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 b1 plr-119032-09 date date legend x -------------------------------------------------- ------------------------------------ y -------------------------------------------------- --------------------------------------------- country province date ----------- ---------------- --------------------- dear ----------------- this letter responds to your letter dated date submitted on behalf of x by its authorized representative requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations for x to file an election to be classified as an association_taxable_as_a_corporation for federal tax purposes facts the information submitted states that on date y formed x a wholly owned province unlimited limited_liability_company located in country x's default status was as a disregarded_entity for federal tax purposes x was eligible to be classified as an plr-119032-09 association_taxable_as_a_corporation for federal tax purposes effective date but failed to timely file a form_8832 entity classification election law and analysis sec_301_7701-3 provides guidance on the classification of a domestic eligible_entity for federal tax purposes under sec_301_7701-3 unless it elects otherwise a domestic eligible_entity is disregarded as an entity separate from its owner if it has a single owner sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided in sec_301_7701-3 by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides that an election under sec_301_7701-3 will be effective on the date specified on form_8832 or on the date filed if no such date is specified on the form the effective date specified on form_8832 cannot be more than days prior to the date the form is filed and cannot be more than months after the date on which the form is filed sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 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 a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 sets forth the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief 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 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 failed to make the election because after exercising reasonable diligence taking into account the taxpayer's experience and the complexity of the return or issue the taxpayer was unaware of the necessity of the election or the taxpayer reasonably relied on a qualified_tax professional including a tax plr-119032-09 professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election sec_301_9100-3 provides in part that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money sec_301_9100-3 provides in part that the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment conclusion based on the facts submitted and representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly x is granted an extension of time of days form the date of this letter to file form_8832 and elect to be classified as an association_taxable_as_a_corporation for federal tax purposes effective date a copy of this letter should be attached to the form_8832 except as specifically set forth above no opinion is expressed or implied as to the federal tax consequences of the transaction described above under any other provision of the code this ruling is directed only to the taxpayer on whose behalf it was requested sec_6110 provides that it may not be used or cited as precedent plr-119032-09 in accordance with the power_of_attorney on file with this office a copy of this letter will be sent to your authorized representatives sincerely curt g wilson curt g wilson deputy 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 uil number info release date cc ebeo br 4emadden cor-102156-00 dear this letter responds to your request dated date for general information regarding sec_162 of the internal_revenue_code this letter is advisory only and is not to be cited as precedent in your request for general information you ask whether where a corporation subject_to sec_162 of the code amends its plan to increase or decrease the aggregate limit but retains the individual limit on the number of equity-based awards that may be issued under the plan that was previously approved by shareholders compensation paid under the plan qualifies as performance-based compensation under sec_162 your question assumes that the plan contains a provision that allows the board_of directors of the corporation in its discretion to amend the plan at any time in any manner it deems appropriate subject_to shareholder approval only to the extent required by applicable laws regulations or rules you also indicate that shareholder approval of a plan containing an aggregate limit is no longer required under section b of the securities exchange act of exchange act sec_162 of the code allows as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business including a reasonable allowance for salaries or other compensation_for_personal_services actually rendered sec_162 of the code however provides that for any publicly_held_corporation no deduction shall be allowed for applicable_employee_remuneration with respect to any covered_employee to the extent that the amount of such remuneration for the taxable_year exceeds dollar_figure under sec_162 of the code applicable_employee_remuneration does not include any remuneration payable solely on account of the attainment of one or more performance goals but only if i the performance goals are determined by a compensation committee of the board_of directors of the taxpayer which is comprised solely of or more outside directors ii the material terms under which the cor-102156-00 remuneration is to be paid including the performance goals are disclosed to shareholders and approved by a majority of the vote in a separate shareholder vote before the payment of such remuneration and iii before any payment of such remuneration the compensation committee referred to in clause i certifies that the performance goals and any other material terms were in fact satisfied under sec_1_162-27 of the income_tax regulations the deduction limit does not apply to qualified_performance-based_compensation qualified performance- based compensation is compensation that meets all of the requirements of paragraphs e performance_goal requirement e outside director requirement e shareholder approval requirement and e certification requirement sec_1_162-27 of the regulations provides in part that qualified_performance-based_compensation must be paid solely on account of the attainment of one or more preestablished objective performance goals sec_1_162-27 of the regulations provides that compensation attributable to a stock_option or stock appreciation plan is deemed to satisfy the requirements of paragraph e if the grant or award is made by the compensation committee the plan under which the option is granted states the maximum number of shares with respect to which the option or right may be granted during a specified period to any employee and under the terms of the option or right the amount of compensation the employee could receive is based solely on an increase in the value of the stock after the date of the grant or award under sec_1_162-27 of the regulations the material terms of the performance_goal under which the compensation is to be paid must be disclosed to and subsequently approved by the shareholders of the publicly_held_corporation before the compensation is paid the requirements of paragraph e are not satisfied if the compensation would be paid regardless of whether the material terms are approved by the shareholders the material terms include the employees eligible to receive compensation a description of the business criteria on which the performance_goal is based and either the maximum amount of compensation that could be paid to any employee or the formula used to calculate the amount of compensation to be paid to the employee if the performance_goal is met except that in the case of a formula based in whole or in part on a percentage of salary or base pay the maximum dollar amount of compensation that could be paid to the employee must be disclosed sec_1_162-27 of the regulations provides that disclosure as to the compensation payable under a performance_goal must be specific enough so that shareholders can determine the maximum amount of compensation that could be paid to any employee during a specified period if the terms of the performance_goal do not provide for a maximum dollar amount the disclosure must include the formula under which the compensation would be calculated thus for example if compensation attributable to the exercise of stock_options is equal to the difference in the exercise cor-102156-00 price and the current value of the stock disclosure would be required of the maximum number of shares for which grants may be made to any employee and the exercise price of those options eg fair_market_value on date of grant sec_1_162-27 of the regulations provides that once the material terms of a performance_goal are disclosed and approved by shareholders no additional disclosure or approval is required unless the compensation committee changes the material terms of the performance_goal if however the compensation committee has the authority to change the targets under a performance_goal after shareholder approval of the goal material terms of the performance_goal must be disclosed to and approved by shareholders no later than the first shareholder meeting that occurs in the fifth year following the year in which shareholders previously approved the performance_goal the regulations are silent concerning whether additional disclosure and approval is required in a case such as that present in your letter sec_1_162-27 and of the regulations do not indicate that the maximum number of equity-based awards that may be granted under the plan is a material term that must be stated in the plan and disclosed to and approved by the shareholders prior to payment of compensation under the plan thus the amendment of a plan to increase or decrease the maximum number of equity-based awards solely through the action of the board_of directors and without shareholder approval does not affect the status of options or rights granted under the plan as qualified performance- based compensation under sec_162 of the code provided no change is made to the individual limit and the specified time no opinion is rendered concerning whether or not for purposes other than the federal tax law a board_of directors has complied with its fiduciary duty to shareholders in cases where a board_of directors discloses to shareholders the number of shares that will be issued under a plan and then exceeds that limit if you have any questions regarding this letter please contact my office pincite- sincerely robert misner robert misner assistant chief branch office of the associate chief_counsel employee_benefits and exempt_organizations


internal_revenue_service department of ne qoy significant index no significant index no washington do contact person telephone number in reference to tiep ra t al ‘999 date dec in re this letter constitutes notice that with respect to the above-named defined benefit pension_plan conditional waivers of the percent excise_tax under sec_4971 of the internal_revenue_code have been granted for the tax and plan years ended date and the conditional waivers of the percent excise_tax have been granted in accordance with section b of the employee_retirement_income_security_act_of_1974 erisa tax waivers have been granted is equal to percent of the contribution which would otherwise be required to reduce the balance in the funding_standard_account to zero as of the end of the plan years ending december of course because we have waived the excise_tax for these two years the penalties and interest associated solely with respect to the excise_taxes under sec_4971 of the code will be zero the amount for which these excise and however the plan is being terminated in originally the company requested a waiver of the minimum_funding_standard under sec_412 of the code for the plan_year ended date termination and the business hardship did not appear to the company was informed of our tentative deniat of the request for the minimum_funding waiver and was offered a conference of right telephone conference was held on date decided to withdraw its request for a waiver of the minimum_funding_standard for the plan_year ended date and to request waivers of the excise_tax under sec_4971 of the code decision was confirmed in your facsimile transmission of date the company then be temporary a distress this a and the minimum_funding_standard under sec_412 of the code and sec_302 of erisa will apply to the plan for the plan years ended december there are accumulated funding deficiencies as of date and for the plan on which a tax is imposed under sec_4971 of the code the enclosed forms return of the excise_taxes related to employee benefit plans with instructions should be used to file the required returns when paying the taxes based on the information submitted aif ee the waivers of the excise_tax are conditioned upon that within one year from the date of this letter the company will the excise_taxes under sec_4971 for the plan years ended date and and reach a settlement with the pbgc on distress termination of the plan you agreed to these conditions in your conference of right on date not satisfied the waivers are retroactively null if these conditions are and void pa a _ this ruling sec_6110 of the code provides that it may not be used by others as precedent is directed only to the taxpayer that requested it a copy of this letter should be sent to the enrolled_actuary for we have sent a copy to the acting area manager for the plan employee_plans in sincerely yours carol d gold director employee_plans tax_exempt_and_government_entities_division enclosures alo


o f f i c e o f t h e c h i e f c o u n s e l department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date number release date conex-142642-14 uil the honorable patty murray united_states senator pacific avenue suite tacoma wa --------------- attention dear senator murray ----------------- i sec_71 years old and is working part-time as a i am responding to your inquiry dated date on behalf of your constituent --------------------------------- home care aide he contacted your office about social_security_taxes withheld from his pay specifically he asked if he needed to pay social_security_taxes for his work as a home care aide and how to get a refund of the social_security_taxes that were withheld from his pay as a general matter we cannot provide binding legal advice applicable to particular taxpayers except through the private_letter_ruling process or in the case of a determination about worker classification the form ss-8 process if your constituent wants to request a worker classification determination he should follow the procedures in the instructions to form ss-8 determination of worker status for purposes of federal employment_taxes and income_tax_withholding available on www irs gov although i may not provide binding legal advice to following general information about the law sec_3101 and sec_3111 of the internal_revenue_code the code impose social_security and medicare taxes collectively called federal_insurance_contributions_act fica tax on employees and employers respectively social_security and medicare taxes apply to wages paid_by an employer or received by an employee with respect to employment sec_3121 defines wages as all remuneration for employment subject_to certain exceptions there are no exceptions from the definition of wages based on age part-time employment or work as a health care aide i can provide the ----------------- conex-142642-14 while there are special rules regarding the application of social_security and medicare taxes to pay for household work done in or around a home such as by caretakers health aides nannies private nurses and yard workers when such work is performed by an employee of the person receiving the household services these rules do not generally exclude such payment from social_security and medicare taxes but only provide a limited exclusion based on a threshold if the worker is an employee of the person receiving the services the employer and the employee are each subject_to social_security and medicare taxes if the wages exceed a threshold_amount for the threshold_amount is dollar_figure generally the worker is an employee for federal tax purposes if the service_recipient has the right to direct and control the worker not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished the service_recipient does not have to actually direct or control the manner in which the worker performs the services but must have the right to do so this determination is based on all the facts and circumstances if the worker is an employee of a party other than the person receiving the services such as a company the work is not viewed as household work and social_security and medicare taxes apply without application of any threshold it appears that the entity paying of the person receiving his services if correct he may file form ss-8 and request a determination of his worker status but as previously indicated work as an employee of a third party would be subject_to social_security and medicare taxes without application of the threshold if an employer withholds social_security or medicare_tax from an employee in error the employee may request the employer to repay or reimburse the employee the overwithheld tax and the employer may file a form 941-x adjusted employer's quarterly federal tax_return or claim_for_refund to correct the overreported amounts and request a refund if the employer will not do so the employee may file a form_843 claim_for_refund and request for abatement to request a refund of social_security and medicare taxes withheld in error i hope this information is helpful if you have additional questions please call me at -------------------- as an employee does not believe that treatment is -------------------- ------------------ ------------------ ------------------ ------------------ is treating or at sincerely victoria a judson division counsel associate chief_counsel tax exempt and government entities


t c no united_states tax_court james r kennedy petitioner v commissioner of internal revenue respondent docket no 9544-o0l filed date on date r mailed to p a notice required by sec_6320 i r c concerning p’s unpaid tax_liabilities for the years through r concedes that such notice was not mailed to p at his last_known_address on date r mailed to pa final notice_of_intent_to_levy concerning p’s unpaid tax_liabilities for the years through although the notice_of_intent_to_levy was mailed to p at his last_known_address p failed to file a request for an administrative hearing with the internal_revenue_service office of appeals appeals_office within the 30-day period prescribed in sec_6330 i r c despite p’s failure_to_file a timely request for an appeals_office hearing r granted p a so-called equivalent_hearing on date r issued a decision letter to p stating that r would proceed with collection by way of levy on date p filed a petition for review with the court held insofar as the petition filed herein purports to be a petition for review of a notice of the filing of a notice of lien pursuant to sec_6320 i r c the court lacks jurisdiction on the ground that r did not make a determination pursuant to that section because r failed to send the written notice prescribed by sec_6320 i r c to p at his last_known_address held further insofar as the petition filed herein purports to be a petition for review of a notice_of_intent_to_levy pursuant to sec_6330 i r c the court lacks jurisdiction on the ground that r did not make a determination pursuant to sec_6330 i r c because p failed to file a timely request for an appeals_office hearing under sec_6330 and b and b i r c held further r’s decision to conduct a so-called equivalent_hearing did not result in a waiver by r of the time restrictions imposed on p for requesting an appeals_office hearing pursuant to sec_6330 i r c james r kennedy pro_se susan watson and wendy s harris for respondent opinion ruwe judge this case was assigned to special_trial_judge robert n armen jr pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_183 the court agrees with and adopts the opinion of the special_trial_judge which is set forth below unless otherwise indicated all section references are to the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure - - opinion of the special_trial_judge armen special_trial_judge this matter is before the court on respondent’s motion to dismiss for lack of jurisdiction respondent contends that the court lacks jurisdiction over the petition on the ground that respondent did not issue a determination_letter to petitioner pursuant to sec_6320 or sec_6330 as explained in detail below insofar as petitioner seeks review of a notice of the filing of a notice of lien pursuant to sec_6320 we will dismiss this case for lack of jurisdiction on the ground that respondent failed to mail the notice required by sec_6320 to petitioner at his last_known_address and therefore petitioner had no opportunity to request an administrative hearing further insofar as petitioner seeks review of a notice_of_intent_to_levy pursuant to sec_6330 we will dismiss this case for lack of jurisdiction on the ground that petitioner failed to make a timely request for an administrative hearing and therefore respondent was not obliged to and did not issue a determination_letter to petitioner background on or about date respondent mailed to petitioner a notice_of_federal_tax_lien filing and your right to a hearing under sec_6320 the notice required by sec_6320 concerning petitioner’s unpaid tax_liabilities for the years q4e- through respondent concedes that the notice required by sec_6320 was not mailed to petitioner at his last_known_address and that such notice was therefore invalid see sec_6320 c in any event petitioner did not request an administrative hearing with the internal_revenue_service office of appeals appeals_office in respect of the notice required by sec_6320 nor did the appeals_office either conduct an administrative hearing or issue a determination_letter regarding the notice required by sec_6320 on or about date respondent mailed to petitioner a final notice_of_intent_to_levy and notice of your right to a hearing notice_of_intent_to_levy concerning petitioner’s unpaid tax_liabilities for the years through the notice_of_intent_to_levy was mailed to petitioner at his last_known_address see sec_6330 c petitioner actually received the notice_of_intent_to_levy on date as reflected by the u s postal service form_3811 domestic return receipt that was signed at the time that the notice was the notice required by sec_6320 listed petitioner’s tax_liabilities as dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure for the years and respectively the notice_of_intent_to_levy stated that petitioner owed amounts from prior notices additional penalties and interest totaling dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure for the years and respectively - - delivered the notice_of_intent_to_levy stated in pertinent part if you don’t pay the amount you owe make alternative arrangements to pay or request appeals consideration within days from the date of this letter we may take your property on date the appeals_office received a form request for a collection_due_process_hearing from petitioner petitioner’s request arrived at the appeals_office in an envelope bearing a u s postal service postmark date of date although the appeals_office concluded that petitioner had failed to file his request for a hearing within the time prescribed in section or the appeals_office granted petitioner a so-called equivalent_hearing see sec_301 1t i temporary proced admin regs fed reg date petitioner attended the eguivalent hearing which was conducted on date on date the appeals_office issued a decision letter to petitioner stating that respondent would proceed with collection by way of levy respondent’s decision letter states in pertinent part your due process hearing request was not filed within the time prescribed under sec_6320 and or however you received a hearing equivalent to a due process hearing except that there is no right to dispute a decision by the appeals_office in court under sec_6320 and or -- - on date despite the above-quoted statement in respondent’s decision letter petitioner filed with the court a petition for lien or levy action under code sec_6320 or d in response to the petition respondent filed a motion to dismiss for lack of jurisdiction asserting that the petition should be dismissed on the ground that the decision letter that respondent issued to petitioner does not constitute a determination_letter sufficient to invoke the court’s jurisdiction pursuant to sec_6330 petitioner filed an objection to respondent’s motion to dismiss asserting that respondent failed to mail the notice required by sec_6320 to him at his last_known_address and to conduct a proper collection hearing this matter was called for hearing at the court’s motions session in washington d c although no appearance was made by or on behalf of petitioner at the hearing petitioner did file a written_statement with the court pursuant to rule c counsel for respondent appeared at the hearing and informed the court that petitioner had recently filed a bankruptcy petition asa result the court issued an order staying all proceedings in this case pursuant to u s c sec_362 shortly thereafter respondent filed a status report with the court stating that petitioner’s bankruptcy case had been dismissed the court subsequently issued an order lifting the automatic_stay this matter was called for further hearing at the court’s motions session in washington d c although no appearance was made by or on behalf of petitioner at the hearing petitioner did file a written_statement with the court pursuant to rule c counsel for respondent appeared at the hearing and offered argument in support of respondent’s motion to dismiss counsel for respondent informed the court that on or about date respondent had issued a substitute notice required by sec_6320 to petitioner concerning his unpaid tax_liabilities for the years through discussion sec_6321 provides that if any person liable to pay any_tax neglects or refuses to pay the same after demand the unpaid tax shall be a lien in favor of the united_states upon all property and rights to property belonging to that person sec_6322 provides that the lien imposed under sec_6321 generally arises at the time of assessment however sec_6323 provides that the lien shall not be valid against any purchaser holder of a security_interest mechanic’s_lienor or judgment lien creditor until the secretary files a notice of lien with the appropriate public officials sec_6320 provides that the secretary shall provide the person described in sec_6321 with written notice of the filing of a notice of lien under sec_6323 including notice of the administrative appeals available to the person - - sec_6331 provides that if any person liable to pay any_tax neglects or refuses to pay the tax within days after notice_and_demand for payment the secretary is authorized to collect the tax by levy upon the person’s property sec_6331 provides that at least days before enforcing collection by way of a levy on the person’s property the secretary is obliged to provide the person with a final notice_of_intent_to_levy including notice of the administrative appeals available to the person in the internal_revenue_service restructuring and reform act of publaw_105_206 112_stat_685 congress enacted new sec_6320 pertaining to liens and pertaining to levies to provide protections for taxpayers in tax collection matters sec_6320 and sec_6330 generally provide that the commissioner cannot proceed with collection until the taxpayer has been given notice of and the opportunity for an administrative review of the matter in the form of an appeals_office hearing and if dissatisfied the taxpayer may seek judicial review of the administrative determination see 115_tc_35 114_tc_176 - sec_6320 and sec_6330 provide in pertinent part that the secretary shall notify a person in writing of his or her right to an appeals_office hearing regarding the secretary’s filing of a notice of lien under sec_6323 or the secretary’s intent to levy respectively by mailing the notice required by sec_6320 or sec_6330 as the case may be by certified or registered mail to such person at his or her last_known_address sec_6320 provides that the prescribed notice shall be provided not more than business days after the day on which the notice of lien under sec_6323 is filed further sec_6320 b provides that the prescribed notice shall explain that the person has the right to request an appeals_office hearing during the 30-day period beginning on the day after the 5-day period described in paragraph sec_6330 provides that the prescribed notice shall be provided not less than days before the day of the first levy with respect to the amount of the unpaid tax for the taxable_period further sec_6330 b provides that the prescribed notice shall explain that the person has the right to although the term last_known_address is not defined in the internal_revenue_code or in the regulations thereunder we have held that a taxpayer’s last_known_address as the term is used in sec_6213 regarding the proper mailing of a notice_of_deficiency is the address shown on the taxpayer’s most recently filed return absent clear and concise notice of a change_of address see eg 91_tc_1019 - request an appeals_office hearing during the 30-day period under paragraph sec_6330 prescribes the matters that may be raised by a taxpayer at an appeals_office hearing in sum sec_6330 c provides that a taxpayer may raise collection issues such as spousal defenses the appropriateness of the commissioner’s intended collection action and possible alternative means of collection sec_6330 b provides that the existence and amount of the underlying tax_liability can be contested at an appeals_office hearing only if the taxpayer did not receive a notice_of_deficiency for the taxes in question or did not otherwise have an earlier opportunity to dispute the tax_liability see 114_tc_604 goza v commissioner supra where the appeals_office issues a determination_letter to the taxpayer following an administrative hearing regarding a lien or levy action sec_6320 by way of cross-reference and d provide that the taxpayer will have days following the issuance of the determination_letter to file a petition for review with the tax_court or a federal district_court see 114_tc_492 we have held that the court’s jurisdiction under sec_6320 and sec_6330 depends upon the issuance of a valid determination_letter and the filing of a timely petition for review see 115_tc_417 offiler v commissioner supra pincite as discussed below we conclude that respondent did not issue a determination_letter to petitioner pursuant to sec_6320 or sec_6330 we therefore lack jurisdiction over the petition however as was the case in meyer v commissioner supra pincite because the basis for dismissal may affect whether respondent can proceed with collection and or may otherwise affect petitioner’s rights we are obliged to determine the proper ground for dismissal notice of the filing of a notice of lien as indicated respondent concedes that he failed to mail the notice reguired by sec_6320 to petitioner at his last_known_address as required under sec_6320 c and that such notice is therefore invalid respondent does not contend that petitioner actually received the notice reguired by sec_6320 under the circumstances petitioner was denied the opportunity to make a timely request for an appeals_office hearing because of the misaddressed notice accordingly insofar as the petition filed herein purports to be a petition for review pursuant to sec_6320 we will dismiss the petition for lack of jurisdiction on the ground that respondent did not make a determination under sec_6320 because respondent failed to send the written notice prescribed by sec_6320 to petitioner may yet have the opportunity to obtain an continued petitioner at his last_known_address notice_of_intent_to_levy petitioner’s failure to make a timely request for hearing the notice_of_intent_to_levy which was dated date was mailed to petitioner at his last_known_address no later than date petitioner received the notice_of_levy on date the notice informed petitioner that he had days from the date of the notice to file a request for an appeals_office hearing on date the appeals_office received by mail petitioner’s request for a hearing the request arrived at the appeals_office in an envelope bearing a u s postal service postmark date of date because the 30-day time period prescribed in sec_6330 and b and b for filing a timely request for an appeals_office hearing expired no later than date it follows that petitioner’s request was untimely as a consequence of petitioner’s failure to make a timely request for an appeals_office hearing the appeals_office was not obliged to conduct the administrative hearing contemplated under sec_6330 continued appeals_office hearing with respect to the notice required by sec_6320 inasmuch as respondent purportedly issued a substitute notice to petitioner on or about date equivalent_hearing in lieu of a hearing under sec_6330 the appeals_office granted petitioner a so-called equivalent_hearing during the motions hearing in this case the court raised the question whether the equivalent_hearing might be considered a waiver by respondent of the 30-day filing period in which a taxpayer must file a request for an appeals_office hearing under sec_6330 and b and b respondent argued that there was no such waiver we agree we note that sec_6330 does not authorize the commissioner to waive the time restrictions imposed therein equally important in offiler v commissioner supra we indicated that where the taxpayer failed to file a timely request for an appeals_office hearing in respect of a notice_of_intent_to_levy an appeals_office review of the taxpayer’s case pursuant to the collection_appeals_program did not result ina determination within the meaning of sec_6320 or sec_6330 upon reflection we are satisfied that the decision to grant petitioner an equivalent_hearing in this case simply reflects respondent’s good_faith effort to further a fundamental policy underlying sec_6330 ie to provide a taxpayer with a final opportunity for administrative review before proceeding with enforced collection consistent with the foregoing we hold that the decision to conduct an equivalent_hearing did not result ina waiver by respondent of the time restrictions within which petitioner was required to request an appeals_office hearing under sec_6330 decision letter on date following the equivalent_hearing the appeals_office issued a decision letter to petitioner stating that respondent would proceed with collection petitioner contends that the decision letter is tantamount to a valid determination_letter under sec_6330 petitioner’s position ignores the unambiguous statement in the decision letter that the equivalent_hearing was not intended to serve as an appeals_office hearing within the meaning of sec_6320 or sec_6330 as previously discussed because petitioner failed to file a timely request for an appeals_office hearing the appeals_office was not obliged to conduct such a hearing in this regard the decision letter was not and did not purport to be a determination_letter pursuant to sec_6320 or sec_6330 see offiler v commissioner supra pincite in sum we hold that respondent did not issue a determination_letter to petitioner sufficient to invoke the court’s jurisdiction to review the notice_of_intent_to_levy insofar as the petition filed herein purports to be a petition for review pursuant to sec_6330 we will dismiss the petition for lack of jurisdiction on the ground that respondent - - did not make a determination pursuant to sec_6330 because petitioner failed to file a timely request for an appeals_office hearing pursuant to sec_6330 and b and b to reflect the foregoing an appropriate order of dismissal for lack of jurisdiction will be entered


department of the treasury int ernal revenue service washington d c date o f f i c e o f c h i e f c o u n s e l number release date cc psi b01 gl-146818-01 uilc internal_revenue_service national_office legal advice memorandum for rollin g thorley acting associate counsel small_business self employed cc sb from william p o’shea acting associate chief_counsel cc psi fo subject proper treatment of trust income 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 trusts x y date year year year gl-146818-01 year year dollar_figurea issues are the trusts in question properly classified as simple trusts or complex trusts for federal_income_tax purposes does state law govern the definition of income for purposes of the trusts’ distribution_requirements is checking the box on the form_1041 to indicate a simple or complex_trust binding or can it be changed on a later return conclusions pursuant to sec_1_651_a_-1 of the income_tax regulations the determination of whether a_trust is classified as either simple or complex is based on both the governing documents of the trust as well as the distributions actually made in a given taxable_year in this case the trusts are required to distribute current income periodically by the governing documents in addition there is no provision for the retention or accumulation of income of the trust finally in all years in question there has not been a distribution of the principal of the trusts thus the trusts are properly classified as simple trusts for federal_income_tax purposes in accordance with the regulatory scheme in place for simple trusts state law is determinative of what items constitute income for a trust’s reporting requirements under sec_651 as well as for any distribution obligations the box on the form_1041 to indicate a simple or complex_trust is not determinative of a trust’s status it can be changed on an amended_return of the box was originally checked incorrectly facts in date x trusts hereafter referred to as trusts were created the trusts were created by the trustor executing a declaration of trust declaration for the gl-146818-01 benefit of each beneficiary and transferring to the trustee a certain amount of cash the trustor of the trusts is the same individual and is related to the trustee and to two of the beneficiaries under the terms of sec_672 of the internal_revenue_code furthermore each of the trusts has a single beneficiary all of whom are united_states citizens some of the beneficiaries are minors the trusts’ corpus involves interests in y in addition at various other times the parents of some of the beneficiaries transferred cash to some of the trusts pursuant to the terms of the declaration the trusts are irrevocable and unamendable the declaration specifies that the net_income of trusts is to be distributed to each beneficiary in convenient installments in addition the specific named beneficiary of each of the trusts is the only income_beneficiary as such the income_interest will terminate upon either the death of the named beneficiary or on termination of the trusts furthermore the declaration states that the determination between principal and income is to be governed by the provisions relating to principal and income under the laws of the state in which principal administration of the trusts are located for purposes of federal income taxes trusts represent that they have erroneously reported and paid tax on certain income for several years the tax years involved are year year year year and year trusts contend that they are all properly classified as simple trusts for federal tax purposes pursuant to the various trust documents however for year year year and year trusts made no distributions of income and both reported and paid income as if it were a complex_trust in year trusts treated themselves as simple trusts reporting the income to the beneficiaries however trusts now assert that the accounting_income was erroneously overstated trusts through their representatives contend that the cumulative result of these errors is an overpayment on the part of trusts of approximately dollar_figurea law and analysis issue one the importance of categorizing a_trust as either simple or complex is necessitated by sec_651 and sec_661 of the internal_revenue_code code sec_651 provides that in the case of any trust the terms of which provide that all of its income is required to be distributed currently and do not provide that any amounts are to be paid permanently set_aside or used for the purposes specified in sec_642 there shall be allowed as a deduction in computing the taxable_income of the trust the amount of the income for the taxable_year which is required to be distributed currently sec_661 of the code by its title applies only to estates and trusts accumulating income or distributing corpus it states that in any taxable gl-146818-01 year there shall be allowed as a deduction in computing the taxable_income of an estate_or_trust the sum of any amount of income for such taxable_year required to be distributed currently including any amount required to be distributed which may be paid out of income or corpus to the extent such amount is paid out of income for such taxable_year and any other_amounts_properly_paid_or_credited_or_required_to_be_distributed for such taxable_year but such deduction shall not exceed the distributable_net_income of the estate_or_trust sec_1_651_a_-1 of the income_tax regulations states that a_trust to which sec_651 applies is referred to in this part as a simple_trust the regulations go on to provide that if the trust is subject_to sec_661 of the code it will be classified as a complex_trust an estate is always classified as a complex_trust specifically sec_1_651_a_-1 states that sec_651 of the code is applicable only to a_trust whose governing instrument requires both of the enumerated requirements first the trust must distribute all of its income currently for the taxable_year second the governing instrument of the trust does not provide that any amounts may be paid permanently set_aside or used in the taxable_year for the charitable etc purposes specified in sec_642 of the code the third requirement to be classified as a simple_trust is one not governed by the trust instrument itself but rather by action of the trustee to be a simple_trust the trust may not make a distribution other than that of current income the regulations make it clear that a_trust can still qualify for classification as a simple_trust under sec_651 for a taxable_year in which it is required to distribute all its income currently and makes no other distributions whether or not a distributions of current income are in fact made the fiduciary must be under a duty to distribute the income currently even if as a matter of practical necessity the income is not distributed until after the close of the trust’s taxable_year see sec_1_651_a_-2 of the regulations further the regulations under sec_1_651_a_-2 make it clear that it is immaterial for purposes of determining whether all the income is required to be distributed currently that the amount of income allocated to a particular beneficiary is not specified in the instrument thus a_trust will be considered to be complex for a year in which any of the following occurs a income is required to be accumulated b the trustee has discretion to accumulate or distribute income even if it does distribute all of its income for the current_year c the principal is distributed or d a charitable_contribution is made finally a_trust cannot be considered to be simple and thus must be classified as complex if the trust’s definition of income fundamentally departs from concepts of local law see sec_1_643_b_-1 of the income_tax regulations under the facts as developed by the field the trusts are properly classified as simple trusts for federal tax purposes no distribution of principal or charitable gl-146818-01 contribution appears to have occurred in the years in question furthermore the governing documents of the trusts require that the trusts’ income be distributed currently to the beneficiaries issue two a_trust cannot be considered to be simple and thus must be classified as complex if the trust’s definition of income fundamentally departs from concepts of local law see sec_1_643_b_-1 of the income_tax regulations thus in accordance with the regulations state law as to the definitions of income and principal govern the classification of those terms for federal_income_tax purposes in this case when the trusts’ governing documents specify that the definitions and state law relating to income and principal are controlling it is in accordance with the applicable federal tax regulations issue three form_1041 u s income_tax return for estates and trusts is the tax_return that is used to report any of the following income deductions gains losses etc from the estate_or_trust any income that is either accumulated or held for future distribution or is distributed currently to the beneficiaries income_tax_liability of the trust or estate and employment_taxes on wages paid to household employees in addition form_1041 requires that the entity to which all of the tax information is applicable be classified among the choices provided on form_1041 for entity classification are both simple_trust and complex_trust using the aforementioned criteria discussed above the tax_return_preparer fiduciary etc must determine whether the trust is either simple or complex and check the appropriate box on the return sec_1_652_a_-1 of the regulations provides that a_trust may be simple one year and a complex_trust for another this classification is made on an annual basis and is based upon both the governing document of the trust and what distributions the trust has actually made for example a_trust can be classified as a simple_trust for several years and then due to the trust’s governing document requirement that at the age of majority the trust must distribute the principle to the beneficiary the trust terminates in the year that the trust is required to distribute the principle of the trust it would cease to be classified as a simple_trust and is classified as a complex_trust for that year the opposite of this can also apply such as in the case where a_trust is complex for several years being required to accumulate all income of the trust for the benefit of the minor beneficiary again once the beneficiary reached the age of maturity and the trust is required to distribute all of its income the trust would then be classified as a simple_trust gl-146818-01 thus it is possible for a_trust to have filed a form_1041 in one year as a simple_trust and file as a complex_trust in another year furthermore a trustee who incorrectly files the form_1041 may file an amended form_1041 within the allotted time period to correct whatever mistakes have been made on the original form_1041 including the trust classification however based on the facts as developed by the field to appears that these trusts should always have been classified as simple trusts 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 william p o’shea acting associate chief_counsel 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 ita b04 plr-110275-10 date date legend taxpayer corp a state a year x state b state c date llc1 date dollar_figurer dollar_figures date llc2 dollar_figuret bank llc3 dear ------------ ------------------------------------- ---------------------------------------------- ------------- ------- ----------- ----------- ------------ -------------------- ------------------------- ---------------------- ----------------- -------------- -------------------------- ---------------------------------------------------------------------- ----------------- -------------------------------------------------- ------------------------------------------------------------------------- this is in reply to your letter requesting a private_letter_ruling under sec_453b of the internal_revenue_code code specifically taxpayer requests a ruling that the transfer of an installment note during an intra-group reorganization will not result in a taxable disposition of the installment note under sec_453b plr-110275-10 facts taxpayer is a subchapter_c_corporation and is a -----------------------company that provides -------------- solutions to various industries taxpayer’s other business operations serve the ----------------------------------------market -------------------------------------- ----------------------------------------------------------------------------------------------------market ------ ---------- market and ---------------market corp a is a state a subchapter_c_corporation and is a wholly-owned subsidiary of taxpayer corp a is engaged primarily in the business of manufacturing -------------------- that other taxpayer entities or unrelated customers convert into --------------used in the -- --------------------------industry in addition corp a is engaged in the business of -------- --- ------------- the installment_sale in year corp a sold approximately x acres of -------------- located in state b and state c and other real and personal_property to an unrelated third party purchaser pursuant to a purchase and sale agreement agreement dated date between corp a and the unrelated third party purchaser corp a formed llc1 a wholly-owned state a limited_liability_company that was disregarded as an entity separate from corp a for federal_income_tax purposes corp a then contributed the assets held_for_sale to llc1 pursuant to the agreement corp a conveyed all of its interest in llc1 to the unrelated third party purchaser effective date in exchange for an installment note note in the face_amount of dollar_figurer which equaled the value of the installment_sale assets installment_sale assets and dollar_figures in cash which equaled the value of the cash sale assets cash sale assets under the agreement corp a exchanged the installment_sales assets for the note and the cash sale assets for the cash amount the note bears interest for the initial 20-year period at a rate equal to three-month libor plus a margin of dollar_figure percent interest payments are due under the note on the last day of each three-month interest period no principal payments are due until maturity the note may not be redeemed or prepaid in whole or in part prior to maturity on date corp a conveyed its interest in the note to a wholly-owned limited_liability_company llc2 which is disregarded as an entity separate from corp a for federal_income_tax purposes llc2 continues to retain title to and possession of the note also on date llc2 entered into a credit agreement and related pledge agreement under which llc2 borrowed approximately dollar_figuret from bank and pledged all of the assets plr-110275-10 of llc2 including the note as collateral llc2 distributed the proceeds of the bank loan to corp a as partial consideration for the purchase of the note a paying agent of the unrelated third party purchaser of the installment_sales assets makes payments on the note to an account of llc2 with bank in addition llc2 makes payments of interest and principal under the bank loan from that account directly to bank corp a will report gain from the sale of the installment_sale assets using the installment_method of accounting under sec_453 taxpayer has represented that corp a qualifies to use the installment_method of accounting under sec_453 for the payments received under the note the proposed corporate restructuring in the proposed corporate restructuring taxpayer will first form a new llc new llc which will be disregarded as an entity separate from taxpayer for federal_income_tax purposes then corp a will merge under state law into new llc upstream_merger following the upstream_merger taxpayer anticipates that new lcc will contribute approximately to percent of the assets of corp a to one or more subsidiaries of taxpayer to then be marketed for sale to third parties the proposed corporate restructuring would enable taxpayer to reduce and consolidate the landholdings of various taxpayer affiliates under a single entity llc3 a wholly-owned limited_liability_company that is disregarded as an entity separate from taxpayer for federal tax purposes taxpayer has represented that the upstream_merger will qualify as either a liquidation described in sec_332 or a reorganization described in sec_368 or both issue will corp a recognize gain_or_loss under sec_453b on the transfer of the note to taxpayer during the proposed restructuring law and analysis sec_453b provides in general that the distribution transmission sale_or_other_disposition of an installment_obligation results in the recognition of gain_or_loss sec_453b provides that if an installment_obligation is distributed transmitted or disposed of in any way other than by sale_or_exchange the gain_or_loss recognized is the difference between the basis in the obligation and the fair_market_value of the obligation at the time of the distribution transmission or disposition the balance of the consideration was a capital_contribution from corp a to llc2 plr-110275-10 sec_453b and sec_332 liquidation sec_453b provides an exception to the application of sec_453b for any distribution to which sec_337 applies sec_337 provides that no gain_or_loss shall be recognized to the liquidating corporation on the distribution to the 80-percent_distributee of any property in a complete_liquidation to which sec_332 applies sec_453b and sec_368 statutory merger the wording of current sec_453b is identical to the wording of sec_453 prior to the amendments to sec_453 by sec_2 of the installment_sales revisions act of publaw_96_471 94_stat_2253 the legislative_history to the act does not indicate that congress intended any substantive change to the rule in sec_453 see s rep no 96th cong 2d sess the regulations under sec_453 have not been updated to reflect the amendments by the act however the regulations under prior sec_453 provide guidance in interpreting and applying sec_453b sec_1_453-9 of the income_tax regulations regulations provides that where the code provides for exceptions to the recognition of gain or in the case of certain dispositions including transfers to corporations under sec_351 and sec_361 no gain_or_loss shall result under sec_453 in the case of a disposition of an installment_sales note sec_361 provides generally that no gain_or_loss is recognized to a corporation if the corporation is a_party_to_a_reorganization and exchanges property pursuant to the plan_of_reorganization solely for stock_or_securities in another corporation a party to the reorganization for purposes of sec_361 the term reorganization is defined in sec_368 and includes a sec_368 statutory merger sec_453b and sec_381 carryover sec_381 provides that if the acquiring_corporation acquires installment_obligations the income from which the distributor or transferor_corporation reports on the installment basis under sec_453 the acquiring_corporation shall for purposes of sec_453 be treated as if it were the distributor or transferor_corporation sec_1_381_c_8_-1 of the regulations provides in part that if in a transaction to which sec_381 applies an acquiring_corporation acquires installment_obligations the income from which the distributor or transferor_corporation has elected under sec_453 and the regulations to report on the installment_method then the acquiring_corporation shall be treated as the distributor or transferor_corporation would have been treated under sec_453 had it not transferred the installment_obligations plr-110275-10 based on the representations that taxpayer qualifies to use the installment_method of accounting under sec_453 for the payments received under the note and that the upstream_merger of corp a will qualify as a sec_332 liquidation then under sec_453b corp a will not recognize gain_or_loss under sec_453b on the transfer of the note to taxpayer pursuant to the liquidation in addition based on taxpayer’s representation that the upstream_merger of corp a will qualify as a sec_368 statutory merger then no gain_or_loss will be recognize under sec_1_453-9 of the regulations on the transfer of the note to taxpayer conclusion whether the proposed upstream_merger is characterized for federal_income_tax purposes as a sec_332 liquidation of corp a or a sec_368 statutory merger or both the proposed restructuring will not result in a disposition of the note under sec_453b accordingly corp a will not recognize gain_or_loss under sec_453b on the transfer of the note to taxpayer during the proposed restructuring except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling 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 sincerely donna welsh senior technician reviewer branch income_tax accounting


department of the treasury internal_revenue_service washington d c date number info release date cc tege eoeg et1 - genin-150784-02 uilc memorandum for director internal_revenue_service center kansas city mo attn entity control from subject office of division counsel associate chief_counsel tax exempt and government entities cc tege eoeg et1 - genin-150784-02 railroad retirement act tax status in accordance with the coordination procedure established between the service and the railroad retirement board rrb the rrb has provided us with its opinion that the following business became an employer under the railroad retirement act and the railroad unemployment insurance act effective date we have reviewed the opinion of the rrb and based upon the information submitted to the rrb we also conclude that became an employer under the railroad_retirement_tax_act effective date please take the appropriate action regarding this business will e mcleod cc


t c memo united_states tax_court robert e smith iii and angela k smith petitioners v commissioner of internal revenue respondent docket no filed date george w connelly jr for petitioners m kathryn bellis and yvette nunez for respondent memorandum findings_of_fact and opinion goeke judge respondent issued a notice_of_deficiency determining a dollar_figure income_tax deficiency and a dollar_figure accuracy-related_penalty under sec_6662 for petitioners’ tax_year during petitioner sec_1unless otherwise indicated all rule references are to the tax_court rules continued transferred their personal assets of cash and marketable_securities to a wholly owned s_corporation which in turn transferred the assets to a family limited_partnership petitioners dissolved the s_corporation and received the partnership_interest in the dissolution of the s_corporation through this structure and the transfer of their personal assets petitioners claimed an ordinary_loss deduction on the liquidating_distribution by using a substantially discounted value for the assets held by the partnership petitioners have conceded that to the extent they are entitled to a loss deduction for it should be characterized as a short-term_capital_loss after concessions the issues for consideration are whether petitioners are entitled to deduct a short-term_capital_loss for relating to the dissolution of the s_corporation and are liable for a sec_6662 accuracy- related penalty for for the reasons stated herein we decide both issues for respondent continued of practice and procedure and all section references are to the internal_revenue_code code in effect for the year at issue all amounts are rounded to the nearest dollar findings_of_fact at the time petitioners timely filed their petition they resided in texas mr smith worked for national coupling co inc national coupling for years retiring in the year at issue and owned big_number shares of its stock representing an approximately ownership national coupling manufactured pneumatic and hydraulic subsea couplings and valves mr smith was the company’s vice president and the manager at its manufacturing_facility he was in charge of manufacturing engineering intellectual_property work and trademarks mr smith is an inventor with over patents issued or in prosecution at the time of trial most of mr smith’s inventions relate to subsea hydraulic couplings and pneumatic couplings from his employment with national coupling one of his inventions was used to fix the space shuttle rocket boosters after the challenger disaster he won a texas inventor of the year award from the texas state bar association in petitioners have been married for over years mrs smith is a homemaker both mr and mrs smith graduated from high school and have taken some college courses 2the parties’ stipulation of facts with accompanying exhibits is incorporated herein by this reference in date national coupling was sold and mr smith retired mr smith received a dollar_figure bonus dollar_figure from the sale of his stock and dollar_figure from the surrender of two company-sponsored life_insurance policies in total he received employee compensation including the bonus of dollar_figure in after the sale he began to provide consulting services to national coupling under a two- year contract and received dollar_figure under that contract in during his employment at national coupling mr smith had worked on a sprinkler device for home sprinkler systems that would automatically apply fertilizer or insecticide he had worked on the sprinkler device in or and a patent application was filed with the u s patent and trademark office uspto in patent applications were also filed in canada and the united kingdom the u s patent was issued in and the canadian patent was issued in date the record does not establish the date of the u k patent documents relating to the sale of national coupling did not grant mr smith the right to the sprinkler device patent however mr smith believed that he would retain the patent rights to the sprinkler device after the sale i tax strategy as a result of the national coupling sale and mr smith’s retirement petitioners’ financial adviser recommended that they obtain estate_planning advice and referred them to richard shanks of the shanks law firm shanks firm now known as shanks hauser the financial adviser had referred other clients to mr shanks an experienced attorney and a certified_public_accountant he has an undergraduate accounting degree from the university of texas and a law degree from the university of texas law school his practice focuses on estate_planning probate tax planning and tax_return preparation and he works mostly with entrepreneurs and executives petitioners met with mr shanks on date he prepared various estate_planning documents for them including wills and medical directives mr shanks also recommended a tax planning strategy intended to mitigate the effect on petitioners’ tax_liability of mr smith’s compensation from national coupling the tax structure involved the organization of an s_corporation and the formation of a family limited_partnership under the structure petitioners would transfer their cash and marketable_securities to a wholly owned s_corporation that would then transfer the assets to a family limited_partnership mr shanks explained to petitioners that the family limited_partnership would provide asset protection the s_corporation would own the limited_partnership and the partnership would hold petitioners’ cash and marketable_securities as part of the structure petitioners would organize and dissolve the s_corporation within the same tax_year the s_corporation would distribute the partnership_interest to the shareholders upon dissolution mr shanks would determine the fair_market_value of the distributed partnership_interest using large discounts for lack of marketability and lack of control generating a tax loss upon the dissolution of the s_corporation the s corporation’s dissolution and the distribution of the partnership_interest were both necessary to generate the tax loss a third entity in the planning structure was a revocable management_trust that would hold the general_partnership interest mr shanks advised that the tax structure could generate either a capital or an ordinary_loss deduction on the basis of the business_purpose of the s_corporation he had implemented similar structures for to other clients between and on date petitioners organized racr ventures inc ventures an s_corporation formed racr partnership ltd racr partnership a family limited_partnership and created the smith management_trust smith trust a revocable management_trust collectively racr structure petitioners each owned of ventures mr smith was its president and treasurer and mrs smith was the vice president and secretary both were directors ventures owned a limited_partnership_interest in racr partnership initially each petitioner was a general_partner petitioners transferred their general_partnership interests to the smith trust petitioners were cotrustees and beneficiaries of the smith trust from the outset petitioners understood that ventures would not hold any assets ventures would immediately transfer its assets to racr partnership and they would dissolve ventures by the end of to accomplish their tax mitigation plan petitioners understood that ventures was the vehicle they would use to minimize their income_tax_liability petitioners’ handwritten notes from their meeting with mr shanks in date identified the racr structure as a vehicle to minimize tax for email communications between petitioners and the shanks firm in july and date acknowledge a liquidation in ventures goes away in and they will form a new corp next year ii transfer of assets on date petitioners made a series of transfers of cash and marketable_securities from three personal accounts at merrill lynch to three newly opened accounts of ventures at merrill lynch ventures accounts and then to three newly opened accounts of racr partnership at merrill lynch racr partnership accounts as follows account no total cash dollar_figure big_number big_number securities dollar_figure big_number big_number big_number petitioners transferred a total of dollar_figure in cash and marketable_securities to racr partnership via ventures in the above transfers on date petitioners made additional nominal cash transfers to two ventures accounts and ventures in turn transferred the cash to two racr partnership accounts the next day by date most of petitioners’ assets were held by racr partnership subsequently the racr partnership transferred a nominal amount of cash to ventures to pay account fees on august and date petitioners transferred additional nominal amounts of cash from their personal account at merrill lynch to a ventures account and then to an racr partnership account at merrill lynch as of the end of august september october and date ventures’ three accounts had zero balances on date racr partnership distributed dollar_figure to petitioners to purchase long-term care insurance that mr shanks had recommended as part of their estate_planning mrs smith recorded the dollar_figure as a loan to petitioners but mr shanks treated the transfer as a distribution in date racr partnership also extended a line of credit to petitioners for dollar_figure mr shanks suggested the line of credit as a means for petitioners to have access to racr partnership’s assets to pay their living_expenses if necessary petitioners signed a line of credit note on date payable to racr partnership with a dollar_figure principal and a interest rate payable at maturity on date petitioners did not withdraw any money from the line of credit and ultimately canceled it in in date petitioners opened accounts in the names of ventures and racr partnership at morgan stanley smith barney smith barney and authorized the transfer of assets held in a personal account at smith barney to ventures and authorized the transfer of those assets from ventures to racr partnership on date petitioners transferred dollar_figure in securities from a personal account at smith barney to a newly opened account for ventures at smith barney the next day ventures transferred the securities to a newly opened account for racr partnership at smith barney smith barney recorded the transfers in journal entries as effective date after the transfer petitioners’ and ventures’ smith barney accounts had zero balances on date petitioners transferred nominal amounts of cash from two personal accounts at merrill lynch to two ventures accounts at merrill lynch and ventures transferred the cash to two racr partnership accounts at merrill lynch the next day during petitioners transferred a total of dollar_figure in cash and marketable_securities to ventures and ventures transferred a net amount of dollar_figure to racr partnership petitioners transferred a net amount of dollar_figure to racr partnership via ventures taking into account the dollar_figure distribution from racr partnership to them for the long-term care insurance ventures did not have any business activities during it did not have a bank account did not issue stock certificates did not keep minutes of meetings and did not follow corporate formalities iii dissolution of ventures on date petitioners met with mr shanks and began to dissolve ventures effective date on date petitioners filed required documents with the texas secretary of state to end ventures’ corporate existence indicating that they had organized ventures to pursue business opportunities and were dissolving the corporation to reduce overhead expenses because they had not found any profitable opportunities the shanks firm prepared the legal documents required to dissolve ventures in the dissolution ventures transferred a limited_partnership_interest in racr partnership to each petitioner effective date petitioners transferred limited_partnership interests to two trusts in the names of each of their two sons children’s trusts effective date as of the end of racr partnership was owned as follows the smith trust owned a general_partnership interest petitioners each owned a limited_partnership_interest and the children’s trusts owned limited_partnership interests iv legal fees mr shanks generally charged a flat fee for his legal services he charged petitioners a flat fee of dollar_figure for services relating to their will and relevant estate_planning documents and the racr structure petitioners paid the fee in two installments of dollar_figure and dollar_figure at the initial meeting on date and on date respectively mr shanks did not charge petitioners an additional fee for ventures’ dissolution in date he submitted an invoice dated date to petitioners for legal services relating to ventures’ dissolution showing a fee of zero v tax returns and reporting position the shanks firm prepared the returns for petitioners ventures and racr partnership for dollar_figure in date mrs smith met with petitioners’ former accountant and return preparer she provided relevant documents relating to the racr structure to the accountant after meeting with the former accountant mrs smith asked mr shanks to answer the accountant’s questions concerning the racr structure petitioners understood that their former accountant did not feel comfortable preparing the necessary returns for the racr structure petitioners did not consult any other tax professionals regarding the racr structure or their income_tax ventures filed an initial and final corporate tax_return for ventures reported gross_receipts of dollar_figure and cost_of_goods_sold of dollar_figure resulting in an ordinary_loss of dollar_figure it reported the values of the limited_partnership interests in racr partnership distributed to petitioners as gross_receipts to calculate the values of the distributed partnership interests the shanks firm used the cash and the value of the securities that petitioners had transferred to racr partnership via ventures and applied a discount for lack of marketability and lack of control mr shanks used a discount on the basis of his research of discounts allowed in reported court opinions ventures’ reported gross_receipts for were calculated as follows item cash and marketable_securities note payable total assets of total assets adjustment for discount for partnership interests gross_receipts amount dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure to calculate cost_of_goods_sold of dollar_figure the shanks firm used petitioners’ alleged bases in the cash and marketable_securities that they had transferred to ventures and then to racr partnership mr shanks intended that the cost_of_goods_sold would equal petitioners’ bases in ventures the parties have stipulated that petitioners had a total basis of dollar_figure in ventures mr shanks had ventures report the values of the distributed partnership interests as gross_receipts and report petitioners’ alleged total basis in ventures as the cost_of_goods_sold because the racr tax strategy was intended to produce an ordinary 3we note that the value of a partnership_interest would be dollar_figure using the above amounts and a discount would result in gross_receipts of dollar_figure loss to offset mr smith’s compensation from national coupling petitioners reported the loss on the distribution of the racr partnership interests as an ordinary_loss ventures did not have any gross_receipts for or any cost_of_goods_sold ventures reported property distributions of dollar_figure including dollar_figure in gross_receipts less certain deductions on two separate forms filed with the internal_revenue_service irs ventures’ business activity was reported as trading or management on its return racr partnership’s business activity was reported as investment racr partnership’s return did not report any gross_receipts sales deductions or business income or loss racr partnership reported nominal amounts of interest_income dividends and net short-term and long-term_capital_gains that passed through to ventures on their joint_return petitioners reported income of dollar_figure from national coupling including dollar_figure in compensation dollar_figure in consulting fees and dollar_figure in capital_gain from two company-sponsored life_insurance policies petitioners have conceded that the dollar_figure received upon the surrender of the two life_insurance policies was ordinary_income petitioners claimed an ordinary_loss deduction of dollar_figure from ventures in the notice_of_deficiency respondent disallowed the dollar_figure adjustment for cost_of_goods_sold from ventures as reported on petitioners’ joint_return and increased petitioners’ ordinary_income by the reported gross_receipts of dollar_figure and in the alternative determined that ventures had gross_receipts of zero resulting in a disallowance of petitioners’ claimed ordinary_loss deduction respondent advanced the alternative argument at trial opinion respondent contends that petitioners are not entitled to deduct the loss upon the dissolution of ventures because the racr structure lacked economic_substance or in the alternative the loss deduction did not meet the sec_165 requirements for a bona_fide loss incurred_in_a_trade_or_business or a transaction entered into for profit he further argues that if petitioners are entitled to the loss deduction they understated the fair_market_value of the partnership interests distributed by ventures each party presented expert testimony on the fair_market_value of racr partnership upon ventures’ dissolution we find that the racr structure lacked economic_substance and accordingly do not address respondent’s two alternative arguments i economic_substance_doctrine taxpayers generally are free to structure their business transactions as they wish even if motivated in part by a desire to reduce taxes 293_us_465 the economic_substance_doctrine however permits a court to disregard a transaction--even one that formally complies with the code--for federal_income_tax purposes if it has no effect other than generating an income_tax loss see 364_us_361 whether a transaction has economic_substance is a factual determination 338_us_451 the taxpayer bears the burden of proving that a transaction has economic_substance 454_f3d_1340 ndollar_figure fed cir an appeal in this case would lie to the court_of_appeals for the fifth circuit accordingly we follow the law of that circuit with respect to its interpretation of the economic_substance_doctrine see 54_tc_742 aff’d 445_f2d_985 10th cir the court_of_appeals for the fifth circuit has interpreted the economic_substance_doctrine as a conjunctive multi-factor test 568_f3d_537 5th cir in klamath the court_of_appeals stated that a transaction will be respected for tax purposes only if it has economic_substance compelled by business or regulatory realities it is imbued with tax-independent considerations and it is not shaped totally by tax-avoidance features thus a transaction must exhibit an objective economic reality a subjectively genuine business_purpose and some motivation other than tax_avoidance 659_f3d_466 5th cir failure to meet any one of these three factors renders the transaction void for tax purposes klamath f 3d pincite while klamath phrases the economic_substance_doctrine as a conjunctive three-factor test the court_of_appeals for the fifth circuit has recognized that there is near-total overlap between the latter two factors to say that a transaction is shaped totally by tax-avoidance features is in essence to say that the transaction is imbued solely with tax-dependent considerations southgate master fund f 3d pincite n petitioners claim that they organized ventures as part of the racr structure to manufacture and sell the sprinkler device after mr smith received the patent they claim that they transferred their personal assets to ventures to finance the start of this new business_enterprise ventures immediately transferred the assets to racr partnership purportedly for asset protection purposes but according to petitioners the funds would have been available to ventures once it started to manufacture the sprinkler device according to petitioners they dissolved ventures four months later because of unforeseeable circumstances the patent had not been issued and mr smith was busy with his consulting work we find that petitioners’ claims with respect to their purpose for organizing and dissolving ventures in are not credible ventures and the racr structure fail to meet all three prongs of the economic_substance_doctrine as set forth by the court_of_appeals for the fifth circuit a objective economic reality inquiry for purposes of the objective economic inquiry a transaction lacks economic_substance if it does not vary control or change the flow of economic benefits id pincite quoting klamath f 3d pincite the objective economic inquiry asks whether the transaction affected the taxpayer’s financial position in any way ie whether the transaction either caused real dollars to meaningfully change hands or created a realistic possibility that they would do so id pincite n a circular flow of funds among related entities does not indicate a substantive economic transaction for tax purposes 873_f2d_879 5th cir aff’g tcmemo_1988_72 the racr structure failed to alter petitioners’ economic position in any way that affected objective economic reality the racr structure was a circular flow of funds among related entities used to generate an artificial tax loss to offset petitioners’ income petitioners transferred a substantial portion of their personal assets to a wholly owned s_corporation ventures which in turn transferred the assets to racr partnership in exchange for a partnership_interest in accordance with petitioners’ prearranged tax scheme ventures dissolved and distributed a partnership_interest to each petitioner petitioners controlled racr partnership it held only their personal assets and they received those assets back in the liquidating_distribution of the partnership_interest they generated a loss by valuing the combined distributed partnership interests using a substantial discount for a lack of control and a lack of marketability they had constant control_over the assets while the form of ownership of the cash and securities changed the substance did not the racr structure and the dissolution of ventures did not affect petitioners’ financial position and did not cause real dollars to meaningfully change hands moreover petitioners understood from the time they implemented the racr structure that they would not lose control_over their personal assets petitioners intended from the beginning to dissolve ventures by the end of and as discussed below never intended that it would manufacture the sprinkler device accordingly we find that the racr structure and ventures’ dissolution lacked objective economic reality and failed to satisfy the first prong of the economic_substance_doctrine as set forth by the court_of_appeals for the fifth circuit failure to satisfy any one prong of the multifactor test established by the court_of_appeals causes the transaction to lack economic_substance nevertheless we will address the remaining two factors of the economic_substance_doctrine as interpreted by the court_of_appeals for the fifth circuit b subjective purpose inquiry the second and third klamath factors while enumerated separately overlap and derive from an inquiry into the taxpayer’s purpose--whether the taxpayer had a subjectively genuine business_purpose or some motivation other than tax_avoidance southgate master fund f 3d pincite accordingly we address the two factors together taxpayers are not prohibited from seeking tax benefits in conjunction with seeking profits for their businesses id taxpayers who act with mixed motives of profits and tax benefits can satisfy the subjective test id pincite however for the subjective purpose inquiry tax-avoidance considerations cannot be the taxpayer’s sole purpose for entering into a transaction 761_f3d_484 5th cir the fact that a taxpayer enters into a transaction primarily to obtain tax benefits does not necessarily invalidate the transaction under the subjective purpose inquiry 277_f3d_778 5th cir rev’g 113_tc_214 petitioners claim that they organized ventures to manufacture the sprinkler device but changed their minds because the patent had not been issued by the end of and mr smith was busy with his consulting work the record is not clear as to whether mr smith owned a right to the sprinkler device patent even if we assume that mr smith had the right to the sprinkler device patent we do not find petitioners’ claims that they organized ventures to manufacture the sprinkler device to be credible first mr smith’s testimony relating to the canadian and u s patents conflicts with the record he testified the canadian patent was issued before the national coupling sale but documents in the record show that it was issued in date mr smith also testified that on the basis of his experience he expected that the uspto would issue the sprinkler device patent shortly after the canadian patent’s issuance thus according to his testimony he should have expected the u s patent to be issued shortly after date however petitioners began to dissolve ventures only one month later mr smith is an experienced businessman familiar with patent procedure the u s patent application was submitted in by the end of he had already waited three years for the patent in the light of these inconsistencies we do not find mr 4petitioners assert that mr smith was to receive the patent rights in the national coupling sale but did not because of an oversight by the attorneys involved in the sale petitioners allege that this mistake was corrected in smith’s testimony that he intended to manufacture the sprinkler device through ventures to be credible nor do we believe that petitioners decided to dissolve ventures because the uspto had not issued the sprinkler device patent by date rather we find that petitioners never intended to operate ventures as a manufacturing business they intended from the beginning of the racr structure to organize and dissolve ventures within the same year to generate a tax loss to minimize their income_tax_liability documents in the record establish that it was petitioners’ intent when they implemented the racr structure to organize and dissolve ventures within the same year these documents include handwritten notes from their initial meeting with mr shanks that refer to an s_corporation as the vehicle to minimize tax event this year and statements made in date that ventures goes away in and they will form a new corp next year additional inconsistencies in the record include the identification of venture’s activity on irs forms as trading and management and not the alleged purpose of manufacturing a reference by an employee of the shanks firm to a liquidation in date when asked about the preparation of the tax returns and mr smith’s testimony stating an incorrect date for when the canadian patent was issued petitioners tried to explain away each of these inconsistencies but we do not find their explanations credible the record establishes that petitioners had a prearranged plan to organize and dissolve ventures within the same year to achieve their tax-avoidance strategy petitioners did not have a genuine business_purpose for ventures or the racr structure they organized ventures and implemented the racr structure solely for tax-motivated reasons irrespective of whether mr smith owned the patent rights we do not believe that ventures was organized to manufacture the sprinkler device ventures existed for only four months and did not conduct any business activities it did not have any assets offices facilities employees or expenses it did not hold any funds to use for business operations because it transferred petitioners’ cash and marketable_securities to racr partnership on the same day or within one day of the initial transfers to it the ventures accounts had zero balances as of the end of august through date ventures did not follow corporate formalities petitioners used the racr structure to transfer their personal assets to racr partnership and added ventures as a conduit for the sole purpose of creating an artificial tax loss by claiming a substantial discount on the value of their personal cash and securities by holding the assets through a partnership petitioners claim that they did not discuss the tax consequences of the racr structure or the dissolution of ventures with mr shanks and did not learn about the loss until the returns had been prepared they contend that they did not discuss the tax consequences when they implemented the racr structure in date they also claim that they did not discuss the tax impact of dissolving and liquidating ventures when they made the decision to liquidate in date we find that these claims are not credible and contradict the record petitioners’ handwritten notes from their initial meeting with mr shanks referred to an s_corporation as a tax-mitigation device an email from an employee of the shanks firm dated date refers to a liquidation in an email dated date mrs smith stated ventures goes away after will there be another corporation beginning in and mr shanks responded in an email dated date we will form a new corp next year these emails show that mrs smith knew that ventures’ dissolution was part of the racr structure from the beginning and they had not changed their minds petitioners’ attempts to explain these inconsistencies are without merit the dollar_figure flat fee for the racr structure included a fee for mr shanks’ services to dissolve ventures petitioners paid the entire fee when they retained mr shanks and he implemented the racr strategy mr shanks did not charge an additional fee to dissolve ventures and submitted an invoice to petitioners showing a fee of zero mr shanks had other clients organize and dissolve s_corporations within the same year to achieve tax benefits although he sought to blame the s corporations’ dissolutions on the economy petitioners knew from the outset that ventures would not operate a manufacturing business they never intended to manufacture the sprinkler device through ventures they planned from the beginning to dissolve ventures before the end of to create an artificial tax loss to offset their income_tax they also knew despite their arguments to the contrary that the racr structure would generate a loss mr shanks designed the tax structure to include the application of a substantial discount on the value of petitioners’ personal assets used in the strategy and thereby the structure would produce a loss even if the marketable_securities increased in value during ventures’ short existence petitioners could have accomplished their alleged estate_planning goal of asset protection through the limited_partnership framework without first transferring their personal assets to ventures ventures was organized for the sole purpose of tax_avoidance accordingly we find that ventures lacked economic_substance and petitioners are not entitled to deduct any loss for relating to ventures or the racr structure ii sec_6662 accuracy-related_penalty respondent determined that petitioners are liable for a sec_6662 accuracy-related_penalty for sec_6662 and b and imposes a penalty equal to of the amount of any underpayment_of_tax that is attributable to negligence or disregard of rules or regulations or a substantial_understatement_of_income_tax the term negligence includes any failure to make a reasonable attempt to comply with the provisions of the code and disregard includes any careless reckless or intentional_disregard_of_rules_and_regulations sec_6662 for individual taxpayers an understatement is substantial if it exceeds the greater of of the amount of tax required to be shown on the return or dollar_figure sec_6662 by claiming the ordinary_loss deduction on the liquidating_distribution of racr partnership interests petitioners understated the tax required to be shown on their joint_return by more than which was more than dollar_figure accordingly they are liable for the sec_6662 penalty 5respondent has conceded any accuracy-related_penalty with respect to the portion of petitioners’ underpayment attributable to the mischaracterization of the proceeds from the two life_insurance policies as capital_gain because national coupling incorrectly reported the life_insurance_proceeds as capital_gain on petitioners’ schedule_k-1 shareholder’s share of income deductions credits etc with respect to this portion of the underpayment unless they establish a defense of reasonable_cause sec_6664 provides an exception to the sec_6662 penalty where the taxpayers demonstrate that they acted with reasonable_cause and in good_faith with respect to the underpayment we determine whether a taxpayer acted with reasonable_cause and in good_faith on a case-by-case basis taking into account all pertinent facts and circumstances sec_1_6664-4 income_tax regs once the commissioner presents a prima facie case that a penalty should apply the taxpayers have the burden to prove that they acted with reasonable_cause and in good_faith 116_tc_438 a taxpayer’s reliance on the advice of a tax professional may constitute reasonable_cause and good_faith 469_us_241 the advice must be based on all pertinent facts and circumstances and the law as it relates to those facts and circumstances and must not be based on any unreasonable factual or legal assumptions sec_1_6664-4 income_tax regs we have summarized the requirements of reasonable reliance on professional advice as follows the taxpayer reasonably believed that the professional was a competent tax adviser with sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment 115_tc_43 aff’d 299_f3d_221 3d cir a taxpayer’s education and business experience are relevant to the determination of whether the taxpayer acted with reasonable reliance on an adviser and in good_faith sec_1_6664-4 income_tax regs the most important factor is the extent of the taxpayer’s effort to assess his or her proper tax_liability id para b due care does not require that the taxpayer challenge his or her attorney’s advice or independently investigate its propriety 138_f3d_216 5th cir rev’g tcmemo_1995_601 the question of whether petitioners’ reliance on mr shanks was reasonable is a difficult one petitioners went to mr shanks upon the recommendation of their financial adviser for estate_planning advice because mr smith was retiring mr shanks was a qualified attorney and a competent adviser and had the necessary and accurate information to provide his tax_advice up to this point petitioners’ reliance on mr shanks was reasonable however we have found that petitioners never intended to conduct any business activities through ventures they understood early in the process that ventures would be organized and dissolved in but continued to represent even at trial that ventures had a business_purpose this is not acting in good_faith they knew from the beginning that ventures would not last past it did not have a genuine business_purpose and its sole purpose was tax_avoidance that knowledge alone negates a reliance defense petitioners knew that the purpose of the racr structure was to minimize their income_tax their handwritten notes from their first meeting with mr shanks referred to an s_corporation as the vehicle to minimize the tax event in mrs smith emailed the shanks firm in date and sought to confirm that ventures would dissolve by the end of petitioners knew from the time they implemented the racr structure that ventures’ sole purpose was to avoid income_tax on mr smith’s bonus from the national coupling sale they knew that ventures would never manufacture the sprinkler device even if mr smith owned the patent rights as he claims petitioners had no intent to keep ventures in existence until the patent was issued but dissolved it after only four months yet they continued to perpetuate their tax-avoidance scheme through their testimony at trial that we have found not to be credible or reliable nor do we find credible petitioners’ attempts to explain away multiple inconsistencies in the record petitioners did not act with reasonable reliance on a professional or act in good_faith accordingly we find that petitioners are liable for the sec_6662 penalty in reaching our holding we have considered all arguments made and to the extent not mentioned above we conclude that they are moot irrelevant or without merit decision will be entered under rule