liability accordingly because the transaction was inconsistent with the intent of subchapter_k and was entered into with a principal purpose of reducing the taxpayer’s federal tax_liability we believe it is appropriate to apply the sec_1_701-2 anti-abuse rule issue four substance over form under the doctrine_of substance over form the courts may look through the form of a transaction to determine its substance in light of economic realities as explained by the supreme court in 435_us_561 citations omitted in applying this doctrine_of substance over form the court has looked to the objective economic realities of a transaction rather than to the particular form the parties employed the court has never regarded the simple expedient of drawing up papers as controlling for tax purposes when the objective economic realities are to the contrary in the field of taxation administrators of the laws and the courts are concerned with substance and realities and formal written documents postf-148077-01 are not rigidly binding nor is the parties' desire to achieve a particular tax result necessarily relevant see also eg 324_us_331 to permit the true nature of a transaction to be disguised by mere formalisms which exists solely to alter tax_liabilities would seriously impair the effective administration of the tax policies of congress 293_us_465 refusing to give effect to transactions that complied with formal requirements for nontaxable corporate_reorganization the question for determination is whether what was done apart from the tax motive was the thing which the statute intended subchapter_k was adopted in part to increase flexibility among partners in allocating partnership tax burdens see generally 41_tc_535 aff'd 352_f2d_466 3d cir this flexibility however is limited by the overarching principle that the substance of the transaction is controlling for tax purposes 200_f3d_1268 10th cir aff'g in part and appeal dismissed in part tcmemo_1996_283 thus there is ample precedent applying the substance_over_form_doctrine to partnership transactions see eg 66_tc_295 acq 1976_2_cb_1 miller v u s ct_cl both involving a substance over form analysis to determine whether a partner has in substance sold a partnership_interest or received a liquidating_distribution cases involving the issue of substance over form are inherently factual and the reluctance of some courts to look beyond the form of the transaction prompted congress to add sec_707 the circumstances that motivated congress to act should not be interpreted as a deficiency with the doctrine there is precedent for the application of the doctrine to transactions that were structured as contributions and distributions but were more appropriately treated as sales see 91_tc_793 96_tc_577 aff'd 963_f2d_218 8th cir we believe that the facts that you have presented establish that taxpayer has effectively parted with the benefits and burdens of assets while receiving cash_equivalent to the value of assets accordingly taxpayer should be taxed in accordance with the substance of this transaction a sale and not its form a contribution and distribution issue five shamming the partnership another theory available to the service is the issue of the existence of a valid partnership in the form of z for federal tax purposes it is plausible to argue that z is not a partnership that should be recognized for federal tax purposes if z is not a postf-148077-01 partnership for federal tax purposes then taxpayer is participating in this transaction as something other than a partner and will not be able to rely on the partnership provisions for nonrecognition treatment the issue of whether or not a partnership was formed is primarily a question of intent in 327_us_280 the supreme court stated a partnership is generally said to be created when persons join together their money goods labor or skill for the purpose of carrying on a trade profession or business and when there is community of interest in the profits and losses when the existence of an alleged partnership arrangement is challenged by outsiders the question arises whether the partners really and truly intended to join together for the purpose of carrying on business and sharing in the profits or losses or both and their intention in this respect is a question of fact to be determined from testimony disclosed by their 'agreement considered as a whole and by their conduct in execution of its provisions ' we see no reason why this general_rule should not apply in tax cases where the government challenges the existence of a partnership for tax purposes citations and footnote omitted as the tower case makes clear the alleged partners' intent must be determined from an examination of the facts the supreme court later elaborated on and explained its decision in tower in 337_us_733 the question is not whether the services or capital contributed by a partner are of sufficient importance to meet some objective standard supposedly established by the tower case but whether considering all the facts--the agreement the conduct of the parties in execution of its provisions their statements the testimony of disinterested persons the relationship of the parties their respective abilities and capital contributions the actual control of income and the purposes for which it is used and any other facts throwing light on their true intent--the parties in good_faith and acting with a business_purpose intended to join together in the present conduct of the enterprise footnote omitted in the instant case the facts do not show that taxpayer and y in good_faith and acting with a business_purpose intended to join together in the conduct of business with d first there does not appear to be a business_purpose for the partnership second y's interest in the partnership is nominal and most of its capital_contribution was returned to it by means of the special distribution third y does postf-148077-01 not participate in the management and control of the business fourth the existence of a tax_avoidance motive on the part of y tends to indicate that there was no bona_fide intent to carry on business as a partnership commissioner v culbertson supra u s pincite n finally y does not provide services to the alleged partnership if y were to leave this alleged partnership there probably would be no detrimental effect on its business it is not accurate to state that taxpayer and d joined together their money assets or skill for the purpose of carrying on a trade profession or business with a community of interest in the profits and losses see eg 327_us_280 201_f3d_505 d c cir affg tcmemo_1998_305 and andantech llc et al v commissioner tcmemo_2002_97 accordingly z should not be treated as a partnership and taxpayer should be treated as transferring assets to d in a taxable transaction finally although it appears that z is operating a legitimate business_enterprise that fact has no bearing on the legitimacy of the partnership per se for example in 873_f2d_879 5th cir aff’g tcmemo_1988_72 the court found that a partnership formed to operate an oil rig lacked economic_substance although the operation of the oil rig itself was not a sham in that the partnership was formed for no other purpose than the creation of tax benefits for its partners case development hazards and other considerations postf-148077-01 this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views please call if you have any further questions by david r haglund senior technician reviewer associate chief_counsel passthroughs and special industries


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-114889-15 date september legend decedent ------------------------ ----------------------------------------------------- ------------------ spouse ------------------ -------------------------- date date --------------------- --------------------------- dear ------------- this letter responds to your personal representative’s letter of date and subsequent correspondence requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the election under sec_2010 of the internal_revenue_code code portability election to allow a decedent’s surviving_spouse to take into account that decedent’s deceased spousal unused exclusion dsue amount the facts and representations submitted are as follows decedent died on date survived by spouse date is a date after the effective date of the amendment to sec_2010 which provides for portability of a dsue amount to a surviving_spouse to obtain the benefit of portability of decedent’s dsue amount to spouse decedent’s estate was required to file form_706 united_states estate and generation-skipping_transfer_tax return on or before the date that is nine months after decedent’s date of death or the last day of the period covered by an extension decedent’s form_706 was due on date spouse relied on a qualified_tax professional plr-114889-15 to timely file a form_706 to make the portability election but such qualified_tax professional failed to do so the estate discovered its failure to elect portability after the due_date for making the election decedent’s estate represents that the value of decedent’s gross_estate is less than the basic exclusion amount in the year of the decedent’s death and that during his lifetime decedent made no taxable_gifts decedent’s estate requests an extension of time pursuant to sec_301_9100-3 to elect portability of decedent’s dsue amount pursuant to sec_2010 law and analysis 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_2010 provides that a credit of the applicable credit_amount shall be allowed to the estate of every decedent against the tax imposed by sec_2001 sec_2010 provides that the applicable credit_amount is the amount of the tentative_tax that would be determined under sec_2001 if the amount with respect to which such tentative_tax is to be computed were equal to the applicable_exclusion_amount on date congress amended sec_2010 effective for estates of decedents dying and gifts made after date to allow portability of a decedent’s unused applicable_exclusion_amount between spouses tax relief unemployment insurance reauthorization and job creation act of pub_l_no sec_303 124_stat_3296 sec_2010 provides that the applicable_exclusion_amount is the sum of the basic exclusion amount and in the case of a surviving_spouse the dsue amount sec_2010 generally provides that the basic exclusion amount is dollar_figure to be adjusted for inflation annually after calendar_year sec_2010 defines the dsue amount to mean the lesser_of a the basic exclusion amount or b the excess of -- i the applicable_exclusion_amount of the last deceased spouse of the surviving_spouse over ii the amount with respect to which the tentative_tax is determined under sec_2001 on the estate of such deceased spouse sec_2010 provides that a dsue amount may not be taken into account by a surviving_spouse under sec_2010 unless the executor of the estate of the deceased spouse files an estate_tax_return on which such amount is computed and makes an election on such return that such amount may be so taken into account the election plr-114889-15 once made shall be irrevocable no election may be made if such return is filed after the time prescribed by law including extensions for filing such return sec_2010 provides that the secretary shall prescribe regulations as may be necessary or appropriate to implement sec_2010 sec_20_2010-2t a of the estate_tax regulations as in effect on date provides that to allow a decedent’s surviving_spouse to take into account that decedent’s dsue amount the executor of the decedent’s estate must elect portability of the dsue amount on a timely-filed form_706 under sec_20_2010-2t a the due_date of an estate_tax_return required to elect portability is nine months after the decedent’s date of death or the last day of the period covered by an extension if an extension of time for filing has been granted under sec_20_2010-2t a the portability election is made by timely filing a complete and properly prepared estate_tax_return unless the executor satisfies the requirements for the election not to apply in sec_20_2010-2t a i sec_301_9100-1 provides that the commissioner may 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 six months except in the case of taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that the term statutory election means an election whose due_date is prescribed by statute the term regulatory election means an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-3 provides the standards the commissioner will use 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 a request for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government 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 the due_date for the portability election is prescribed by statute in the case of an estate required to file an estate_tax_return under sec_6018 see sec_2010 sec_6075 plr-114889-15 and a in the case of an estate that is not required to file an estate_tax_return under sec_6018 the due_date is prescribed by regulation see sec_20_2010-2t a see also sec_20_2010-2 and revproc_2014_18 2014_7_irb_513 sec_2 accordingly in the latter case a taxpayer may seek an extension of time to elect portability under the provisions of sec_301_9100-3 sec_6018 requires the filing of an estate_tax_return in all cases where the gross_estate exceeds the basic exclusion amount in effect under sec_2010 for the calendar_year which includes the date of death for purposes of this determination under sec_6018 the basic exclusion amount is reduced but not below zero by the sum of -- a the amount of the adjusted_taxable_gifts within the meaning of sec_2001 made by the decedent after date plus b the aggregate amount allowed as a specific exemption under sec_2521 as in effect before its repeal by the tax reform act of with respect to gifts made by the decedent after date decedent’s estate represents that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is not required to file an estate_tax_return under sec_6018 under these facts the commissioner has discretionary authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly we grant an extension of time of days from the date of this letter in which to elect portability under sec_2010 the election should be made by filing a complete and properly-prepared form_706 and a copy of this letter within days from the date of this letter to the cincinnati service_center at the following address internal_revenue_service cincinnati service_center stop cincinnati oh for purposes of electing portability a form_706 filed by decedent’s estate within days from the date of this letter will be considered to be timely filed 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 if it is later determined that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is required to file an estate_tax_return pursuant to sec_6018 the commissioner is without authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-114889-15 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 leslie h finlow senior technician reviewer office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury internal_revenue_service washington d c date number info release date cc tege eoeg et1 - genin-135291-03 uilc memorandum for director internal_revenue_service center cincinnati oh attn technical unit from subject office of division counsel associate chief_counsel tax exempt and government entities cc tege eoeg et1 - genin-135291-03 railroad retirement act tax status in accordance with the coordination procedure established between the service and the railroad retirement board rrb the rrb has provided us with its opinion that ceased to be an employer under the railroad retirement act and the railroad unemployment insurance act effective date and that became an employer under the acts effective date the rrb also concluded that became the successor employer of we have reviewed the opinion of the rrb and based upon the information submitted to the rrb we also conclude that ceased to be an employer under the railroad_retirement_tax_act effective date and that became an employer under the act effective date we also conclude that became the successor employer of please take the appropriate action regarding these businesses cc will e mcleod


internal_revenue_service significant index no department of the treasury washington dc g contact person telephone number in reference to eep ra t a2 mar in re request_for_ruling on behalf taxpayer k this letter is in response to your request on behalf of taxpayer k dated date in which you asked for a ruling as to whether certain proposed distributions from an individual_retirement_account ira b owned by taxpayer k are part of a series of substantially_equal_periodic_payments and are therefore not subject_to the percent additional tax imposed on premature distributions under sec_72 of the internal_revenue_code code the ruling_request was amended by you in telephone calls with date and on date to clarify the methodology used to calculate distributions of our office on november according to the facts as stated taxpayer k participated in a plan described in sec_401 of the code sponsored by taxpayer k’s employer after taxpayer k ceased employment with the employer on date taxpayer k’s benefit under the employer’s sec_401 plan was transferred in a direct_rollover to a newly established ira ira a owned by taxpayer k a portion of ira a’s balance was subsequently transferred on date to a second ira ira b which was established solely for the purpose of receiving such amount taxpayer k attained age in taxpayer k would like to start receiving quarterly distributions from ira b beginning on date and would like to avoid the percent tax imposed on premature distributions under code sec_72 by taking distributions in the form of substantially_equal_periodic_payments as described in sec_72 of the code the quarterly distribution amount for was calculated by dividing the account balance of ira b as of date by an annuity factor which is the present_value of a one dollar per year annuity paid in quarterly installments of of a dollar and commencing at age the annuity factor is calculated using commutation functions derived from the up-1984 mortality_table where an interest rate of percent is used once such quarterly payments commence the same amount will be distributed for each quarter of subsequent years from ira b and only from tra b ruling requested based on these facts you have requested the following ruling the proposed method of determining periodic_payments satisfies one of the methods described in notice_89_25 and results in substantially_equal_periodic_payments within the meaning of sec_72 of the code and such payments will not be subject_to the additional tax of sec_72 unless the requirements of sec_72 are not met applicable law sec_408 of the internal_revenue_code provides that amounts paid or distributed out of an individual_retirement_plan must be included in gross_income by the payee or distributee in the manner provided under sec_72 of the code sec_72 of the internal_revenue_code provides rules for determining how amounts received as annuities endowments or life_insurance contracts and distributions from qualified_plans are to be taxed sec_72 of the internal_revenue_code was added to the code by the tax_reform_act_of_1986 tra_'86 effective generally for taxable years beginning after date sec_72 provides for the imposition of an additional percent tax on early distributions from qualified_plans including iras the additional tax is imposed on that portion of the distribution that is includible in gross_income sectton t a iv of the code provides that sec_72 shall not apply to distributions which are part of a series of substantially_equal_periodic_payments not less frequently than annually made for the life or life expectancy of the employee or the joint lives or joint life expectancies of such employee and his beneficiary sec_72 of the code imposes the additional limitation on distributions excepted from the percent tax by sec_72 that if the series of payments ts subsequently modified other than by reason of death or disability before the later of the close of the 5-year period beginning with the date of the first payment and the employee's attainment of age then the taxpayer's tax for the first taxable_year in which such modification occurs shall be increased by an amount determined under regulations equal to the tax that would have been imposed except for the sec_72 exception plus interest for the deferral_period jz sec_1_72-9 of the income_tax regulations regulations provides tables that are to be used in connection with computations under sec_72 and the regulations thereunder included in this section are tables giving life expectancies for one life table v and joint life and last survivor expectancies for two lives table vi notice_89_25 1989_1_cb_662 provides guidance in the form of questions and answers on certain provisions of the tax_reform_act_of_1986 tra_'86 in the absence of regulations on sec_72 of the code this notice provides guidance with respect to the exception to the tax on premature distributions provided under sec_72 t a iv q a-12 of notice_89_25 provides three methods for determining substantially_equal_periodic_payments for purposes of sec_72 of the code two of these methods involve the use of an interest rate assumption that must be an interest rate that does not exceed a reasonable interest rate on the date payments commence proposed methodology the proposed method for determining quarterly periodic_payments described in the ruling_request as modified is to calculate a quarterly distribution amount for by dividing the account balance of ira b as of date by an annuity factor that is the cost of a one dollar per year life_annuity paid in quarterly installments of one-fourth of a dollar commencing at age the annuity factor is calculated using commutation functions derived from the up- mortality_table using an interest rate of percent only one quarterly distribution will be paid in and the same quarterly distribution amount will be distributed each subsequent quarter thereafter all distributions will be taken from ira b and only from ira b conclusion - the mortality_table and interest rate used are such that they do not result in the circumvention of the requirements of sec_72 and sec_72 of the code through the use of an unreasonable mortality_table or an unreasonably high interest rate accordingly we conclude that the proposed method as modified of determining periodic_payments satisfies one of the methods described in notice_89_25 and results in substantially_equal_periodic_payments within the meaning of sec_72 of the code and such payments will not be subject_to the additional tax of sec_72 unless the requirements of sec_72 are not met y i this ruling is directed only to the individual that re quested it sec_61 k of the code provides that it may not be used or cited by others as precedent sincerely yours martin l pippins manager employee_plans actuarial group tax_exempt_and_government_entities_division


of f i c e of c h i ef c ou n sel department of the treasury i n t e r n al r e v e n u e s e r v i c e w ashington d c date number info release date conex-127217-08 uil the honorable ginny brown-waite member u s house of representatives citrus country drive unit dade city fl attention ------------------ dear congresswoman brown-waite to your inquiry dated date on behalf of your i am responding on constituent --------------------------------- it appears that ----------------is dissatisfied with the actions of an attorney involved in an attempted exchange of properties that was intended to qualify as a like-kind_exchange under sec_1031 of the internal_revenue_code however the issue raised seems to be one of attorney negligence rather than the application of the federal_income_tax law to the exchange therefore it would not be appropriate for us to comment on this matter if you have any questions please contact me or ----------------------------------at ----- -------- ------- sincerely michael j montemurro branch chief office of associate chief_counsel income_tax accounting


significant index number department of the treasury internal_revenue_service washington d c l tax_exempt_and_government_entities_division dec fier ma al re plan no _ plan ein taxpayer dear this letter constitutes notice that approval has been granted for your request for a 5-year automatic_extension for amortizing the unfunded liabilities as of for the above-named plan which are described in sec_431 and sec_431 b of the internal_revenue_code code and sec_304 and sec_304 of the employee_retirement_income_security_act_of_1974 ‘erisa’ this extension is effective with the plan_year beginning _ this extension applies to the eligible amortization charge bases as identified in your application submission the extension of the amortization periods of the unfunded liabilities of the plan was granted in accordance with sec_431 of the code sec_431 of the code requires the secretary to extend the period of time required to amortize any unfunded_liability of a plan for a period of time not in excess of years if the plan submits an application meeting the criteria stated in sec_431 the plan has submitted the required information to meet the criteria in sec_431 including a certification from the plan's actuary that i absent the extension under subparagraph a the plan would have an accumulated_funding_deficiency in the current plan_year or any of the succeeding plan years ii the plan_sponsor has adopted a plan to improve the plan's funding status sei a iii the plan is projected to have sufficient assets to timely pay expected benefits and anticipated expenditures over the amortization period as extended and iv the notice required under paragraph a has been provided we have sent a copy of this letter to the manager ep classification in _ to the manager ep compliance unit in ' and to your authorized representative pursuant to a power_of_attorney on file in this office this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited by others as precedent if you require further assistance in this matter please contact iid at sincerely yours david m ziegler manager ep actuarial group


department of the treasury washington dc person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 - plr-103000-04 date date internal_revenue_service number release date index number -------------------------------------------- ---------------------- ----------------------------------- ------------------------------- - legend x y --------------------------------------------------------------------- ----------------------- -------------------------- ----------------------- a b d1 d2 d3 d4 d5 -- ---- -------------------------- -------------------------- ---------------- ---------------- -------------------------- dear -------------- requesting a ruling under sec_1362 of the internal_revenue_code facts organized on d1 y a wholly owned subsidiary of x was organized on d2 x elected to be an s_corporation effective d3 x also made an election to treat y as a qualified_subchapter_s_subsidiary qsub effective d3 held a portion of their shares in their individual_retirement_accounts iras which were it was discovered that at the time of both elections a of the shareholders of x according to the information submitted and representations therein x was this responds to your letter dated date submitted on behalf of x x and its shareholders have agreed to make any adjustments that the sec_1362 provides that an election under sec_1362 shall be sec_1361 provides that a small_business_corporation cannot have a sec_1361 defines an s_corporation as a small_business_corporation for plr-103000-04 ineligible shareholders on or about d4 x was informed by its accountants of the invalid election to rectify the situation all b shares owned by the iras were sold to eligible shareholders on d5 commissioner may require consistent with the treatment of x as an s_corporation and y as a qsub law and analysis which an election under sec_1362 is in effect for such year shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual terminated whenever at any time on or after the first day of the taxable_year for which the corporation is an s_corporation the corporation ceases to be a small_business_corporation the termination is effective on and after the day of the cessation sec_1362 sec_1361 defines a qsub as a domestic_corporation that is not an ineligible_corporation if percent of the stock of the corporation is owned by an s_corporation and the s_corporation elects to treat the corporation as a qsub by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or b was terminated under sec_1362 the secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination steps were taken so that the corporation is once more a small_business_corporation and the corporation and each person who was a shareholder in the corporation at any time during the period specified pursuant to this subsection agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the ineffectiveness or termination the corporation shall be treated as an s_corporation during the period specified by the secretary conclusion sec_1362 in relevant part provides that if an election under sec_1362 furthermore during the period from d3 to d5 each individual whose ira held plr-103000-04 based solely on the facts submitted and representations made we conclude that x’s s election was ineffective for the taxable_year beginning on d3 because b shares of x were held by a ineligible shareholders we further conclude that the ineffectiveness of x’s s election constituted an inadvertent invalid election within the meaning of sec_1362 in addition we conclude that the inadvertent invalid s election does not affect the status of y as a qsub of x under the provisions of sec_1362 x will be treated as an s_corporation from d3 and thereafter provided that x’s s election was otherwise valid and has not otherwise terminated under sec_1362 and provided that the qsub election was otherwise valid and has not otherwise terminated shares of x will be treated as the owner of the x shares held by the respective individual’s ira except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provisions of the code specifically no opinion is expressed regarding whether x is otherwise eligible to be an s_corporation or whether y is otherwise eligible to be a qsub provides that it may not be used or cited as precedent letter is being mailed to your authorized representative s david r haglund enclosures cc david r haglund senior technician reviewer branch office of associate chief_counsel passthroughs and special industries in accordance with the power_of_attorney on file with this office a copy of this this ruling is directed only to the taxpayer requesting it sec_6110 copy of this letter copy for sec_6110 purposes sincerely


t c summary opinion united_states tax_court timothy macarthur daye sr petitioner and marvis henderson-daye intervenor v commissioner of internal revenue respondent docket no 3148-09s filed date timothy macarthur daye sr pro_se marvis henderson-daye pro_se olivia j hyatt for respondent armen special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_1 unless otherwise indicated all subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure b the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case in this sec_6015 proceeding petitioner seeks to be relieved from a federal_income_tax liability assessed against him because he filed a joint federal_income_tax return for that year consistent with respondent’s determination denying him administrative relief petitioner’s spouse marvis henderson-daye intervenor from whom he has been separated for over months opposes relief background some of the facts have been stipulated and they are so found we incorporate by reference the parties’ stipulation of facts and accompanying exhibits at the time the petition was filed petitioner and intervenor resided at separate addresses in the state of north carolina petitioner and intervenor were married in they separated in date and at the time of trial in date were still separated petitioner and intervenor have one minor son during their marriage petitioner and intervenor maintained separate financial accounts but had one joint bank account for joint items such as joint tax refunds petitioner holds a bachelor of arts degree in business administration he has taken coursework in individual and corporate_taxation as well as an h_r block tax course at all relevant times petitioner has worked for duke university as a financial analyst during his marriage to intervenor petitioner was the primary breadwinner and through and including the time of trial his average income was approximately dollar_figure per year intervenor holds a bachelor of arts degree in communications as well as a master’s degree on date intervenor was involved in an accident and thereafter became permanently disabled before becoming permanently disabled intervenor worked for the state of north carolina at the time she became permanently disabled the state of north carolina paid intervenor percent of her salary for a 3-year period until she was approved for social_security disability benefits in intervenor’s request for social_security disability benefits was approved during the time that intervenor was awaiting approval of her request for social_security disability benefits she incurred credit card debt to pay for living_expenses including household bills and prescriptions in date intervenor received a dollar_figure insurance settlement resulting from the date accident of the dollar_figure settlement approximately dollar_figure served to pay attorney’s fees and the remainder was used to pay off the credit card bills that intervenor had accrued while awaiting approval for the social_security disability benefits during her marriage to petitioner and through and including the time of trial intervenor’s average annual income was approximately dollar_figure intervenor received a form ssa-1099 social_security_benefit statement for indicating she received disability benefits of dollar_figure the benefits were paid in a lump sum for year sec_2002 through of the dollar_figure dollar_figure was taxable but no income_tax was withheld petitioner and intervenor filed their joint federal_income_tax return for on date reporting a tax_liability of dollar_figure the tax_return was prepared by petitioner and presented to intervenor for her review and signature along with the tax_return intervenor remitted a check from her individual bank account for dollar_figure to bring the outstanding tax_liability to dollar_figure intervenor wrote the check at petitioner’s request because he stated that the outstanding liability was her liability along with the joint tax_return petitioner and intervenor submitted an installment_agreement signed by both parties indicating they could pay dollar_figure per month toward the outstanding liability reported on the federal_income_tax return in actuality of the reported tax_liability of dollar_figure dollar_figure was attributable to petitioner and dollar_figure was attributable to intervenor on date intervenor and her son moved out of the family home before moving out intervenor established an apartment by setting up utilities and purchasing bedroom and living room furniture using the money from the lump-sum social_security_benefits since moving out of the family home intervenor has maintained her apartment providing for all of the living_expenses for herself and her son from date through date petitioner did not pay child_support to intervenor as of the time of trial petitioner and intervenor have an agreement under which dollar_figure is garnished from petitioner’s paycheck for child_support however petitioner remains approximately dollar_figure in arrears for child_support on date petitioner submitted to respondent a form_8857 request for innocent spouse relief under sec_6015 ultimately respondent issued a final_determination denying petitioner’s request for relief under sec_6015 discussion in general spouses may elect to file a joint federal_income_tax return for a year even if one spouse had no obligation to file a return for that year sec_6013 after electing to file a joint federal_income_tax return each spouse is jointly and severally liable not only for the entire tax due but also for any deficiency subsequently determined even if all income giving rise to the tax_liability is allocable to only one of the spouses sec_6013 114_tc_276 if certain requirements are met however an individual may be relieved of joint_and_several_liability under sec_6015 except as otherwise provided in sec_6015 the taxpayer bears the burden_of_proof to show his or her entitlement to relief rule a 119_tc_306 affd 101_fedappx_34 6th cir there are three types of relief available under sec_6015 in general sec_6015 provides full or apportioned relief from joint_and_several_liability sec_6015 provides proportionate tax relief to divorced or separated taxpayers and in certain circumstances sec_6015 provides equitable relief from joint_and_several_liability if relief is not available under subsection b or c petitioner did not request nor is petitioner entitled to relief under sec_6015 or c sec_6015 permits relief from joint_and_several_liability where it is inequitable to hold the individual liable for any unpaid tax or a deficiency or any portion of either we review de novo petitioner’s entitlement to equitable relief under sec_6015 see 132_tc_203 pursuant to sec_6015 the commissioner has prescribed revenue_procedure guidelines to help irs employees determine whether a requesting spouse is entitled to relief from joint_and_several_liability see revproc_2003_61 2003_2_cb_296 modifying and superseding revproc_2000_15 2000_1_cb_447 the court consults these guidelines when reviewing the irs’ denial of relief see 120_tc_137 according to revproc_2003_61 sec_4 2003-c b pincite a requesting spouse must satisfy threshold conditions which include inter alia that the income_tax_liability from which the requesting spouse seeks relief be attributable to an item of the nonrequesting spouse unless one of enumerated exceptions applies the joint federal_income_tax return reported a tax_liability of dollar_figure of which dollar_figure is attributable to petitioner and none of the exceptions enumerated in revproc_2003_61 supra apply therefore petitioner is not entitled to relief from joint_and_several_liability under sec_6015 for the portion of the liability that is attributable to him with regard to the remaining dollar_figure of the reported tax_liability that is attributable to intervenor and taking into account the factors the commissioner considers in such matters see revproc_2003_61 sec dollar_figure and c b pincite we find that it would not be inequitable to hold petitioner liable for the joint_and_several income_tax_liability that arises from the joint federal_income_tax return filed with intervenor accordingly petitioner is not entitled to relief from liability under sec_6015 little would be gained by burdening this opinion with a discussion of each of the factors contained in revproc_2003_ supra see sec_7463 last sentence suffice it to note that petitioner has not demonstrated that he would suffer economic hardship if relief were not granted nor that he did not know and had no reason to know that intervenor would not pay the income_tax_liability see revproc_2003_61 sec_4 a ii and iii c b pincite moreover petitioner agreed to and signed an installment_agreement under which he and intervenor agreed to make monthly payments of dollar_figure toward their joint tax_liability finally given his business and tax acumen petitioner undoubtedly knew that he could have filed a separate_return and avoided joint_and_several_liability for the tax attributable to intervenor’s social_security disability benefits in this regard when asked by respondent’s counsel at trial whether he knew he could file using the married_filing_separately filing_status petitioner replied as follows mr daye yes respondent but you chose to do married_filing_jointly anyway mr daye yes i did conclusion we have considered all of the arguments made by petitioner and to the extent that we have not specifically addressed them we conclude that they are without merit to reflect the foregoing decision will be entered for respondent


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom it a plr-108380-99 date date legend x y z a b c d e dear this is in response to your letter dated date requesting a ruling on behalf of x a corporation concerning the federal_income_tax consequences of a waiver of dividends by x x previously requested and received a favorable ruling plr-19143-96 that x’s waiver of dividends declared by y did not result in income to x under facts substantially identical to the facts presented below because the previously issued ruling by its terms ceases to be effective three years after the issuance of the letter_ruling date b x again requests that the same ruling be issued with respect to x’s waiver of dividends declared by y in z reorganized from a mutual_savings_bank to a mutual holding_company pursuant to the laws of state a under the plan_of_reorganization z transferred substantially_all of its assets and liabilities including all of its deposit liabilities to a newly created capital stock bank y in exchange for percent of y’s common_stock the remaining percent of y common_stock was sold through stock offerings to former depositors of z who became depositors of y as a result of the reorganization individuals residing in state a and the general_public also as part of the reorganization z changed its name to x the purpose of the reorganization was to achieve an organizational structure that made it easier for x and y to raise equity_capital to diversify geographically to expand the financial products offered and to compete more effectively in the current marketplace since the reorganization y has operated as a capital stock bank and subject_to statutory and regulatory constraints prevailing financial conditions and future earnings y has declared and paid cash dividends on its common_stock the first dividend was declared and paid to the minority stockholders in the quarter following the reorganization as one of the considerations in the decision to declare and pay dividends the board_of directors of y looks at its capital requirements its economic forecasts and such other factors as it deems relevant a portion of y’s earnings will be retained by y in order to provide capital for its operations and expansion of its banking business on date c the officers and trustees of x owned directly and indirectly d of the e outstanding shares of common_stock of y or percent y has no outstanding preferred_stock at this time in addition the officers and trustees of x held in the aggregate less than dollar_figure percent of the deposits in y on date c x as the majority stockholder has in the past waived cash dividends declared by y x also anticipates that it will continue to waive from time to time certain of the future cash dividends declared and paid_by y it is represented that the waiver of dividends allows y to make dividend distributions to minority shareholders who own the publicly traded common_stock thereby enhancing its market_value and providing y with greater access to capital markets for future equity offerings and still permits y to maintain adequate capital to support its operations and expand its banking business however the board_of trustees of x has fiduciary responsibilities that must be considered in determining whether a dividend will be waived and each waiver is considered independent from each other waiver of dividends therefore x will waive its dividends only when its board_of trustees determines that a bona_fide business_purpose exists for such waiver and that such waiver will enhance the value of x’s investment in y the following representations have also been made in regard to the dividend waiver y has in the past and is expected to continue to declare and pay cash dividends on a quarterly basis no dividend waivers will be made by x with respect to stock_dividends if any declared and paid_by y and prior to the declaration of any cash dividend by y x will submit a written_statement to y indicating the extent of its waiver of the anticipated dividends sec_61 of the internal_revenue_code provides that except as otherwise provided in subtitle a gross_income means all income from whatever source derived including dividends generally a majority shareholder who agrees to waive dividends while other shareholders receive theirs does not realize income if there is no family or direct business relationship between the majority and minority shareholders and the waiver is executed for valid business reasons see rev_rul 1953_1_cb_178 however the waiver by a majority shareholder of the right to receive a pro_rata share of any dividends_paid by a corporation will not be recognized for income_tax purposes where such dividends are paid to the relatives as minority shareholders in the form of increased dividends and the waiver results primarily in a benefit to the relatives income is realized by the majority shareholder to the extent of the increased distribution to the related shareholders resulting from the waiver see revrul_56_431 1956_2_cb_171 revproc_67_14 1967_1_cb_591 lists the conditions under which the service will consider a request for a ruling on a proposed waiver of dividends transaction when the waiving and nonwaiving shareholders are individuals the following three conditions must be satisfied a bona_fide business reason must exist for the proposed waiver of dividends the relatives eg brothers sisters spouse ancestors and lineal_descendants of the waiving shareholder must not be in a position to receive more than percent of the total dividends distributed to the nonwaiving shareholders and the ruling is not effective if any change in stock ownership other than death enables nonwaiving relatives to receive more than percent of the dividend because x is a corporation not an individual revproc_67_14 is not determinative of whether a ruling_request on a proposed waiver of dividends transaction will be considered however some of the conditions listed in revproc_67_14 are appropriate for determining whether the service will consider a request for a ruling on a proposed waiver of dividends transaction when a waiving or nonwaiving shareholder is a corporation one condition that is applicable regardless of whether the waiving or nonwaiving shareholder is an individual or a corporation is the existence of a bona_fide business reason for the proposed waiver of dividends in this ruling_request it is represented that x has a bona_fide business reason for the proposed waiver of dividends because the waiver would allow y to make dividend distributions to minority shareholders who own the publicly traded common_stock of y thereby enhancing its market_value and providing y with greater access to capital markets for future equity offerings and still permit y to maintain adequate capital to support its operations and expand its banking business the board_of trustees of x has certain fiduciary responsibilities which must be considered in determining whether a dividend will be waived consequently x will waive its dividends only when its board_of trustees determine that a bona_fide business_purpose exists for such waiver and that such waiver will enhance the value of x’s investment in y as stated above x is a corporation and therefore can not have relatives as defined in revproc_67_14 or a family relationship as referred to in rev_rul however rev_rul also refers to whether or not there is a direct business relationship between the waiving and nonwaiving shareholders with respect to x and y it is represented that as of c the officers and trustees of x own directly and indirectly percent of the outstanding common_stock of y y has no outstanding preferred_stock based on these facts the officers and trustees of x do not hold a significant interest in y and thus there is no direct business relationship between the waiving and nonwaiving shareholders revproc_67_14 provides for a restriction on waiver of dividends a ruling issued on a proposed waiver of dividends transaction will not be effective for a period longer than three years from the date of the ruling this restriction is also appropriate when the waiving or nonwaiving shareholder s is a corporation based on the information submitted the applicable law and the representations made we conclude that a bona_fide business reason does exist for the proposed waiver and that there is no direct business relationship between the waiving and nonwaiving shareholders accordingly the waiver by x of any part of its pro_rata share of cash dividends declared by y during the period beginning on the date of this ruling through a period of three years after the issuance of this letter_ruling will not result in income to x if the percentage of common_stock of y held directly and indirectly by the officers and trustees of x increases significantly during the waiver period this ruling will no longer be applicable this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that a ruling may not be used or cited as precedent a copy of this ruling should be attached to x’s federal_income_tax return sincerely yours acting assistant chief_counsel income_tax and accounting by michael gompertz assistant to the branch chief branch enclosures copy of letter copy for sec_6110 purposes


internal_revenue_service department of the treasury index number number release date washington dc person to contact telephone number refer reply to cc dom p si - plr-116016-98 date date x a date year dear this letter responds to the date ruling_request submitted by you on behalf of x requesting relief under sec_1362 of the internal_revenue_code the information submitted states that on date of year a transferred the assets of a business to x in exchange for x’s stock a as x’s president represents that x intended to elect to be an s_corporation from inception a also represents that x’s accountant believed that x’s attorney had drafted and filed a form_2553 election by a small_business_corporation for x to be effective year and the attorney thought the accountant had drafted and filed a form_2553 meanwhile x and a had received assurances from both the attorney and accountant that the necessary documents had been executed and filed however a form_2553 was not filed for x sec_1362 of the code provides that if-- a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may mr edward a zittel treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation for x’s year taxable_year accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective for its year taxable_year within days following the date of this letter then such election will be treated as timely made for x’s year taxable_year a copy of this letter should be attached to the form_2553 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter is being forwarded to x sincerely yours h grace kim assistant to the chief branch office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


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 fip b04 plr-107166-16 date date x y adviser fund portfolio state a state b number f number g number h number i number j ----------------------------------------------------------------------------------------------- --------------- ----------------------------------------------------------------------------------------------- ------------------------------- ------------------------------------------ --------------------------- ----------------------------------------------------------------------------------------------- ------------------------------- -------------- -------------- ---- ---- ---- ---- dear ------------------------ this letter is in response y’s request for a ruling that y rather than the variable_contract holder is the owner of portfolio entities facts x is the parent of a consolidated_group that includes y and other subsidiaries y is a life_insurance_company within the meaning of sec_816 of the internal_revenue_code plr-107166-16 fund fund is a state a business_trust it is an open-end management investment_company registered under the investment_company act of and the securities act of as amended portfolio portfolio is a newly formed series of fund portfolio has elected to be classified as a partnership ownership of portfolio shares of portfolio are offered to certain x group_life_insurance company segregated_asset accounts to serve as an investment vehicle for variable_contracts shares of portfolio except as otherwise permitted by sec_1_817-5 of the income_tax regulations are held by segregated_asset accounts underlying variable_contracts of one or more life_insurance_companies the variable_contracts are variable_contracts within the meaning of sec_817 of the code public access to shares of portfolio is available exclusively through the purchase of a variable_contract except as otherwise permitted by sec_1_817-5 of the income_tax regulations although the terms of each variable_contract may vary the insurance_company will generally hold the premiums_paid by a variable_contract holder net of any fees or commissions and any income earned on the net_premiums in a segregated_asset_account the variable_contract holder generally will be able to allocate amounts held in the segregated_asset_account among several different investment options or subaccounts at least one subaccount will correspond to an investment in portfolio the life_insurance_companies whose segregated_asset accounts hold shares of portfolio are life_insurance_companies within the meaning of sec_816 of the code portfolio’s investment objectives under normal circumstances substantially_all of portfolio’s assets will be invested in a variety of eligible third-party mutual funds other third-party variable insurance investment options or both collectively underlying funds the underlying funds will in turn invest in u s and foreign equity and debt instruments under normal market conditions portfolio’s exposure to the two broad assets classes of debt and equity are expected to be as follows debt will be number g to number h percent equity will be number i to number j percent the portion of portfolio’s assets allocated to an underlying fund will change over time and there can be no expectation that current or past positions in an underlying fund will be maintained in the future plr-107166-16 adviser of portfolio fund has entered into an investment advisory agreement with adviser adviser is a corporation organization under the laws of state a and is a wholly-owned subsidiary of y adviser is a registered investment adviser under the investment advisers act of as amended pursuant to the investment advisory agreement adviser is responsible for managing the investment and reinvestment of portfolio’s assets and continuously reviewing supervising and administering portfolio’s investment programs adviser has discretion over the percentage of portfolio's assets allocated to each underlying fund the investment advisory agreement between the fund and adviser shall continue in effect until terminated provided however in accordance with the requirements of sec_15 of the investment_company act of that if the agreement is to continue in effect for a period of more than number f years from the date of its execution it may only continue if it is specifically approved at least annually by the board_of fund or by a vote of the outstanding voting_securities of portfolio variable_contract holders all investment decisions concerning fund and portfolio will be made by adviser in its sole and absolute discretion a variable_contract holder will only be able to allocate premiums and transfer amounts in the insurance_company segregated_asset_account to and from the insurance_company subaccount corresponding to a fund a variable_contract holder will not be able to direct portfolio’s investment in any particular asset or recommend a particular investment or investment strategy and there will be no agreement or plan between adviser and a variable_contract holder regarding a particular investment a variable_contract holder will have no current knowledge of portfolio’s specific assets portfolio’s holdings however will be available as permitted by the sec including in quarterly filings with the sec and annual and semi-annual reports to shareholders a variable_contract holder will have no legal equitable direct or indirect interest in any of the assets of portfolio rather a variable_contract holder will have only a contractual claim against the insurance_company offering the contract to receive cash from the insurance_company pursuant to the terms of the specific variable_contract portfolio’s diversification portfolio will comply with the diversification requirements of sec_817 and sec_1_817-5 of the income_tax regulations plr-107166-16 ruling requested for federal_income_tax purposes y rather that the variable_contract holder is the owner of portfolio investor_control rules law if the separate_account assets underlying the variable_contract are considered the assets of the life_insurance_company that issues the contract and not the property of the contract holder sec_817 governs the tax treatment of the contract if the separate_account assets underlying the contract are considered the assets of the contract holder the contract holder is taxed on the income derived from the investment_assets under sec_61 in general the holder of legal_title is the owner of the property and is taxed on the income derived from the property however if a person other than the holder of legal_title possesses the benefits_and_burdens_of_ownership that person is attributed ownership of property for tax purposes see eg 435_us_561 309_us_331 the supreme court summarized this principle in corliss v bowers 381_us_376 stating that taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed-the actual benefit for which the tax is paid the service applied these general tax_ownership principles in a series of investor_control rulings revrul_77_85 1977_1_cb_12 revrul_80_274 1980_2_cb_27 revrul_81_225 1981_2_cb_12 revrul_82_54 1982_1_cb_11 revrul_2003_91 2003_2_cb_347 and revrul_2003_92 2003_2_cb_350 the rulings stand for the proposition that contract holders possessing control_over the investment of the separate_account assets in addition to the other_benefits and burdens of contract ownership are the owners of separate_account assets for federal_income_tax purposes even if the insurance_company retains possession of and legal_title to those assets in revrul_77_85 the service concluded that if the contract holder of an investment annuity_contract may select and control the investment_assets in the separate_account of the life_insurance_company then the contract holder is treated as the owner of those assets for federal_income_tax purposes and is taxed on the income derived from the investment_assets in the ruling the individual_contract holder of a variable_annuity contract retained the right to direct the custodian of the account supporting that variable_annuity to sell purchase and exchange securities or other assets held in the custodial_account the contract holder also was able to exercise an owner's right to vote account securities either through the custodian or individually the service found that the contract holder possessed significant incidents_of_ownership over the assets held in the custodial_account and thus concluded that the policyholder was the owner of those assets for federal_income_tax purposes plr-107166-16 in revrul_80_274 the contract holder transferred existing investments to an insurance_company in return for an annuity_contract and could withdraw all or a portion of the cash_surrender_value of the contract at any time prior to the annuity_starting_date the service applying revrul_77_85 concluded that the contract holder’s position was substantially identical to what it would have been had the investment been directly maintained or established and thus the contract holder was the owner of the investment for federal_income_tax purposes in revrul_81_225 the service described four situations in which the contract holder is considered the owner of mutual_fund shares held by insurance_companies in connection with annuity_contracts and one situation in which the insurance_company is the owner of the mutual_fund shares for federal_income_tax purposes in the four situations in which the contract holder is considered the owner of the mutual_fund shares the shares are available for purchase other than through the purchase of an annuity_contract in those situations the service concluded that the contract holder had investment control_over the mutual_fund shares and that the contract holder’s position in each situation was substantially identical to what it would have been had the mutual_fund shares been purchased directly by the contract holders conversely in the situation in which the mutual_fund shares were only available through the purchase of an annuity_contract the insurance_company was the owner for federal_income_tax purposes in revrul_82_54 the contract holder of certain annuity_contracts could allocate premium payments among three funds and had an unlimited right to change those allocations prior to the maturity_date of the annuity_contract interests in the funds were not available for purchase by the general_public but were instead only available through the purchase of an annuity_contract the service concluded that the purchaser's ability to choose among general investment strategies for example between stock bonds or money market instruments either at the time of the initial purchase or subsequent thereto did not constitute control sufficient to cause the contract holders to be treated as the owners of the mutual_fund shares for federal_income_tax purposes in the eighth circuit addressed the tax_ownership issue in the context of a variable_annuity contract 749_f2d_513 8th cir the taxpayers upon purchasing the contract could allocate premiums among mutual funds and could change the allocation at any time the taxpayers bore the full investment risk and could withdraw any or all of the investment upon seven days’ notice in addition the taxpayer was not required to exercise the annuity feature of the contract the eighth circuit concluded that the taxpayers surrendered few of the rights of ownership or control_over assets of the sub-account id pincite the court held that for federal_income_tax purposes the taxpayers not the issuing insurance_company owned the mutual_fund shares that funded the variable_annuity and thus the taxpayers were required to include in gross_income any gains dividends or other income derived from the mutual_fund shares in revrul_2003_91 the service concluded that the variable_contract holder did not plr-107166-16 have sufficient control_over segregated account assets to be deemed the owner of the assets the variable_contract was funded by a separate_account that was divided into twelve subaccounts each subaccount offered a different investment strategy interests in the subaccounts were available solely through the purchase of a variable life or variable_annuity contract that qualified as a variable_contract under sec_817 the investment activities of each subaccount were managed by an independent investment adviser there was no arrangement plan contract or agreement between the contract holder and the issuing insurance_company or between the contract holder and the independent investment adviser regarding the availability of a particular subaccount the investment strategy of any subaccount or the assets to be held by a particular subaccount other than a contract holder's right to allocate premiums and transfer funds among the available subaccounts all investment decisions concerning the subaccounts were made by the issuing insurance_company or the independent investment adviser in their sole and absolute discretion a contract holder had no legal equitable direct or indirect interest in any of the assets held by a subaccount but had only a contractual claim against the issuing insurance_company to collect cash in the form of death_benefits or cash surrender values under the contract the service concluded that based on all the facts and circumstances the contract holder did not have direct or indirect control_over the separate_account or any subaccount asset and therefore the contract holder did not possess sufficient incidents_of_ownership over the assets supporting the variable_contracts to be deemed the owner of the assets for federal_income_tax purposes in revrul_2003_92 the purchasers of variable_annuity and variable life_insurance contracts were able to allocate their premiums among ten different sub-accounts each sub-account invested in a partnership in the factual scenario in which the partnership interests were available other than through the purchase of a variable_annuity or life_insurance_contract the service concluded that the contract holders were the owners of the interests in the partnerships in contrast if the partnership interests were only available through the purchase of a variable_annuity or life_insurance_contract the service concluded that the insurance_company was the owner of the interests in the partnerships analysis in the revenue rulings discussed above the service took the position that if the holder of a variable life_insurance_policy or variable_annuity contract possesses sufficient incidents_of_ownership over the assets supporting the policy or contract the contract holder is viewed for federal_income_tax purposes as the owner of the underlying assets and as a result is currently taxed on any income and gains attributable to the underlying assets the determination of whether the holder of a variable life_insurance_policy or variable_annuity contract possesses sufficient incidents_of_ownership over the assets of the separate_account underlying the variable life_insurance_contract or variable_annuity contract depends on all the relevant facts and circumstances see revrul_2003_91 plr-107166-16 in the present case the variable_contract holders do not have any control_over portfolio’s investments including portfolio’s investments in the underlying funds the investment decisions of portfolio are made by adviser in its sole and absolute discretion and are subject_to change without notice to or approval by the variable_contract holders the variable_contract holders in this case do not have any more control_over the assets held under their contract than was the case in revrul_82_54 or revrul_2003_91 portfolio is not an indirect means of allowing a variable_contract holder to invest in an underlying fund conclusion based on the representations and facts presented for federal_income_tax purposes y rather than the variable_contract holder is the owner of portfolio and its underlying investment_assets 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 letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for rulings and it is subject_to verification on examination sincerely alexis a macivor branch chief branch financial institutions products