t c memo united_states tax_court thomas and deborah mcintyre petitioners v commissioner of internal revenue respondent docket nos filed date terri a merriam jaret r coles and adam j blake for petitioners nhi t luu for respondent memorandum findings_of_fact and opinion kroupa judge these consolidated cases are affected items proceedings stemming from petitioners’ involvement in hoyt cattle partnerships almost twenty years ago petitioners claimed hoyt 1jaret r coles and adam j blake both filed motions to withdraw as petitioners’ counsel we granted both motions partnership losses totaling dollar_figure on the returns for and the relevant years after concession sec_2 the sole issue is whether petitioners are liable for the sec_6662 accuracy- related penalties for those years rather than raise a substantive defense petitioners raise a procedural argument they argue they should not be held liable for the penalties because they argue the penalties are based on invalid returns we find petitioners are liable for the penalties findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the accompanying exhibits are incorporated by this reference petitioners resided in colorado at the time they filed the petition in docket no they resided in missouri at the time they filed the petition in docket no petitioners’ background petitioner husband petitioner has a bachelor’s degree in business management with a minor in finance from texas tech he has held various business-related positions including manager of a savings and loan company mortgage banker and part owner of a 2petitioners concede they are liable for the sec_6662 accuracy-related_penalty for 3all section references are to the internal_revenue_code in effect for the relevant years temporary staffing business petitioner sold his interest in the temporary staffing business for a substantial amount in petitioners’ investment with hoyt petitioner learned about the hoyt organization4 in he attended a seminar on investing in the stock market and he anticipated having funds to invest another seminar attendee who had previously invested with hoyt informed petitioner of the hoyt investment opportunity petitioner paid the hoyt organization dollar_figure for promotional materials pertaining to the cattle partnerships the materials focused heavily on the investors’ tax savings one of the documents described the investment several times as a tax_shelter which petitioner admits was a red flag that warranted further investigation the promotional materials also warned that a change in tax laws or an internal_revenue_service irs examination could subject the investor to penalties and interest on the federal tax_liability petitioner did not consult with a 4jay hoyt organized and promoted to numerous investors and operated as a general_partner a total of almost cattle- breeding partnerships between and he also formed partnerships to help manage or operate aspects of the hoyt organization that included preparing tax returns for each investor we determined in that hoyt cattle operations lacked economic_substance durham farms j v v commissioner tcmemo_2000_159 affd 59_fedappx_952 9th cir the commissioner subsequently removed all hoyt income and deductions from the investor partnership returns and then he made computational adjustments to the individual partners’ returns following the respective partnership proceedings tax consultant attorney or any other independent adviser before investing with hoyt petitioner discussed the hoyt cattle partnerships with jay hoyt and dave barne sec_5 by telephone petitioner believed that jay hoyt’s certification as an enrolled_agent meant that the hoyt cattle operations were legitimate petitioner never met however with anyone from the hoyt organization in person nor did he visit any of the hoyt ranches he spoke with only one of the two or three references the hoyt organization provided the reference merely confirmed everything that petitioner had been told about the hoyt investment petitioner orally informed the hoyt organization in of his decision to invest in the cattle partnerships the hoyt organization sent petitioner paperwork but petitioner does not recall what documents if any he signed petitioner did not have any adviser or attorney review the paperwork petitioners paid the hoyt organization dollar_figure in they were partners in durham genetic engineering dge durham genetic engineering dge durham genetic 5dave barnes was an employee of the hoyt organization see keller v commissioner tcmemo_2006_131 affd in part and reversed in part 556_f3d_1056 9th cir 6this amount includes the dollar_figure payment petitioners made for the promotional materials engineering dge and shorthorn genetic engineering sge in petitioners’ returns for the relevant years petitioners had their personal accountant prepare their individual federal_income_tax return for each of the relevant years these accountant-prepared documents did not include any hoyt partnership items petitioners then submitted the accountant-prepared documents to the hoyt organization for the addition of hoyt partnership items including losses the hoyt organization added the hoyt losses to the documents and attached schedules k-1 partner’s share of income credits deductions etc before returning them to petitioners for filing with the irs these hoyt-prepared returns and schedules k-1 were the only documents petitioners ever received from the hoyt organization after they invested petitioners never contacted the hoyt organization to request nor were they ever given copies of the partnership returns for any of their hoyt investments petitioners filed with the irs what the hoyt organization directed them to file as a return for the filing the filing included a form_1045 application_for tentative refund which attached a form_1040 u s individual_income_tax_return for and schedules k-1 for the hoyt partnerships for petitioners signed the form_1045 under penalty of perjury but did not sign the attached form_1040 petitioners mailed the filing via certified mail from hempstead texas they claimed hoyt partnership losses totaling dollar_figure on the form_1040 this amount of partnership losses was almost seven times the amount petitioners had invested with the hoyt organization that year the partnership losses reduced petitioners’ tax_liability for to dollar_figure and generated a dollar_figure net_operating_loss that petitioners carried back to petitioners submitted a dollar_figure check with the filing as payment of the tax_liability for respondent processed the filing as a return for and a net_operating_loss_carryback to respondent accepted the dollar_figure check as payment for the tax_liability respondent issued and mailed to petitioners a dollar_figure refund for petitioners filed no other return for the deficiency_notice decision documents were entered in hoyt partnership proceedings for taxable_year respondent made computational adjustments to petitioners’ tax_liabilities for each of the years 7petitioners had reported a dollar_figure tax_liability on the original return for 8petitioners attempted to file on date an amended_return for that did not report any hoyt losses or income the amended_return is irrelevant however because it was filed almost five years after the original return had been processed through that were based on the decisions entered in the partnership proceedings respondent disallowed portions of petitioners’ distributive shares of losses from the partnerships resulting in a dollar_figure underpayment of federal_income_tax for respondent also disallowed the net_operating_loss_carryback for and determined a dollar_figure underpayment for that year respondent determined petitioners were liable for a sec_6662 accuracy-related_penalty for each of the three years respondent issued petitioners affected items notices for the deficiencies and penalties at issue as previously mentioned petitioners concede they are liable for the accuracy- related penalty for the penalties are dollar_figure for and dollar_figure for discussion the sole issue for decision9 is whether petitioners are liable for the accuracy-related penalties10 for and 9we have already determined that we have no jurisdiction over respondent’s computational adjustments of the deficiencies in these affected items proceedings see mcintyre v commissioner tcmemo_2009_305 10a taxpayer is liable for an accuracy-related_penalty for any portion of an underpayment attributable to among other things a substantial_understatement_of_income_tax sec_6662 and b there is a substantial_understatement_of_income_tax if the amount of the understatement exceeds the greater of either percent of the tax required to be shown on the return or dollar_figure sec_6662 sec_1_6662-4 income_tax regs respondent has met his burden of production with respect to petitioners’ substantial_understatement_of_income_tax petitioners acknowledge that they did not act reasonably or in good_faith as a defense against the penaltiesdollar_figure they conceded after trial that they have not established reasonable_cause or good_faith see sec_6664 116_tc_438 sec_1_6664-4 income_tax regs instead petitioners argue that they are not liable for the accuracy- related penalties for and because of a procedural defect they argue that the filing respondent processed was an invalid return they claim that the form_1040 included with the filing is invalid because it is unsigneddollar_figure petitioners argue that by extension they cannot be held liable for the penalties for because those penalties are attributable to a net carryback from the unsigned form_1040 11the accuracy-related_penalty under sec_6662 does not apply to any portion of an underpayment if the taxpayer proves that there was reasonable_cause for his or her position and that he or she acted in good_faith with respect to such portion sec_6664 116_tc_438 sec_1_6664-4 income_tax regs the determination of whether a taxpayer acted with reasonable_cause and in good_faith depends on the pertinent facts and circumstances including the taxpayer’s efforts to assess his or her proper tax_liability the knowledge and experience of the taxpayer and the reliance on the advice of a professional sec_1_6664-4 income_tax regs the taxpayer bears the burden of proving reasonable_cause higbee v commissioner supra pincite 12petitioners also argue that the return is invalid because they were not partners in any hoyt partnerships in we held in our previous opinion mcintyre v commissioner supra that we lack jurisdiction in this affected items proceeding to consider petitioners’ status as partners in because it is a partnership_item to be addressed if at all at the partnership level accordingly we will not consider petitioners’ partnership-level argument in this affected items proceeding first and foremost petitioners’ argument regarding the validity of the filing confuses the issuedollar_figure respondent properly processed the entire filing as a return for and a net carryback to we distinguish this case from the cases deciding whether sufficient information was provided by the taxpayer for the commissioner to compute the correct_tax liability for the year at issue see 321_us_219 unsigned return that discloses no information relating to a taxpayer’s income not a return 309_us_304 incorrect form nevertheless constituted a return because it contained all the data from which a tax could be computed and assessed although it did not purport to state any amount due as tax 72_tc_818 unsigned return form_1040 with attachments containing frivolous arguments did not constitute a tax_return moreover we disagree that the filing was invalid petitioners signed the form_1045 included in the filing under penalty of perjury petitioners also submitted payment of the dollar_figure tax_liability reported on the filing respondent 13petitioners also attempt to distance themselves from the hoyt organization by challenging the validity of the filing they argue that they were duped by hoyt and that the filing was made without their consent hoyt did not file the return on petitioners’ behalf however the return was mailed from petitioners’ home in hempstead texas rather than from any of the hoyt office locations accepted the filing and properly processed it as the return for and a refund claim for consistent with this processing respondent accepted the dollar_figure check for liability and issued petitioners the dollar_figure refund for petitioners cannot now argue that the filing was invalid as a defense against the penalties furthermore petitioners have failed to establish that they otherwise filed a valid_return for petitioners have not raised a valid partner-level defense against the penalties as petitioners have conceded their actions constituted a lack of due care and failure to do what a reasonable or prudent person would have done we accordingly sustain respondent’s determination that petitioners are liable for the accuracy-related_penalties for the relevant years in reaching our holding we have considered all arguments made and to the extent not mentioned we conclude that they are moot irrelevant or without merit to reflect the foregoing and petitioners’ concessions decisions will be entered for respondent


department of the treasury internal_revenue_service washington d c jun z014 '201437029 tax_exempt_and_government_entities_division uniform issue list legend taxpayer a decedent irac custodian d trust e dear this is in response to your request dated date submitted by your authorized representative as supplemented by correspondence dated date and april24 and in which you request a ruling that ira c will not be treated as an inherited ira within the meaning of sec_408 of the internal_revenue_code the code with respect to you and that you be permitted to rollover over the proceeds of ira c into an ira maintained in your own name the following facts and representations have been submitted under penalty of perjury in support of the rulings requested taxpayer a is the surviving_spouse of decedent who died on date having attained age at his death decedent b maintained an individual re irement account ira c with custodian d taxpayer a represents that decedent had not designated a beneficiary for ira c consistent with custodian d's adoption_agreement custodian d will distribute decedent b's proceeds to his estate decedent b died testate and his last will and testament will named trust e as beneficiary decedent 8's will - - - - - - - - - - - - - - - - - - - - - ' ' appoints taxpayer a as his personal representative and she represents that she intends to assign all of decedent b's estate assets to trust e including assigning a beneficial_interest in ira c to trust e trust e appointed taxpayer a as successor trustee of all trusts created under the trust trust e provides that upon decedent b's death trust e is divided into two shares the marital share and the residuary_trust taxpayer a is the sole beneficiary of the marital share portion of trust e trust e provides that the marital share is to be funded with a pecuniary amount which if allowed as a federal estate_tax_marital_deduction would result in the least possible federal estate_tax payable at decedent b's death taxpayer a as successor trustee determines which estate assets will fund the marital share portion of trust e with the remainder of estate assets placed in the residuary_trust taxpayer a represents that she will transfer ira c to the marital share portion of trust e taxpayer further represents that the residuary_trust will be sufficiently funded with non-ira c assets to satisfy specific bequests of decedent b as sole trustee of trust e taxpayer a proposes to either transfer ira c directly into an ira in her name by way of a trustee-to-trustee transfer from trust e or to make a distribution of the assets of ira c to herself as beneficiary of the trust e under her power as successor trustee it is taxpayer a's intention to roll over the distribution into one or more iras set up and maintained in her own name based on the facts and representations you request the following rulings that the proceeds of ira c which will be distributed to trust e and subsequently paid to taxpayer a shall not constitute an inherited ira within meaning of sec_408 of the code with respect to taxpayer a and that taxpayer a as the surviving_spouse of decedent b may transfer ira c directly into an ira in her name by means of trustee-to-trustee transfer and if ira cis transferred by means of a trustee-to-trustee transfer that the trustee-to-trustee transfer will be exempt from the withholding requirements of sec_3405 of the code or in the alternative taxpayer a as the surviving_spouse of decedent b may roll over the ira c distribution she will receive into an ira set up and maintained in her name and taxpayer a is not required to include ira c proceeds in income for federal_income_tax purposes for the year in which the ira c proceeds are distributed and rolled over into the ira set up and maintained in taxpayer a's name provided the proceeds are timely rolled over into an ira set up and maintained in the name of taxpayer a and if taxpayer a appoints ira b to herself and receives the proceeds of ira b she will be treated as the payee or distributee thereof for purposes of sec_408 of the code sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the 60th day after the day on which the individual receives the payment or distribution or the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 of the code does not apply to any amount described in sec_408 of the code received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 of the code from an ira which was not includible in gross i ncome because of the application of sec_408 of the code sec_408 of the code provides in summary that the rollover rules of sec_408 do not apply to inherited iras sec_408 of the code provides that the term inherited ira means an ira aquired by an individual other than the ira owner's spouse as a result of the death of the ira owner sec_1_408-8 of the income_tax regulations question and answer q a- provides that a surviving_spouse of an ira owner may elect to treat the spouse's entire_interest as a beneficiary in an individual's ira as the spouse's own ira in order to make this election the spouse must be the sole beneficiary of the ira and have an unlimited right to withdraw amounts from the ira if a_trust is named as beneficiary of the ira this requirement is not satisfied even if the spouse is the sole beneficiary of the trust generally if the proceeds of a decedent's ira are payable to a_trust and are paid to the trustee of the trust who then pays them to the decedent's surviving_spouse as the beneficiary of the trust the surviving_spouse is treated as having received the ira proceeds from the trust and not from the decedent accordingly the surviving_spouse in general is not eligible to roll over the distributed ira proceeds into his her own ira however the general_rule will not apply in a case where the ira has not yet been distributed and the surviving_spouse as the sole trustee of the decedent's trust has sole authority and discretion under trust language to pay the ira proceeds to him her in such a case the surviving_spouse may roll over the proceeds into an ira set up and maintained in his her name within days of the date the proceeds are distributed from the ira in this case decedent b's estate is the default beneficiary of ira c decedent b's will names trust e as the beneficiary of his estate as the personal representative of decedent b's estate taxpayer a intends to transfer ira c to trust e under the terms of trust e and in her powers as sole successor trustee taxpayer a intends to distribute the proceeds from ira c to herself taxpayer a represents that within days of distributing the ira c proceeds she will roll them over from trust e to an ira set up in her own name therefore with respect to your ruling requests we conclude as follows the proceeds of ira c which will be distributed to trust e and subsequently paid to taxpayer a as beneficiary of trust e will not be treated as an inherited ira within the meaning of sec_408 of the code with respect to taxpayer a taxpayer a is eligible to roll over or have transferred by means of a trustee-to-trustee transfer a distribution of the proceeds of ira c into an ira set up and maintained in her own name as long as the rollover of such distribution occurs no later than the h day from the date the distribution is made from the ira c taxpayer a is not required to include ira c proceeds in income for federal_income_tax purposes for the year in which the ira c proceeds are distributed and rolled over into the ira set up and maintained in taxpayer a's name provided the proceeds are timely rolled over into an ira set up and maintained in the name of taxpayer a - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ' if taxpayer a appoints ira c to herself and receives the proceeds of ira c she will be treated as the payee or distribute thereof for purposes of sec_408 of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is based on the assumption that ira c met the requirements of sec_408 of the code at all relevant times and that trust e is valid under applicable state law it also assumes that any rollover ira established by taxpayer a will also meet the requirements of sec_408 of the code at all relevant times this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter_ruling is being sent to your authorized representative if you have any questions please contact or fax at please address all correspondence to se t ep ra t1 i d by phone at sincerely yours carlton a watkins manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose cc


department of the treasury internal_revenue_service washington c tax_exempt_and_government_entities_division date jul contact person identification_number il le yghs telephone number t eo b4 legend ein dear sir or madam this is in reference to your letter of date requesting advance approval of your grant procedures under sec_4945 of the internal_revenue_code the information submitted shows that the grants will be administered by f a publicly supported arganization under its b program organizations operating under the b program may elect the c and or the d option for purposes of the c scholarship awards option f selects individual scholarship recipients in the b program through a competition the initial phase of the competition is the x test which is given annually in participating high schools by high school officials after the test f identifies and honors students scoring in a group that represents the top two percent of graduating high school seniors nationwide and designates a number that represents less than one percent of the graduating high school seniors in each state as semifinalists the semifinalists then take a second test y to confirm their earlier performance those who repeat their prior performance who demonstrate high academic standing in high school and who meet other standard requirements are designated as finalists f's selection procedures in its d scholarship awards option generally parallel those applied in the c option however eligibility in the d option is limited to the top-scoring black students semifinalists in the d option are designated in at least four geographic regions each consisting - lay 1s of several states according to the distribution of the black population throughout the united_states you have entered into an agreement with f whereby you have agreed to sponsor a specific number of scholarships each year to be awarded to children and or relatives of employees of e under the b program f may award scholarships only to students who are designated as finalists the actual number of b scholarships to be supported by you will not exceed the number of employees’ children who qualify as finalists in their respective competitions after the list of finalists is obtained f reviews the finalist group to determine which students are eligible for grants under an employer related scholarship program no application is required from the students to enter the b program therefore neither you nor f can determine the number of eligible applicants if there is an insufficient number of employees’ children who qualify as finalists the total number of scholarships to be awarded in a particular year is automatically reduced or some foundations may permit scholarships to be offered to finalists who are not children of employees f monitors participating employers to ensure a sufficiently large base of employees’ children from which at least one or more b finalists would ordinarily be expected to emerge this is necessary since fewer than one out of one hundred seventy-five students in a senior class achieves the b finalist level the selection of individual grant recipients is made by selection committees designated by f f the members of the selection committee are totally independent and separate from you confirms the individual scholarship recipient's enrollment at the educational_institution makes payment of the award through the appropriate financial aid office of the educational_institution and supervises and investigates the use of the grant funds by the recipients in their educational program the scholarships will not be used as a means of inducement to recruit employees nor will a - grant be terminated if an employee parent leaves the company scholarships will only be awarded to students who plan to enroll in an institution that meets the requirements of sec_170 of the code and which may further be limited by f after the scholarship is awarded the recipient will not be restricted in his her course of study in rare cases sponsors may ask f to give preference in selection to individuals who propose to study in certain broad fields f will supply statistical information to you which will enable you to maintain the records required by rev_proc 1976_2_cb_670 sec_4945 of the code provides for the imposition of taxes on each taxable_expenditure of a private_foundation sec_4945 of the code provides that the term taxable_expenditure means any amount_paid or incurred by a private_foundation as a grant to an individual for travel study or other similar purposes by such individual unless such grant satisfies the requirements of sec_4945 sec_4945 of the code provides that sec_4945 shall not apply to an individual grant awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance by the secretary if it is demonstrated to the satisfaction of the secretary that the grant constitutes a scholarship or fellowship_grant which is subject_to the 2x provisions of sec_117 and is to be used for study at an educational_organization described in sec_170 revproc_76_47 1976_2_cb_670 sets forth guidelines to be used in determining whether a grant made by a private_foundation under an employer-related program to a child of an employee of the particular employer to which the program relates is a scholarship grant subject_to the provisions of sec_117 if a private foundation's program satisfies the seven conditions set forth in sections dollar_figure through dollar_figure of revproc_76_47 and meets the percentage_test described in sec_4 the service will assume the grant will be subject_to the provisions of sec_117 section dollar_figure of revproc_76_47 provides a percentage_test guideline it states that in the case of a program that awards grants to children of employees of a particular employer the program meets the percentage_test if the number of grants awarded under that program in any year to such children does not exceed percent of the number of employees’ children who i were eligible ii were applicants for such grants and iii were considered by the selection committee in selecting the recipients of grants in that year or percent of the number of employees’ children who can be shown to be eligible for grants whether or not they submitted an application in that year as stated in sec_4 of revproc_76_47 if a sponsor's program satisfies the seven conditions set forth in sections dollar_figure through but does not meet the percentage_test of section dollar_figure applicable to grants to employees’ children the question whether the grants are scholarship or fellowship grants subject_to the provisions of sec_117 of the code will be tesolved on the basis of all the facts and circumstances in making this determination the service will consider as a substitute for the percentage_test of section dollar_figure all the relevant facts and circumstances to determine whether the primary purpose of the program is to provide extra compensation or other employment incentive or whether the primary purpose is to educate recipients in their individual capacities these facts and circumstances will be considered in the context of the probability that a grant will be available to any eligible applicant such relevant facts and circumstances could include the history of the program such as the source of the program's funding the courses of study for which the grants are available any eligibility requirements imposed by the program other than employment of the applicants or their parents and the age and grade level prerequisites for the studies for which the grants are available the publicity given the grant program the degree of independence of the selection committee the particular standards used for selection the specific means used to determine whether those standards have been met the precise nature of the employee limitation or preference the number of grants available the number of employees or their children who would be eligible for them the percentage of eligible employees or their children applying for grants who normally eg on an average basis receive grants under the program and whether and how many grants are awarded to individuals who do not qualify as employees or children of employees in this instance the following facts and circumstances are considered relevant aside from the employment preference f a public charity operates its private_foundation sponsored b program in a substantially_similar manner to its nationwide college scholarship program for a academically talented high school students no application is required individuals must achieve finalist status in their respective competitions recipients are chosen by selection committees totally independent of the private_foundation or the employer involved no limitations are placed on the recipients’ choice of course of study after the grant is awarded the number of actual grants made may not exceed the number of employees’ children who qualify as finalists employees children in its programs in f provided an average of one scholarship for every big_number under the facts and circumstances as stated above there is only an insignificant probability that any particular employee's child will be selected and thus the grant's primary purpose is not one of providing extra compensation or other employment incentive and the facts_and_circumstances_test of revproc_76_47 sec_4 is met accordingly based upon the information presented and assuming your scholarship program will be conducted as proposed with a view to providing objectivity and non-discrimination in the awarding of scholarship grants we rule that your grants to f for the awarding of scholarship grants to children of employees of e comply with the requirements of sec_4945 of the code thus such expenditures made in accordance with those procedures will not constitute taxable_expenditures within the meaning of sec_4945 of the code the recipient of the scholarship is responsible for determining whether ail or part of the scholarship is includible in gross_income under sec_117 of the code we understand that f - will advise the recipient that amounts granted are taxable_income if the aggregate scholarship amounts received by the recipient exceed tuition and fees not including room and board required for enrollment or attendance at the educational_institution and fees books supplies and equipment required for courses of instruction this ruling will remain in effect as long as the procedures in awarding grants under your program remain in compliance with sections dollar_figure through dollar_figure of revproc_76_47 please note that this ruling is only applicable to grants awarded under the b program before you enter into any other scholarship or educational loan program you should submit a request for advance approval of that program your procedures for awarding grants under the b program are considered to satisfy the facts_and_circumstances_test of revproc_76_47 and therefore will not be counted in determining whether the percentage_test of revproc_76_47 is met with respect to any other such program for which prior approval has been granted we are informing the ohio te_ge office of this ruling please keep a copy of this ruling with your organization's permanent records bis this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited as precedent sincerely tot vu beck gerald v sack manager exempt_organizations technical group


internal_revenue_service department of the treasury number release date index no washington dc person to contact telephone number refer reply to cc fip plr-118180-99 date date legend taxpayer date date year amount amount amount amount amount amount amount number number percent percent dear this letter responds to a letter received on date requesting a ruling that interest deductions relating to certain notes described below will not be disallowed under sec_163 of the internal_revenue_code plr-118180-99 facts taxpayer is a holding_company that owns several insurance_companies as of date taxpayer’s capital structure included approximately amount of short-term debt amount of equity and a put option that allowed taxpayer to sell its convertible preferred shares to a third party upon the occurrence of certain catastrophic events that caused losses that exceeded taxpayer’s catastrophe reinsurance coverage the short-term debt was incurred during the two years preceding date the put option was purchased in year as a substitute for upper layer reinsurance the put option was scheduled to expire on date taxpayer proposes to issue senior subordinated debt the notes and purchase new put options the put options the notes will be issued with an aggregate stated principal_amount between amount and amount they will be general unsecured obligations of taxpayer they will have a term of number years they will pay interest semi-annually at a fixed interest rate to be determined on a competitive basis they will be callable after one year there will be a call_premium that will decrease over number years the notes are not by their terms payable in stock or in an amount determined by the value of stock the notes will not be convertible into equity the payment of principal and interest on the notes will not be contingent upon or connected to the exercise of the put options taxpayer will issue the notes to replace short-term debt currently on its books the notes will provide capital for taxpayer’s general business needs taxpayer intends to contribute some of the net_proceeds to its insurance subsidiaries for insurance operations and to retain a portion of the proceeds for general corporate purposes the notes will be offered in a private_placement exempt from registration under the united_states securities act of or to qualified institutional buyers as defined in rule 144a under the securities act they will be transferable subject_to restrictions on the type of the transferee the put options will allow taxpayer to put up to a total amount between amount and amount of its convertible preferred_stock preferred_stock the put options will have a term of number years they will be exercisable only if taxpayer incurs a significant decline in its net_worth resulting from financial plr-118180-99 or natural catastrophic events a qualifying_event the put options will be transferable by their writers subject_to certain credit standards and taxpayer’s approval a qualifying_event will occur if taxpayer’s net_worth gross assets minus gross liabilities as determined in accordance with generally_accepted_accounting_principles decreases by percent or more in any one year or percent or more during three consecutive years for purposes of determining whether a qualifying_event has occurred during a period the net_worth at the beginning of the period will be increased by the amount of any additional equity issued by taxpayer during the period and decreased by the amount of any equity retired or repurchased by taxpayer during the period and by the amount of any extraordinary dividends_paid by taxpayer in excess of its customary common_stock dividend rate taxpayer’s actuaries estimate that there is less than an chance that taxpayer will suffer a qualifying_event during the term of the put options despite the occurrence of a qualifying_event the put options will not be exercisable unless taxpayer’s net_worth at the close of the most recent quarter prior to the date of exercise is at least amount the put options may not be initially exercised with respect to preferred_stock having an aggregate purchase_price of less than amount thereafter the put options may be exercised in minimum increments of amount however an investor will not be required to purchase preferred_stock to the extent that the investor’s aggregate purchase_price for such preferred_stock would exceed the investor’s pro_rata portion based on his put option holdings of the net decrease in taxpayer’s net_worth resulting from the qualifying_event subject_to the minimum put option exercise taxpayer represents that the put options will serve as a substitute for upper layer reinsurance taxpayer also represents that the cost of purchasing the put options should be less than the cost of traditional reinsurance although the notes and the put options might be issued at the same time they will be issued as separate and distinct instruments that are not connected to or contingent upon each other investors may purchase notes without selling put options and vice versa taxpayer expects however that some investors will purchase notes and also sell put options in that case taxpayer represents that upon the exercise of the put option plr-118180-99 the investor may not satisfy its obligation under the put option with a note applicable law sec_163 provides that no deduction shall be allowed for any interest_paid or accrued on a disqualified_debt_instrument sec_163 provides that the term disqualified_debt_instrument means any indebtedness of a corporation that is payable in equity of the issuer or a related_party sec_163 provides for purposes of paragraph indebtedness shall be treated as payable in equity of the issuer or a related_party only if- a a substantial amount of the principal or interest is required to be paid or converted or at the option of the issuer or a related_party is payable in or convertible into such equity b a substantial amount of the principal or interest is required to be determined or at the option of the issuer or a related_party is determined by reference to the value of such equity or c the indebtedness is part of arrangement which is reasonably expected to result in a transaction described in subparagraph a or b for purposes of this paragraph principal or interest shall be treated as required to be so paid converted or determined if it may be required at the option of the holder or a related_party and there is a substantial certainty the option will be exercised there are no final temporary or proposed_regulations under sec_163 sec_163 was added to the internal_revenue_code by the taxpayer_relief_act_of_1997 p l the conference_report explained that a n instrument is to be treated as payable in stock if a substantial portion of the principal or interest is required to be determined or may be determined at the plr-118180-99 option of the issuer or related_party by reference to the value of stock of the issuer or related_party an instrument also is treated as payable in stock if it is part of an arrangement designed to result in such payment of the instrument with or by reference to such stock such as in the case of certain issuances of a forward_contract in connection with the issuance of debt nonrecourse debt that is secured principally by such stock or certain debt_instrument that are convertible at the holder’s option when it is substantially certain that the right will be exercised conf_rep holding based on the representations made by the taxpayer and the applicable law we conclude that sec_163 will not apply to disallow deductions for interest_paid or accrued on the notes except as specifically ruled on above no opinion is expressed concerning the tax consequences of this transaction under any other provision of the code or regulations in particular no opinion is expressed concerning whether the notes are indebtedness for federal_income_tax purposes temporary or final regulations under sec_163 have not been adopted therefore this ruling may be modified or revoked if temporary or final regulations when adopted are inconsistent with the conclusion in the ruling however when the criteria in section dollar_figure of revproc_2000_1 2000_1_irb_4 are satisfied a ruling is not modified retroactively or revoked in rare or unusual circumstances this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent in accordance with the provisions of a power_of_attorney on file with this office we are sending a copy of this letter_ruling to taxpayer’s authorized representative sincerely yours acting associate chief_counsel financial institutions products by william e blanchard senior technician reviewer branch enclosure copy


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 intl b02 plr-103727-13 date date ty ------ legend taxpayer individual a fc country a year year year --------------------- --------------- -------------------- ---------------- ------------------------------------------ ---------- ------ ------ ------ tax firm b ---------------------------------------- tax firm c ------------------------------ tax firm d ---------------------------------- dear --------------------- this is in response to a letter dated date and supplemental documentation submitted by taxpayer’s authorized representative that requested the consent of the commissioner of the internal_revenue_service commissioner for plr-103727-13 taxpayer to make a retroactive qualified_electing_fund qef election under sec_1295 of the internal_revenue_code code and sec_1_1295-3 with respect to taxpayer’s investment in fc the ruling contained in this letter is based upon information and representations submitted on behalf of taxpayer by its authorized representatives and accompanied by a penalties of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of this request_for_ruling such material is subject_to verification on examination the information submitted in the request is substantially as set forth below facts taxpayer is an s_corporation whose sole owner is individual a taxpayer owns an interest in fc a publicly-traded foreign_corporation incorporated in country a that constitutes a passive_foreign_investment_company pfic within the meaning of sec_1297 of the code taxpayer initially acquired its interest in fc in year and has acquired additional shares since year from year to year taxpayer engaged tax firm b for the preparation of its u s tax_return since before year taxpayer has engaged tax firm c for the preparation of its u s tax_return tax firm b and tax firm c are qualified to provide tax_advice on international tax matters including issues related to pfics tax firm b and tax firm c advised taxpayer with regard to u s federal_income_tax matters including with respect to taxpayer’s ownership of fc taxpayer relied on tax firm b and tax firm c to provide advice with respect to filing and reporting requirements in general as well as any elections or statements that would be necessary to elect specific tax treatment neither tax firm b nor tax firm c identified fc as a pfic and as such did not advise taxpayer regarding any potential pfic reporting requirements or available elections in year another shareholder in fc contacted taxpayer about the potential pfic status of fc which led taxpayer to consult further with tax firm c after discussing the issue with tax firm c taxpayer retained tax firm d to help taxpayer come into compliance based on the determination that fc had likely been a pfic since before year taxpayer requested tax firm d to submit a private_letter_ruling request on taxpayer’s behalf to make a retroactive qef election with respect to fc under sec_1_1295-3 retroactive to year taxpayer has submitted an affidavit under penalties of perjury describing the events that led to the failure to make the qef election by the election due_date including the roles of tax firm b and tax firm c taxpayer provided information regarding its ownership of fc to tax firm b and tax firm c and tax firm b and tax firm c had access to all relevant information with respect to fc taxpayer represents that in the relevant years fc was not identified as a pfic and taxpayer did not receive plr-103727-13 any advice regarding the availability of a qef election with respect to fc taxpayer has submitted affidavits from tax firm b and tax firm c corroborating the representations made by taxpayer with respect to the discovery of fc’s pfic status taxpayer has paid an amount sufficient to eliminate any prejudice to the united_states government as a consequence of an inability to file amended returns in accordance with a closing_agreement between taxpayer and the commissioner further taxpayer filed an amended_return for each of its subsequent taxable years affected by the retroactive election if any taxpayer represents that as of the date of this request_for_ruling the pfic status of fc has not been raised by the irs on audit for any of the taxable years at issue ruling requested taxpayer requests the consent of the commissioner to make a retroactive qef election with respect to fc under sec_1_1295-3 retroactive to year law sec_1295 of the code provides that a pfic will be treated as a qef with respect to a taxpayer if an election by the taxpayer under sec_1295 applies to such pfic for the taxable_year and the pfic complies with such requirements as the secretary may prescribe for purposes of determining the ordinary_earnings and net capital_gains of such company under sec_1295 a qef election may be made for any taxable_year at any time on or before the due_date determined with regard to extensions for filing the return for such taxable_year to the extent provided in regulations such an election may be made after such due_date if the taxpayer failed to make an election by the due_date because the taxpayer reasonably believed the company was not a pfic under sec_1_1295-3 a shareholder may request the consent of the commissioner to make a retroactive qef election for a taxable_year if the shareholder reasonably relied on a qualified_tax professional within the meaning of sec_1_1295-3 granting consent will not prejudice the interests of the united state sec_3 government as provided in sec_1_1295-3 the request is made before a representative of the internal_revenue_service raises upon audit the pfic status of the corporation for any taxable_year of the shareholder and the shareholder satisfies the procedural requirements of sec_1 f plr-103727-13 the procedural requirements include filing a request for consent to make a retroactive election with and submitting a user_fee to the office of the associate chief_counsel international sec_1_1295-3 additionally affidavits signed under penalties of perjury must be submitted that describe the events that led to the failure to make a qef election by the election due_date the discovery of such failure the engagement and responsibilities of the qualified_tax professional and the extent to which the shareholder relied on such professional sec_1_1295-3 and iii conclusion based on the information submitted and representations made with taxpayer’s ruling_request we conclude that taxpayer has satisfied sec_1_1295-3 accordingly consent is granted to taxpayer to make a retroactive qef election with respect to fc for year provided that taxpayer complies with the rules under sec_1_1295-3 regarding the time and manner for making the retroactive qef election we will accordingly approve a closing_agreement with taxpayer with respect to those issues affecting its tax_liability on the basis set forth above the necessary closing_agreement for taxpayer has been prepared in triplicate and is enclosed in pursuance of our practice with respect to such agreements the agreement contains a stipulation to the effect that any change or modification of applicable statutes enacted subsequent to the date of this agreement and made applicable to the taxable_period involved will render the agreement ineffective to the extent that it is dependent upon such statutes except as specifically set forth above no opinion is expressed or implied concerning the u s federal tax consequences of the facts described above under any other provision of the code this private_letter_ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent plr-103727-13 a copy of this letter_ruling must be attached to any federal_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 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to taxpayer’s authorized representative sincerely jeffery g mitchell branch chief branch international


internal_revenue_service number release date index number -------------------------------------------- ---------------------------------------------------------------- ------ -------------------------------------------- ------------------------------ attn ------------------------------------ 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 b06 plr-103681-16 date date re -------------------------------------------------------------------------- legend taxpayer dear -------------- -------------------------------------------- ein ----------------- as discussed in our telephone conversation with taxpayer’s authorized representatives on date we are revoking private_letter_ruling dated date in addition this letter limits the retroactive effect of the revocation pursuant to sec_7805 of the internal_revenue_code in private_letter_ruling the internal_revenue_service held that the stipends that taxpayer paid to its research fellows using grants other than those authorized under the national research service award nrsa program did not constitute wages for employment_tax purposes and were not subject_to social_security taxation under sec_3101 sec_3111 and sec_3121 the service has recently determined that private_letter_ruling is not in accord with the current views of the service amounts paid to research fellows under non-nrsa grants that are compensatory in nature constitute a payment for services are wages for employment_tax purposes and are subject_to social_security taxation under sec_3101 sec_3111 and sec_3121 plr-103681-16 accordingly private_letter_ruling is revoked pursuant to the authority granted under sec_7805 this revocation will apply to taxpayer’s taxable periods beginning on or after the date of this letter this letter does not constitute an adverse letter_ruling with respect to the issue addressed in private_letter_ruling in accordance with the power_of_attorney on file with our office we are sending copies of this letter to taxpayer’s authorized representatives in addition we are sending a copy of this letter to the appropriate operating division director sincerely william a jackson chief branch office of associate chief_counsel income_tax accounting enclosures copy of this letter copy for sec_6110 purposes cc


t c memo united_states tax_court paul a rendina and janet mae rendina petitioners v commissioner of internal revenue respondent docket no filed date joseph p alexander j timothy bender and david g lambert for petitioners jeffrey j erney for respondent memorandum findings_of_fact and opinion beghe judge respondent determined a deficiency of dollar_figure in petitioners’ federal_income_tax and additions to tax of dollar_figure and dollar_figure under sec_6653 and sec_6661 respectively the deficiency arose from respondent’s determination that the distribution to petitioner2 of two condominium units by wood street apartments inc wsai was a dividend we hold that petitioner received the condominium units as a distribution in de_facto_liquidation of his shares of wsai thereby reducing his realized gain by the amount of his basis in the shares and by the amount of certain liabilities to third parties that he assumed resulting in a lesser deficiency than respondent determined we also hold petitioner liable for the additions to tax for negligence under sec_6653 and substantial_understatement under sec_6661 computed on the reduced deficiency findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and attached exhibits are incorporated herein when petitioners filed their petition they resided in willoughby hills ohio 1unless otherwise identified section references are to the internal_revenue_code in effect for and all rule references are to the tax_court rules_of_practice and procedure 2janet mae rendina has an interest in this case solely by virtue of having filed a joint federal_income_tax return with her husband accordingly all references to petitioner in the singular are to paul a rendina petitioner is a certified_public_accountant during the year at issue he was an owner-shareholder in a certified public accounting firm rendina vitantonio inc wood street apartments inc in petitioner and thomas j ackerman ackerman a construction contractor formed wsai as a general business corporation under ohio law for the purposes of constructing and selling condominium units in willoughby ohio wsai was operated as a c_corporation petitioner and ackerman each paid wsai approximately dollar_figure for an equal number of common shares of wsai in and wsai constructed the condominium units known as south wood condominiums south wood south wood consists of two-story townhouses built in clusters of six units in each of three buildings wsai financed the construction of south wood primarily with borrowed funds the funds used by wsai consisted of a loan from security federal savings and loan of approximately dollar_figure petitioner’s deposits in wsai’s checking account of approximately dollar_figure and approximately dollar_figure in loans from three of 3petitioner made three deposits into the account on date petitioner deposited dollar_figure into the account on date petitioner deposited dollar_figure into the account with a notation on the deposit ticket indicating that the deposit was a loan on date petitioner deposited dollar_figure into the account petitioner’s accounting clients william and mary foss the fosses vito and adella navar the navars and frank and benette posa the posas the principal amounts of the loans from the fosses navars and posas were dollar_figure dollar_figure and dollar_figure respectively the loan checks were made to wsai and deposited in wsai’s checking account at national city bank wsai issued promissory notes to the lenders providing that interest would be paid at a rate of percent per year the maturity_date of each of the notes was approximately year after issuance on date the posas lent dollar_figure to wsai and received notes as follows entity wsai wsai wsai4 date amount dollar_figure big_number big_number on date date and date the fosses lent dollar_figure dollar_figure and dollar_figure respectively to wsai and received notes as follows entity wsai wsai date amount dollar_figure big_number 4in petitioner replaced the prior note with a note issued in the name of wsai which was by then no longer an active corporation when the notes were typed petitioner’s office inadvertently transcribed the information from the client’s old notes wsai5 big_number on date the navars lent dollar_figure to wsai and received the following note entity wsai date amount dollar_figure with the exception of one of the foss notes each new note reflected a rollover of the obligation on the prior note for the months of january february march and date all interest payments due on the notes to the fosses navars and posas were made in the name of wsai in of the units were sold two of which were purchased by ackerman the stated purchase prices and dates of purchase for the units were as follows purchaser thomas j michelle l ackerman condo unit a bldg a purchase date purchase_price dollar_figure 5see supra note 6the record does not indicate the source of the funds used to make the first months’ interest payments in 7ackerman borrowed dollar_figure to purchase the two condominium units and testified that he performed approximately dollar_figure worth of work on each of them while the statutory conveyance fee for each of the units was dollar_figure representing percent of the purchase_price the way we decide this case does not require a factual determination of how much ackerman actually paid for each of the units we do find that the stated purchase prices for the units purchased by the unrelated parties were the actual purchase prices thomas j michelle l ackerman geza bihari larry ruth entis donald c janet t matz debra j stewart karen ann helsel donald l smith unit b bldg a unit c bldg a unit d bldg a unit e bldg a unit f bldg a unit a bldg b unit c bldg b dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure edward n barbara j snyder unit d bldg b gia m perrico lauren b joseph wolf unit e bldg b unit f bldg b dollar_figure dollar_figure dollar_figure ronald s denise a rychel unit a bldg c dollar_figure gary ackerman maria l podmore sharon l spei unit b bldg c unit c bldg c unit d bldg c dollar_figure dollar_figure dollar_figure john viviani kimberly m ficke unit f bldg c dollar_figure ackerman and petitioner expected a net profit of approximately dollar_figure to dollar_figure on each condominium unit sold based on a cost estimate of approximately dollar_figure per unit however wsai incurred approximately dollar_figure to dollar_figure in commissions and settlement costs for each condominium in addition rebates or building allowances were given to prospective buyers in amounts ranging from dollar_figure to dollar_figure wsai also incurred financing costs unanticipated zoning costs development fees dollar_figure paid in settlement of a lawsuit by south wood condominium association related to alleged construction defects in south wood and various misrepresentations nondisclosures and failures to perform and wsai’s actual construction costs toward the end of two of the units remained unsold petitioner and ackerman orally agreed that wsai would transfer title to the two remaining condominium units to petitioner in consideration of petitioner’s assumption of the foss navar and posa notes and petitioner’s discharge of wsai’s debt owed to him in date wsai transferred south wood’s two remaining condominium units to petitioner petitioner did not report any income or gain from the receipt of the two condominium units on his federal_income_tax return but did report a taxable dividend from wsai in the amount of dollar_figure although wsai had filed u s_corporation income_tax returns for the tax years and employing the completed_contract_method of accounting and showing no gross_receipts sales or other income wsai filed no u s_corporation income_tax return for the tax_year in which all the condominium units were sold or transferred with the transfer of the last two condominium units to petitioner in wsai no longer held business_assets and ceased to be a going concern upon transfer of all condominium units in wsai ceased doing business but did not formally dissolve its charter was revoked in for nonpayment and nonfiling of ohio franchise tax returns in date petitioner sold one of the units for dollar_figure transfer of notes from wsai to canterbury construction co following his receipt of the last two south wood condominium units petitioner gave the fosses navars and posas the option of either having their loans repaid or of having the loan obligations taken over by canterbury construction co canterbury an s_corporation wholly owned by petitioner that is in the business of real_estate construction and development the note holders chose to have canterbury take over the loan obligations and to continue receiving interest payments while petitioner did not in his individual capacity issue promissory notes to any of the note holders canterbury issued new notes to the fosses navars and posas sometime after date and began making interest payments on the notes the loans to the posas and navars in the principal amounts of dollar_figure and dollar_figure respectively have been paid as of the date of filing of the petition the fosses still held a note issued by canterbury on which they were receiving interest payments as a result of the earlier lawsuit wsai turned its books_and_records over to the south wood estates condominium association petitioner has not recovered the books_and_records of wsai from the association corporation tax and transferee issues on or around date respondent sent petitioner as transferee of wsai a 30-day_letter with a report of income_tax examination and explanation of items asserting for the taxable_year that wsai had taxable_income of dollar_figure resulting from gross_receipts of dollar_figure from the sale of the south wood condominium units based on the retail sales prices as determined by the transfer_taxes paid less costs and expenses of dollar_figure the report took the position that wsai owed u s 8respondent excluded the two units transferred to petitioner from the calculation of gross_receipts 9respondent relied on the cohan_rule to provide what respondent regarded as a reasonable allowance for costs and other expenses in lieu of substantiating documents see 39_f2d_540 2d cir respondent arrived at the dollar_figure figure for costs and expenses by allowing dollar_figure of construction loan proceeds cf our findings supra p dollar_figure as the cost of the land and dollar_figure as expenses of the continued corporation income_tax of dollar_figure and an addition of dollar_figure for failure_to_file its corporation income_tax return wsai’s liability for u s_corporation income_tax and the failure_to_file addition remains unresolved respondent had issued no statutory_notice_of_deficiency to wsai or to petitioner as transferee as of the date_of_issuance of this report opinion because wsai has never filed a u s_corporation income_tax return the periods of limitation on assessment of wsai’s corporation income_tax_liability and petitioner’s transferee_liability remain open indefinitely in the course of our unsuccessful efforts to lead the parties to a comprehensive settlement or to postpone the submission of this case in order to allow the related corporation tax and transferee_liability cases to be perfected and consolidated with this case we observed to the parties that it would have been preferable in the interests of efficient case management and sound judicial administration to bring the cases on together so that the interrelated questions of corporate taxable_income and earnings_and_profits which bear on the transferee_liability and dividend questions could have been tried togetherdollar_figure be that as it may we decide continued sale of the condominium units 10for an example of a consolidated proceeding dealing with continued this case on its somewhat unsatisfactory record in a way that enables us to avoid making the earnings_and_profits dividend determination and leave the related corporate taxable_income question for another day if respondent should decide to pursue it the substantive tax question before us is whether petitioner’s receipt of two condominium units during the taxable_year was a taxable_distribution from wsai respondent determined that petitioner’s receipt of the last two units was a dividend in the amount of dollar_figure during the taxable_year petitioner contended that his receipt of the units was not taxable to him because it was offset by discharge of wsai’s debt to him and his assumption of the foss navar and posa notes petitioner also maintained that his receipt of the two units could not be a dividend because wsai had no earnings_and_profits petitioner in his reply brief raised the alternative argument that he received the condominium units in de_facto_liquidation of wsai which would entitle him to use the basis of his wsai stock to compute his gain on the distribution if we should determine that his payments into wsai represented equity rather than debt because it appeared to us that this position continued related questions of corporation tax and transferee_liability and shareholder gain on liquidation see 65_tc_18 might have greater merit than the primary position of either of the parties we had them address this newly raised issue in supplemental briefs i lack of prejudice to respondent in addressing liquidation respondent maintains that petitioner’s delay in raising the de_facto_liquidation issue precludes us from addressing it respondent relies on brown v commissioner tcmemo_1979_443 to argue that our consideration of the new issue raised on brief would severely prejudice her case and violate fundamental fairness we have allowed petitioner to raise the de_facto_liquidation issue for two reasons first just as respondent is not bound by the theory upon which she relied in determining the deficiency 283_f2d_474 8th cir so petitioner is not precluded from raising a new_theory on post- trial brief 906_f2d_62 2d cir affg 92_tc_1267 and tcmemo_1989_165 declining to adopt an ironclad rule that the tax_court may not consider a legal theory surfacing in posttrial briefs our duty is to consider all the evidence and in light thereof decide whether or not petitioner has a deficiency we are therefore entitled to adopt a new_theory of decision especially where we give both parties the opportunity to argue its merits see 424_f2d_116 5th cir revg 50_tc_927 89_tc_1010 affd 914_f2d_396 3d cir where the record contains sufficient facts to permit us to decide a case on an issue that would dispose_of it we shall do so whether or not the parties have pleaded the issue barnette v commissioner tcmemo_1992_595 affd without published opinion sub nom allied management corp v commissioner 41_f3d_677 11th cir see 89_tc_105 körner j concurring 57_tc_767 in 8_bta_1249 affd 34_f2d_1022 6th cir the board decided the case on the record presented as we do here the parties’ failure to plead correctly does not prevent us from deciding this case on what we consider to be the correct application of the law to the facts in the record presented barnette v commissioner supra our second reason for allowing petitioner to raise the de_facto_liquidation issue is that respondent has not been surprised or prejudiced by our addressing it see 56_tc_388 affd 478_f2d_1160 affd sub nom 478_f2d_731 8th cir the rule that a party may not raise a new issue on brief is not absolute it is founded upon the exercise of judicial discretion in determining whether considerations of surprise and prejudice require that a party be protected from a belated confrontation that precludes or limits his opportunity to present pertinent evidence 92_tc_1267 affg 906_f2d_62 2d cir respondent’s reliance on brown v commissioner tcmemo_1979_443 is misplaced in brown the taxpayer was not given notice of the commissioner's change in theory and was thus denied the opportunity to prepare an adequate case on the new issue brown is distinguishable from the case at hand we have given both petitioner and respondent the same opportunity to make their arguments on the de_facto_liquidation issue by way of supplemental reply brief thus neither party is advantaged or disadvantaged respondent maintains that if petitioner had raised the de_facto_liquidation issue earlier respondent would have had the opportunity to provide evidence on whether wsai was formally dissolved whether the corporate records established a plan by the shareholders to dissolve wsai whether wsai continued to hold title to the land underlying the condominiums or any other_property whether wsai continued to manage the common areas of the condominium complex whether wsai continued to file tax returns whether wsai continued to comply with statutory corporate formalities and whether wsai maintained its corporate identity the record adequately addresses these issues and additional evidence is not needed to enable us to make a fair determination of whether de_facto_liquidation treatment of wsai is appropriate with respect to the observation of corporate and tax formalities wsai was not formally dissolved--its charter was revoked for nonfiling of ohio franchise tax returns and nonpayment of ohio taxes and it neither adopted a written plan_of_liquidation nor filed the notice of corporate dissolution or liquidation required by sec_6043 the record also shows that wsai filed no u s_corporation income_tax returns for or any year thereafter the record further shows that wsai no longer held business_assets after the sale and distribution of the south wood units and that thereafter south wood was managed by the south wood condominium association finally the record shows that wsai did maintain its corporate identity at least until its charter was revoked having made findings on the foregoing factual issues the majority of which facially would tend to favor respondent’s position that wsai was not liquidated in we see no prejudice to respondent ii de_facto_liquidation applying the three-pronged test of 50_tc_130 whether there is a manifest intention to liquidate whether there is a continuing purpose to terminate corporate affairs and whether the activities of the corporation and its shareholders are directed toward that objective we are convinced that wsai and its shareholders displayed a manifest intention to liquidate and continuing purpose to terminate corporate affairs and that the activities of wsai and its shareholders were directed to that end see olmsted v commissioner tcmemo_1984_381 neither the code nor the regulations to sec_331 define the term complete_liquidation however as we noted in olmsted v commissioner tcmemo_1984_381 the regulations under sec_332 governing subsidiary liquidations contain a definition of complete_liquidation under sec_332 that applies equally to sec_331 a status of liquidation exists when the corporation ceases to be a going concern and its activities are merely for the purpose of winding up its affairs paying its debts and distributing any remaining balance to its shareholders a liquidation may be completed prior to the actual dissolution of the liquidating corporation however legal dissolution of the corporation is not required nor will the mere retention of a nominal amount of assets for the sole purpose of preserving the corporation’s legal existence disqualify the transaction sec_1_332-2 income_tax regs respondent maintains that petitioner never liquidated wsai in support of her position respondent relies on 87_tc_498 in haley bros construction corp the corporation at issue marywood corp was not dissolved formally in accordance with state law and continued to maintain a checking account we held that there was no liquidation because there was a business_purpose for the continued existence of marywood which continued to be operated in accordance with that business_purpose holding and selling real_property maintaining a checking account paying expenses and filing tax returns moreover the continued corporate existence of marywood served the purpose of insulating its parent_corporation from liabilities on a mortgage and in pending litigation in the case at hand there was no business_purpose for wsai to continue operating wsai did not file a corporate tax_return for and with the sale or distribution of all of the condominium units wsai had no further assets of any consequence we are unpersuaded by respondent’s assertion that because wsai continued some activities through the beginning of it did not liquidate complete_liquidation can occur despite an extended liquidation process and several earlier opinions of this court have upheld liquidations despite protracted time frames see eg estate of maguire v commissioner supra t 41_bta_965 olmsted v commissioner supra in order for complete_liquidation treatment to apply it is not essential that a formal plan_of_liquidation be adopted or that the corporation dissolve as long as there is a manifest intention to liquidate that is carried out 412_f2d_556 5th cir 145_f2d_37 3d cir affg 45_bta_37 96_f2d_177 5th cir affg 35_bta_415 olmsted v commissioner supra silverman v commissioner tcmemo_1971_ see bittker eustice federal income_taxation of corporations shareholders par pincite 6th ed mertens law of federal income_taxation sec_42 pincite rev respondent maintains that petitioner has failed to provide the necessary books_and_records to support his position regarding the liquidation of wsai although we agree with respondent that there are gaps in the record we believe that it contains sufficient evidence to sustain our conclusion that wsai was liquidated in the intentions of petitioner and ackerman to liquidate wsai at the end of were apparent from the sales of wsai’s assets its cessation of business and the agreement of petitioner and ackerman that wsai would distribute the last two condominium units to petitioner in consideration of petitioner's assumption of the corporation's liabilities to its lenders and his recovery_of his investment out of the balance with that final distribution wsai held title to no further assets of any substantial consequence with the exception of interest payments made through the beginning of wsai engaged in no further activities finally respondent argues that petitioners made no disclosure of any kind on their individual_income_tax_return regarding the receipt of the two condominium units as a liquidating_distribution as required by sec_1_331-1 income_tax regs which states in every case in which a shareholder transfers stock in exchange for property to the corporation which issued such stock the facts and circumstances shall be reported on his return unless the property is part of a distribution made pursuant to a corporate resolution reciting that the distribution is made in liquidation of the corporation and the corporation is completely liquidated and dissolved within one year after the distribution see sec_6043 for requirements relating to returns by corporations sec_1_331-1 income_tax regs does not impair our ultimate conclusion that a de_facto_liquidation did occur during the taxable_year in the case at hand although sec_1_331-1 income_tax regs appears to complement sec_6043 and sec_1_6043-1 income_tax regs thereunder 11the record contains no evidence of the source of the funds that were apparently used to make interest payments in the name of wsai providing for the filing of form_966 corporate dissolution or liquidation by a corporation that adopts any resolution or plan_of_liquidation the filing of form_966 is not a condition of liquidation treatment under any provision of the internal_revenue_code 222_f2d_472 7th cir revg 21_tc_853 murphy v commissioner tcmemo_1996_59 see also 36_tc_201 affd 301_f2d_394 7th cir we are satisfied that sec_1_331-1 income_tax regs like the regulation under sec_6043 is directory only while compliance with these regulations serves the evidentiary function of supporting the conclusion that a distribution was received in a corporate_liquidation and helps to avoid controversies of the sort we now deal with we regard them as playing only a facilitating role petitioner's compliance with sec_1 d income_tax regs is not a condition_precedent to our treating the distribution of the condominium units to petitioner as a liquidating distributiondollar_figure we are convinced that the agreement of the wsai shareholders petitioner and ackerman for the distribution of the last two condominium units to petitioner in consideration of 12for an example of a mandatory requirement for filing a form in order to obtain specified tax treatment in a one month liquidation see former sec_333 repealed by sec_631 of the tax_reform_act_of_1986 publaw_99_514 100_stat_2085 his taking care of the corporate liabilities and recovering his own investment manifested wsai’s intention to liquidate and that that intention was carried out in the informal winding-up of wsai's affairs that followed iii computation of gain having found that wsai was liquidated in we turn to the tax treatment of petitioner’s receipt of the condominium units sec_331 provides that amounts received by a shareholder in complete_liquidation of a corporation shall be treated as full payment in exchange for the stock considering a liquidating_distribution in effect as a sale by the shareholder of his stock to the corporation bittker eustice federal income_taxation of corporations shareholders pincite 6th ed s rept 68th cong 1st sess c b pt as a result the shareholder computes gain_or_loss under sec_1001 by subtracting the adjusted_basis of his stock from the amount_realized the fair_market_value of the distribution and reports the difference as capital_gain or loss if the stock is a capital_asset in his hands to compute petitioner’s gain we first look at the value of the condominium units distributed to determine the amount_realized we then look at whether petitioner’s deposits into the wsai checking account were loans or equity investments concluding that they are equity rather than debt we add them to petitioner’s basis in his wsai stock rather than treating them as liability offsets to the amount_realized we also look at whether petitioner assumed or took subject_to wsai liabilities because the amount_realized under sec_1001 on the liquidation exchange is the net value of the distribution and that amount must be reduced by the amount of liabilities assumed_or_taken_subject_to see 311_f2d_951 we then subtract the basis of petitioner’s shares from the amount_realized on the distribution to compute his gain a value of condominium units distributed respondent maintains that petitioner received a taxable_distribution of dollar_figure or the value of the two condominium units receiveddollar_figure petitioner maintains that he gave value equivalent to that of the condominium units petitioner’s position throughout this proceeding has been that the value of the condominium units was no more than dollar_figure--the sum of what he argues were the amount of the wsai liabilities that he assumed and his deposits into the wsai account we disagree with petitioner’s estimate of the value of the condominium units received the average selling_price of the 13respondent makes her determination of the value of the condominiums based on the dollar_figure average price of the other units sold as well as the price petitioner received from the sale of one of the units transferred to petitioner other condominium units was dollar_figure four months after the distribution petitioner sold one of his condominium units for dollar_figure petitioner has not convinced us that the fair_market_value of his condominium units should be less than the average selling_price of the other units sold or dollar_figure thus we find the fair_market_value of the condominiums transferred to petitioner to be dollar_figure b basis of wsai shares debt v equity respondent maintains that no loan or other value was given by petitioner to wsai however the deposit records of national city bank where wsai maintained a checking account indicate that petitioner deposited dollar_figure into wsai’s account because the books_and_records of wsai were not made available we must look to such documentary_evidence as bank statements as well as the testimony of witnesses in considering whether petitioner gave value to wsai hagaman v commissioner tcmemo_1987_ we are satisfied that petitioner’s deposits into the wsai account constitute value that resulted in cost to be taken into account in determining petitioner’s gain on the receipt of the condominium units 14we exclude from this calculation the purchase_price of ackerman’s condominium units see supra note while the analysis would vary depending on whether the investment in the corporation were debt or equity the net tax effect to petitioner would be the same if petitioner's investment in the corporation were a loan wsai's transfer of property to petitioner in satisfaction of the loan would not be governed by sec_331 to that extent this is because the transfer would not be in payment for petitioner's stock in such a case the corporation merely would be repaying the loan receiving equal value in exchange for the transfer resulting in no taxable_event for the transferee see 580_f2d_442 j hofert co v united_states aftr 2d ustc par c d cal if petitioner's investment were equity petitioner would be entitled to increase his basis in his wsai shares by the amount of the investment under this scenario petitioner would subtract his basis from the amount of the distribution if the distribution should exceed petitioner's basis the excess would be treated as capital_gain from sale of the stock in 405_f2d_481 6th cir affg tcmemo_1967_62 the court noted that although the intention of the parties weighs heavily in determining whether advances are loans proof of such intent is to be found in the arrangements concerning the normal security_interest and repayment or efforts to secure the same in 432_f2d_741 6th cir the court relied on the fact that there was no unconditional promise to repay the loans no fixed schedule of payments and no security given for issuance of the loans in the case at hand none of the factors are present that would tend to show that petitioner reasonably expected wsai to repay the loan in accordance with terms in line with those generally prevailing in the business community see 308_f2d_39 2d cir remanding 35_tc_268 moreover no interest payments to petitioner were made or provided for see 725_f2d_307 5th cir if petitioner had been a true lender he would have provided for interest payments 396_f2d_630 5th cir we find that petitioner’s dollar_figure of deposits into the wsai checking account was a contribution to the capital of wsai because petitioner was a shareholder of wsai his dollar_figure of contributions to capital is reflected in an increased basis for his wsai stock sec_1_118-1 income_tax regs thus petitioner’s basis in his wsai stock was dollar_figure 15at trial respondent produced copies of wsai checks to petitioner and to camelot court development inc and camelot court development inc ii in the amounts of dollar_figure dollar_figure and dollar_figure respectively petitioner has a 45-percent interest in continued petitioner’s amount_realized from the distribution of the condominium units should be reduced by the amount of the corporation's liabilities to the posas fosses and navars that petitioner agreed to assume and for whose discharge he made the necessary arrangements thus after subtracting the assumed_liabilities of dollar_figure from the dollar_figure gain dollar_figure amount_realized minus dollar_figure adjusted_basis petitioner’s realized capital_gain is dollar_figure iv additions a sec_6653 negligence addition respondent determined that petitioner is liable for an addition_to_tax for negligence pursuant to sec_6653 sec_6653 imposes an addition_to_tax of percent of the portion of the underpayment to which sec_6653 applies continued camelot court development inc and a 50-percent interest in camelot court development inc ii petitioner objected to their introduction into evidence because they had not been submitted to petitioner prior to trial contrary to our standing_pretrial_order for incorporation in the stipulation of facts under rule respondent did not request leave to amend her answer to assert an additional deficiency for these amounts and did not make any argument on brief that we should treat them as taxable_distributions or as reductions in the basis of petitioner's stock respondent maintained at trial that the documents were offered for impeachment purposes only under fed r evid as an exception to rule and the standing_pretrial_order and we so regard them sec_6653 defines negligence as including any failure to make a reasonable attempt to comply with the provisions of the code petitioner has the burden of proving that respondent’s determination of the addition_to_tax for negligence is erroneous rule a 79_tc_846 negligence is defined as the lack of due care or the failure to do what a reasonable and ordinarily prudent person would do under similar circumstances 62_f3d_1266 10th cir affg tcmemo_1993_607 939_f2d_874 9th cir affg in part and revg in part on other grounds tcmemo_1989_390 a taxpayer’s failure to maintain adequate books_and_records is sufficient to establish negligence sec_6001 zafiratos v commissioner tcmemo_1992_135 affd without published opinion 993_f2d_880 3d cir moran v commissioner tcmemo_1981_352 petitioner has been a certified_public_accountant for many years and was aware of the requirement that complete and accurate books_and_records be maintained with respect to wsai’s activities and any distributions from wsai to petitioner as an accountant petitioner was also aware of his requirement to verify and document the value of the condominium units distributed to him see 60_tc_728 d’arcangelo v commissioner tcmemo_1994_572 a careful consideration of the evidence including the selling_price of the other south wood condominiums and petitioner’s sale price of his own south wood condominium around the time for filing his return should have alerted him as an accountant to the appropriate values for the condominium units distributed see derochemont v commissioner tcmemo_1991_ we sustain respondent’s determination that petitioner was negligent with respect to the underpayment b sec_6661 substantial_understatement addition respondent determined that petitioner is liable for an addition_to_tax under sec_6661 for substantial_understatement this addition applies when the understatement of income_tax exceeds the greater of percent of the tax required to be shown on the return for the taxable_year or dollar_figure sec_6661 the understatement for purposes of this addition is reduced where there is substantial_authority for the tax treatment of any item or if there was adequate_disclosure in or attached to the return of the relevant facts affecting any item sec_6661 petitioner made no disclosure of the distribution on his individual return for and made no argument against imposition of this addition since the amount of petitioner’s understatement for the taxable_year is substantial we sustain respondent’s determination on this issue decision will be entered under rule


internal_revenue_service number release date index number -------------------- ------------------------------------- ---------------------------- ----------------------- ------------------------------------ department of the treasury washington dc person to contact ------------------------- id no ------------- telephone number --------------------- refer reply to cc fip b02 plr-132566-06 date november ---- ------------ --------------------------- ---------------------------- legend taxpayer ---------------------------------------------------------------------- state a a lp llc building b dear ------------ this is in reply to a letter dated date requesting a ruling on behalf of taxpayer you requested a ruling that following the proposed transaction described below taxpayer’s allocable share of rents from building will be disregarded from taxpayer’s gross_income to the extent that it does not exceed taxpayer’s allocable share of lp’s deductions for building lease payments for purposes of determining taxpayer’s gross_income under the income tests of sec_856 and c of the internal_revenue_code facts --------------------------------------------------- ----------------- ------ taxpayer is a state a real_estate_investment_trust reit that has elected under plr-132566-06 sec_856 to be treated as a reit for federal_income_tax purposes taxpayer is the managing general_partner of lp and owns approximately a percent of the outstanding common units of lp lp owns and operates numerous real properties throughout the united_states through business entities classified as partnerships or disregarded entities for federal_income_tax purposes llc a limited_liability_company that is unrelated to taxpayer or lp owns the building and leases it to lp lp operates the building and leases commercial office space in the building to tenants that are also unrelated to taxpayer or lp lp pays rent to llc that is funded by rents that lp receives from the commercial tenants to whom it leases space the rents collected by lp from the commercial tenants annually exceed the rent that lp pays to llc for the building exercise that option following the exercise of the option lp will continue to pay rent on the building to llc that is funded through rents received from the commercial tenants but as a member of llc will be entitled to receive its allocable share of the building rent law and analysis lp holds an option to purchase a b percent interest in llc and proposes to sec_856 provides that at least percent of a reit's gross_income must be derived from among other sources rents_from_real_property must be derived from among other sources rents_from_real_property sec_856 provides that at least percent of a reit's gross_income sec_856 provides that rents_from_real_property include subject_to exclusions provided in ' d a rents from interests_in_real_property b charges for services customarily furnished or rendered in connection with the rental of real_property whether or not such charges are separately_stated and c rent attributable to personal_property leased under or in connection with a lease of real_property but only if the rent attributable to the personal_property for the taxable_year does not exceed percent of the total rent for the tax_year attributable to both the real and personal_property leased under or in connection with the lease sec_1_856-3 of the income_tax regulations provides that a reit that is a partner in a partnership is deemed to own its proportionate share of each of the assets of the partnership and to be entitled to the income of the partnership attributable to that share for purposes of sec_856 the partner’s interest in the partnership’s assets is determined in accordance with the partner’s capital interest in the partnership plr-132566-06 upon exercise of the option taxpayer will be entitled to an allocable share of the income derived by lp from lp’s interest in llc to the extent that lp’s gross_income as a member of llc is derived from the income paid_by lp out of rents from commercial tenants of the building lp’s income may be double counted because it directly earns gross_income from the commercial tenants of the building which is used by lp to pay the building rent to llc thus pursuant to sec_1_856-3 taxpayer would be treated as earning the same gross_income twice accordingly for purposes of determining taxpayer’s gross_income for purposes of the income tests under sec_856 and c taxpayer’s allocable share of gross_income from the building will be disregarded as an item_of_gross_income to the extent of taxpayer’s share of lp’s deductions for rents paid on the building to llc except as specifically ruled upon above no opinion is expressed concerning any federal_income_tax consequences relating to the facts herein under any other provision of the code specifically we do not rule whether taxpayer otherwise qualifies as a reit under part ii of subchapter_m of chapter of the code this ruling is directed only to the taxpayer requesting it taxpayer should attach a copy of this ruling to each tax_return to which it applies sec_6110 of the code provides that this ruling may not be used or cited as precedent sincerely william e coppersmith william e coppersmith chief branch office of associate chief_counsel financial institutions products


internal_revenue_service number info release date index no jun attention dear this letter responds to your inquiry dated date concerning a letter_ruling request sent to you and under separate cover sent to the internal_revenue_service by in this letter_ruling request asks that the is the authorized representative of irs postpone the effective date of a letter_ruling revocation addressed to we are currently considering this letter_ruling request in a manner consistent with revproc_2000_1 2000_1_irb_4 revproc_2000_1 describes the irs’ administrative procedures for issuing a letter_ruling we have enclosed a copy of revproc_2000_1 for your convenience i hope this information is helpful to you in responding to questions please contact if you have any sincerely paul f kugler assistant chief_counsel passthroughs and special industries