department of the treasury internal_revenue_service te_ge eo examinations commerce street dallas tx tax_exempt_and_government_entities_division number release date date legend org name of organization num ein number datel effective date date year end of effective date org dear uil person to contact _ identification_number contact telephone number in reply refer to te_ge review staff ein num last date for filing a petition with the tax_court this is a final adverse determination_letter as to your exempt status under sec_501 of the internal_revenue_code your exemption from federal_income_tax under sec_501 of the code is hereby revoked retroactively to date our adverse determination was made for the following reasons you failed to meet the requirements of sec_501 and sec_1 c -1 d in that you failed to establish that you were operated exclusively for an exempt_purpose rather you were operated for the benefit of private interests and your assets inured to the benefit of outsiders contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code you are required to file federal_income_tax returns on form_1120 these returns should be filed with the appropriate service_center for the year ending date2 and for all years thereafter processing of income_tax returns and assessment of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the united_states tax_court the united_states claim court or the district_court of the united_states for the district of columbia before the day after the date this determination was mailed to you contact the clerk of the appropriate court for the rules for initiating suits for declaratory_judgment you also have the right to contact the office_of_the_taxpayer_advocate however you -should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or you can contact the taxpayer_advocate from the site where the tax_deficiency was determined by writing to internal_revenue_service taxpayer advocates office local office taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling we will notify the appropriate state officials of this action as required by sec_6104 of the internal_revenue_code if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours marsha a ramirez director eo examinations government entities division department of the treasury internal_revenue_service tege eo examination hopkins plaza room baltimore md date taxpayer_identification_number form tax_year s ended december person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter catalog number 34809f if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and thank you for your cooperation sincerely marsha a ramirez director e o examinations enclosures publication publication report of examination letter catalog number 34809f form 886a department of the treasury - internal_revenue_service schedule no or exhibit explanation of items year period ended name of taxpayer org legend org name of organization promoter name of promoter rep representative of promoter affiliates name of affiiates founders name of founders state name of state issue should the org’s charitable supporting organization’s tax exempt status be revoked because the organization was not organized and operated exclusively for exempt purposes facts the org’s charitable supporting_organization cso was established as an integral component of an arrangement called the master financial plan mfp the mfp was designed specifically for founder by a now-defunct tax_shelter promoter the mfp purported to provide the founders with income_tax avoidance asset protection and estate_planning benefits entities participating in and or created to implement the master financial plan a affiliated entities of promoter associates ltd - the promoter all affiliated the promoter and have come under federal investigation by the securities_and_exchange_commission sec federal bureau of investigation and the internal_revenue_service service for promoting numerous tax_shelter schemes involving offshore transactions including the repatriation of funds in the form of tax-free borrowing the promoter entities are as follows entities below listed promoter associates company headquartered in nassau promoter claimed to be a leading firm in the business of providing tax reduction and asset protection through the establishment of offshore entities and accounts parent company charged with it was organized as promoter bahamian ltd was a a form 886-a rev department of the treasury - internal_revenue_service page -1- form 886a department of the treasury - internal_revenue_service schedule no or exhibit explanation of items year period ended name of taxpayer org coordinating the actions of its subsidiaries as well as affiliated law firm an promoter associates inc promoter’ was a state corporation incorporated in promoter's function was to provide the office space and the staff who provided services to promoter and its investors and served as the office through which investors are solicited promoter and promoter also regularly induced clients securities firm promoter was located in state securities purchase including issued those by to overseas advisors ltd was a bahamian entity that acted as an investment adviser and a mutual_fund company for promoter investors advisor managed mutual funds that had been sold to promoter investors it also maintained accounts with brokerage firms into which investor securities were placed affiliate was an entity organized under the laws of a caribbean island_affiliate ostensibly acted as loi insurance policies sold to promoter investors affiliate also controlled the funds of promoter investors that were to be repatriated to those individuals from accounts located in the bahamas issuer of many of the investment products eg an affiliate was a bahamian entity and liability company affiliate was an international legal firm that operated as promoter’s legal advisors with promoter in nassau bahamas and promoter in state affiliate’s legal tax opinion supporting the legality of the master financial plan was used by promoter to solicit wealthy clients also shared offices limited state a it affiliate funding affiliate was an arm of promoter and was based in nassau bahamas affiliate was set up to receive wire transactions from investors at an account it established with the bank affiliate capital llc affiliate was a state company used to facilitate the repatriation of client funds promoter leasing llc promoter leasing’ was a state limited_liability_company used to hide a client's interest in property b affiliated entities of founder - the clients the following entities were established to implement the master financial plan founder charitable supporting_organization cso is a non-profit organization exempt from federal_income_tax under sec_501 of the internal_revenue_code by virtue of being recognized as a supporting_organization as described under sec_501 and sec_509 of the internal_revenue_code promoter literature claims the objectives of setting up a supporting_organization are as foliows form 886-a crev department of the treasury - internal_revenue_service page -2- form 886a department of the treasury - internal_revenue_service schedule no or exhibit explanation of items year period ended name of taxpayer org to create a vehicle which permits charitable giving with deductibility up to percent tax to take advantage of the tax benefits of charitable giving while maintaining a high degree of ultimate control_over the donated asset and to create a conduit for tax-free investing offshore an s_corporation set up in the state on behalf of mr founder by a state-based attorney and cpa who represented promoter in its initial dealings with the founders corp was set up to receive mr founder’s annual lottery income to purchase the loss of income insurance plan and to participate in a veba mr founder is the percent shareholder of s corp affiliate properties ltd affiliate an s_corporation set up on behalf of mrs founder by an attorney and cpa who represented promoter in its initial dealings with the founders affiliate was set up to receive mrs founder’s annual lottery income to purchase the loss of income insurance plan and to participate in a veba on affiliate properties’ checking december account payable to the fund for dollar_figure this amount was for affiliate’s veba policy mrs founder is the percent shareholder of affiliate the founders issued a check on a corp was an international_business_corporation set up in the bahamas to borrow funds from cso in exchange for interest payments at an annual rate of five percent b corp was a hybrid guarantee company set up on behalf overseas to avoid u s income_taxation as a controlled_foreign_corporation under sec_957 of the internal_revenue_code investment llc was a limited_liability_company set up in the state investments was an international_business_corporation ventures was an international_business_corporation leasing was a state limited_liability_company set up to purchase and lease shipping containers from a separate business mr founder owns c supported organizations - the entities cso supports hearing association is a sec_501 organization that promotes the use of spoken language and hearing technology for the deaf and the hard of hearing pilot association other volunteers that provides free air transportation for any person facing a life crisis or requiring life-saving medical treatment organization comprised of sec_501 pilots and is a background form 886-acev department of the treasury - internal_revenue_service page -3- form 886a department of the treasury - internal_revenue_service schedule no or exhibit explanation of items year period ended name of taxpayer org a promotion and design of the master financial plan on march founder and his spouse founder won the powerball lottery their lottery payout was dollar_figure at the time of their winning mr founder was employed by a manufacturing concern as a controller mr founder has a b s degree in economics and m s degree in accounting mrs founder has a b s degree in political relations million per year for consecutive years in the fall mr founder contacted promoter to discuss his annual lottery income and the tax and estate_planning arrangements promoter had available for individuals like the founders mr founder first learned about promoter in a promoter brochure called later changed to this was a brochure that was enclosed in his subscription to the report a monthly magazine the founders were contacted by attorney shortly after leaving their name and telephone number with promoter rep indicated that he was a representative of promoter and an attorney in state mr rep scheduled a meeting with the founders sometime in january or february during the initial meeting rep stated that promoter was a state-based financial and legal firm specialized in helping selectively chosen clients of wealth accepting as clients only those individuals they could help at a to ratio this means that if promoter charged a fee of dollar_figure it would help the client save dollar_figure through tax and estate_planning arrangements the savings would come in the form of a reduction in income taxes paid rep further discussed the backgrounds of promoter officers which included one former irs employee the founders requested client references but rep claimed he was prohibited from providing client references to the founders due to the sophistication of the planning techniques the client references would be made available once the founders agreed to use promoter however promoter never provided such references and the founders did not press the issue rep also provided promotional materials to the founders called the due diligence package which contained a list of promoter entities eg leasing arm estate_planning arm investing arm etc and legal opinions supporting the legality of promoter products list or representatives including their credentials a after the presentation was made the founders asked for a letter issued feb detailing the fees they were expected to pay in exchange for promoter's services the letter provides that dollar_figure was to be paid to rep for tax planning services the founders believed that rep would also receive a commission from promoter since he was promoter representative bringing in business as a salesman as part of his services rep established affiliate properties limited s_corporations formed in april to receive the founder's lottery winnings the letter also provides that dollar_figure founders retained promoter their total fees would not exceed dollar_figure be credited promoter in turn guarantees income_tax savings of at least dollar_figure they agreed to implement all of promoter's proposed strategies was to be paid to promoter as an initial retainer fee if the of which the initial retainer will to the founders if form 886-arev department of the treasury - internal_revenue_service page -4- form 886a department of the treasury - internal_revenue_service schedule no or exhibit explanation of items year period ended name of taxpayer org later that spring the founders received a second letter regarding developing a plan for reducing your taxes this letter discussed the master financial plan an analysis of the founders’ personal providing recommendations of specific promoter products to reduce and thefounders’ income_tax_liability this letter also required thefounders to pay a dollar_figure fee which was paid from an account situation financial after the first meeting thefounders spoke to rep by telephone bimonthly to discuss tax planning ideas promoter and the possibility of a during these conversations rep talked about the other services promoter provided eg asset protection overseas brokerage accounts annuities insurance products and other techniques that would allow thefounders to meet their objectives through tax planning and asset protection strategies to the promoter office visit site in july rep arranged to meet the founders at the promoter office during the presentation promoter officials presented the master financial plan thefounders received a financial summary sheet which stressed the severity of tax situation thefounders’ daughter could face should they both die prematurely as an example of the failure to properly plan promoter gave thefounders a tax_court opinion involving a person who died prematurely and suffered adverse tax consequences thefounders felt the opinion required them to undertake some action immediately to avoid this at this point promoter stated that their master financial plan was proven accepted and a result legal product used by their clients for many years in support of this claim promoter cited tax opinions contained in their package b sec description of the master financial plan in its complaint against promoter the sec stated that promoter offered a product known as a master financial plan whose function is to provide a means by which the investor can invest cash and securities offshore usually in the bahamas or another caribbean nation and receive tax-free gains from the investment activity the basic structure of the plan involves the transfer of an investor's income and or assets into offshore entities established on behalf of the investor these funds and assets are then used to purchase investment and other products offered by promoter and its affiliates the master financial plan also provides investors with a means to repatriate assets through transactions that hide the actual ownership of the assets thereby enabling the investors to utilize the untaxed funds without paying tax obligations for instance in its sales manual promoter states once money is invested offshore there are several ways to repatriate part or all of it these include such non-taxable methods as with secured credit cards personal or corporate loans mortgages personal withdrawals or through insurance policies capital can also be repatriated through taxable means such as through salaries or annuities promoter promises its clients that through the implementation of the master financial plan the clients will reduce their taxes by significant percentages have their investments grow offshore in a form 886-a ev department of the treasury - internal_revenue_service page -5- form 886a department of the treasury - internal_revenue_service schedule no or exhibit explanation of items year period ended name of taxpayer org free environment and will tax encumbrances be abie to protect their assets from unwanted liabilities and the sec contends that the master financial plan essentially establishes the framework through which the promoter investor invests and protects cash and assets avoids payment of taxes and repatriates his or her funds c description of thefounder’s master financial plan promoter designed the master financial plan to further the income_tax reduction asset protection and personal estate_planning objectives of thefounders it involved the establishment of several offshore and domestic entities the purchase of several insurance plans and the execution of transactions through which thefounders invested their lottery proceeds the types of entities employed by promoter for thefounders included international business corporations ibc voluntary employee beneficiary associations veba’ support organizations so liability companies llc the insurance arrangements included products such as loss-of-income loi insurance policies and foreign variable annuities vfa s_corporations s limited corp and mr founder indicated that the components of the master financial plan were essentially individual plans designed to achieve the goals of income_tax reduction and asset protection and that he retained to provide such products and strategies description of component entities a international business corporations the sec report stated that promoter sales literature described ibc’s as corporations formed in a tax_haven but not authorized to do business within that country they are intended to be used as an investment or asset protection vehicle the promoter investor transfers personal assets or an investment portfolio to the ibc promoter tells clients the offshore entities are not owned or controlled by the clients for tax purposes rather nominee officers or directors act on behalf of the clients to control the entities and effect transactions in fact promoter personnel have authority to effect the transactions retaining sole signatory authority over all accounts typically in order to effect a transfer of funds senior personnel at affiliate or must authorize the transfer b supporting organizations so’s are described as charitable organizations established for the benefit of an individual client among the stated benefits of an investor establishing an so over using a domestic charitable_organization is that investment funds transferred to the investor's personal so can grow tax free these investment gains are available to the offshore corporations that manage the investments of the so the donor investor through access to form 886-a rev department of the treasury - internal_revenue_service page -6- form 886a department of the treasury - internal_revenue_service schedule no or exhibit explanation of items name of taxpayer year period ended org the ability promoter states that thefounders as cso’s trustees are able to make investment decisions including charitable_contributions giving them a high degree of control_over the donated assets in addition salaries and other administrative expenses may be paid to thefounders and or their family members in the approximate amount of percent of the cso’s gross_income borrow indirectly from contributed funds direct and the to c voluntary employee beneficiary association promoter defines a veba as an employee benefit program that permits employers to take tax deductions for certain employee_benefits payments such as the payment of life sick accident death or other_benefits the investment gains of these payments grow tax deferred under certain circumstances the gains can be accessed tax-free eg borrowing funds to pay for the children’s college education through a veba trust mr founder described the veba as an irs-approved plan that would allow him to purchase life_insurance for union-affiliated employees he would be able to purchase a whole_life_insurance policy as an investment and deduct the policy premiums the union members would include family members including mr founder’s father and his father-in-law d s-corporation separate s-corp’s were established for mr founder and mrs founder to shield the payments of their lottery winnings paid in the form of an annual annuity from frivolous lawsuits gains from wagering are not considered wages compensation_for services trade_or_business income gross_receipts or sales - all of which are otherwise called earned_income the s-corp model is also used to implement the veba and requires at least two employees under the veba arrangement the employees would join the union and the employer would contribute tax deductible premiums to the veba trust if the insurance_policy accumulates cash_value the trust that administers the arrangement can issue loans to participants if certain conditions are met viz paying uninsured medical_expenses paying for post-secondary education of dependents and unusual unexpected hardship events although repayment is anticipated any outstanding loan balances at death can be paid off by the death_benefit e limited_liability_company an llc offers personal protection and tax savings but does not require the reporting and record keeping of a corporation description of insurance products the types of investment products sold by promoter include loss of income policies loi equity management mortgages thefounders implemented loi and fva annuities emm variable fva foreign and a loss of income insurance program an loi is an agreement between the promoter client and affiliate whereby the client purchases a policy to insure against a future loss of income form 886-acev department of the treasury - internal_revenue_service page -7- form 886a department of the treasury - internal_revenue_service schedule no or exhibit explanation of items name of taxpayer org year period ended an loi policy is usually purchased for coverage until the earlier of a specified term such a sec_1 year or the date of death of the insured the insurance_company typically holds the net premium in a separate_account along with the net_premiums of other loi insurance policies creditors cannot access policy reserves the insurance_company guarantees a fixed return on such premiums most lo policies provide that your premiums plus a guaranteed return will be paid back to the policy holder at the end of a specified period usually years the sales manual also states that investment decisions are made by the insurance_company the funds received by affiliate for the sale of loi’s are pooled in an account at bank maintained by affiliate in the bahamas sec contends that in reality loi’s are not purchased as insurance but as a vehicle to make offshore and tax-free investments of funds which can be repatriated as desired by the investor no promoter investor has ever filed a claim against an loi for a loss of income what in fact occurs is that the investor purchases the loi from affiliate and then borrows back a percentage of the premium through a note or investment contract usually in the form of a mortgage called an equity management mortgage or emm generally the emm is obtained through two affiliated entities of promoter affiliate and affiliate which act as the mortgagee the investor's proceeds from the emm are then placed in an ibc and invested offshore or repatriated by the investor the net effect of the loi emm transaction is that the investor s-corp is able to deduct the premium paid for the loi encumber his property through a mortgage to himself and deduct the interest payments to himself on the mortgage the investor can then invest the proceeds from the mortgage offshore through an ibc with affiliate managing the investment the remainder of the premium left with affiliate is then invested to provide the investor with a fixed rate of return over the ten-year life of the policy b foreign variable annuities the fva is a variable_annuity issued by affiliate the investor purchases the fva by transferring cash or securities to affiliate affiliate then pays the investor or his designees the principal and an agreed upon rate of return over the succeeding years promoter markets the fva as a means to repatriate a client's assets without tax consequences with respect to fvas the promoter sales manual states you could purchase a foreign variable_annuity contract between you and a foreign insurer during the accumulation period of the annuity_contract you could set_aside money and have it grow on a tax-deferred basis pending withdrawal at retirement or another time selected by you the payout period begins whereby the insurance_company promises to pay a steady stream of income for a fixed period of time or for life form 886-arev department of the treasury - internal_revenue_service page -8- form 886a department of the treasury - internal_revenue_service schedule no or exhibit explanation of items year period ended name of taxpayer org implementation of cso pursuant to the arrangement thefounders set up cso as a_trust on or about november using boilerplate promoter associates promoter language the trust is organized and all times be operated to support or benefit as defined by treasury regulations section thereafter will a -4 b one or more publicly_supported_organization and shall comply will all other requirements of sec_509 of the code on or about april cso received a favorable exemption_letter from the service as a supporting_organization under sec_509 of the internal_revenue_code the supported organizations included each supported_organization was represented on cso’s board_of trustees by one of their employees one of thefounders and two family friends brought the board_of director membership to five thefounders made a contribution of dollar_figure to cso on or about december and another dollar_figure on or about december they reported additional small amounts were contributed a charitable deduction for the amount on or contributed on schedule a of their form_1040 about december cso wired dollar_figure to affiliate’s account in the bahamas some of what happened next is somewhat unclear because promoter likely deposited thefounder’s cso money in a general promoter account and commingled the money with other clients’ money per sec materials promoter likely misappropriated the bahamas cso ibc to operate a ponzi scheme ie new client money was absconded to pay money and used it promoter or taken to pay obligations to old clients for practical purposes it appears that once the cso money reached the bahamas thefounders lost the ability to properly track and account for the cso money during this period promoter accountings to thefounders were generally deficient ibc at the time thefounders believed the dollar_figure ibc supposedly invested the funds set up for thefounders by promoter to receive cso’s funds in generally the sec describes this as a broker mutual_fund arrangement it appears that the loan origination papers between the cso and the ibc were likely not prepared also few interest payments to the cso from the ibc were made of cso money would supposedly be loaned to a separate_account established for it at affiliates sometime thereafter thefounders discovered that promoter was under federal investigation by the sec and the fbi thefounders contacted the service to disclose their tax treatment resulting from their participation in the master financial plan pursuant to announcement i r b date in april form 886-arev department of the treasury - internal_revenue_service page -9- form 886a department of the treasury - internal_revenue_service schedule no or exhibit explanation of items name of taxpayer org year period ended form_990 for the calendar years cso reported the following amounts of revenue and expenses on its form_990 revenue - direct public support dollar_figure dollar_figure dollar_figure interest on savings and temporary cash investments dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure total revenue expenses - bank fees accounting fees legal fees distributions to supported organizations total expenses excess or deficit for the year nets assets at beginning of year other changes in net assets net assets at end of year dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure cso received approximately dollar_figure dividend income from the organizations in interest_income cso did not receive any further interest or to the supported cso distributed dollar_figure investment bahamas attempts made by thefounders to ascertain the whereabouts of the dollar_figure have failed form 886-a crev department of the treasury - internal_revenue_service page -10- form 886a department of the treasury - internal_revenue_service schedule no or exhibit explanation of items year period ended name of taxpayer org founder settle related individual income_tax case founder's individual_income_tax_return came under examination by the service as a result of a large charitable_contribution_deduction taken on schedule a proposed exam adjustments included among other things a denial of the promoter ‘promoter’ inspired transactions in particular a denial of the charitable deduction to the cso and a denial of certain business deductions taken generally the exam notice disallows the claimed charitable_contribution to the cso because it represents a sham_transaction entered into for purposes of personal gain rather than for reasons of disinterested generosity similarly the exam notice disallows the promoter business deductions because they are sham transactions lacking economic_substance appeals documents indicate that a settlement was secured and therein founder conceded the above mentioned charitable_contribution_deduction issue and the promoter business deductions relating to the veba and lo policies the founder individual income_tax case decision document filed with u s tax_court indicates that parties agreed to a dollar_figure deficiency for the taxable_year the form_4549 income_tax examination changes for thefounders reflects the above deficiency as well as interest with respect to exam adjustments appeals documents indicate that full payment including interest was made law sec_501 of the code provides in part for the exemption of organizations that are organized and operated exclusively for religious charitable or educational_purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation except as otherwise provided in subsection h and which does not participate in or intervene in including the publishing or distributing of statements any political campaign on behalf of or in opposition to any candidate for public_office sec_1_501_c_3_-1 provides that in order to be exempt as an organization described in sec_501 an organization must be organized and operated exclusively for one or more of the purposes specified in that section if an organization fails to meet either the organizational or the operational_test it is not exempt be regarded as operated sec_1_501_c_3_-1 provides that an organization will it engages primarily in activities which exclusively for one or more exempt purposes only if an organization accomplish one or more of such exempt purposes specified in sec_501 will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 provides that an organization is not operated exclusively for one or more exempt purposes if part to the benefit of private shareholders or individuals the words private_shareholder_or_individual refer to persons having a personal and private interest in the activities of the organization net_earnings inure in whole or its in sec_1_501_c_3_-1 provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests is necessary for an organization to establish that it form 886-a cev department of the treasury - internal_revenue_service page -11- form 886a department of the treasury - internal_revenue_service schedule no or exhibit explanation of items year period ended name of taxpayer org sec_1_509_a_-4 b provides that in order to qualify as a supporting_organization an organization must be both organized and operated exclusively for the benefit of to perform the this section as being functions of organized and operated to publicly supported organizations if an organization fails to meet either the organizational or the operational_test it cannot qualify as a supporting_organization or to carry out the purposes of hereinafter referred to or more specified support or benefit one in in 326_us_279 the united_states supreme court held that regardless of the number of truly exempt purposes the presence of a single substantial non-exempt purpose will preclude exemption under sec_501 in 412_f2d_1197 ct_cl the court stated that loans to an organization’s founder or substantial_contributor can constitute inurement that is prohibited under sec_501 in that case the church made loans to its founder and his family and failed to produce documentation that demonstrated that the loans were advantageous to the church the church also failed to produce documentation to show that the loans were repaid significantly the court stated that the very existence of private source of loan credit from an organization's earnings may itself amount to inurement of benefit in freedom church of revelation v united_states f_supp big_number d d c the court revoked a church’s exempt status because substantial activity engaged in by plaintiff was the the court held that church was actively promoting tax- promotion of tax-avoidance schemes avoidance schemes and that its earnings were inuring to private individuals including its leaders the court therein stated that evidence submitted verifies the existence of a substantial nonexempt purpose ie tax_avoidance in 73_tc_196 affd 631_f2d_736 cir the court revoked a religious organization’s tax exemption where income was primarily from contributions from the founder and they had control of the board and expenditures further no religious services were offered on a group basis few if any members existed few if any outside donations were received no place of worship existed no grants were made for charitable purposes and activities were limited to investment activities aimed at accumulating money to build a church plans to build the church never went past the preliminary drawing stage the court characterized the circumstances as those of an incorporated_pocketbook and found that the organization was not operated exclusively for an exempt_purpose and that earnings inured to the benefit of private individuals in revrul_67_5 1967_1_cb_123 it was held that a foundation controlled by the creator's family was operated to enable the creator and his family to engage in financial activities which were beneficial to them but detrimental to the foundation it was further held that the foundation was operated for a substantial non-exempt purpose and served the private interests of the creator and his family therefore the foundation was not entitled to exemption from federal_income_tax under sec_501 taxpayer position form 886-a crev department of the treasury - internal_revenue_service page -12- form 886a department of the treasury - internal_revenue_service schedule no or exhibit name of taxpayer org explanation of items year period ended the promoter promoters and representatives in general at appeals and at all other times founder maintain that they relied in good-faith on the advice provided to them by that thefounders changed accountants as soon as they became aware that the sec was investigating the promoter plan and that they made no further use of promoter strategies in subsequent years further that thefounders filed a disclosure notice with the office of tax_shelter analysis under announcement wherein thefounders disclosed the promoter transaction further that thefounders came forth and provided deposition testimony as well as other materials for the further that due to promoter frauds purpose of cooperating with the sec investigation the cso transaction thefounders lost substantially_all finally thefounders have continued to support the organizations named as part of the cso plan the money associated with further government's position as a result of our examination of cso for the period ending december we have determined that your organization no longer qualifies as an exempt_organization under sec_501 revocation of exempt status is appropriate because cso was not operated exclusively for exempt purposes we propose a revocation of your exempt status in general cso was not organized or operated exclusively for an exempt_purpose because it was established as part of an abusive tax_avoidance scheme that promised to provide thefounders significant income_tax savings asset protection and personal estate_planning in reality the cso was part and parcel of a series of transactions that were among other things designed to conceal actual ownership of assets create deductions with no economic_substance and provide for supposedly tax-free investments essentially the cso transaction had abusive tax_avoidance as a substantial purpose because the cso had a substantial nonexempt purpose it is in contravention of sec_501 and should be revoked see 326_us_279 while promoter literature routinely extolled the purported benefits of so’s tax or otherwise it was for the most part devoid of guidance on how such organizations were to be operated in order to maintain exemption in general evidence gathered indicates that cso was not responsive to or an integral part of the named supported organizations and hence the close relationship required was not achieved the cso’s failure to operate as a sec_509 a organization further supports the existence of a substantia nonexempt purpose key aspects of promoter’s so pitch included the availability of a charitable deduction tax-free investing offshore and a high degree of control_over assets by donor these factors are central to promoter scheme because repatriation of donated funds back to the donor in the form of loans notes investment contracts were a hallmark of the promoter scheme generally thefounders followed the promoter script essentially thefounders contributed dollar_figure cso then wired the dollar_figure on behalf of thefounders affiliate borrowed the dollar_figure advisor over the funds with affiliate to the cso and claimed a charitable_contribution_deduction on their individual return the to an offshore_account in the bahamas apparently an ibc created and retained affiliate as an investment affiliate supposedly invested the funds in brokerage accounts it controlled as per design thefounders believed the cso money was invested offshore and form 886-a crev department of the treasury - internal_revenue_service page -13- form 886a department of the treasury - internal_revenue_service schedule no or exhibit explanation of items year period ended name of taxpayer org would be available if needed thefounders had other similar promoter arrangements and did borrow from these arrangements up to now thefounders believed in the promoter design in reality more_likely_than_not the cso money at this time was commingled with other promoter clients’ money and used by promoter for their benefit tax in sum and as per the above cso was operated as part of a tax_avoidance scheme avoidance schemes do not further an exempt_purpose see 588_fsupp_693 d d c generally cso was designed and operated to enable thefounders to engage in financial activities which are beneficial to them and or entities with whom they are transacting business but detrimental to cso is operated for a substantial non-exempt purpose see revrul_67_5 1967_1_cb_123 accordingly it further even assuming arguendo that an abusive tax_avoidance purpose did not exist cso would still fail to be operating exclusively for an exempt_purpose because the few activities transactions engaged in were not for an exempt_purpose in general cso activity was limited to making investments and facilitating the circuitous repatriation of funds back to the donor and this is a nonexempt purpose furthermore inurement would nevertheless result if activity consisted mostly of investment loan activity see 73_tc_196 affd 631_f2d_736 cir essentially had the cso money been available to thefounders as called for by the promoter design then the cso’s net_earnings would have inured to the benefit of thefounders but for the promoter fraud thefounders would have had a private source of money in sum the very presence of a private source of loan credit could constitute inurement and also result in revocation see 412_f2d_1197 ct ci conclusion cso’s exempt status an sec_501 should be revoked because it was not organized or operated exclusively for exempt purposes we offered you an informal conference with the case manager however you declined to hold this conference should this revocation be upheld you may be required to file form_1041 we will notify the appropriate state officials of the revocation in accordance with sec_6104 form 886-a cev department of the treasury - internal_revenue_service page -14-


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc dom p si 7-plr-117692-99 date date legend testamentary_trust decedent a b son son c sister d spouse e f g h plr-117692-99 company i j grandson granddaughter great-grandson great-granddaughter grandson k l trust a_trust b_trust c plr-117692-99 trust d court m n dear sir or madam in a letter dated you requested rulings concerning the generation-skipping_transfer gst tax consequences of the proposed partition and modification and clarification of the administrative provisions of the trust the information submitted and the representations made are summarized as follows the testamentary_trust was created under item iv of decedent’s will which was executed on a decedent died testate in b survived by son and son item iv of decedent’s will provides as follows distribution of income the sum of c a month is to be paid to sister the income of the testamentary_trust not paid to sister during her lifetime and after her death all of the income is to be paid as follows d per stirpes to the lineal_descendants of son living at the time of the respective distribution of if there is no lineal descendant of son then living the d is to be paid to son or if he is then deceased it is to be paid per stirpes to the lineal_descendants of son living at the time of the respective distribution or if there is no lineal descendant of son then living it is to be paid to son plr-117692-99 d per stirpes to the lineal_descendants of son living at the time of the respective distribution or if there is no lineal descendant of son then living the d is to be paid to son or he if is then deceased it is to be paid per stirpes to the lineal_descendants of son living at the time of the respective distribution or if there is no lineal descendant of son then living it is to be paid to son if at the time of any distribution there is no lineal descendant of decedent then living the income is to be paid to spouse item iv of decedent’s will directs the trustee in so far as retention is not forbidden by law to retain in the testamentary_trust any income that would otherwise be payable to any person under the age of e years except the part if any that the trustee may determine is necessary for his proper support or maintenance any sums so retained are to be paid to the person who would have been entitled to them if distributed as income when and if he attains the age of e years or on the termination of the testamentary_trust if it terminates prior to the time when he reaches that age if he does not live until the time provided for the payment of the income retained that sum is to be added to and treated as part of the principal of the testamentary_trust the income for the first f months of each calendar_year not required to be paid monthly is to be distributed on g of that year and the income for the second f months of each calendar_year not required to be paid monthly is to be distributed on h of the following year provided that more frequent periods of distribution may be determined by the trustee with the approval of a court of competent jurisdiction distribution of principal on the final termination of the testamentary_trust the principal is to be paid to decedent’s then living lineal_descendants per stirpes if at the time of the termination of the testamentary_trust there is no lineal descendant of decedent then living the principal is to be distributed as provided in item v of decedent’s will termination of the trust the testamentary_trust is to terminate on the death of the survivor of spouse and all lineal_descendants of decedent living at the time of decedent’s death successor trustee in the event of the merger consolidation or sale of substantially_all of its assets by company to or with another bank or trust company authorized to carry on a_trust business the merged consolidated or purchasing company is thereupon to become the trustee of the testamentary_trust plr-117692-99 a majority of the adults then entitled to receive income from the testamentary_trust or if only one then that one may at any time or times by instrument in writing delivered to the then trustee name a successor trustee and may change any designation of a successor trustee previously made prior to the time when the successor trustee has become a trustee provided that the successor trustee is to be a bank or trust company authorized to carry on a_trust business in one or more states of the united_states and having capital surplus and undivided profits of not less than i if any adult has renounced his right to name a successor trustee a majority of the remaining adults or if only one then that one then entitled to receive income from the testamentary_trust is to have the right provided in this paragraph to name a successor trustee in the event that the then trustee resigns is removed or fails or ceases to serve for any reason the successor trustee named in the manner provided in this paragraph is to succeed to all the powers and duties of the original trustee son died in j leaving no surviving issue son died in j survived by two children grandson and granddaughter and two great-grandchildren great-grandson and great-granddaughter the children of his deceased grandson grandson pursuant to the terms of the testamentary_trust the share of son is being paid per stirpes to the living lineal_descendants of son the current income beneficiaries of the testamentary_trust are grandson granddaughter great-grandson and great-granddaughter over the years the relationships among the income beneficiaries have deteriorated until k the testamentary_trust was administered as one trust the income beneficiaries requested the resignation of the trustee but could not come to majority agreement regarding the appointment of a successor trustee as provided in the trust at the request of income beneficiaries the trustee divided the testamentary_trust assets pro_rata into four separate trusts in l trust a was established for granddaughter with one-third of the testamentary trust’s assets trust b was established for grandson with one-third of the testamentary trust’s assets the remaining one-third of the testamentary trust’s assets was divided pro_rata between two separate trusts trust c for the benefit of great-grandson and trust d for the benefit of great-granddaughter the trustee petitioned the court for its approval of the division of the testamentary_trust in addition the trustee petitioned the court to give each income_beneficiary the power to name a separate trustee for his or her separate trust finally because trust a_trust b_trust c and trust d collectively the trusts were still being administered under the terms of the testamentary_trust the petition also requested the plr-117692-99 clarification of the terms by which the successor trustees would distribute the assets of the trusts at their termination on m the court issued an order approving the division of the testamentary_trust pro_rata into separate trusts for the benefit of the individual income beneficiaries in addition the court order authorized and directed the trustee to allow the income_beneficiary of each trust to appoint a separate successor trustee for his or her respective trust the court also directed each successor trustee until the termination of the testamentary_trust to administer a_trust by making current income distributions only to the income_beneficiary or his or her respective living lineal_descendants per stirpes it is represented that once the successor trustees began receiving assets from the testamentary_trust it became apparent that the terms of the testamentary_trust relating to distributions prior to termination needed to be clarified the current income beneficiaries the contingent_remainder beneficiaries and the trustees of the trusts entered into a consent and stipulation as to terms governing the distribution of trust assets consent and stipulation the court approved the consent and stipulation on n paragraph of the consent and stipulation provides that each of trust a and trust b collectively the separate trusts and trust c and trust d collectively the sub-trusts will terminate at the same time on the death of the survivor between grandson and granddaughter paragraph provides that on the final termination the assets of the separate trusts and sub-trusts are to remain separated along the family lines of decedent’s grandchildren except as otherwise specifically provided in the consent and stipulation paragraph of the consent and stipulation provides that on the final termination the balance of the assets in each separate trust is to be distributed to the then living descendants of the grandchild for whose benefit the separate trust was created paragraph of the consent and stipulation provides that on the final termination the balance of the assets in each sub-trust is to distributed to the sub-trust’s income_beneficiary in the event that the income_beneficiary is not then living the balance of the assets of the deceased income beneficiary’s sub-trust is to be distributed to the deceased income beneficiary’s then living descendants per stirpes or if none the assets are to be distributed per stirpes among the then living descendants of the deceased income beneficiary’s nearest lineal ancestor who was a descendant of decedent and who has one or more then living descendants in the event that a sub-trust has more than one income_beneficiary the balance of the assets in the sub-trust is to be distributed per stirpes to the then living lineal_descendants of the beneficiary for whose benefit the sub-trust was created plr-117692-99 paragraph of the consent and stipulation provides that on the final termination in the event that a grandchild of decedent has no living lineal_descendants on the final termination the balance of the assets of that grandchild’s separate or sub- trust in the same family line is to be distributed to the descendants of decedent per stirpes paragraph provides that in the event no lineal_descendants of decedent are living on the final termination all trust assets are to be distributed pursuant to item v of the trust paragraph of the consent and stipulation provides that prior to final termination the trustee is to pay the income from a separate trust semiannually or more often in its discretion to the grandchild of decedent for whom the separate trust was created paragraph of the consent and stipulation provides that after the death of a grandchild of decedent the trustee is to pay the income from the separate trust semiannually or more often in its discretion to the lineal_descendants of the grandchild who are living at the time of the respective distributions per stirpes subject_to the distribution of income section of the testamentary_trust directing the accumulation of income notwithstanding the foregoing if a b c one or more of the descendants of a deceased grandchild request the trustee to divide the separate trust into sub-trusts for the descendants the trustee in its discretion considers its advisable to make such a division and the internal_revenue_service issues a favorable private_letter_ruling determining that such a division will not cause the testamentary_trust to lose its grandfathered exemption from the federal generation-skipping_transfer_tax then the trustee in its discretion may divide the separate trust per stirpes among the then-living descendants of the deceased grandchild each share created for a descendant is to held and administered as a sub-trust for the benefit of that descendant paragraph of the consent and stipulation provides that in the event that prior to termination any separate trust ceases to have a current income_beneficiary eg a separate trust’s sole income_beneficiary dies without then-living lineal_descendants the balance of such trust’s assets is to be divided per stirpes among the then-living lineal_descendants of decedent and the share of such descendant is to be transferred to the separate trust or sub-trust benefitting the descendant plr-117692-99 paragraph of the consent and stipulation provides that the trustee is to pay the income from a sub-trust semiannually or more often in its discretion to the descendant of decedent for whom the sub-trust was created paragraph provides that after the death of the descendant the trustee is to pay the income from the sub-trust semiannually or more often in its discretion to the lineal_descendants of the deceased descendant who is living at the time of the respective distributions per stirpes subject_to the distribution of income section of the testamentary_trust directing the accumulation of income notwithstanding the foregoing if d e f one or more of the descendants of a deceased grandchild request the trustee to divide the sub-trust into further sub-trusts for the descendants the trustee in its discretion considers its advisable to make such a division and the internal_revenue_service issues a favorable private_letter_ruling determining that such a division will not cause the testamentary_trust to lose its grandfathered exemption from the federal generation-skipping_transfer_tax then the trustee in its discretion may divide the sub-trust per stirpes among the then-living descendants of the deceased grandchild each share created for a descendant is to held and administered as a sub-trust for the benefit of that descendant paragraph of the consent and stipulation provides that in the event that prior to the final termination any sub-trust ceases to have a current income_beneficiary eg a sub-trust’s sole income_beneficiary dies without then-living lineal_descendants the balance of that sub-trust’s assets is to be divided per stirpes among the then-living descendants of the income beneficiary’s nearest lineal ancestor who was a descendant of decedent and who has one or more then-living descendants or if none per stirpes among the then-living lineal_descendants of decedent each share created for a then- living descendant is to be transferred to the separate trust or sub-trust benefitting the descendant paragraph of the consent and stipulation provides that each separate trust and each sub-trust need not have the same trustee it is represented that the testamentary_trust was irrevocable on date and there have been no additions actual or constructive to it since that date you have requested the following rulings plr-117692-99 the division of the testamentary_trust did not cause trust a_trust b_trust c and trust d to be subject_to the gst tax the modification and clarification of the administrative provisions of the testamentary_trust as provided in the court order dated m and the consent and stipulation will not affect the gst exempt status of trust a_trust b_trust c and trust d sec_2601 imposes a tax on every generation-skipping_transfer made by the transferor to a skip-person sec_26_2601-1 of the generation-skipping_transfer_tax regulations provides that the tax does not apply to any generation-skipping_transfer under a_trust as defined in sec_2652 that was irrevocable on date the rule_of the preceding sentence does not apply to a pro_rata portion of any generation-skipping_transfer under an irrevocable_trust if additions are made to the trust after date sec_26_2601-1 provides that except as provided in sec_26_2601-1 or c any trust in existence on date is considered an irrevocable_trust sec_2611 defines the term generation-skipping_transfer as a taxable_distribution a taxable_termination and a direct_skip sec_26_2611-1 provides that a generation-skipping_transfer is an event that is either a direct_skip a taxable_distribution or a taxable_termination the determination as to whether an event is a generation-skipping_transfer is made by reference to the most recent transfer subject_to the estate or gift_tax sec_2612 defines the term direct_skip to mean a transfer subject_to a tax imposed by chapter or of an interest in property to a skip_person sec_2613 defines the term skip_person to mean -- a natural_person assigned to a generation that is two or more generations below the generation assignment of the transferor or a_trust -- a if all interests in such trust are held by skip persons or b if -- plr-117692-99 i there is no person holding an interest in the trust and ii at no time after such transfer may a distribution including distributions on termination be made from such trust to a non-skip_person the testamentary_trust is a generation-skipping_trust because it provides for distributions to more than one generation of beneficiaries below decedent’s generation the testamentary_trust however has been exempt from the gst tax pursuant to sec_26_2601-1 because it was irrevocable on date and there have been no additions to it since that date you have requested a ruling that the proposed division of the testamentary_trust into separate trusts and the proposed modification of the provision relating to the appointment of successor individual trustees will not cause the trusts be subject_to the gst tax an amendment to an exempt trust that modifies or otherwise changes the quality value or timing of any of the powers or beneficial interests rights or expectancies originally provided under the terms of the trust will cause the trust to lose its exemption from the gst tax a trust's exemption from the gst tax is not affected however by amendments relating to the administration of a_trust based on the information submitted and the representations made the interests of the income beneficiaries under the division of the testamentary_trust will remain the same and the timing of the termination of the trusts will remain the same consequently the value of the income or corpus interest of each income_beneficiary will not change materially as a result of the division of the testamentary_trust corpus into separately administered trusts therefore the proposed division of the testamentary_trust into separate trusts will not change the quality value or timing of any powers beneficial interests rights or expectancies originally provided for under the terms of the testamentary_trust accordingly we conclude that the proposed division of the testamentary_trust into separate trusts will not cause distributions from the resulting trusts to be subject_to the gst tax imposed by chapter provided that no additions are made to the trusts after date in addition we conclude that the modification and clarification of the separate trust and the sub-trusts relates to the administration of those trusts and will not modify or otherwise change the quality value or timing of any of the powers beneficial interests rights or expectancies originally provided under the terms of the trust accordingly neither distributions from the separate trusts or the sub-trusts to skip persons nor terminations of interests of non-skip persons in the separate trusts or sub-trusts will be subject_to the gst tax plr-117692-99 except as ruled in this letter we express or imply no opinion concerning the tax consequences of the transaction under the cited provision or under any other provision of the code this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative sincerely joseph h makurath joseph h makurath senior technician reviewer branch assistant chief_counsel passthroughs and special industries


date cor-115928-00 internal_revenue_service number info release date uil the honorable ed bryant u s house of representatives washington d c dear mr bryant thank you for your letter of date signed by you and a number of your colleagues encouraging the internal_revenue_service to immediately readjust the business standard mileage rate to reflect the recent increase in gasoline prices you note that the increased cost has particularly burdened self-employed taxpayers who use automobiles for business purposes gasoline prices we realize increased gasoline prices are an economic burden however the cost of gasoline is only one part of the business standard mileage rate which includes fixed and operating automobile costs these costs include depreciation or lease payments maintenance and repairs insurance and license and registration fees in addition to gasoline and oil less than one-third of the cents per mile rate comes from the cost of gasoline and oil thus an immediate adjustment in the rate taking into account the recent increase in gasoline prices might not be significant setting the business standard mileage rate the rate is a national average amount determined by an annual study performed by an independent_contractor who is an expert in the cost analysis of business use of automobiles the contractor uses recent data from each state on the component costs of operating the most popular automobiles the contractor then combines this data to achieve a national composite cents-per-mile rate advantages of using the business standard mileage rate reducing a taxpayer’s record-keeping burden is the principal advantage of using the rate gasoline prices rise and fall during the year but taxpayers may continue to use the same rate without having to keep records of actual expenses although rising gasoline prices can be a disadvantage for taxpayers who use the rate falling prices can work to their advantage for example although gasoline prices fell in for all of and through date taxpayers were able to use the rate that reflected the earlier higher prices taxpayer’s options to deduct the ordinary and necessary expenses of using an automobile for business purposes a taxpayer must substantiate the cost date place and business_purpose of each use of the automobile by adequate_records for the cost the taxpayer has two options substantiate actual cost by keeping records or by other_sufficient_evidence use the business standard mileage rate using the rate gives approximate not actual costs taxpayers can deduct the actual business_expenses of using a personally-owned automobile and this may be advantageous when automobile costs are rising publication travel entertainment gift and car expenses contains further information on how taxpayers should substantiate expenses i have enclosed the relevant pages from that publication i am sending a similar letter to your colleagues i hope this information is helpful please call me at or robert a berkovsky at if you have any questions sincerely charles o rossotti enclosure


internal_revenue_service number release date index number - --------------------------------------- ---------------------------------- ------------------------------------------ --------------------------------- department of the treasury washington dc person to contact ---------------------- -------- ------------- telephone number --------------------- refer reply to cc psi - plr-130680-05 date date ---------------------------------- ----------------------- legend x --------------------------------------------------- a ----------------------------------------------------- b_trust -------------------------------------------------- trust --------------------------------------------------- date date date date date date ----------------------- ---------------------- ----------------- ----------------- ----------------- ---------------- ----------------------------------------- --------------------------------------------------------------------- ----------------------------------------- this letter responds to a letter dated date and subsequent the information submitted states that x was incorporated on date and elected plr-130680-05 dear ------------------------ correspondence submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code to be an s_corporation effective date in date the shareholders of x consisted of individuals and trust a voting_trust with two individual beneficiaries a and b_trust is a permissible s_corporation shareholder under sec_1361 however under sec_1361 the beneficiaries of trust a and b are treated as the shareholders of x on date b contributed his beneficial_interest in trust to trust a grantor_trust that was treated under subpart e of part of subchapter_j of chapter as entirely owned by b_trust was eligible to be an s_corporation shareholder under sec_1361 however under sec_1361 the deemed owner of trust b is treated as the shareholder of x the trust agreement for trust provides that upon b’s death the beneficial interests in trust are to be allocated by the trustee to eleven subtrusts each a separate and independent share of trust these eleven subtrusts are to be established for the benefit of eleven separate individuals the trust agreement for trust also provides that each subtrust must satisfy all of the requirements of a qualified_subchapter_s_trust set forth in sec_1361 and that the consent of the beneficiary of each subtrust to the continuation of x’s s election is a condition_precedent to the formation and funding of each subtrust when b died on date trust ceased to be a grantor_trust under sec_1361 trust remained a permissible s_corporation shareholder until date two years after b’s death however under sec_1_1361-1 the estate of b was treated as the shareholder of x from date to date on date each subtrust by the terms set forth in the trust agreement for trust satisfied all of the requirements of a qualified_subchapter_s_trust qsst within the meaning of sec_1361 however the income beneficiaries of the subtrusts failed to timely file an election under sec_1361 accordingly the s election of x terminated on date in date the tax_return_preparers of trust discovered the beneficiaries’ failure_to_file the qsst elections and notified x of these omissions x represents that the trustee of trust inadvertently failed to require that the qsst elections be filed as a condition to the funding of the subtrusts x also represents that x was unaware of the beneficiaries’ failure_to_file the qsst elections and that these omissions took place outside the knowledge and reasonable control of x and were not a part of any plan or intention of x to terminate its s election x represents that for all taxable years during the termination period x and x’s shareholders have filed tax returns consistent with x being an s_corporation plr-130680-05 sec_1361 provides that the term as corporation means with respect to any taxable_year a small_business_corporation for which an election under ' a is in effect for such year sec_1361 provides that a asmall business corporation means a domestic_corporation that is not an ineligible_corporation and that does not have as a shareholder a person other than an estate a_trust described in ' c or an organization described in ' c who is not an individual sec_1361 provides that for purposes of sec_1361 a_trust may be a shareholder if all of it is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states sec_1361 provides that for purposes of sec_1361 in the case of a_trust described in sec_1361 the deemed owner shall be treated as the shareholder sec_1361 and sec_1_1361-1 provide that for purposes of sec_1361 a_trust which was described in sec_1361 immediately before the death of the deemed owner and which continues in existence after such death is a permitted shareholder but only for the 2-year period beginning on the day of the deemed owner’s death sec_1_1361-1 provides that if stock is held by a_trust described in sec_1_1361-1 the estate of the deemed owner is generally treated as the shareholder as of the day of the deemed owner’s death sec_1361 provides that a_trust created primarily to exercise the sec_1361 provides that in the case of a qualified_subchapter_s_trust voting power of stock transferred to it may be a shareholder sec_1361 provides that in the case of a_trust described in sec_1361 each beneficiary of the trust shall be treated as a shareholder qsst with respect to which a beneficiary makes an election under sec_1361 such trust shall be treated as a_trust described in sec_1361 and for purposes of sec_678 the beneficiary of such trust shall be treated as the owner of that portion of the trust which consists of stock in an s_corporation with respect to which the election under sec_1361 is made sec_1362 provides that a beneficiary of a qsst or his legal_representative may elect to have sec_1361 apply sec_1361 provides that an election under sec_1362 shall be effective up to days and months before the date of the election trust- a the terms of which require that- i during the life of the current income sec_1361 provides that the term qualified_subchapter_s_trust means a plr-130680-05 beneficiary there shall be only income_beneficiary of the trust ii any corpus distributed during the life of the current income_beneficiary may be distributed only to such beneficiary iii the income_interest of the current income_beneficiary in the trust shall terminate on the earlier of such beneficiary’s death or the termination of the trust and iv upon termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to such beneficiary and b all of the income within the meaning of sec_643 of which is distributed or required to be distributed currently to individual who is a citizen or resident_of_the_united_states sec_1_1361-1 provides that for purposes of sec_1361 and sec_1361 a substantially separate and independent share of a_trust within the meaning of sec_663 and the regulations thereunder is treated as a separate trust for a separate share which holds s_corporation stock to qualify as a qsst the terms of the trust applicable to that separate share must meet the qsst requirements stated in sec_1_1361-1 and ii sec_1_1361-1 provides that if a_trust ceases to be a qualified_subpart_e_trust satisfies the requirements of a qsst and intends to become a qsst the qsst election must be filed within the 16-day-and-2-month period beginning on the date on which the trust ceases to be a qualified_subpart_e_trust if the estate of the deemed owner of the trust is treated as the shareholder under sec_1_1361-1 the qsst election may be filed at any time but no later than the end of the 16-day-and- 2-month period beginning on the date on which the estate of the deemed owner ceases to be treated as a shareholder sec_1362 provides that except as provided in ' g a small_business_corporation may elect in accordance with the provisions of ' to be an s_corporation sec_1362 provides that an election under ' a shall be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation a termination of an s_corporation_election under ' d is effective on and after the date of cessation sec_1362 provides that if an election under ' a by any corporation was terminated under ' d or the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the termination steps were taken so that the corporation is a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified under ' f agrees to make the adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary for that period then notwithstanding the circumstances plr-130680-05 resulting in such termination the corporation shall be treated as an s_corporation during the period specified by the secretary based solely on the facts submitted and the representations made we hold that x’s election to be an s_corporation terminated on date as a result of the failure of the beneficiaries of the eleven subtrusts to make the election required under sec_1361 we also hold that the termination was inadvertent within the meaning of sec_1362 we further hold that pursuant to the provisions of sec_1362 x will be treated as except as specifically set forth above no opinion is expressed concerning the an s_corporation from date and thereafter provided that the required qsst elections with an effective date of date are filed with the appropriate service_center within days from the date of this letter the eleven subtrusts otherwise qualify as qssts and x’s election to be an s_corporation was otherwise valid and was not terminated under sec_1362 accordingly the shareholders of x must include in income their pro_rata share of the separately_stated and nonseparately computed items of x as provided in sec_1366 make any adjustments to basis as provided in sec_1367 and take into account any distributions made by x as provided in sec_1368 if x or its shareholders fail to treat x as described above this letter_ruling will be null and void federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 or whether each of the eleven subtrusts are qssts within the meaning of sec_1361 of the code provides that it may not be used or cited as precedent being sent to x's authorized representative enclosures sincerely yours beverly katz senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries this ruling is directed only to the taxpayer who requested it sec_6110 pursuant to a power_of_attorney on file with this office a copy of this letter is copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ------------------------------------- ------------------------------------ -------------------------------------------------- ------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-137172-03 date date estate ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- x d1 d2 year x y z ----------------------- -------------------------- ------------- ------------------- ------- --------------- --------------- --------------- dear ------------- this letter responds to a letter dated date and subsequent correspondence submitted by you as the executor of the estate requesting certain rulings under the internal_revenue_code the information submitted states that x died on d1 of year pursuant to x s will the executor of the estate will give certain bequests of cash and personal_property to individual named beneficiaries any residual estate remaining is to be divided equally and distributed to ten named charitable organizations each of which is represented as being an organization described in ' c collectively the charities plr-137172-03 article viii of x s will grants the executor of the estate the power to make distribution or division of the estate in cash or in_kind or both to allot different kinds or disproportionate shares of property or undivided interests in property among the beneficiaries and to determine the value of any such property and to make such elections under the tax laws applicable to the estate as the executor determines should be made no compensating adjustments between principal and income nor with respect to any bequest or devise shall be made even though the elections so made may affect beneficially or adversely the interests of the beneficiaries the estate has filed its income_tax returns for all taxable years on a fiscal_year sec_441 provides that taxable_income shall be computed on the basis of at the time of x s death x owned a non-qualified annuity_contract the contract which had a basis in x s hands of dollar_figurex and a value of dollar_figurey as of d1 of year the contract was purchased after date no payments had been received by x under the contract the named beneficiary of the death_benefit under the contract is the estate the estate surrendered the contract on d2 of year for dollar_figurez the difference between dollar_figurey and dollar_figurez represents interest accrued after the death of x the estate has not included any amount in its gross_income or taken any income_tax deduction with respect to the contract for any taxable_year the estate has made interim distributions satisfying all specific and pecuniary bequests the amounts received upon surrender of the contract will be distributed as part of the remaining residuary bequest to the charities which have also received interim cash distributions ending d1 which is not the last day of any month the taxpayer’s taxable_year in general an estate may adopt a calendar_year or a fiscal_year sec_441 defines a fiscal_year as a period of twelve months ending on the last day of any month other than december sec_642 provides that in the case of an estate there shall be allowed as a deduction in computing its taxable_income in lieu of the deduction allowed by sec_170 relating to deduction for charitable etc contributions and gifts any amount of the gross_income without limitation which pursuant to the terms of the governing instrument is during the taxable_year paid for a purpose specified in ' c determined without regard to sec_170 a deduction in computing its taxable_income any amount of the gross_income without limitation which pursuant to the terms of the governing instrument is during the taxable_year permanently set_aside for a purpose specified in sec_170 or is to be used exclusively for religious charitable scientific literary or educational_purposes or for the prevention of cruelty to children or animals or for the establishment acquisition maintenance or operation of a public cemetery not operated for profit sec_642 provides that in the case of an estate there shall be allowed as plr-137172-03 sec_691 provides that the amount of all items of gross_income in respect of a decedent which are not properly includible in respect of the taxable_period in which falls the date of the decedent s death or a prior period including the amount of all items of gross_income in respect of a prior decedent if the right to receive such amount was acquired by reason of the death of the prior decedent or by bequest devise or inheritance from the prior decedent shall be included in the gross_income for the taxable_year when received of a the estate of the decedent if the right to receive the amount is acquired by the decedent s estate from the decedent b the person who by reason of the death of the decedent acquires the right to receive the amount if the right to receive the amount is not acquired by the decedent s estate from the decedent or c the person who acquires from the decedent the right to receive the amount by bequest devise or inheritance if the amount is received after a distribution by the decedent s estate of such right deferred_annuity_contract dies before the annuity_starting_date and the beneficiary receives a death_benefit under the annuity_contract the amount received by the beneficiary in a lump sum in excess of the owner-annuitant’s investment_in_the_contract is includible in the beneficiary’s gross_income as ird within the meaning of sec_691 revrul_2005_30 applies to deferred_annuity contracts purchased on or after date revrul_2005_30 2005_20_irb_1015 holds that if the owner-annuitant of a based solely on the facts and representations submitted we conclude that the excess of dollar_figurey over dollar_figurex received by the estate as the named beneficiary of the contract upon the surrender of the contract was ird includible by the estate in its year gross_income the estate is entitled to a deduction under sec_642 for the amounts of ird paid to the charities in the year taxable_year or under sec_642 for the remaining amounts of ird which were set_aside for charitable purposes we further conclude that the estate has not filed its income_tax returns based on an allowable taxable_year under sec_441 upon an allowable taxable_year those returns as amended must include the ird in the estate’s gross_income and claim the appropriate deduction under sec_642 a copy of this letter should be attached to each return the estate must file amended income_tax returns for all taxable years based except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the transactions described above this ruling is directed only to the taxpayer requesting it sec_6110 of plr-137172-03 the code provides that it may not be used or cited as precedent sincerely j thomas hines chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date -------------------------- ------------------------------------------------ ---------------------------------------- --------------------------- - 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 b03 plr-154333-05 date february ------- ------------------------------ legend taxpayer ------------------------------------------------------------ year dear ---- --------- this is in response to your letter dated date in your letter you requested an extension of time on behalf of taxpayer to make a late election to treat qualified_dividend_income as investment_income under sec_163 and sec_163 of the internal_revenue_code for year additionally you requested a revocation under sec_1 d - c of the income_tax regulations of the election previously made to treat qualified_dividend_income as investment_income under sec_163 for year the request to make the late election is based on sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations facts taxpayer timely filed form_1040 individual_income_tax_return for year the return was prepared using a computerized tax_return preparation software program sold to the general_public taxpayer's return included form_4952 investment_interest expense deduction it is represented that the tax_return preparation program permits a taxpayer to elect to include all of the taxpayer’s qualified_dividend_income in investment_income the software program does not calculate the optimal amount of qualified_dividend plr-154333-05 income the taxpayer should include in investment_income and does not advise the taxpayer that the software program does not calculate this optimal amount instead a taxpayer using the program was required to compute this amount and manually enter it into the software program it is represented that taxpayer did not realize that the software program did not compute the proper amount to include in investment_income and merely elected to include all qualified income in investment_income on form_4952 for year applicable law sec_163 of the code provides that in the case of a taxpayer other than a corporation the amount allowed as a deduction for investment_interest for any taxable_year shall not exceed the net_investment_income of the taxpayer for the taxable_year sec_163 of the code provides in part that investment_income means the sum of -- i gross_income from property_held_for_investment other than any gain taken into account under clause ii l ii the excess if any of -- l the net gain attributable to the disposition of property_held_for_investment over ll the net_capital_gain determined solely by taking into account gains and losses from dispositions of property_held_for_investment plus iii so much of the net_capital_gain referred to in clause ii ll or if lesser the net gain referred to in clause ii l as the taxpayer elects to take into account under this clause such term shall include qualified_dividend_income as defined in sec_1 only to the extent the taxpayer elects to treat such income as investment_income for purposes of this subsection sec_1_163_d_-1 of the regulations provides that the election for qualified_dividend_income must be made on or before the due_date including extensions of the income_tax return for the taxable_year in which the qualified_dividend_income is received sec_1_163_d_-1 of the regulations provides that the election under sec_163 is revocable with the consent of the commissioner sec_301_9100-1 through of the procedure and administration regulations provide the standards the commissioner uses to determine whether to grant an extension of time to make a regulatory election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-1 of the regulations defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register plr-154333-05 or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 of the regulations provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 of the regulations provides that requests for extensions of time for regulatory elections other than automatic changes covered under sec_301_9100-2 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 of the regulations provides that a taxpayer will be deemed to have acted reasonably and in good_faith if the taxpayer -- i requests relief before the failure to make the regulatory election is discovered by the service ii inadvertently failed to make the election because of intervening events beyond the taxpayer's control iii failed to make the election because after exercising due diligence the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of the service or v reasonably relied on a qualified_tax professional and the tax professional failed to make or advise the taxpayer to make the election sec_301_9100-3 of the regulations provides that a taxpayer will not be considered to have acted reasonably and in good_faith if the taxpayer -- i seeks to alter a return position for which an accuracy-related_penalty could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires a regulatory election for which relief is requested ii was informed in all material respects of the required election and related tax consequences but chose not to file the election or iii uses hindsight in requesting relief if specific facts have changed since the original deadline that make the election advantageous to a taxpayer the service will not ordinarily grant relief sec_301_9100-3 of the regulations provides that the commissioner will grant a reasonable extension of time only when the interests of the government will not be prejudiced by the granting of relief under paragraph c i the interests of the government are prejudiced if granting relief would result in a taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made plr-154333-05 conclusion taxpayer's election is a regulatory election as defined under section b because the due_date of the election is prescribed in the regulations under sec_1_163_d_-1 in the present situation the requirements of sec_301_9100-1 and sec_301_9100-3 of the regulations have been satisfied the information and representations made by taxpayer establish that taxpayer acted reasonably and in good_faith with this request furthermore granting an extension will not prejudice the interests of the government it is represented that the taxpayer will not have a lower tax_liability in the aggregate for all taxable years affected by the election if given permission to make the election in the appropriate amount at this time than taxpayer would have if the election were made in the appropriate amount by the original deadline for making the election accordingly taxpayer is granted an extension of time for making the election until days following the date of this ruling the election should be made by filing a revised form_4952 and schedule d and by including a copy of this ruling with an amended_return for year additionally taxpayer is granted consent to revoke the first election made on the year return these rulings are based upon information and representations submitted by taxpayer and accompanied by a penalty of perjury statement while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as expressly provided herein no opinion is expressed or implied concerning the federal_income_tax consequences of any aspect of any transaction or item discussed or referenced in this ruling under the powers of attorney on file in this office a copy of this ruling is being sent to your authorized representatives this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent sincerely yours christopher f kane chief branch associate chief_counsel income_tax accounting