t c memo united_states tax_court dwight schwersensky petitioner v commissioner of internal revenue respondent docket no 17983-03l filed date dwight schwersensky pro_se sylvia l shaughnessy for respondent memorandum opinion gale judge this case is before the court on respondent's motion for summary_judgment on the issue of whether he may proceed by levy to collect unpaid income taxes for petitioner's tax_year respondent's motion also seeks a penalty under sec_6673 a hearing was held thereon for the reasons set forth below we shall grant respondent's motion summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trials fla peach corp v commissioner 90_tc_678 summary_judgment may be granted where there is no genuine issue of material fact and a decision may be rendered as a matter of law rule a and b the moving party bears the burden of proving that there is no genuine issue of material fact and factual inferences are viewed in a light most favorable to the nonmoving party 119_tc_252 85_tc_812 79_tc_340 the party opposing summary_judgment must set forth specific facts which show that a genuine question of material fact exists and may not rely merely on allegations or denials in the pleadings 91_tc_322 87_tc_214 unless otherwise noted all section references are to the internal_revenue_code_of_1986 as amended and all rule references are to the tax_court rules_of_practice and procedure background2 at the time of filing the petition petitioner resided in poway california on date petitioner and his wife mrs schwersensky jointly submitted a form_1040 u s individual_income_tax_return for on which they inserted zeros into every line related to income and taxes and attached a two-page statement of frivolous tax_protester arguments petitioner and mrs schwersensky included with the form_1040 two forms w-2 wage and tax statement for indicating that qualcomm inc paid petitioner dollar_figure in wages and withheld federal_income_tax of dollar_figure and that marantha chapel paid mrs schwersensky dollar_figure in wages and withheld dollar_figure in federal_income_tax the form_1040 sought a refund of the couple's combined withholdings of dollar_figure on date respondent advised petitioner and mrs schwersensky by letter that the form_1040 they submitted for was frivolous and that the position taken the facts hereinafter are established in the record and or undisputed although petitioner's spouse maureen t schwersensky requested a sec_6330 hearing jointly with petitioner and the resulting notice_of_determination was issued to both only petitioner filed a petition in this case these contentions included inter alia that no section of the internal_revenue_code establishes an income_tax 'liability' and 'income' can only be a derivative of corporate activity therein had no basis in law the letter offered petitioner and mrs schwersensky an opportunity to correct the return within days without penalty petitioner subsequently sent only frivolous tax_protester correspondence to respondent concerning respondent accordingly issued petitioner and mrs schwersensky a notice_of_deficiency with respect to determining that petitioner and mrs schwersensky had income in the amount of the wages reported on their forms w-2 income from the sale of securities of dollar_figure and other income resulting in a deficiency of dollar_figure and taking into account amounts withheld an underpayment_of_tax of dollar_figure plus a dollar_figure penalty determined under sec_6662 collectively including interest the liability petitioner and mrs schwersensky received the notice_of_deficiency as petitioner referred to it in a subsequent letter to respondent challenging the authority of the individual who issued it and containing additional frivolous tax_protester arguments however no petition was filed with respect to the deficiency_notice a certified copy of form_4340 certificate of assessments and payments covering petitioner's taxable_year records that respondent assessed the liability on date and sent notices of balance due to petitioner on date and date on date respondent sent petitioner a letter final notice_of_intent_to_levy and notice of your right to a hearing with respect to the liability on date petitioner made a timely request for a hearing wherein he raised numerous issues including i that he was challenging the appropriateness of the collection action ii that no valid underlying assessment was ever made iii that he had never received the statutory 'notice and demand' for payment of the taxes at issue and iv that he was challenging the existence of the underlying liability under sec_6330 in the hearing request petitioner also demanded that respondent produce various documents at the sec_6330 conference5 and stated his intention to record the conference in response to petitioner's request for a hearing an appeals settlement officer sent petitioner a letter on date scheduling a conference for date the letter for example petitioner requested that respondent provide copies of assessment certificates and all supporting records names and irs employee id's of the individuals who prepared and signed the assessment certificates and the notice_and_demand for payment and a copy of the statute that authorizes the secretary to 'estimate the amount of taxes which have been omitted to be paid on the basis of my return' the hearing request also included voluminous amounts of tax_protester rhetoric such as that in order to deceive people irs employees falsely claim that sec_1 or makes a person liable for income_tax and requires mandatory the person to pay it none of these sections makes anyone 'liable' for income_tax nor 'requires' mandatory anyone to pay such tax advised that no tape or stenographic recordings of the conference would be allowed and that petitioner would be precluded under sec_6330 from challenging the underlying liability for because he had received a notice_of_deficiency for but had not filed a petition in response thereto the letter included a copy of the form_4340 for petitioner's taxable_year recording that notice_and_demand for payment had been made contrary to petitioner's earlier claim the letter further advised that if petitioner wished to consider alternatives to the proposed levy action such as an installment_agreement he should bring with him a completed form 433-a collection information statement for individuals as well as completed income_tax returns for and petitioner appeared for the conference rescheduled for date at his request accompanied by a witness and a court reporter the settlement officer terminated the conference rather than allow petitioner to record it on date a letter notice_of_determination concerning collection action s under sec_6320 and or notice_of_determination was issued to petitioner the settlement officer determined that the proposed levy action should be sustained in light of petitioner's refusal to abide by the procedures the office of appeals had established for conducting sec_6330 conferences notably petitioner's refusal to forgo recording the conference the notice_of_determination i stated that appeals had verified that all of the requirements of applicable law and administrative procedures had been met including the making of a valid assessment ii answered petitioner's contention that he never received notice_and_demand for payment by noting that the settlement officer had provided petitioner a copy of his form_4340 for documenting that notice_and_demand for payment had been sent iii answered petitioner's challenge to the existence of the underlying tax_liability by advising that petitioner was precluded from pursuing such a challenge because he had received a notice_of_deficiency as indicated by his correspondence referencing it iv noted that petitioner had failed to provide the requested financial information regarding potential collection alternatives and v concluded that the proposed levy balanced the need for the efficient collection_of_taxes with the legitimate concern that the collection action be no more intrusive than necessary petitioner timely filed a petition in response to the notice_of_determination wherein he alleged inter alia that he had never received a notice_of_deficiency that he had not received any taxable_income for and that respondent had violated the law by denying petitioner his right to record his sec_6330 conference pursuant to sec_7521 in his response opposing respondent's motion for summary_judgment petitioner in general raises the challenges noted above and further contends i that no valid notice_of_deficiency was issued to him for ii that respondent failed to provide the requested documents or verification that the requirements of any applicable law or administrative procedure had been met iii that the collection action had not been authorized as required by sec_7401 and iv that the notice of petitioner's right to a hearing under sec_6330 was invalid because it was not issued by the secretary as required by sec_6330 or the secretary's duly authorized delegate as provided in sec_7701 and a a i consistent with his other submissions petitioner's response to the motion for summary_judgment contained approximately eight pages of tax_protester rhetoric including such arguments as t here is no statute anywhere in the internal_revenue_code which makes dwight schwersensky liable for the tax imposed in sec_1 or sec_871 n o international maritime contract or other contract exists wherein dwight schwersensky is in privity with the internal_revenue_service the irs is acting as a third party debt collector under some undisclosed contract for some undisclosed third party commissioner has burden_of_proof that a contract exists to compel me with a duty and obligation to perform and if no contract is produced must provide a liability statute to make me liable in order to issue a notice_of_deficiency continued discussion introduction sec_6331 authorizes the secretary to levy upon property and property rights of a taxpayer liable for taxes who fails to pay those taxes within days after notice_and_demand for payment is made sec_6331 provides that the levy authorized in sec_6331 may be made with respect to any unpaid tax only if the secretary has given written notice to the taxpayer days before the levy sec_6330 requires the secretary to send a written notice to the taxpayer of the amount of the unpaid tax and of the taxpayer's right to a sec_6330 hearing at least days before any levy is begun if a sec_6330 hearing is requested the hearing is to be conducted by appeals and at the hearing the appeals officer conducting it must verify that the requirements of any applicable law or administrative procedure have been met sec_6330 c the taxpayer may raise at the hearing any relevant issue relating to the unpaid tax or the proposed levy sec_6330 the taxpayer may also raise challenges to the continued dwight schwersensky is not a u s citizen but in fact is a california national a member of the republic we note that notwithstanding the last assertion petitioner stated in his request for a hearing i am a u s citizen existence or amount of the underlying tax_liability if the taxpayer did not receive a statutory_notice_of_deficiency with respect thereto or did not otherwise have an opportunity to dispute that liability sec_6330 however if the taxpayer received a notice_of_deficiency and failed to petition the tax_court he may not challenge the underlying liability in the sec_6330 proceeding 114_tc_176 at the conclusion of the hearing the appeals officer must determine whether and how to proceed with collection and shall take into account i the verification that the requirements of any applicable law or administrative procedure have been met ii the relevant issues raised by the taxpayer iii challenges to the underlying tax_liability by the taxpayer where permitted and iv whether any proposed collection action balances the need for the efficient collection_of_taxes with the legitimate concern of the taxpayer that the collection action be no more intrusive than necessary sec_6330 we have jurisdiction to review the appeals officer's determination where we have jurisdiction over the type of tax involved in the case sec_6330 see 122_tc_287 where the underlying tax_liability is properly at issue we review the determination de novo goza v commissioner supra pincite where the underlying tax_liability is not at issue we review the determination for abuse_of_discretion id pincite whether an abuse_of_discretion has occurred depends upon whether the exercise of discretion is without sound basis in fact or law see 125_tc_14 104_tc_367 standard of review of determination at the hearing on respondent's motion petitioner conceded receiving the notice_of_deficiency for and failing to file a petition for redetermination he maintains that the notice_of_deficiency was invalid having received the notice and failed to file a petition with respect to it petitioner may not challenge it now or otherwise contest the underlying tax_liability in this proceeding goza v commissioner supra pincite as the underlying liability is therefore not at issue respondent's determination is reviewed for abuse_of_discretion id pincite see also 114_tc_604 respondent's determination petitioner repeatedly stated that he is challenging the appropriateness of the collection actions as provided in sec_6330 he has provided no specifics however in the letter petitioner sent to the irs service_center that disputed the notice_of_deficiency contained only frivolous tax_protester arguments any event he has not disputed the assertion in the notice_of_determination that he failed to provide a collection information statement as requested by the settlement officer consequently petitioner's claim is no bar to summary_judgment as it is not an abuse_of_discretion for appeals personnel to refuse to consider collection alternatives where a taxpayer fails to submit requested financial information sapp v commissioner tcmemo_2006_104 picchiottino v commissioner tcmemo_2004_ newstat v commissioner tcmemo_2004_208 petitioner also contended throughout the hearing process and contends now that there was never a valid assessment of the liability pursuant to sec_6203 and that he never received notice_and_demand for payment of it as required by sec_6303 however the certified form_4340 for petitioner's taxable_year establishes otherwise on both counts in the absence of any showing of irregularity forms are presumptive evidence that a tax has been validly assessed under sec_6203 115_tc_35 furthermore a notice of balance due which was sent to him as recorded on petitioner's form constitutes notice_and_demand for payment for purposes of sec_6303 craig v commissioner t c pincite schaper v commissioner tcmemo_2002_ petitioner has put forth no specific allegation beyond his general denials that would tend to show an irregularity in the form_4340 in the assessment or in the notice_and_demand for payment it is undisputed that petitioner received a notice_of_deficiency and a notice_of_intent_to_levy with respect to which are also both sufficient for purposes of sec_6303 craig v commissioner supra pincite we therefore find no abuse_of_discretion in the notice of determination's verification that all applicable procedural requirements including the foregoing were followed petitioner's contention that the settlement officer failed to provide him certain documents or the verification that the requirements of any applicable administrative procedure had been met is also unavailing as respondent need not do so 118_tc_162 petitioner's contention that the instant collection action has not been authorized as required by sec_7401 is meritless sec_7401 applies to a civil_action the levy at issue made pursuant to sec_6331 is an administrative action that does not necessitate the institution of a civil suit see carrillo v commissioner tcmemo_2005_290 williams v petitioner also contends that the settlement officer failed to verify that the requirements of any applicable law or administrative procedure had been met as required by sec_6330 suffice to say that as discussed above all specific challenges made by petitioner to the procedures followed by respondent in maintaining this collection action are meritless and petitioner's general contrary allegation is insufficient to bar summary_judgment see hromiko v commissioner tcmemo_2003_107 commissioner tcmemo_2005_94 yazzie v commissioner tcmemo_2004_233 affd 153_fedappx_456 9th cir see also 461_us_677 petitioner further claims in opposition to summary_judgment that he was not provided notice of his right to a sec_6330 hearing by the secretary or_his_delegate as required by sec_6330 see also sec_7701 a i this claim is also meritless as the secretary has delegated the authority to issue notices of intent to levy to a host of internal_revenue_service employees delegation_order no rev effective date see also craig v commissioner supra pincite yazzie v commissioner supra we note also that there is no requirement that a notice_of_intent_to_levy be signed everman v commissioner tcmemo_2003_137 petitioner contends that his right to a hearing under sec_6330 was infringed as a result of the settlement officer's decision to terminate the conference rather than allow petitioner to record it in 121_tc_8 we held that sec_7521 entitles taxpayers to audio record conferences held pursuant to sec_6320 and sec_6330 however in kemper v commissioner tcmemo_2003_195 issued on the same day as keene and also involving a failure to accord the taxpayer the opportunity to audio record his sec_6330 conference we held that because the only arguments the taxpayers had advanced were frivolous and groundless it was not necessary to remand the taxpayers' case to the office of appeals so that a second conference airing the contentions could be audio recorded petitioner was questioned by the court at the hearing on respondent's motion for summary_judgment concerning the issues he wished to raise at a conference on remand petitioner stated that the issues were the same as those listed in his request for a hearing as well as an innocent spouse claim on behalf of mrs schwersensky as discussed above the issues raised in petitioner's hearing request are all frivolous and or groundless as for the innocent spouse claim mrs schwersensky's entitlement to relief under sec_6015 is irrelevant to this case which concerns only whether respondent may proceed with his collection action against petitionerdollar_figure the remaining arguments raised by petitioner are nothing more than tax_protester rhetoric and legalistic gibberishdollar_figure we do not address such arguments with somber reasoning and copious citations of precedent as to do so might suggest that they possess some colorable merit see 737_f2d_1417 5th cir mrs schwersensky failed to petition this court within days of respondent's notice_of_determination as to her see sec_6330 cf 116_tc_263 jointly filing spouses are not a single_person for purposes of sec_6330 see supra note sec_4 and because petitioner has admitted the issues he seeks to raise and they are all frivolous groundless or irrelevant we conclude that neither trial nor a remand to appeals to allow a recorded hearing is necessary respondent's failure to afford petitioner an opportunity to record the sec_6330 conference was harmless error and further proceedings in this case would not be productive see holliday v commissioner aftr2d ustc par big_number 9th cir affg tcmemo_2005_132 153_fedappx_451 9th cir affg tcmemo_2004_224 117_tc_183 lee v commissioner tcmemo_2004_264 we therefore conclude that there are no genuine issues of material fact present in this case and hold that respondent is entitled to judgment as a matter of law regarding the proposed collection activity accordingly we shall grant respondent's motion for summary_judgment sec_6673 penalty respondent has also moved for a penalty under sec_6673 sec_6673 authorizes this court to require a taxpayer who has instituted or maintained a proceeding primarily for delay or whose position is frivolous or groundless to pay a penalty of up to dollar_figure to the united_states see 119_tc_276 102_tc_596 95_tc_624 affd without published opinion 956_f2d_1168 9th cir in 115_tc_576 this court issued a stern warning to taxpayers concerning the imposition of a penalty under sec_6673 on those taxpayers who abused the availability of the protections offered by sec_6320 and sec_6330 by instituting actions merely for purposes of delay or by taking frivolous or groundless positions in such actions see kemper v commissioner supra petitioner's essential position in this case is that he owes no federal income taxes despite having received over a half a million dollars in wages and according to information returns that have not been legitimately disputed more than dollar_figure in proceeds from securities trading petitioner further invents numerous groundless claims to defeat respondent's collection of duly assessed taxes petitioner's position is patently frivolous his tax_protester arguments persuade us that he invoked the sec_6330 protections in bad faith respondent's motion for summary_judgment and to impose a penalty put petitioner on effective warning that sec_6673 penalties might be imposed petitioner nonetheless persisted in his course of conduct as evidenced by the tax_protester rhetoric in his response to respondent's motion petitioner has merely wasted the time and resources of respondent and this court we shall therefore impose a substantial penalty on petitioner pursuant to sec_6673 in the amount of dollar_figure to reflect the foregoing an appropriate order and decision will be entered


internal_revenue_service appeals_office release number release date date date certified mail dear department of the treasury employer_identification_number person to contact employee id number tel fax tax period s ended uil we considered your appeal of the adverse action proposed by the director exempt_organizations rulings and agreements this is our final_determination that you do not qualify for exemption from federal_income_tax under internal_revenue_code the code sec_501 a as an organization described in sec_501 of the code our adverse determination was made for the following reason s you had recurring nonmember income exceeding of gross revenue from oil gas lease royalties pipeline and investment_income please show your employer_identification_number on all returns you file and in all correspondence with internal_revenue_service you are required to file federal_income_tax returns on form_1120 for the tax periods stated in the heading of this letter and for all tax years thereafter file your return with the appropriate internal_revenue_service center per the instructions of the return for further instructions forms and information please visit wwww irs gov we will make this letter and the proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information we have provided to you ina separate mailing notice notice of intention to disclose please review the notice and the documents attached that show our proposed deletions if you disagree with our proposed deletions follow the instructions in notice you also 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 matters that may not have been resolved through normal channels get prompt and proper handling if you want taxpayer_advocate assistance please contact the taxpayer_advocate for the irs office that issued this letter you may call toll-free for the taxpayer_advocate or visit www irs gov advocate for more information if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter ‘a sincerely yours acting appeals team manager enclosure publication and or department of the treasury internal_revenue_service cincinnati oh legend state b n date p date q date r year s year t year v year ww percentage x percentage y percentage z percentage dear date employer id number contact person id number contact telephone number contact fax number uil we considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code the code based on the information provided we determined that you don’t qualify for exemption under sec_501 of the code this letter explains the basis for our conclusion please keep it for your records issues do you qualify for exemption under sec_501 of the code no for the reasons stated below facts you were formed as a corporation in the state of b on p although you were formed in r you did not previously apply for exemption and you were subject_to auto revocation as of q for failure_to_file form_990 you submitted a request for reinstatement on n your articles of incorporation state that you were formed letter rev catalog number 47628k to promote interest in hunting trap shooting skeet shooting rifle shooting pistol shooting fishing bait casting boating and other lawful sports to aid in the protection of fish birds and game and to promote and provide social and athletic recreation for its members to give and promote entertainments lectures social affairs celebrations exhibitions games amusements of any and all descriptions for the general enjoyment and instruction of the members to provide shooting matches among its own members and members of other similarly constituted organizations for the benefit enjoyment instruction and well- being of its members to establish and own shooting galleries and the necessary equipment for them to purchase or lease and to maintain and operate buildings club houses or other structures as incidental to the above purposes and to sell lease mortgage or otherwise dispose_of the same you provide a meeting place and facilities for individuals with common interests in hunting fishing trap shooting boating and other lawful sports you also promote the protection of fish birds and other wild game and the accompanying grounds you provide instructional meetings and literature on hunting fishing and shooting your membership is open to any person having an interest in hunting fishing boating shooting and the preservation of the same there is only one class of membership and all members have voting privileges your bylaws state that the use of the club grounds and club house are for members and their immediate families only your revenue is from member dues tavern sales and royalties from oil_and_gas rights in s y of your total revenue was from an oil_and_gas lease in t x of your revenue was from royalties and pipeline revenue and in v z of your revenue was from royalties law sec_501 of the internal_revenue_code code provides for exemption from federal_income_tax for clubs organized for pleasure recreation and other non-profitable purposes substantially_all of the activities of which are for such purposes and no part of the net_earnings of which inures to the benefit of any private shareholder sec_1_501_c_7_-1 of the regulations states that a club which engages in business such as making its social and recreational facilities available to the general_public or by selling real_estate timber or other products is not organized and operated exclusively for pleasure recreation and other non-profitable purposes and is not exempt under sec_501 an incidental sale of property will not deprive a club of its exemption revrul_66_149 1966_1_cb_146 provides that a social_club is not exempt from federal_income_tax as an organization described in sec_501 of the code if it regularly derives a substantial part of its income from nonmember sources such as for example dividends and interest on investments in this instance the club’s funds were invested primarily for the purpose of producing income through dividends interest or capital appreciation it is evident that such income is regularly derived from nonmember sources that the income is received in fulfillment of and pursuant to a profit_motive and that the income from investments is substantial in relation to total income revrul_69_220 1969_1_cb_154 held that a social_club that receives a substantial portion of its income from the rental of property and uses such income to defray operating_expenses and to improve and expand its facilities is not exempt under sec_501 of the code letter rev catalog number 47628k 87_f2d_5 held that where a club engages in income producing transactions which are not a part of the club purposes exemption will not be denied because of incidental trivial or non- recurrent activities such as sales of property no longer adapted to club purpose 75_fsupp_769 stated that a corporation that was organized for the purpose of promoting the game of mah jongg but income from memberships was insufficient to meet expenses and the corporation engaged in the commercial enterprise of selling to the public lists and tiles and the income therefrom enabled the corporation to meet its deficit carry on without an increase of dues or curtailment of operations and to accumulate a surplus which was donated to charity was not operated exclusively for social purposes or charitable purposes therefore the corporation was not exempt from federal_income_tax under sec_501 of the code or sec_501 of the code in united_states of america v fort worth club of fort worth texas 345_f2d_52 cir a social_club which derived over half of its receipts in amounts of hundreds of thousands of dollars from profitable outside business was not exempt from federal income taxes on ground that it was organized and operated exclusively for pleasure recreation and other non-profitable purposes the court declared that for a social_club to qualify for exemption under sec_501 of the code its outside profits must be strictly incidental to club activities not a result of an outside business and either negligible or non-recurring application of law you do not meet the qualifications for exemption under sec_501 of the code although you were initially formed for pleasure recreation and other non-profitable purposes substantially_all of your activities are not for such purposes you are engaged in leasing oil_and_gas rights and you receive royalties from this activity which does not fulfill a pleasure recreation or other non-profitable purpose you are like the organization in revrul_66_149 that did not qualify for exemption under sec_501 of the code you regularly derive income from nonmember sources specifically an oil_and_gas lease as well as royalties and pipeline revenue based on the financial data provided for s-v the income is regularly derived from these nonmember sources and the income from these sources is substantial in relation to your total income you are also similar to the organization in revrul_69_220 because you receive a substantial portion of your revenue from sources other than your members under sec_501 of the code transactions with outsiders should not be a regular source_of_income you are not similar to the organization in santee club v white your income from the oil_and_gas lease and royalties are not incidental or trivial in addition they are recurring for the past several years you have received a substantial amount of revenue from these sources per sec_1_501_c_7_-1 of the regulations you are engaging in business activities and you are not organized and operated exclusively for pleasure recreation and other non-profitable purposes you are similar to the organization in national mah jongg league v u s the majority of your revenue is from an oil_and_gas lease and from royalties therefrom your income from these sources exceeds the income from your members many times over the revenue from oil_and_gas lease and from royalties is recurring and more than incidental while you may have been organized for pleasure and recreation your revenue clearly shows that you are not operating for these purposes per united_states of america v fort worth club of fort worth texas your royalty income must be incidental to your club activities and either negligible or non-recurring instead your royalty income is both recurring and letter rev catalog number 47628k substantial for the years s-v over w of your revenue was received from nonmember sources on a recurring basis conclusion you do not meet the requirements for exemption under sec_501 of the code you receive the majority of your income from nonmember sources on a recurring basis by leasing oil_and_gas rights and receiving royalties you are engaging in a regular trade_or_business and derive a significant profit from the activity as a result you do not operate substantially for pleasure recreation or other non-profitable purposes if you don’t agree you have a right to file a protest if you don’t agree with our proposed adverse determination to do so you must send a statement to us within days of the date of this letter the statement must include e e e e e e your name address employer_identification_number ein and a daytime phone number acopy of this letter highlighting the findings you disagree with anexplanation of why you disagree including any supporting documents the law or authority if any you are relying on the signature of an officer director trustee or other official who is authorized to sign for the organization or your authorized representative one of the following declarations for an officer director trustee or other official who is authorized to sign for the organization under penalties of perjury i declare that i examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete for authorized representatives under penalties of perjury i declare that i prepared this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete your representative attorney certified_public_accountant or other individual enrolled to practice_before_the_irs must file a form_2848 power_of_attorney and declaration of representative with us if he or she hasn’t already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney we’ll review your protest statement and decide if you provided a basis for us to reconsider our determination if so we'll continue to process your case considering the information you provided if you haven’t provided a basis for reconsideration we’ll forward your case to the office of appeals and notify you you can find more information about the role of the appeals_office in publication how to appeal an irs decision on tax- exempt status letter rev catalog number 47628k where to send your protest please send your protest statement form_2848 if needed and any supporting documents to the applicable address u s mail street address for delivery service internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh you can also fax your statement and supporting documents to the fax number listed at the top of this letter if you fax your statement please contact the person listed at the top of this letter to confirm that he or she received it if you agree if you agree with our proposed adverse determination you don’t need to do anything if we don’t hear from you within days we’ll issue a final adverse determination_letter that letter will provide information on your income_tax filing_requirements you can find all forms and publications mentioned in this letter on our website at www irs gov formspubs if you have questions you can contact the person listed at the top of this letter sincerely jeffrey i cooper director exempt_organizations rulings and agreements enclosure publication letter rev catalog number 47628k


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom corp plr-116956-98 date date p sec_1 sec_2 t1 t2 state x dear this letter responds to your date request for rulings on certain federal_income_tax consequences of two proposed mergers related rulings concerning exempt_organization issues appear in a separate letter issued by the internal_revenue_service on date plr-116956-98 summary of facts p is a state x nonprofit corporation and the parent of a corporate group that provides health care services to the general_public p is the sole shareholder of t1 a state x for-profit corporation and the sole member of sec_1 and sec_2 both of which are state x nonprofit_corporations sec_2 is the sole member of t2 also a state x nonprofit corporation p’s membership interest in sec_1 entitles p to receive liquidating distributions and select the board_of directors p sec_1 and sec_2 are exempt from federal income_taxation under sec_501 and sec_509 of the internal_revenue_code proposed transactions for what are represented to be good business purposes p proposes the following transactions i t1 will convert to a nonprofit corporation under state x law the conversion ii t1 and t2 will merge with and into sec_1 under state x law the t1 merger and the t2 merger together the mergers in the t1 merger p will receive a membership interest in sec_1 in exchange for its membership interest in t1 in the t2 merger sec_2 will receive a membership interest in sec_1 in exchange for its membership interest in t2 and will immediately distribute the sec_1 interest to p representations the taxpayer has made the following representations concerning the proposed transactions a the fair_market_value of the proprietary interest in sec_1 received in the t1 merger and the t2 merger will approximately equal the fair_market_value of the respective t1 and t2 proprietary interests surrendered b sec_1 has no plan or intention to reacquire any of its proprietary interest issued in the mergers and no plan or intention to sell or otherwise dispose_of any of the assets of t1 or t2 acquired in the mergers c the conversion will not result in the dissolution of t1 under state x law d to the best of the taxpayer representative’s knowledge and belief each of the mergers will qualify as a reorganization under sec_368 if the service rules as proposed plr-116956-98 rulings based solely on the information submitted and the representations made we rule as follows the t1 merger will not result in gain_or_loss under sec_336 and sec_337 provided the t1 merger occurs before proposed sec_1_337_d_-4 of the income_tax regulations becomes effective as a final_regulation the t2 merger will not result in gain_or_loss under sec_336 and sec_337 provided the t2 merger occurs before proposed sec_1_337_d_-4 becomes effective as a final_regulation the continuity_of_interest requirement set forth in sec_1_368-1 is satisfied in the t1 merger and in the t2 merger caveats no opinion is expressed about the tax treatment of the transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the transactions that are not specifically covered by the above rulings in particular no opinion was requested and none is expressed about i the tax consequences under sec_311 of the distribution by sec_2 of the membership interest in sec_1 received in the t2 merger or ii the tax treatment of the t1 mergers and the t2 merger under sec_368 except to the extent indicated in ruling this ruling has no effect on any earlier documents and is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent each taxpayer involved in the transaction must attach a copy of this ruling letter to the taxpayer’s federal_income_tax return for the taxable_year in which the transaction is completed plr-116956-98 in accordance with the power_of_attorney on file in this office a copy of this letter is bring sent to your authorized representative sincerely yours assistant chief_counsel corporate by wayne t murray senior technician reviewer branch prior written_determination


o f f i c e o f t h e c h i e f c o u n s e l department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date number release date conex-129056-16 uil the honorable james b renacci member u s house of representative sec_1 park center drive suite wadsworth ohio dear representative renacci i am responding to your letter dated date on behalf of your constituent --------------------------- requested your assistance in determining whether unused funds in a flexible_benefit_plan default to the u s treasury when a business ceases operations you have asked whether this is true and if so how he can claim those funds ---------------- ------------------ flexible benefit plans like the plan sponsored by former employer the flex plan are subject_to requirements under sec_125 of the internal_revenue_code the code sec_125 of the code does not require that unused funds revert to the u s treasury when the employer ceases operations and the plan terminates in addition how unused funds are disposed of when the plan terminates would depend on what the plan document provides about plan termination and the facts and circumstances at that time proposed treasury regulations under sec_125 of the code however do set forth rules on the use of unused amounts forfeited by a plan participant with respect to an ongoing plan proposed sec_1 o enclosed provides that forfeitures may be retained by the employer maintaining the plan or if not retained by the employer used to defray plan expenses returned to employees that is current participants and allocated on a reasonable and uniform basis based on for example contributions and not on claims experience conex-129056-16 from the information that you provided to us during the months he was employed in ---- ------- ---------------- employer according to the flex plan’s summary_plan_description health care expenses_incurred on or before termination of employment could be reimbursed deposited money into the flex plan sponsored by his former had unused funds in his flex plan account when his employment ---------------- terminated but he did not have unreimbursed health care expenses as of that date your letter states that the flex plan document provided that any unused funds reverted to the plan to pay plan administrative expenses wrote that he was told that because his former employer went out of business unused funds defaulted to the u s treasury ---------------- it appears from the information you provided to us that unused funds in the flex plan are forfeited upon an employee’s termination of employment unless the employee had reimbursable health care expenses on or before the termination and submitted a claim within days this is consistent with proposed sec_1 a i and iii enclosed which together provide that a plan is prohibited from reimbursing health care expenses_incurred after an employee terminates employment and no longer participates in the plan as noted above how unused funds are disposed of when the plan terminates would depend on what the plan document provides about plan termination and the facts and circumstances at that time i hope this information is helpful if you need additional information please contact --------------------- ---------------------- ---------------------- or me at at sincerely victoria a judson associate chief_counsel tax exempt and government entities enclosure


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 -------------------------- -------------------------- -------------------------------------- telephone number --------------------- refer reply to cc psi b04 plr-130491-14 date date legend grantor spouse trust state state statute charity charity charity charity date grantor’s charities trustee investment direction adviser distribution adviser trust_protector company state state statute state statute state statute state statute state statute state statute ------------------------------------------- -------------------------------------------- ---------------------------------------------------------------------- ------------- ------------------------------------------ ------------------------------------------- ------------------------------------------------------------ -------------------------------------------------------------- ------------------------------------------------ -------------------------- ------------------------------------- -------------------------------------------------- ------------------------------------------------- ----------------------------------------- ---------------------------------- ------------------------------------------------------ ------------- ---------------------------------------------- -------------------------------------------------- -------------------------------------------------- ----------------------------------------------------- -------------------------------------------------- -------------------------------------------------- plr-130491-14 case case a b c d e f g h i dear ------------ ----------------------------------------------------------------------------------------- --------------- ----------------------------------------------------------------------------------------- ----------- ----------------- -------------- -------- -------------- --- --- --- ------ --- this letter responds to your authorized representative’s letter dated date requesting rulings regarding the gift_tax consequences of two transfers to trust and the release of certain powers held by grantor the facts and representations submitted are summarized as follows on date grantor a resident of state created trust to benefit grantor and three-named charities charity charity and charity trust is irrevocable and is sited in state grantor initially funded trust with dollar_figurec the fiduciaries include trustee a corporate trust company and four trust advisers the four trust advisers are investment direction adviser a corporation distribution adviser a five-member limited_liability_company llc charitable distribution adviser cda who is initially spouse and trust_protector a five-member llc if and when spouse is no longer able to serve as cda company a five-member llc will serve as cda initially the same five individuals are members or shareholders and officers of distribution adviser company and trust_protector none of the individuals are beneficiaries of trust it is represented that charitie sec_1 through are organizations described in sec_501 of the internal_revenue_code charitie sec_1 and and any replacement charity are referred to as grantor’s charities it is represented that charity is also an organization described in sec_501 under trust charity may receive distributions indirectly through one or more of grantor’s charities distributions to grantor article i b i of trust provides that during grantor’s life the trustee at the direction of the distribution adviser shall distribute to grantor quarterly payments of plr-130491-14 h percent of the value of the trust assets determined pursuant to article xxiv c as of the end of the calendar_year grantor’s quarterly distributions article i b provides that during grantor’s life the trustee at the direction of the distribution adviser shall distribute to grantor first from income and to the extent income is not sufficient from principal such amounts as necessary to maintain grantor in his accustomed standard of living and an additional_amount up to the difference between the grantor’s quarterly distributions in the preceding year and the payment due under article i b i in the current_year grantor’s support distributions article i b provides that the trustee shall have the discretion exercisable at any time at the direction of the distribution adviser to distribute any part or all of the income and principal of the trust to grantor grantor’s special contingent distributions in the event that during grantor’s life the trust_protector determines in its discretion that any law regulation ordinance judicial decision or other rule enforceable by any governmental body that is adopted after date has the result that a material tax_assessment fee penalty or other charge or required_payment is imposed on trust or on the recipient with respect to the transfer of trust assets to any exempt charitable_organization to which transfers are permitted under the trust provisions distributions to grantor’s charities article i b ii provides that during grantor’s life the trustee at the direction of the distribution adviser shall distribute dollar_figureb each quarter to charity subject_to the condition that any amount in excess of i percent of the total quarterly distributions made to charity and charity shall be expended by charity only to support certain activities charity quarterly distribution article i b iii provides that during grantor’s life the trustee at the direction of the distribution adviser shall distribute dollar_figured to charity each quarter charity quarterly distribution these distributions to charity and charity are subject_to certain restrictions as provided in trust pursuant to article i b the trustee in the trustee’s discretion at the direction of the distribution adviser may at any time and from time to time distribute part of all of the trust estate during grantor’s life to any one or more of grantor’s charities provided charity receives at least i percent and charity receives at least e percent of the aggregate distributions to grantor’s charities charity discretionary distributions grantor’s veto powers and testamentary limited_power_of_appointment article i c grants grantor certain veto powers over distributions to grantor and to grantor’s charities article i c i provides that during grantor’s life grantor has the right to veto at any time and from time to time in whole or in part for any reason or for no reason any grantor quarterly distribution grantor support distribution grantor plr-130491-14 special contingent distribution and charity discretionary distribution grantor’s sole discretionary veto powers pursuant to article i c ii through iv grantor may veto certain distributions to grantor’s charities based on certain objective standards grantor’s sole objective veto powers pursuant to article i c ii grantor may veto any other distributions to grantor’s charities if grantor has made a good_faith determination that the charity is not fulfilling the purposes for which it was created as provided in the article under article i c iii grantor may veto any charity quarterly distribution to charity if charity has not met certain requirements regarding distributions to charity or charity has failed to meet certain requirements as provided in the article pursuant to article i c iv grantor may exercise his power to veto any charity quarterly distribution to charity if charity has failed to meet certain reporting requirements as provided in the article article i c provides that grantor may veto any charity quarterly distribution to charity and any charity quarterly distribution to charity for any reason or no reason provided that the then serving cda consents to the veto and the cda does not have a substantial adverse_interest to the grantor with respect to these distributions within the meaning of sec_25_2511-2 grantor’s consent veto power however if the cda is not serving or is substantially adverse to grantor then the trust_protector if one is serving and does not have a substantial adverse_interest to grantor with respect to these distributions must consent to the veto the determination of whether the cda or the trust_protector has a substantial adverse_interest to grantor with respect to the disposition of the trust assets or income within the meaning of sec_25_2511-2 is made by the trust_protector with the advice of tax counsel if the value of the trust assets in the immediate preceding quarter falls below a certain amount determined under article i b iv grantor may exercise this veto power without the consent of the cda article i c provides that grantor may at any time or from time to time release any one or more of the veto powers listed above by providing notice to the trust advisers and the trustee article i f grants grantor a testamentary limited power to appoint the trust estate to spouse grantor’s charities or two other charities grantor’s testamentary power grantor may not appoint any trust property in favor of grantor grantor’s creditors grantor’s estate or the creditors of grantor’s estate in the event that grantor fails to exercise effectively the limited_power_of_appointment the remainder of trust will be distributed f percent to charity and g percent to charity article ix provides that the investment direction adviser has powers limited to investment decisions regarding trust assets article x provides that the distribution adviser serves in a fiduciary capacity and has the full power to direct the trustee to distribute income and principal of trust pursuant to the provisions of trust and subject plr-130491-14 to grantor’s veto powers the trust_protector has the power to remove any distribution adviser and appoint a successor article xi provides that the cda holds the powers granted in article i including the power to consent or not to grantor’s veto of charity and charity quarterly distributions the trust_protector has the power to remove any cda and appoint a successor article xii provides that the trust_protector has the powers already described and other powers that do not include any powers regarding distributions from trust article xxi b provides in relevant part that an individual is considered incapacitated if i during any period that such individual is legally incompetent as determined by a court of competent jurisdiction ii during any period that a conservator or guardian for such individual has been appointed based upon his or her incapacity or iii during any period that a certification is in effect that has been issued by two physicians who have examined the individual at issue and who certify to the trustee that such individual as a result of illness accident age or other cause no longer has the capacity to act prudently and effectively in financial affairs grantor proposes to release the grantor’s sole objective veto powers and retain only the grantor’s consent veto power and grantor’s sole discretionary veto powers grantor also proposes to transfer property in excess of dollar_figurea to trust proposed transfer after he releases the grantor’s sole objective veto powers grantor’s consent veto power and grantor’s sole discretionary veto powers will be referred to collectively as grantor’s veto powers further grantor intends to execute a springing durable special power_of_attorney to permit the attorney-in-fact to exercise grantor’s veto powers only at such times grantor is incapacitated as defined in trust the draft document provides that in the event that grantor is incapacitated as defined under article xxi b of trust an attorney-in-fact will have the authority and the duty either to exercise or to decline to exercise any veto powers held by grantor under trust the attorney-in-fact cannot serve as a director trustee or officer of one of grantor’s charities and cannot be a_trust adviser the power_of_attorney will become effective upon the grantor’s incapacity and shall terminate upon grantor’s death grantor reserves the right to revoke the power_of_attorney at a time when the grantor is not incapacitated the language of trust will be amended to provide that at any time an attorney-in-fact is named and grantor is incapacitated for all purposes the attorney-in-fact shall have all the same rights powers duties and authorities with respect to the exercise and non-exercise of the veto powers as are held by grantor under trust the attorney-in-fact shall not have the power to release any of the veto powers in grantor’s name you have requested the following rulings plr-130491-14 the date transfer and the proposed transfer of property to trust by grantor is and will be treated as wholly incomplete gifts for gift_tax purposes when grantor releases his right to exercise his grantor’s objective veto powers but retains grantor’s veto powers and grantor’s testamentary power such release will not result in a completed_gift of the date transfer or the proposed transfer of property to trust should grantor become incapacitated and unable to exercise the grantor’s veto powers and the grantor’s testamentary power such incapacity will not result in a completed_gift of the date transfer or the proposed transfer of property to trust should grantor execute a springing durable_power_of_attorney which gives the attorney-in-fact the authority to exercise grantor’s veto powers the existence of the springing durable_power_of_attorney will not result in a completed_gift of the date transfer or the proposed transfer of property to trust sec_2702 does not apply to the date transfer or the proposed transfer of property to trust by grantor law and analysis ruling sec_2501 imposes a tax for each calendar_year on the transfer of property by gift by an individual sec_2511 provides that the tax imposed by sec_2501 applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-2 of the gift_tax regulations provides that a gift is complete as to any property or part thereof or interest therein of which the donor has so parted with dominion and control as to leave in the donor no power to change its disposition whether for the donor's own benefit or for the benefit of another but if upon a transfer of property whether in trust or otherwise the donor reserves any power over its disposition the gift may be wholly incomplete or may be partially complete and partially incomplete depending upon all the facts in the particular case accordingly in every case of a transfer of property subject_to a reserved power the terms of the power must be examined and its scope determined sec_25_2511-2 also provides an example where the donor transfers property to another in trust to pay the income to the donor or accumulate it in the discretion of the trustee and the donor retains a testamentary power to appoint the remainder among the donor's descendants the example concludes that no portion of plr-130491-14 the transfer is a completed_gift however if the donor had not retained a testamentary_power_of_appointment but instead provided that the remainder should go to x or his heirs the entire transfer would be a completed_gift sec_25_2511-2 provides that a gift is incomplete in every instance in which a donor reserves the power to revest the beneficial title in himself or herself a gift is also incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed_or_ascertainable_standard sec_25_2511-2 provides that the relinquishment or termination of a power to change the beneficiaries of transferred property occurring otherwise than by death of the donor is regarded as the event which completes the gift and causes the gift_tax to apply in 308_us_39 the taxpayer created a_trust for the benefit of named beneficiaries and reserved the power_to_revoke the trust in whole or in part and to designate new beneficiaries other than himself six years later in the taxpayer relinquished the power_to_revoke the trust but retained the right to change the beneficiaries in the taxpayer relinquished the right to change the beneficiaries the court stated that the taxpayer's gift is not complete for purposes of the gift_tax when the donor has reserved the power to determine those others who would ultimately receive the property accordingly the court held that the taxpayer's gift was complete in when he relinquished his right to change the beneficiaries of the trust a grantor's retention of a power to change the beneficial interests in a_trust causes the transfer to the trust to be incomplete for gift_tax purposes even though the power may be defeated by the actions of third parties 37_tc_897 see also 51_tc_352 in this case grantor retained grantor’s testamentary power to appoint the property in trust to spouse grantor’s charities and two other named charitable organizations under sec_25_2511-2 the retention of a testamentary power to appoint the remainder of a_trust is considered a retention of dominion and control_over the remainder accordingly based upon the facts submitted and the representations made we conclude that the retention of this power causes the date transfer to trust to be incomplete with respect to the remainder_interest in trust if grantor retains the grantor’s testamentary power the proposed transfer of property to trust will also be an incomplete_gift of the remainder in trust if at any time grantor releases the grantor’s testamentary power such release will result in a completed_gift of the remainder_interest in trust in this case the date transfer is also an incomplete_gift of the lifetime interests in trust for the following reasons grantor retained the grantor’s sole discretionary plr-130491-14 veto powers to veto discretionary distributions to grantor’s charities and quarterly support and contingent distributions to grantor grantor also retained the grantor’s sole objective veto powers and grantor’s consent veto power to veto quarterly distributions to grantor’s charities pursuant to these powers at the time of the date transfer to trust grantor retained the right to veto any distributions of income and principal to any one or more of grantor’s charities during his lifetime under sec_25_2511-2 a gift is incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries in this case grantor's sole discretionary veto powers grantor’s consent veto power and grantor’s sole objective veto powers give grantor the power to change the interests of the beneficiaries during his lifetime accordingly based upon the facts submitted and the representations made we conclude that the retention of these veto powers causes the date transfer to trust to be an incomplete_gift of the lifetime interests in trust ruling grantor proposes to release the grantor’s sole objective veto powers while retaining the grantor’s consent veto power and grantor’s sole discretionary veto powers grantor’s veto powers grantor’s sole discretionary veto powers give grantor the power to veto any charity discretionary distributions to grantor’s charities during grantor’s lifetime grantor’s consent veto power gives grantor the power to veto any quarterly distribution to grantor’s charities for any reason or for no reason with the consent of the cda during grantor’s lifetime further if the value of the trust assets in the immediate preceding quarter falls below a certain amount determined under article i b iv grantor may exercise this veto power without the consent of the cda sec_25_2511-2 provides that a donor is considered as himself having a power if it is exercisable by him in conjunction with any person not having a substantial adverse_interest in the disposition of the transferred property or the income therefrom sec_25_2511-2 does not define substantial adverse_interest sec_25_2514-3 provides that a coholder of the power has no adverse_interest merely because of his joint possession of the power or merely because he is a permissible appointee under a power at least one court has considered whether a person’s interest in a_trust was a substantial adverse_interest for purposes of sec_25_2511-2 in 195_f2d_999 1st cir the donor reserved the power_to_revoke a_trust in conjunction with his half-brother or his mother the trust provided for income to donor’s wife during her lifetime and upon her death the principal of the trust would be paid to his mother for her life and upon her death to his half-brother the court concluded that since the mother and the half-brother had no interest in the life_estate for the wife that neither the interests of the mother or the plr-130491-14 half-brother were adverse to the withdrawal of the life_estate for the wife the court stated that the regulation the predecessor to sec_25_2511-2 recognizes realistically that when the donor has reserved the power to withdraw any of the donated interests with the concurrence of some third person who has no interest in the trust adverse to such withdrawal it is in substance the same as if the donor had reserved such power in himself alone see also 57_tc_627 paxton’s interest in the trust whether regarded as substantial or insignificant would not be adversely affected by the exercise or nonexercise of the power he possesses with respect to the trust because his interest will not change or be adversely affected for purposes of the predecessor of sec_672 8_tc_213 revocation of trust by grantor with wife’s consent would not be an act that is adverse to the interests of the wife for purposes of the predecessor of sec_672 the internal_revenue_service considered the same question in the context of sec_2041 in revrul_79_63 1979_1_cb_102 decedent's spouse who died in created a testamentary_trust under the terms of which the trust income was payable to the decedent for life and the remainder was payable equally to the decedent's children or to any one of such children as the decedent might direct by will in addition the trust terms provided that at any time during the decedent's lifetime the decedent with the consent of a one of the decedent's children could direct the trustees to distribute all or any part of the trust property to anyone including the decedent under the terms of the governing instrument the decedent and a were trustees of the trust and they continued in those positions until the decedent's death in the question presented was whether any amount of the trust property is includible in the decedent's gross_estate under sec_2041 as the value of property subject_to a general_power_of_appointment in view of the fact that the power held by the decedent was exercisable only with the consent of a the revenue_ruling concludes that a is a taker in default not of the lifetime power in which a has a power of consent but rather of the testamentary power exercisable solely by the decedent in such a situation a would not have necessarily been in a better economic position after the decedent's death by refusing to exercise the power in favor of the decedent during the decedent's lifetime thus the fact that a might survive the decedent and receive an interest in the property if the decedent failed to exercise the testamentary power in favor of persons other than a does not elevate a's interest as a consenting party of the lifetime power to a substantial adverse_interest in this case spouse’s interest will be adverse to the exercise of grantor’s consent veto power if the exercise of grantor’s consent veto power will diminish or eliminate spouse’s significant economic_interest in the property subject_to grantor’s power in this case grantor reserved the power to veto quarterly distributions to charity and charity spouse has no interest adverse to such distributions spouse is merely a permissible appointee of the remainder of trust spouse’s interest as a permissible appointee does not elevate spouse's interest as a consenting party of the lifetime power to a substantial adverse_interest further spouse’s consent to grantor’s plr-130491-14 veto would benefit the permissible appointees including spouse because a veto of a quarterly distribution would result in the accumulation of that amount in trust further spouse’s interest as a permissible appointee is not a substantial interest for purposes of sec_25_2511-2 sec_25_2514-3 provides that an interest adverse to the exercise of a power is considered as substantial if its value in relation to the total value of the property subject_to the power is not insignificant several cases in which the courts considered whether a contingent_remainder is a substantial interest for purposes of the predecessor of sec_672 concluded that a contingent_remainder is not a substantial interest see 225_f2d_621 8th cir 19_tc_672 8_tc_213 4_tc_286 669_fsupp_751 d c w d va the same rationale applies in determining whether spouse’s interest as a permissible appointee is a substantial interest spouse is only one of four permissible appointees in default of the exercise of grantor’s testamentary power trust assets will be distributed to charity and charity we conclude that spouse’s interest as a permissible appointee is insignificant for purposes of sec_25_2511-2 accordingly we conclude that spouse’s interest is not an adverse substantial interest for purposes of sec_25_2511-2 if spouse ceases to serve as cda a five-member llc will serve as cda the llc and none of its members are income or remainder beneficiaries of trust therefore the llc members do not have substantial adverse interests to the exercise of grantor’s consent veto power further both spouse and the successor cda are prohibited from exercising the consent power if spouse or the successor cda have substantial adverse interests to the grantor consent veto power in such a case the trust_protector has the power to consent to this power the trust_protector is not a beneficiary of the trust and does not have a substantial adverse_interest to the exercise of grantor’s consent veto power in conclusion because the cda either spouse or the llc or in default the trust_protector does not have a substantial adverse_interest to grantor’s consent veto power under sec_25_2511-2 grantor is considered as having himself the power to veto any charitable quarterly distribution to grantor’s charities for any reason and for no reason accordingly based upon the facts submitted and representations made we conclude that the proposed transfer of property to trust will be an incomplete_gift assuming grantor retains grantor’s consent veto power grantor’s sole discretionary veto power and grantor’s testamentary power furthermore while the proposed transfer of property to trust will not result in a completed_gift a distribution from trust to grantor’s charities will be a completed_gift from grantor to that charity a distribution from trust to grantor will be considered as a return_of_capital and will not be considered a completed_gift upon grantor's death the plr-130491-14 fair_market_value of the property in trust is includible in grantor's gross_estate for federal estate_tax purposes ruling state law the state where trust is sited allows the trustor’s state of residence in this case state to control the guardianship of property state statute in revrul_75_350 1975_2_cb_366 husband’s will provided for the creation of a_trust for the benefit of his wife the trust granted wife a testamentary general_power_of_appointment under state law wife was legally incapable of executing a will from the time her husband died until her death upon wife’s death the trust passed to her children in default of wife’s power_of_appointment over the trust the service considered whether the trust principal was includible in the wife’s gross_estate under sec_2042 in view of her legal incapacity during the existence of the trust the service stated that the requirements of sec_2041 require only that the decedent has at the time of death a general_power_of_appointment which is exercisable further the practical inability to exercise or release a general power did not affect the existence of the power at her death therefore incapacity is immaterial in view of the requirements of sec_2041 the service ruled that the trust property was includible in wife’s gross_estate because wife held a general_power_of_appointment under sec_2041 see also revrul_55_518 1955_2_cb_384 the service ruled that property subject_to the power to alter amend revoke or terminate is includible in the powerholder’s gross_estate if the power exists at the date of death regardless of the manner in which it may be exercised in 613_f2d_1213 2nd cir aff’g 71_tc_351 husband’s will established a_trust for the benefit of his wife decedent and granted decedent a testamentary general_power_of_appointment over the trust subsequent to husband’s death a state court declared decedent incompetent decedent lacked capacity from husband’s death until her death the service included the trust property in decedent’s gross_estate under sec_2041 decedent’s counsel claimed that because of the decedent's incompetence she was never able after her husband's death to exercise the power vested in her by his will and thus the property subject_to the general_power_of_appointment should not be included in decedent’s estate under sec_2041 the court_of_appeals held that on the basis of statutory language legislative_history of sec_2041 administrative interpretation and case law that when an instrument has conferred a testamentary power which by its terms can be exercised in favor of the donee’s estate the property subject_to the power is part of the donee’s gross_estate even though the donee by virtue of incompetency was unable to make a valid will at any time after the power was granted plr-130491-14 id pincite2 see also 630_f2d_340 5th cir 597_f2d_382 3rd cir 432_f2d_1278 9th cir sec_25_2511-2 provides that if upon the transfer of property whether in trust or otherwise the donor reserves any power over its disposition the gift may be wholly incomplete or may be partially complete and partially incomplete depending upon all the facts in the particular case emphasis added the statute and regulations under sec_2511 require only that the donee reserve the power to make the gift incomplete in this case as in revrul_75_350 and the cases cited above grantor if incapacitated will continue to have reserved the grantor’s veto powers and grantor’s testamentary power incapacity is not a release or termination of grantor’s veto powers for purposes of sec_25_2511-2 the practical inability of grantor to exercise his veto powers due to his incapacity does not affect the existence of the power accordingly as in revrul_75_350 and the cases cited above grantor’s incapacity will not cause a completed_gift to occur provided the grantor does not release such powers prior to incapacity accordingly based on the facts submitted and the representations made we conclude that should grantor become incapacitated and unable to exercise grantor’s veto powers or grantor’s testamentary power his incapacity will not result in a completed_gift of the date transfer or the proposed transfer of property to trust on the date when grantor is declared incapacitated assuming grantor has not released any of these powers prior to being declared incapacitated ruling grantor intends to execute a springing durable_power_of_attorney that would be effective if grantor becomes incapacitated as defined in trust and would give the attorney-in-fact grantor’s veto powers in 387_us_456 the court held that where the issue involved is the determination of property interests for federal estate_tax purposes and the determination is based on state law the highest court of the state is the best authority on its own law the court held that if there is no decision by the state’s highest court federal authorities must apply what they find to be the state law after giving proper regard to relevant rulings of other courts in this case state case law and statutory law recognize the validity of a durable_power_of_attorney and state statutory law specifies the rights or limitations of the attorney-in- fact with respect to veto powers in case the court addressed whether gifts of the principal’s property made by an attorney-in-fact under a durable_power_of_attorney were includible in the principal’s gross_estate where the power_of_attorney did not authorize the giving of such gifts the court stated that the legal effect of gifts made pursuant to a power_of_attorney is plr-130491-14 determined according to state law case in case the court stated that the court must decide state law issues as it concludes the state supreme court would citing estate of bosch the court defined a power_of_attorney as a written authorization to an agent to perform specified acts in behalf of his principal citing case id when a power_of_attorney is executed a fiduciary relationship between the principal and the attorney-in-fact is created id there are many obligations which arise under such a relationship not the least of which is the agent’s duty to act exclusively in the interest of the principal and forego any personal advantage aside from compensation in the exercise of his or her work id while a power_of_attorney is merely a formalized agency agreement it must be in writing in order to be valid and effective id the court concluded that the power_of_attorney did not authorize the giving of the gifts and therefore under state law the gifts were void and thus includible in the principal’s gross_estate under state statute a fiduciary includes an attorney-in-fact under a power_of_attorney state statute provides that in a power_of_attorney a principal may grant authority to an attorney-in-fact to act on the principal’s behalf with respect to all lawful subjects and purposes or with respect to one or more express subjects or purposes the attorney-in-fact may be granted authority with regard to the principal’s property personal care or any other matter all acts done by an attorney-in-fact pursuant to a durable_power_of_attorney during any period of incapacity of the principal have the same effect and inure to the benefit of and bind the principal and the principal’s successors in interest as if the principal had capacity state statute an attorney-in-fact has a duty to act solely in the interest of the principal state statute if a power_of_attorney grants limited authority to an attorney-in-fact the attorney-in-fact has the authority granted in the power_of_attorney as limited with respect to permissible actions subjects or purposes state statute a power_of_attorney may not be construed to grant authority to an attorney-in-fact to perform the power_to_revoke a gift of the principal’s property in trust unless expressly authorized in the power_of_attorney state statute in this case state statute authorizes the principal to execute a springing durable_power_of_attorney under state statute if the instrument expressly provides that the attorney-in-fact may veto a gift the instrument is construed to grant such powers therefore in this case the execution of a springing durable_power_of_attorney that expressly gives the attorney-in-fact the authority to exercise grantor's veto powers is valid under state law pursuant to state statute the attorney-in-fact acts on behalf of the principal the fact that an attorney-in-fact is acting on the grantor’s behalf does not cause grantor to release or terminate such veto powers and therefore the execution of the springing durable_power_of_attorney is not a release or termination of grantor’s veto powers under sec_25_2511-2 plr-130491-14 further if grantor is declared incapacitated and the springing durable_power_of_attorney becomes effective grantor’s incapacity will not cause a release or termination of grantor’s veto powers see ruling finally if the attorney-in-fact exercises one of grantor’s veto powers such exercise does not result in a distribution from trust the attorney-in-fact is acting on behalf of the grantor and the exercise of the veto power not does result in a completed_gift however if the attorney-in-fact does not exercise such veto powers and the trustee distributes trust income and or principal to any beneficiary other than to grantor or on grantor’s behalf the distribution is a completed_gift by grantor and not the attorney-in-fact even though grantor is incapacitated at the time accordingly based on the facts presented and the representations made we conclude that the existence of the springing durable_power_of_attorney does not result in a completed_gift of the date transfer or the proposed transfer of property to trust ruling sec_2702 provides special valuation rules in the case of transfers of interests in trusts under sec_2702 solely for the purpose of determining whether a transfer of an interest in trust to or for the benefit of a member_of_the_transferor's_family is a gift and the value of such transfer the value of any interest in such trust retained by the transferor or any applicable_family_member as defined in sec_2701 shall be determined as provided in sec_2702 sec_2702 provides that the value of any retained_interest that is not a qualified_interest shall be treated as being zero the value of any retained_interest that is a qualified_interest is determined under sec_7520 sec_2702 provides that sec_2702 does not apply to a transfer if the transfer is an incomplete_gift sec_2702 defines an incomplete_gift as any transfer which would not be treated as a gift whether or not consideration was received for such transfer sec_25_2702-1 of the gift_tax regulations provides that sec_2702 does not apply to a transfer no portion of which would be treated as a completed_gift without regard to any consideration received by the transferor in this case the date transfer to trust by grantor is incomplete as to both the lifetime interests and the remainder interests therefore no portion of the transfer is a completed_gift under sec_2702 sec_2702 does not apply to a transfer that is an incomplete_gift accordingly based on the facts submitted and the representations made we conclude that sec_2702 does not apply to the date transfer to trust by grantor and if grantor retains both the grantor’s consent veto power and the plr-130491-14 grantor’s testamentary power at the time of the proposed transfer of property to trust we conclude that sec_2702 will not apply to this transfer in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely _________________________ lorraine e gardner senior counsel branch office of the associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter


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 tege eoeg teb presp-143399-06 date date dear ----------------- this letter is in response to your application_for an allocation of authority to issue dollar_figure------- ----------------in clean renewable energy bonds crebs under sec_54 of the internal_revenue_code the code sec_54 of the code imposes a limitation of dollar_figure on the amount of crebs which may be issued to finance qualified projects the limitation sec_54 provides that the limitation is to be allocated by the secretary of treasury in such manner as the secretary deems appropriate except that no more than dollar_figure of the limitation may be allocated to finance qualified projects of qualified borrowers which are governmental bodies section of notice_2005_98 2005_52_irb_1211 provides that the limitation will be allocated among qualified projects for which a share of such limitation has been requested beginning with the project s requesting the smallest share in dollar amount and continuing with the project s requesting the next-smallest share until the total limitation has been exhausted however in the event that dollar_figure has been allocated to qualified projects of qualified borrowers that are governmental bodies the remaining shares of the limitation will be allocated under the methodology described in the previous sentence only to qualified projects of qualified borrowers that are not governmental bodies for purposes of allocating the limitation among projects all qualified projects located at the same site and owned by the same qualified_borrower are treated as a single project and each project is treated as requesting a single allocation an allocation of shares of the limitation cannot be made with respect to the project owned by the borrower listed in appendix a because such borrower is a governmental presp-143399-06 body and dollar_figure has already been allocated to applications requesting a smaller share of the limitation to finance qualified projects owned by qualified borrowers that are governmental bodies we appreciate your submission of the application_for our consideration and encourage you to continue to pursue your plans for constructing a clean renewable energy project sincerely assistant chief_counsel exempt_organizations employment_tax government entities tax exempt government entities by timothy l jones senior counsel tax-exempt_bonds branch presp-143399-06 appendix a borrower name project type project location -------------------- trash combustion facility -------------------------------- ----------- amount requested dollar_figure--------------


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 b01 plr-113416-16 date date legend a ------------------------------------------------------ --------------------------------------- b ------------------------------------------------------ ------------------------ x --------------------------------- ------------------------- y ---------------------------------------------------- ----------------------------------------------------- z ----------------------------------------------------- ------------------------- old p ---------------------------------------------------- ------------------- new p ---------------------------------------------------- --------------------- date date date date -------------------- ---------------------- ------------------- ------------------- plr-113416-16 date date date state ---------------------- ------------------- --------------------------- --------- dear ----------- this responds to a letter dated date submitted on behalf of z successor to x and y by z's authorized representative requesting relief under sec_1362 of the internal_revenue_code the code facts according to the information submitted and representations made x was incorporated on date under the laws of state a community_property_state effective date x made an election to be treated as an s_corporation on date x converted to y a limited_partnership under the laws of state and made an election to be treated as an association_taxable_as_a_corporation for u s federal_income_tax purposes effective as of date on date y converted to z a state corporation under the laws of state x y and z are hereinafter collectively referred to as the taxpayer immediately prior to date a was the sole shareholder of x on date a transferred a portion of a’s interest in y to old p in exchange for all the interests of old p the taxpayer represents that a and a’s spouse treated old p as a partnership for u s federal_income_tax purposes in connection with this transaction a and old p entered into a partnership_agreement that provided that liquidating distributions would be made to all partners pro_rata in accordance with their respective capital_account balances as adjusted up to the amounts of those capital accounts and thereafter to all partners pro_rata according to their respective percentage interests in the partnership the liquidation provision on date a’s spouse and b each acquired limited_partnership interests in y on date b transferred all of b’s interests in y equally to a and a’s spouse on date a caused new p to replace old p as an owner of y the taxpayer represents that new p is an entity that is disregarded for u s federal_income_tax purposes and that all of the interests in new p are owned by a and a’s spouse y’s s election terminated on date when old p an impermissible shareholder acquired interests in y the conversion on date or the issuance of limited_partnership interests on date also may have created a second class of stock in violation of the one class of stock requirement under sec_1361 thereby possibly plr-113416-16 causing y's s_corporation_election to terminate other than this termination and these potential terminations of the s_corporation_election the taxpayer represents that it has qualified as an s_corporation the taxpayer represents that the conversions on date and date qualified as f reorganizations within the meaning of sec_368 the taxpayer represents that it believed that the s_corporation_election succeeded to y and z because the conversions were f reorganizations the taxpayer represents that the possible termination of its s_corporation_election was inadvertent and was not motivated by tax_avoidance or retroactive tax planning the taxpayer represents that neither it nor any of its shareholders intended to terminate the taxpayer's subchapter_s_election in addition the taxpayer represents that the taxpayer’s s_corporation_election has not been terminated by revocation and that z has not at any time had sufficient passive_investment_income to cause a termination of the s_corporation_election under sec_1362 further the taxpayer represents that the taxpayer and its shareholders agree to make any adjustments required as a condition of obtaining relief under the inadvertent_termination_rule as provided under sec_1362 of the code that may be required by the secretary the taxpayer and its shareholders represent that they have filed all returns consistent with the taxpayer being an s_corporation law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for the year sec_1361 defines a small_business_corporation as a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 c who is not an individual c have a nonresident_alien as a shareholder and d have more than class of stock sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the 1st day of the taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation revproc_99_51 1999_52_irb_760 provides that a general_partnership interest includes rights and obligations not included in a limited_partnership_interest if these obligations and rights result in general and limited_partnership interests in a limited_partnership having non-pro rata distribution rights such interests are different classes of stock for purposes of sec_1361 revproc_2002_69 2002_2_cb_831 provides that if a qualified_entity and a husband and wife as community_property owners of the entity treat the entity as either a plr-113416-16 disregarded_entity or a partnership for federal tax purposes the service will accept the selected treatment for federal tax purposes a business_entity is a qualified_entity if the business_entity is wholly-owned by a husband and wife as community_property under the laws of a state no person other than one or both spouses would be considered an owner for federal tax purposes and the business_entity is not treated as a corporation under sec_301_7701-2 of the procedure and administration regulations sec_1362 provides in part that if an election under sec_1362 by any corporation was terminated under sec_1362 the secretary determines that the circumstances resulting in the termination were inadvertent no later than a reasonable period of time after the discovery of the circumstances resulting in the termination steps were taken so that the corporation for which the termination occurred is a small_business_corporation and the corporation for which the termination occurred and each person who was a shareholder in such corporation at any time during the period of inadvertent termination of the s election agrees to makes such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the termination the corporation is treated as an s_corporation during the period specified by the secretary conclusion based solely on the facts submitted and the representations made we conclude that y’s s election terminated on date when old p an impermissible shareholder acquired interests in y we further conclude that if y’s s election had not terminated on date because an impermissible shareholder acquired shares the conversion on date or the issuance of limited_partnership interests on date may have caused the taxpayer to have more than one class of stock as a result of y being a limited_partnership or having the liquidation provision we conclude however that the termination and potential terminations described above were inadvertent within the meaning the meaning of sec_1362 therefore the taxpayer will be treated as an s_corporation effective date provided the taxpayer's s_corporation_election is not terminated under sec_1362 other than those terminations described in this letter except as specifically ruled upon above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code specifically we express or imply no opinion regarding the taxpayer's eligibility to be an s_corporation in addition we express or imply no opinion on whether the conversions on date and date qualified as f reorganizations within the meaning of sec_368 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-113416-16 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer's authorized representative sincerely joy c spies joy c spies senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes