internal_revenue_service number release date index number ----------------------- ----------------------------------------------- -------------------------------- -------------------------------- in re --------------------------------------------------- ------------------- -------------------------------- ------------------------- -------------------------------- 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 tege eb qp2 plr-137978-04 date date legend employer ---------------------- board --------------------------------------------- y --------------------------------------------------------------- plan a ------------------------------------------------------------------------------ trust ---------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------- state x ----------- dear ---------------- requesting a ruling concerning the proposed amended and restated deferred_compensation plan plan a which state x intends to be an updated eligible_deferred_compensation_plan under sec_457 of the internal_revenue_code_of_1986 the code as amended under the economic_growth_and_tax_relief_reconciliation_act_of_2001 egtrra employers participating in plan a are represented to be eligible employers within the meaning of sec_457 establishment of nonqualified retirement plans the board has delegated the authority to administer any nonqualified retirement plans to y the employee_benefits division of y administrates and handles matters relating to the state x deferred_compensation plans it is represented that y is an instrumentality of state x this is in reply to your letter of date on behalf of state x and y the board is the statutory body responsible under state x law for the effective date the board established plan a pursuant to state x under plan a the amounts of compensation that may be deferred under the with certain limitations a participant may elect the manner in which his or her in plr-105902-99 the internal_revenue_service ruled that plan a is an eligible plr-137978-04 statutes plan a was amended and restated by board on date plan a was last amended by the board on date deferred_compensation as defined in sec_457 of the code plan a has been amended since the ruling to include a number of revisions taking into account statutory changes under sec_457 and the revised income_tax regulations under sec_457 promulgated by the treasury_department on date annual maximum limitation are within the limitations of sec_457 including catch-up computation for amounts deferred for one or more of the participant's last three taxable years ending before he or she attains normal_retirement_age the participant's election to defer compensation must be filed prior to the beginning of the month in which his or her participation_agreement becomes effective deferred amounts will be distributed the election must be made prior to the date any amounts become payable to the participant under plan a if the participant fails to make a timely election distribution will commence at the time and in the manner set forth in plan a under plan a no amounts will be made available to the participant or beneficiary earlier than the calendar_year the participant attains age when the participant is separated from service or when the participant is faced with an unforeseeable_emergency as defined under plan a in accordance with the requirements of sec_457 the manner and time of benefit payout must meet the distribution_requirements of sec_401 and sec_457 of the code requirements plan a in accordance with sec_457 includes a provision permitting an in-service distribution of dollar_figure or less from a participant's account within the requirements of that section plan a all property and rights purchased with such amounts and all income attributable to such amounts property or rights shall be held in trust for the exclusive benefit of participants and beneficiaries under plan a for the exclusive benefit of the participants and beneficiaries of plan a the trust under plan a is established pursuant to a writing that is represented to be a valid trust under state law generally nonassignable and not subject in any manner to anticipation alienation sale transfer assignment pledge encumbrance attachment or garnishment by creditors of the participant or the participant's beneficiary the rights of any participant or beneficiary to payments pursuant to plan a are plan a further provides that all amounts of compensation deferred pursuant to however plan a does permit one exception to the above distribution in order to comply with the trust requirements set forth in sec_457 the plr-137978-04 the terms of trust make it impossible prior to the satisfaction of all liabilities with respect to plan participants and their beneficiaries for any part of the assets and income of the trusts to be used for or diverted to purposes other than the exclusive benefit of plan participants and their beneficiaries plan a permits a participant to transfer amounts from his or her account by way of a trustee-to-trustee transfer to any defined benefit governmental_plan as defined in sec_414 of the code where the transfer is used to purchase permissive service credits under a defined benefit governmental_plan trust was established effective date it has been represented that the trust was established pursuant to a writing that constitutes a valid trust under the laws of state x and is currently a valid trust under state x law sec_457 of the code provides rules for the deferral of compensation by an individual participant in an eligible_deferred_compensation_plan as defined in sec_457 sec_457 of the code provides that in the case of a participant in an eligible_deferred_compensation_plan any amount of compensation deferred under the plan and any income attributable to the amounts so deferred shall be includible in gross_income only for the taxable_year in which such compensation or other income is paid or otherwise made available to the participant or beneficiary a basic requirement prescribed by sec_457 is that an eligible sec_457 plan must meet the sec_457 distribution_requirements described above in order to retain its tax-deferred eligible status a sec_457 plan would violate these provisions of sec_457 and the regulations thereunder if the participant or anyone else received a distribution earlier than the earliest date established in sec_457 eligible_plan the plan must have distribution_requirements providing that under the plan amounts will not be made available to participants or beneficiaries earlier than i the calendar_year in which the participant attains age ii when the participant has a severance_from_employment with the employer or iii when the participant is faced with an unforeseeable_emergency as determined under treasury regulations however sec_401 generally allows plans to postpone the required_beginning_date until april of the calendar_year following the later of the calendar_year in which the employee retires or in which he attains age sec_457 provides that the total amount payable to a participant under the plan will not be treated as made available merely because the participant may elect sec_457 of the code provides that for a sec_457 plan to be an sec_457 of the code provides that a plan maintained by an eligible sec_1_457-6 of the income_tax regulations defines an unforeseeable plr-137978-04 to receive such amount or the plan may distribute such amount without the participant's consent if i such amount does not exceed dollar_figure and ii such amount may be distributed only if -- i no amount has been deferred under the plan with respect to such participant during the 2-year period ending on the date of the distribution and ii there has been no prior distribution under the plan to such participant under this option emergency as a severe financial hardship of the participant or beneficiary resulting from an illness or accident of the participant or beneficiary the participant’s or beneficiary’s spouse or the participant’s or beneficiary’s dependent as defined in sec_152 loss of the participant's or beneficiary’s property due to casualty including the need to rebuild a home following damage to a home not otherwise covered by homeowner’s insurance eg as a result of a natural disaster or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant or the beneficiary governmental employer shall not be treated as an eligible_deferred_compensation_plan unless all assets and rights purchased with such deferred_compensation amounts and all income attributable to such amounts property or rights of the plan are held in trust for the exclusive benefit of participants and their beneficiaries sec_457 provides that a_trust described in sec_457 shall be treated as an organization exempt from tax under sec_501 sec_457 states that custodial accounts and contracts described in sec_401 shall be treated as trusts under rules similar to the rules under sec_401 gross_income any portion of the entire amount payable to such participant solely by reason of the transfer of such portion from one eligible_deferred_compensation_plan to another eligible_deferred_compensation_plan by reason of a direct trustee-to-trustee transfer to a defined governmental_plan as defined in sec_414 if such transfer is a for the purchase of permissive_service_credit as defined in sec_415 under such plan or b a repayment to which sec_415 does not apply by reason of subsection k thereof sec_1_457-10 of the regulations provides that an eligible governmental_plan may provide for the transfer of amounts deferred by a participant or beneficiary to another eligible governmental_plan if the conditions in paragraphs b or of sec_1_457-10 are met and such transfer of assets is not between an eligible governmental_plan and a tax-exempt entity’s eligible_plan sec_1_457-10 of the regulations further provides that upon the transfer of any amount between eligible plans under paragraphs b through b of section sec_457 provides that a participant shall not be required to include in sec_457 provides that no amount shall be includible in gross_income based upon the facts summarized above we conclude as follows plan a when adopted by participating employers as described above is an plan a assets designed to provide a fixed annuity or other guaranteed return the trust will be treated under sec_457 as an organization exempt from plr-137978-04 b if the participant is performing services for the entity maintaining the receiving plan such amount is subject_to the restrictions of sec_1_457-6 relating to when distributions are permitted to be made to a participant under an eligible_plan in the receiving plan in the same manner as if the transferred amount had originally been deferred under the receiving plan eligible_deferred_compensation_plan as defined in sec_457 of the code taxation under sec_501 of the code that are acquired under the provisions of appendices c and d to plan a and that are held in a custodial_account an annuity_contract or other contract issued by an insurance_company and described in sec_401 will be treated as a_trust under rules similar to the rules under sec_401 of the code terms of plan a are excluded from the gross_income of the employee in the taxable_year such amounts are deferred amounts of compensation deferred in accordance with the terms of plan a including any income attributable to such deferred_compensation will be includible in the gross_income of the employee in the taxable_year or years in which such amounts are paid to the employee in accordance with the terms of plan a for these purposes amounts are not considered to be paid and taxable to the employee in the event of a direct_rollover described in sec_401 of the code a payment to a spouse or former spouse pursuant to a qualified domestic relation order as defined in sec_414 as addressed in sec_1_457-10 of the regulations and or a transfer for the purchase of permissive_service_credit as described in sec_415 amounts deferred under any deferred_compensation plan other than the above described plan a if the proposed amended and restated plan a is significantly modified this ruling will not necessarily remain applicable this ruling is directed only to amounts of compensation deferred by an employee in accordance with the no opinion is expressed concerning the timing of the inclusion in income of plr-137978-04 plan a sec_6110 of the code provides that this ruling may not be used or cited as precedent sincerely robert d patchell branch chief qualified_plans branch employee_benefits tax exempt government entities enclosure cc


internal_revenue_service number release date index number ---------------------- ------------------------------------------- --------------------------------------- ------------------------------ department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ----------------------- ----------------- telephone number --------------------- refer reply to cc tege eoeg eo1 plr-127659-16 date march ---------------------- ---------------------- --------------------------- foundation founder first llc revocable_trust ------------------------------ irrevocable_trust ----------------------------------------------- new llc ----------------------- dear -------------- this letter responds to a letter from founder’s authorized representative dated date requesting a ruling that founder’s proposed gift by means of a distribution from revocable_trust upon founder’s death to foundation of the nonvoting interests in new llc the only asset of which is a promissory note from a disqualified_person described in sec_4946 of the internal_revenue_code will not violate the prohibition against self-dealing under sec_4941 facts foundation which was created by founder and her late husband is a nonprofit corporation recognized as an organization described in sec_501 that is a private_foundation under sec_509 foundation has four directors of which three are founder and her two sons the fourth director is an outside independent director founder sold membership interests in first llc to irrevocable_trust in exchange for a promissory note founder’s descendants are beneficiaries of irrevocable_trust sec_4946 of the internal_revenue_code_of_1986 as amended to which all subsequent section references are made unless otherwise stated plr-127659-16 founder desires that following her death any part of the principal and interest on the promissory note which remains then unpaid be used to benefit foundation to that end founder contributed and transferred the promissory note to new llc in exchange for voting and nonvoting interests which subsequently were transferred to revocable_trust founder is the settlor and sole trustee of revocable_trust and holds a revocation power in the form of a power to direct the trustee to distribute the assets of the trust to her during her lifetime founder’s descendants are beneficiaries of revocable_trust new llc will hold and administer the promissory note and receive payments of interest and principal on the promissory note new llc’s sole asset and source_of_income is and will be the promissory note power to manage the affairs of new llc is vested in the manager who is selected and may be removed by the members holding voting interests in new llc one of founder’s sons who is also a director of foundation is the sole manager of new llc the members holding nonvoting interests possess no management rights or rights to vote on the manager of new llc new llc may only be dissolved with written approval of all members whether holding voting or nonvoting interests founder proposes that at the time of her death revocable_trust which will become irrevocable at that time will distribute to foundation all of the nonvoting interests in new llc which have a profit-sharing ratio of percent revocable_trust will retain its voting interests in new llc which have a profit-sharing ratio of one percent law sec_4941 imposes an excise_tax on each act of self-dealing between a disqualified_person and a private_foundation and on the participation of any foundation_manager knowing that it is such an act sec_4941 defines self-dealing in part as including any direct or indirect lending of money or other extension of credit between a private_foundation and a disqualified_person sec_4946 provides in part that the term disqualified_person means with respect to a private_foundation a person who is - a a substantial_contributor to the foundation b a foundation_manager within the meaning of sec_4946 c an owner of more than percent of - i the total combined voting power of a corporation ii the profits interest of a partnership or plr-127659-16 iii the beneficial_interest of a_trust or unincorporated enterprise which is a substantial_contributor to the foundation d a member_of_the_family as defined in sec_4946 of any individual described in subparagraph a b or c e a corporation of which persons described in subparagraph a b c or d own more than percent of the total combined voting power f a partnership in which persons described in subparagraph a b c or d own more than percent of the profits interest and g a_trust or estate in which persons described in subparagraph a b c or d hold more than percent of the beneficial_interest sec_4946 defines the term foundation_manager to include an officer director or trustee of a foundation sec_53_4941_d_-1 provides in part that an organization is controlled by a private_foundation if the foundation or one or more of its foundation managers acting only in such capacity may only by aggregating their votes or positions of authority require the organization to engage in a transaction which if engaged in with the private_foundation would constitute self-dealing for these purposes an organization will be considered to be controlled by a private_foundation if the private_foundation has the right to exercise veto power over the actions of such organization relevant to any potential acts of self-dealing in sec_53_4941_d_-1 example private_foundation p owns the controlling_interest of the voting_stock of corporation x and as a result of such interest elects a majority of the board_of directors of x two of the foundation managers a and b who are also directors of corporation x form corporation y for the purpose of building and managing a country club a and b receive a total of percent of y's stock making y a disqualified_person with respect to p under sec_4946 in order to finance the construction and operation of the country club y requested and received a loan in the amount of dollar_figure million from x the making of the loan by x to y shall constitute an indirect act of self-dealing between p and y sec_53_4941_d_-2 provides generally that the lending of money or other extension of credit between a private_foundation and a disqualified_person shall constitute an act of self-dealing thus for example an act of self-dealing occurs where a note the obligor of which is a disqualified_person is transferred by a third party to a private_foundation which becomes the creditor under the note analysis irrevocable_trust and revocable_trust are disqualified persons under sec_4946 with respect to foundation because they are trusts in which founder’s descendants who are disqualified persons under sec_4946 with respect to plr-127659-16 foundation hold more than a 35-percent beneficial_interest irrevocable_trust is the obligor of a promissory note that was held by founder founder desires that following her death any unpaid principal and interest on the promissory note be used to benefit foundation an act of self-dealing would occur if founder transferred the promissory note to foundation which would become creditor under the note see sec_53_4941_d_-2 instead founder contributed and transferred her ownership of the promissory note to new llc at founder’s death foundation will acquire the nonvoting interests in new llc which have a profit-sharing ratio of percent by gift through a distribution from revocable_trust rather than through a self-dealing transaction if foundation will control new llc within the meaning of sec_53_4941_d_-1 then foundation will be indirectly serving as the creditor under the note by reason of its ownership_interest see sec_53_4941_d_-1 example however foundation will not control new llc within the meaning of sec_53 d - b due to lack of voting power as holder of the nonvoting interests foundation will have no management rights or right to vote on the manager of new llc revocable_trust which will have become irrevocable at founder’s death will own all of the voting interests giving revocable_trust the right to select and remove the manager of new llc as a holder of nonvoting interests foundation will have a right to receive distributions only if new llc dissolves or chooses to make current distributions but the timing and amount of such distributions will be uncertain and could not be compelled by foundation only revocable_trust as the holder of the voting interests may elect or remove the manager of new llc and such manager will have the sole power to manage the affairs of new llc and determine the timing and amount of distributions thus foundation and foundation’s managers acting only in such capacity will not have sufficient votes or positions of authority to cause new llc to engage in a transaction additionally foundation will not have the power to compel dissolution of new llc since new llc may only be dissolved with written approval of all members including revocable_trust the power associated with the nonvoting interests of new llc as a necessary party to vote on the liquidation of the llc is not considered equivalent to a veto power within the meaning of sec_53_4941_d_-1 because the power cannot be exercised over an action relevant to any potential act of self-dealing accordingly foundation’s receipt from revocable_trust upon founder’s death of nonvoting interests in new llc will not constitute a loan or extension of credit between a private_foundation and a disqualified_person within the meaning of sec_4941 and sec_53_4941_d_-2 because foundation will not acquire an interest in the promissory note instead foundation will acquire nonvoting interests in new llc with respect to which it will not have any management rights or control_over distributions plr-127659-16 thus founder’s proposed transfer of nonvoting interests in new llc to foundation will not constitute an act of self-dealing described in sec_4941 conclusion based solely on the facts and representations submitted we rule that founder’s proposed gift to foundation by means of a transfer by revocable_trust of nonvoting interests in new llc the sole asset of which is a promissory note from a disqualified_person with respect to foundation will not constitute an act of direct or indirect self- dealing under sec_4941 the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party as specified in revproc_2017_1 2017_1_irb_1 b we have not verified any of the material submitted in support of the request for a ruling and such material is subject_to verification on examination the associate office will revoke or modify a letter_ruling and apply the revocation retroactively if there has been a misstatement or omission of controlling facts the facts at the time of the transaction are materially different from the controlling facts on which the ruling is based or the transaction involves a continuing action or series of actions and the controlling facts change during the course of the transaction see revproc_2017_1 sec_11 no ruling is granted as to whether foundation qualifies as an organization described in sec_501 or sec_509 no opinion is expressed regarding the value of the voting or nonvoting interests for estate_tax purposes see 674_f2d_761 9th cir except as expressly provided above no opinion is expressed or implied concerning the federal income or foundation excise_tax consequences of any other aspects of any transaction or item_of_income described in this letter_ruling this ruling will be made available for public inspection under sec_6110 after certain deletions of identifying information are made for details see enclosed notice notice of intent to disclose a copy of this ruling showing the deletions that we intend to make on the version that will be made available to the public is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice this letter_ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-127659-16 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely _______________________________ amy f giuliano senior technician reviewer exempt_organizations branch associate chief_counsel tax exempt and government entities cc


t c memo united_states tax_court richard s miller and sandra r erickson petitioners v commissioner of internal revenue respondent richard s miller petitioner v commissioner of internal revenue respondent docket nos filed date ronald l mountsier for petitioners catherine s tyson for respondent memorandum findings_of_fact and opinion vasquez judge in these consolidated cases respondent determined the following deficiencies in and petitioner richard s miller’s filing_status was single petitioner miller married petitioner erickson in richard s miller and sandra r erickson year richard s miller year deficiency dollar_figure deficiency dollar_figure big_number the issue for decision is whether petitioners’ horse breeding activity was an activity_not_engaged_in_for_profit pursuant to sec_183 findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference at the time they filed the petition petitioners resided in florida in mr miller purchased electric pump tool services electric pump when mr miller purchased electric pump it had sales of dollar_figure and employees at the time of trial mr miller had increased the sales of electric pump to dollar_figure million and increased its employees to at the time of trial mr miller had expanded electric pump to six offices throughout the country mr miller received dollar_figure dollar_figure and dollar_figure in unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure and in salary from electric pump respectively at various times mr miller has been in the pay phone business the hog slaughter and breeding business and the spent-hen chickens that no longer produce eggs business mr miller has also owned real_property which he rented out in mr miller purchased his first paso fino horse paso fino horses have a smooth gait which enables riders to have a smooth ride shortly after purchasing his first paso fino mr miller joined the paso fino horse association pfha in either or mr miller became a board member of the pfha and later served on the executive committee and as treasurer mr miller began attending pfha conventions in mr miller also attended instructional clinics and seminars on topics such as advertising and trail riding from until mr miller conducted his horse activities from his home and farm in van meter iowa in mr miller had a horse barn built on the iowa property and in or around a hay shed was built initially mr miller entered his horses in show competitions in the northern united_states during this period mr miller’s horses were trained in minnesota mr miller was successful at the northern shows but when he attempted to compete at a national show his horses were unable to compete with the horses that were trained in southern states such as florida georgia and louisiana home to the industry’s top trainers in date mr miller purchased approximately acres of property in ocala florida and moved some of his horses from iowa to florida some of the horses were already in florida ocala florida advertises itself as the horse capital of the world one of the main reasons that mr miller moved his horses to florida and bought the property in ocala was that it was near trainer jorge suarez mr suarez is a noted trainer and rider of paso fino horses and along with his three brothers runs a farm called 4js mr suarez is from puerto rico and was involved with paso fino horses in puerto rico before coming to the united_states mr miller met mr suarez in and was impressed with mr suarez’s riding ability mr suarez has a reputation as one of the top five paso fino riders in the world mr miller consults with mr suarez on buying and selling horses and would not buy a horse without having mr suarez see it first in mr miller moved to fort myers florida which is approximately miles from his farm in ocala beginning in and continuing in and mr miller filed a schedule c profit or loss from business listing his principal business as show horse breeding in mr miller reported losses of dollar_figure on his schedule c in mr miller reported losses of dollar_figure on his schedule c and losses of dollar_figure on form_4797 sales of business property in mr miller sold three horses at a loss in mr miller reported schedule c losses of dollar_figure and losses of dollar_figure on form_4797 in mr miller sold one horse at a loss ms erickson kept financial records for the breeding activity listing income and expenses in addition to ms erickson’s records mr miller registered his horses with the pfha which maintained records concerning the performance of specific horses at horse shows recording earnings and placement the pfha certificate also traces the horse’s bloodlines as a lifetime member of the pfha mr miller had access to the pfha information hours a day through the internet when mr miller decided to run his horse activity as a business he had a business plan but did not commit it to writing mr miller began with three mares picaedia marcia and romana and some stallions including guayacan mr miller’s plan was to have excellent mares breed them and raise the foals to about years old before putting a saddle on them by the time the horses were years old mr miller expected they would appreciate in value there are three types of paso fino horses fino pleasure and performance fino horses are the most profitable of the three mr miller modified his initial business plan because he realized that his mares were not good enough to give birth to excellent fino horses additionally mr miller encountered unexpected setbacks with some of his horses marcia always produced twins which are undesirable in the paso fino horse industry mr miller incurred increased veterinary bills to pinch off one ovary every time marcia was bred so that marcia delivered only one offspring mr miller also used an embryo transfer on marcia which cost approximately dollar_figure guayacan which mr miller paid dollar_figure for in came with high expectations guayacan turned out not to be an athlete and got lazy and mr miller decided to geld him in mr miller sold guayacan for dollar_figure another horse amarissa ia broke her hoof kicking her stall at age after spending dollar_figure on veterinary bills to heal amarissa ia mr miller hoped that she could gait properly because she would not be worth much without a proper gait mr miller also had to euthanize a 5-day-old foal because of an arthritic condition separate and apart from the horses mr miller kept as part of his business mr miller used a personal horse named artillero maraco mr miller did not claim deductions with respect to artillero maraco except to the extent of show winnings mr miller did not ride his other horses for pleasure purposes ms erickson does not ride at all mr miller’s farm is a working farm and has no living quarters mr miller used various methods to advertise his horses mr miller advertised in magazines handed out brochures at shows listed his farm in the pfha farm directory and had business cards in addition to paid advertisements mr miller received considerable publicity when his horses were successful at events in addition to consulting with mr suarez mr miller uses various veterinarians for his horses among the veterinary doctors mr miller consults with are dr jose diava who mr miller uses for horse reproduction issues and dr james wright a horse bone and muscle specialist who also handles most of mr miller’s routine veterinary needs in when mr miller decided to convert his horse activity into a business he began keeping activity logs mr miller spent over big_number and hours on the horse activity in and respectively mr miller was involved in all aspects of the horse activity except cleaning the stalls in mr miller’s sales of horses totaled dollar_figure up from dollar_figure in mr miller had a profit in of dollar_figure in mr miller’s sales totaled dollar_figure as of date the estimated fair_market_value of mr miller’s horses was dollar_figure with a basis of dollar_figure mr miller had a basis of dollar_figure in the ocala farm including the addition of a fence the property was appraised in date at dollar_figure opinion generally the commissioner’s deficiency determinations set forth in a notice_of_deficiency are presumed correct and the taxpayer bears the burden of showing the determinations are in error rule a 290_us_111 there are exceptions to this rule sec_7491 shifts the burden_of_proof to the commissioner with respect to a factual issue affecting the tax_liability of a taxpayer who meets certain preliminary conditions this case is decided on the preponderance_of_the_evidence and is not affected by sec_7491 sec_183 provides generally that if an activity is not engaged in for profit no deduction attributable to such activity shall be allowed except as provided in sec_183 sec_183 defines an activity_not_engaged_in_for_profit as any activity other than one with respect to which deductions are allowable for the taxable_year under sec_162 or under paragraph or of sec_212 a taxpayer who is carrying_on_a_trade_or_business may deduct ordinary and necessary expenses_incurred in connection with the operation of the business sec_162 the u s court_of_appeals for the eleventh circuit to which an appeal in this case would lie has held that an activity constitutes a trade_or_business within the meaning of sec_162 if the taxpayer’s actual and honest objective is to realize a profit 62_f3d_356 11th cir affg in part and revg in part tcmemo_1993_519 the expectation of profit need not have been reasonable however the taxpayer must have entered into the activity or continued it with the objective of making a profit 91_tc_371 sec_1_183-2 income_tax regs whether the requisite profit objective exists is determined by looking at all the surrounding facts and circumstances 94_tc_41 sec_1_183-2 income_tax regs greater weight is given to objective facts than to a taxpayer’s mere statement of intent 84_tc_1244 affd 792_f2d_1256 4th cir sec_1_183-2 income_tax regs sec_1_183-2 income_tax regs provides a list of factors to be considered in the evaluation of a taxpayer’s profit objective the manner in which the taxpayer carries on the activity the expertise of the taxpayer or his advisers the time and effort expended by the taxpayer in carrying on the activity the expectation that assets used in the activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar activities the taxpayer’s history of income or losses with respect to the activity the amount of occasional profits if any from the activity the financial status of the taxpayer and elements of personal pleasure or recreation this list is nonexclusive and the number of factors for or against the taxpayer is not necessarily determinative but rather all facts and circumstances must be taken into account and more weight may be given to some factors than to others id see 70_tc_715 affd 615_f2d_578 2d cir manner in which the activity is conducted the fact that a taxpayer carries on the activity in a businesslike manner and maintains complete and accurate books_and_records may indicate a profit objective sec_1_183-2 income_tax regs the evidence established that mr miller kept complete and accurate records and that he operated the horse breeding activity in a businesslike manner mr miller had a business plan for the horse breeding activity see phillips v commissioner tcmemo_1997_128 holding that a business plan need not be in written form and can be evidenced by the taxpayer’s actions mr miller’s longtime accountant dennis mueller testified that mr miller’s records were organized and compared favorably with the records mr miller kept in his other business ventures and those that others maintained in livestock and farm businesses mr mueller credibly testified that mr miller never gets into a business without the intention of making a profit when mr miller decided to turn his horse breeding activity into a business he had three mares and a plan to breed horses that would appreciate in value mr miller suffered setbacks with his mare marcia because she always produced twins which are undesirable in the paso fino horse community as a result his costs increased because he decided to use embryonic transfers an expensive procedure mr miller wanted to breed fino quality horses but realized that his mares were not good enough consequently he had to modify his approach in order to reach his goal of breeding fino horses when mr miller started conducting his activities as a business his plan was to have valuable horses after a few years because the horses would have to mature before they appreciated in value mr miller registered his horses with the pfha the pfha maintained records of a horse’s bloodlines and show results these records were available online to mr miller at all times because he was a life member of the pfha another factor that demonstrates that mr miller conducted his horse activities in a businesslike manner is that he advertised his horses in a variety of ways mr miller advertised in magazines listed his farm in the pfha directory and handed out fliers at shows and mr miller and his wife had business cards additionally mr miller’s attendance and successful participation at horse shows provided publicity to a wide audience we conclude that this factor indicates that petitioners had the requisite profit_motive expertise of the taxpayer and his advisers a taxpayer’s expertise research and study of an activity as well as his consultation with experts may be indicative of a profit intent sec_1_183-2 income_tax regs mr miller purchased his first paso fino in and joined the pfha shortly after mr miller used mr suarez a highly respected rider and professional trainer of paso fino horses as his trainer mr suarez is considered one of the top five paso fino riders in the world mr miller purchased the farm in ocala because of its proximity to mr suarez mr miller did not buy a horse unless mr suarez had seen the horse if mr miller and mr suarez disagreed over a horse mr suarez’s viewpoint prevailed because mr miller recognized that mr suarez had more expertise in addition to his association with mr suarez mr miller used experienced veterinarians dr diava was a specialist in reproductive issues and dr wright was a muscle and bone specialist we conclude that this factor is indicative of the requisite profit_motive the expectation that assets may appreciate in value in when mr miller decided to turn his horse breeding activity into a business his goal was to breed horses that would appreciate in value after about years as of date mr miller’s horses were valued at dollar_figure with a basis of dollar_figure the unrealized_gain in the horses indicates that they have appreciated in value in addition to the horses the value of mr miller’s farm appreciated in value mr miller purchased the farm in for dollar_figure per acre including the addition of a fence mr miller’s basis in the land was dollar_figure a comparative market analysis performed in date indicated that the land was worth approximately dollar_figure or dollar_figure per acre respondent argues that the values of the horses and the farm are inflated and based on mr miller’s unreliable estimates the value of the land is based on a comparative market analysis performed by clayton fell of triple crown realty although the value of the horses was provided by mr miller on the basis of his consultations with mr suarez respondent provided no credible_evidence that the value of the horses was erroneous we conclude that this factor is indicative of the requisite profit_motive the taxpayer’s success in similar or dissimilar activities mr miller is a successful businessman he purchased electric pump in with sales of dollar_figure and employees at the time of trial electric pump had dollar_figure million in sales and employees additionally mr miller has been successful in the real_estate business although these businesses are dissimilar to horse breeding their growth demonstrates mr miller’s business acumen and ability to develop and improve businesses mr miller also has experience in the spent-hen business as well as raising hogs for both slaughter and breeding the hog business has some similarities with the horse business but is not entirely similar the record shows that mr miller is a successful entrepreneur who is not afraid to take risks we conclude that this factor is indicative of the requisite profit_motive history of income or loss in the years at issue mr miller had cumulative losses of dollar_figure some of the losses are the result of unexpected setbacks mr miller suffered by a year not at issue mr miller had sales of dollar_figure and a profit of dollar_figure respondent argues that the decrease in losses is due only to a decrease in expenses we disagree mr miller initially tried to breed fino quality horses but realized he did not have the mares to do so and was selling pleasure and performance quality horses he made an effort to improve his stable and to be able to sell fino quality horses mr miller encountered unexpected setbacks with some of his horses because marcia always produced twins which are undesirable in the paso fino horse industry mr miller had to pinch off one ovary every time marcia was bred as a result marcia delivered only one offspring but mr miller had increased veterinary bills mr miller used an embryo transfer on marcia which cost approximately dollar_figure guayacan which mr miller paid dollar_figure for in came with high expectations guayacan turned out not to be an athlete and got lazy and mr miller decided to geld him in mr miller sold guayacan for dollar_figure when she wa sec_4 years old amarissa ia started kicking the stall and broke her hoof after spending dollar_figure on veterinary bills to heal amarissa ia mr miller can only hope that she can gait properly because she is not worth much without a proper gait mr miller also had to euthanize a 5-day-old foal because of an arthritic condition expenses also decreased in because mr miller did not have the type of setbacks he had had in previous years a record of substantial losses over several years may be indicative of the absence of a profit_motive 72_tc_411 affd without published opinion 647_f2d_170 9th cir sec_1_183-2 income_tax regs however provides that a series of losses during the startup phase of an activity may not necessarily be an indication that the activity is not engaged in for profit this court has recognized that the startup phase of a horse breeding activity i sec_5 to years 72_tc_659 we believe that the years in issue through encompassed a startup_period see phillips v commissioner tcmemo_1997_128 see also engdahl v commissioner supra pincite as mr miller's losses were sustained as a result of unforeseen setbacks and during the startup phase of the horse breeding activity we conclude that the losses sustained are not an indication that the horse breeding activity was not engaged in for profit financial status of the taxpayer a lack of income from sources other than the activity in question may indicate that an activity is engaged in for profit substantial income from sources other than the activity in question particularly if offset by substantial tax benefits may indicate the activity is not engaged in for profit sec_1 b income_tax regs mr miller received a substantial salary from electric pump and received income from other sources as well during the years at issue mr miller received average annual wages of dollar_figure from electric pump without the claimed losses from the horse breeding activity mr miller’s income would have been higher although this factor may indicate that mr miller lacked a profit_motive it is but one factor and is not determinative of the outcome additionally mr mueller testified that mr miller did not enter into a business without the expectation and intent to make a profit elements of personal pleasure and time and effort expended the absence of personal pleasure or recreation relating to the activity in question may indicate the presence of a profit objective sec_1_183-2 income_tax regs the mere fact that a taxpayer derives personal pleasure from a particular activity does not per se demonstrate a lack of profit_motive at all relevant times mr miller kept a personal horse and did not claim deductions related to the horse except to the extent of show winnings related to the horse additionally mr miller’s wife does not ride at all mr miller’s farm is a working farm and has no living quarters mr miller participated in all aspects of the breeding activity except cleaning the stalls and he spent a substantial amount of his time on the breeding activity mr miller spent over big_number and hours on the horse activity in this number is rounded to the nearest dollar and respectively mr miller spent a significant amount of time traveling to horse shows where he interacted with others in the industry and also advertised his breeding activity additionally mr miller hired competent people to assist in carrying on the horse breeding activity we conclude that this factor is not indicative of the lack of a requisite profit_motive conclusion the evidence established that mr miller maintained adequate_records operated the horse breeding activity in a businesslike manner consulted with horse experts including a renowned trainer expended a significant amount of time on the horse breeding activity had a reasonable expectation that the assets used in the activity would appreciate in value and had success in other businesses some of which are loosely related to horse breeding furthermore mr miller sustained the losses in issue during the startup phase of the horse breeding activity and partly from unforeseen circumstances accordingly we conclude that mr miller engaged in the horse breeding activity during and with the actual and honest objective of making a profit and sec_183 is inapplicable in this case in reaching all of our holdings herein we have considered all arguments made by the parties and to the extent not mentioned above we find them to be irrelevant or without merit to reflect the foregoing decisions will be entered for petitioners


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi br 1-plr-132125-00 date date legend x y a country d1 a b ein this letter responds to your representative’s date request for a private_letter_ruling submitted on behalf of x requesting a time extension under sec_301_9100-3 of the procedure and administration regulations facts according to the information submitted y is an entity disregarded as separate from its owner a on d1 y acquired a a interest in x a joint-stock company formed under the laws of country y acquired an additional b interest in x several days later x and a intended from d1 to elect to classify x as a partnership for federal tax purposes however form_8832 entity classification election was not timely filed law and analysis sec_301_7701-3 classifies eligible foreign entities for federal tax purposes this section classifies any foreign eligible_entity whose members all have limited_liability as an association unless the entity elects otherwise sec_301_7701-3 allows an entity to elect to change its classification by filing form_8832 entity classification election with the service_center designated on that form sec_301_7701-3 provides that all such elections become plr-132125-00 effective on the date specified by the entity on form_8832 or on the date filed if no effective date is specified the specified effective date must not be earlier than days prior to the filing_date of form_8832 nor later than twelve months after that filing_date sec_301_9100-1 gives the commissioner discretion to grant reasonable extensions of time to make regulatory elections under the rules of sec_301_9100-2 and sec_301_9100-3 under sec_301_9100-1 a regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register or a notice published in the internal_revenue_bulletin sec_301_9100-3 sets forth the standards which the commissioner uses to determine whether to grant a discretionary time extension under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence proving to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 as a result x is granted an extension of time for making the election to be treated as a partnership for federal tax purposes effective d1 until days following the date of this letter x should make the election by filing form_8832 a copy of this letter should be attached to that form 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 s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely paul f kugler associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ------------------------------------------------------------ ------- ------------------------------------------------------------ ---------- -------------------------- ----------------------------- ---------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc psi plr-136875-04 date july do ---------date of death ------------------------- do ---------date of death ------------------------- -------------------------- -------------------- ------------------------- ------------------------------- ------------------------ legend decedent spouse daughter son grandson granddaughter ------------------------------------- granddaughter --------------------------------- great-grandchild ---------------------- state acting trustee county court court date date date date date date date date date date date trust x y dollar_figurez ------------ ----------------------------------------- -------------------- -------------------------------------- -------------------------------------- ------------------- ---------------------- ----------------------- -------------------------- ----------------------- ------------------------ ----------------------- ----------------- ----------------------- ------------------ ----------------------- ------------------------------------------------- ------ ---------- ----------------- under item iii of decedent’s will decedent directs that the residue of decedent’s according to the facts submitted decedent executed his last will and testament plr-136875-04 dear ------------------- this is in response to your authorized representative’s submission dated date and subsequent correspondence in which rulings were requested concerning the effect of orders issued by court and court with regard to trust and the decedent revocable_trust agreement trust on date trust was amended on date and date decedent died a resident of county state on date estate is to be given bequeathed devised and appointed to the trustee of trust article iii paragraph of trust provides that if decedent’s wife spouse survives decedent then upon decedent’s death after the distribution of a specific_bequest to each of son and daughter trustee is to distribute the assets of trust to marital trust paragraph a provides that trustee is to pay the entire net_income from the marital trust to spouse so long as she lives as amended on date paragraph c provides that upon the death of spouse and if either of decedent’s children daughter and son are then living the marital trust is to end and its remaining balance is to be held in a family_trust notwithstanding the foregoing spouse shall have a testamentary special_power_of_appointment to donate and appoint at her death the remaining balance of the marital trust at such time to or for the benefit of such one or more of decedent’s issue in such manner and in such proportions whether outright in trust or otherwise as she may desire but under no circumstances may that remaining balance be appointed to spouse’s creditors spouse’s estate or the creditors of spouse’s estate paragraph as amended provides that upon spouse’s death the trustee shall except to the extent spouse‘s will contains a different direction for the payment of death taxes make available from the property belonging to the marital trust to the executors of spouse’s estate such amount as said executor shall determine to be equal to the excess of all death taxes which shall become payable by reason of spouse’s death over the death taxes which would have become payable by reason of spouse’s death if in the computation there had not been included any part of the property belonging to the marital trust trust into two separate trusts the gst exempt marital trust and the gst non-exempt marital trust to be held on the same terms and conditions as those set forth in trust and ii to direct that all death taxes attributable to the gst exempt marital trust and the gst non-exempt marital trust at the subsequent death of spouse be allocated against the gst non-exempt marital trust on date court issued its order on date acting trustee and spouse petitioned court i to divide marital decedent’s federal estate_tax_return form_706 was filed on date a date that on date spouse executed her last will and testament spouse died on date plr-136875-04 granting the petition the gst exempt marital trust would hold an amount of property equal to decedent’s unused gst_exemption and the gst non-exempt marital trust would hold the remaining property in the marital trust court ordered that the gst non-exempt marital trust would be liable for all estate and inheritance taxes on the gst exempt marital trust and the gst non-exempt marital trust payable at the death of spouse except as otherwise hereinabove provided both trusts would be held pursuant to the terms of marital trust is prior to date an election was made on the return to treat the gst exempt marital trust and gst non-exempt marital trust as qualified_terminable_interest_property qtip pursuant to sec_2056 and an estate_tax_marital_deduction was claimed pursuant to sec_2652 and sec_26_2652-2 of the generation-skipping_transfer_tax regulations a reverse_qtip_election was made to treat decedent as the transferor of the gst exempt marital trust and decedent’s remaining gst_exemption was allocated to the trust to cause the trust to have a zero inclusion_ratio for purposes of chapter the qtip property for which a deduction was claimed on decedent’s estate_tax_return is includible in spouse’s gross_estate under sec_2044 by reason of spouse’s death with respect to assets that pass under her will are to be paid out of and charged generally against the principal of spouse’s residuary_estate without apportionment under item vi of spouse’s will spouse exercised her special testamentary_power_of_appointment under decedent’s will and directed that any and all property remaining in the marital trust and for purposes of this ruling specifically the gst non- exempt marital trust continue to be held in trust and divided into five shares as follows daughter - x son - x granddaughter - y granddaughter - y and grandson -y separate trusts spouse’s will incorporates by reference the terms of trust into the separate trusts on date acting trustee filed a second amended petition for declaration of rights concerning the interpretation of item vi of spouse’s will on date court issued its order construing the language of item vi of spouse’s will to mean that spouse intended to divide the gst non-exempt martial trust into separate trusts court stated that if spouse had intended the gst non-exempt marital trust to remain one trust she would not have stated that the gst non-exempt marital trust be divided according to court the use of the word share is further indication of her intent that the gst non-exempt marital trust be divided for the benefit of the five named beneficiaries court reasoned that had spouse intended to leave the corpus intact in the gst non-exempt marital trust no reference to division would have been necessary item ii of spouse’s will provides that any inheritance and estate_taxes assessed plr-136875-04 and spouse could have simply mandated the percentage of payout in favor of each beneficiary consequently court determined that it was the intent of spouse to create the separate trusts the following rulings are requested court 2’s construction and interpretation of the language of item vi spouse’s will regarding whether there is a single trust the gst non-exempt marital trust for decedent’s five named beneficiaries or five separate trusts one for each of the five named beneficiaries will be given effect by the internal_revenue_service service for purposes of chapter court 1’s order directing that the gst non-exempt marital trust be liable for all federal_estate_taxes payable by the gst exempt marital trust and gst non-exempt marital trust at the death of spouse will be given effect by the service for purposes of federal_estate_taxes sec_2001 imposes a tax on the transfer of the taxable_estate of every under sec_2612 a taxable_termination means the termination by law decedent who is a citizen or resident_of_the_united_states sec_2601 imposes a tax on every generation-skipping_transfer gst a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip made by a transferor death lapse of time release of power or otherwise of an interest in property held in a_trust unless a immediately after such termination a non-skip_person has an interest in such property or b at no time after such termination may a distribution including distributions on termination be made from such trust to a skip_person sec_2612 provides that for purposes of chapter a taxable_distribution means any distribution from trust to a skip_person other than a taxable_termination or a direct_skip tax imposed by chapter or of an interest in property to a skip_person natural_person assigned to a generation which i sec_2 or more generations below the generation assignment of the transferor or a_trust a -- if all interests in such trust are held by skip persons or b - i there is no person holding an interest in such trust and ii at no time after such transfer may a distribution including distributions on termination be made from such trust to a skip_person sec_2612 provides that the term direct_skip means a transfer subject_to a under sec_2613 for purposes of chapter a skip_person means a sec_2613 provides that for purposes of chapter the term non-skip sec_2603 provides that in the case of a taxable_termination or direct sec_2603 provides that in the case of a taxable_distribution the tax plr-136875-04 person means any person who is not a skip_person imposed by sec_2601 shall be paid_by the transferee skip from a_trust the tax shall be paid_by the trustee ruling whether a state trial court’s characterization of property rights conclusively binds a federal court or agency in a federal estate_tax controversy the court concluded that the decision of a state trial_court as to an underlying issue of state law should not be controlling when applied to a federal statute rather the highest court of the state is the best authority on the underlying substantive rule_of state law to be applied in the federal matter if there is no decision by that court then the federal authority must apply what it finds to be the state law after giving proper regard to the state trial court’s determination and to relevant rulings of other courts of the state in this respect the federal_agency may be said in effect to be sitting as a state court in 387_us_456 the court considered on date court issued its order construing the language of item vi of spouse’s will to mean that spouse intended to divide the gst non-exempt marital trust into five separate trusts while court 2’s order is not controlling for purposes of chapter court 2’s interpretation is a reasonable interpretation of spouse’s will and is consistent with applicable state law accordingly we conclude that court 2’s construction and interpretation of the language of item vi of spouse’s will regarding whether there is a single trust the gst non-exempt marital trust for decedent’s five named beneficiaries or five separate trusts for each named beneficiary will be given effect by the service for purposes of chapter the division of the gst non-exempt marital trust into the three separate trusts for the grandchildren will result in a direct_skip under sec_2612 and the gst taxes due are payable by the trusts under sec_2603 ruling on date court issued an order directing that the gst non-exempt marital trust be liable for all estate and inheritance taxes attributable to the gst exempt marital trust and the gst non-exempt marital trust due on the death of spouse this situation is analogous to the situation in revrul_73_142 1973_1_cb_405 in the ruling a lower state court construed a_trust instrument to mean that the decedent reserved the right to remove and appoint a trustee only once and that this power did plr-136875-04 not include the right to appoint himself and that once having exercised that power decedent would have exhausted his reserved powers the decedent subsequent to the decree did remove the original trustee and appoint another not himself so that under the interpretation of the court he no longer had such a right as of the date of his death the lower court decree was contrary to decisions of the highest court of the state the service considered the effect to be given the decree in determining the estate_tax consequences of the trust in the ruling the service stated that while the problem in bosch involves the fact that federal authorities are not bound by a determination of a state trial_court this does not mean that the parties to the state court action are not bound by the decree the lower court had jurisdiction over the parties and over the subject matter of the proceeding the time for the parties to appeal the lower state decree had passed unlike the situation in bosch the decree in the ruling was handed down before the time of event giving rise to the tax that is the date of the grantor’s death thus while the decree would not be binding on the government as to questions relating to the grantor’s power to appoint himself as trustee prior to the date of the decree it is controlling in this situation court had jurisdiction over the parties and over the subject matter of the proceeding the time for appeal had passed the decree was handed down before the time of the event giving rise to federal_estate_taxes that is the death of spouse thus as in revrul_73_142 the service will give effect to court 1’s order directing that the gst non-exempt marital trust be liable for all federal_estate_taxes payable by the gst exempt marital trust and the gst non-exempt marital trust at the death of spouse to the extent that there are sufficient assets in the gst non-exempt marital trust to pay such taxes the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party 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 plr-136875-04 except as specifically ruled herein we express or imply no opinion on the federal tax consequences of the transaction or 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 provides that it may not be used or cited as precedent sincerely lorraine e gardner senior counsel branch passthroughs and special industries enclosure copy for sec_6110 purposes