internal_revenue_service department of the treasury number release date index nos washington dc refer reply to cc psi plr-111234-00 date date legend dear trust grantor a b c d e date date state we received your letter dated date requesting rulings under sec_61 sec_643 sec_1001 sec_1015 sec_1223 sec_2501 and sec_2601 of the internal_revenue_code this letter responds to your request grantor executed a_trust agreement creating an irrevocable inter_vivos_trust trust on date for the benefit of grantor’s daughter a and a’s issue a died on date survived by b c d and e who are children of a paragraph a of article of the trust agreement provides in part that the trustee shall manage invest and reinvest the trust estate shall collect the income therefrom plr-111234-00 after deducting from such income the expenses of administration chargeable thereto shall from time to time during the trust term as hereinafter defined pay or in his discretion apply out of such net_income such amounts to or for the benefit of such one or more members living at the time of such payment or application of the class consisting of a and the issue of a and in such proportions amongst them with power to exclude any one or more as the trustee shall in his discretion determine to be advisable accumulating and adding to principal any net_income not so paid or applied in addition the trustee shall from time to time make such distributions or in his discretion apply such amounts out of the principal of the trust estate to or for the benefit of such one or more members of said class living at the time of such distribution or application in such proportions amongst them and with like power of exclusion as the trustee in his discretion determine to be advisable paragraph a of article of the trust agreement also provides in part that at the end of the trust term the trust hereunder shall terminate and the trustee shall distribute the then remaining principal of the trust estate with all accrued and all undistributed_income pertaining thereto to the then living issue of a in equal shares per stirpes or if there shall be none to grantor’s then living issue in equal shares per stirpes or if there shall be none to those persons to whom and in those proportions in which the same would have been distributed under the laws of state then in effect had grantor died intestate immediately after the end of the trust term domiciled in state and owning said principal and income paragraph a of article of the trust agreement further provides in part that as used in this agreement the expression trust term shall mean the period beginning at the date of this agreement and ending upon the earlier of a the death of the last to die of a and the issue of a or b the twenty-first anniversary of the death of the last to die of a and the children of a living at the date of this agreement namely b c d and e paragraph b of article of the trust agreement provides in part that notwithstanding the provisions of paragraph a of article if a shall die before the end of the trust term and at any time or from time to time after her death the trustee shall in his discretion determine it to be economically expedient or otherwise advisable he is authorized to divide all or any part of the principal of the trust estate into equal shares per stirpes in respect of the issue of a at the time of such division and to hold each resulting share of said principal or part thereof as the principal of a separate trust for the benefit of the issue in respect of whom the same shall have been determined hereinafter referred to in this paragraph b as the beneficiary and the issue of the beneficiary and to add to such last-mentioned principal any such share determined in respect of the beneficiary which shall result from any subsequent division pursuant to this paragraph b paragraph b of article of the trust agreement also provides in part that each such trust shall terminate at the end of the trust term or upon the earlier death of the plr-111234-00 beneficiary and during such period the trustee shall manage invest and reinvest said share shall collect the income therefrom and after deducting from such income such expenses of administration as shall be properly chargeable thereto shall from time to time pay or in his discretion apply out of such net_income such amounts to or for the benefit of such one or more of the beneficiary and the issue of the beneficiary living at the time of such payment or application and in such proportions amongst them with power to exclude any one or more as the trustee shall in his discretion determine to be advisable accumulating and adding to principal any net_income not so paid or applied the trustee shall from time to time make such distributions or in his discretion apply such amounts out of the principal of said share to or for the benefit of such one or more of the beneficiary and the issue of the beneficiary living at the time of such distribution or application in such proportions amongst them and with like power of exclusion as the trustee shall in his discretion determine to be advisable paragraph b of article of the trust agreement further provides in part that at the end of such period such trust shall terminate and the then remaining principal thereof with all accrued and all undistributed_income pertaining thereto shall be distributed to the beneficiary if the beneficiary shall not be living at the end of such period he or she shall have a limited testamentary_power_of_appointment over said principal and income such power to be exercisable by express reference thereto in his or her duly probated will in favor of any person or persons other than the beneficiary the beneficiary’s creditors the beneficiary’s estate or creditor of the beneficiary’s estate to the extent if any that said principal and income shall not thus be effectively appointed the same shall be distributed to the beneficiary’s then living issue in equal shares per stirpes or if there shall be none in equal shares per stirpes to the then living issue of the beneficiary’s nearest ancestor of whom there shall be issue then living and who shall be a descendant of grantor or if there shall be none to grantor’s then living issue in equal shares per stirpes or if there shall be none to those persons to whom and in those proportions in which the same would have been distributable under the laws of state then in effect had grantor died intestate immediately after the end of such period domiciled in state and owning said unappointed principal and income the trustees of trust now propose to partition trust pro_rata into four separate trusts one for the primary benefit of each of a’s four children namely b c d and e you represent that no additions actual or constructive have been made to trust after date you have requested the following rulings the proposed pro_rata partition of trust will not cause trust to lose its generation-skipping_transfer gst tax exempt status and will not cause the partitioned trusts to be subject_to the gst tax plr-111234-00 neither the proposed partition of trust into four separate trusts nor the proposed pro_rata allocation of trust assets among the partitioned trusts will constitute a transfer by any of b c d and e that will be subject_to the gift_tax under sec_2501 after the proposed partition of trust into four separate trusts each of the partitioned trusts will be treated as a separate taxpayer under sec_643 the proposed partition of trust into four separate trusts and the proposed pro_rata allocation of each existing asset among the partitioned trusts will not result in the realization by trust of any income under sec_61 and will not result in the realization of any gain_or_loss under sec_1001 after the proposed partition of trust into four separate trusts the assets of the partitioned trusts received from trust will have the same basis and the same holding periods as those assets formerly had when held by trust under sec_1015 and sec_1223 respectively ruling_request sec_2601 imposes a tax on every generation-skipping_transfer sec_2611 provides that for purposes of the gst tax the term generation- skipping transfer means a taxable_distribution a taxable_termination and a direct_skip sec_2612 provides that for purposes of the gst tax the term taxable_termination means the termination by death lapse of time release of power or otherwise of an interest in property held in a_trust unless - a immediately after such termination a non-skip_person has an interest in such property or b at no time after such termination may a distribution including distributions on termination be made from such trust to a skip_person sec_2612 provides that for purposes of the gst tax the term taxable_distribution means any distribution from a_trust to a skip_person other than a taxable_termination or a direct_skip sec_2612 provides that for purposes of the gst tax the term direct_skip means a transfer subject_to a tax imposed by chapter or of an interest in property to a skip_person plr-111234-00 sec_2613 provides that for purposes of the gst tax the term skip_person means -- a natural_person assigned to a generation which i sec_2 or more generations below the generation assignment of the transferor or a_trust a if all interests in such trust are held by skip persons or b if -- i there is no person holding an interest in such trust and ii at no time after such transfer may a distribution including distribution on termination be made from such trust to a non-skip_person sec_2613 provides that for purposes of the gst tax the term non-skip_person means any person who is not a skip_person sec_26_2601-1 of the gst tax regulations provides in part that the gst tax does not apply to any generation-skipping_transfer under a_trust as defined in sec_2652 that was irrevocable on date the rule_of the preceding sentence does not apply to a pro_rata portion of any generation-skipping_transfer under an irrevocable_trust if additions are made to the trust after date sec_26_2601-1 provides that except as provided in sec_26_2601-1 or c any trust as defined in sec_2652 in existence on date is considered an irrevocable_trust sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy paragraph b i a b or c of this section by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust plr-111234-00 for purposes of this section a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer to determine whether a modification of an irrevocable_trust will shift a beneficial_interest in a_trust to a beneficiary who occupies a lower generation the effect of the instrument on the date of the modification is measured against the effect of the instrument in existence immediately before the modification if the effect of the modification cannot be immediately determined it is deemed to shift a beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification a modification that is administrative in nature that only indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered to shift a beneficial_interest in the trust based on the information submitted and representations made we conclude that the proposed pro_rata partition of trust will not cause trust to lose its generation- skipping transfer gst tax exempt status and will not cause the partitioned trusts to be subject_to the gst tax ruling_request sec_2501 imposes a tax for each calendar_year on the transfer of property by gift during such calendar_year by any individual resident or nonresident the proposed partition of trust and the proposed allocation of trust assets are consistent with the trust agreement and accord the beneficiaries no more than their legal entitlement accordingly we conclude that neither the proposed partition of trust into four separate trusts nor the proposed pro_rata allocation of trust assets among the partitioned trusts will constitute a transfer by any of b c d and e that will be subject_to the gift_tax under sec_2501 ruling_request sec_643 provides that under regulations prescribed by the secretary two or more trusts shall be treated as one trust if such trusts have substantially the same grantor or grantors and substantially the same primary beneficiary or beneficiaries and a principal purpose of such trusts is the avoidance of the tax_imposed_by_chapter_1 of the code section b of the tax_reform_act_of_1986 provides that in the case of a_trust which was irrevocable on date sec_643 shall apply only to that portion of the trust which is attributable to a contribution to corpus after date plr-111234-00 accordingly as long as the four new trusts are separately managed and administered they will be considered separate trusts for federal_income_tax purposes ruling_request sec_61 provides that gross_income includes gains derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized over the adjusted_basis provided in sec_1011 and the loss shall be the excess of the adjusted_basis over the amount_realized sec_1001 provides that except as otherwise provided in subtitle a of the code the entire amount of the gain_or_loss on the sale_or_exchange of property shall be recognized sec_1_1001-1 of the income_tax regulations provides the general_rule that except as otherwise provided in subtitle a of the code the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or as loss sustained see generally 499_us_554 the conversion for the purpose of eliminating a survivorship feature of a joint_tenancy into a tenancy_in_common is a nontaxable_transaction likewise the severance of a joint_tenancy under a partition action pursuant to state law is a nontaxable_transaction in each situation there is no sale_or_exchange see revrul_56_437 1956_2_cb_507 cf revrul_69_486 1969_2_cb_159 non-pro rata in-kind distribution from trust pursuant to agreement of beneficiaries is an exchange between the beneficiaries because trustee was not authorized by the trust instrument or local law to make non-pro rata distribution distinguished by revrul_83_61 1983_1_cb_78 as a general matter a transaction will be a taxable_event under sec_1001 if the transaction is a sale exchange or other_disposition of property and when there is an exchange the exchange results in the receipt of property that is materially different in the ruling_request paragraph b of article of the trust agreement provides the authority for the trustees after the death of grantor’s daughter a to partition all or any part of the principal of trust into equal shares per stirpes in respect of grantor’s daughter’s living issue and to hold each such separate trust for the benefit of the particular issue and his or her issue the proposed partition of trust is in compliance with the terms and conditions of the trust agreement accordingly the proposed partition will not be a sale exchange or other_disposition of property therefore we conclude that the division of trust into four plr-111234-00 separate trusts and distribution of trust’s assets among the four partitioned trusts on a pro_rata basis will not cause trust to recognize any gain_or_loss from a sale_or_other_disposition of property under sec_61 or sec_1001 ruling_request sec_1015 provides that if the property was acquired after date by a transfer in trust other than by a transfer in trust by a gift bequest or devise the basis shall be the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on such transfer under the law applicable to the year in which the transfer was made sec_1_1015-1 of the income_tax regulations provides in part that property acquired by gift has a single or uniform basis although more than one person may acquire an interest in such property the uniform basis of the property remains fixed subject_to proper adjustment for items under sec_1016 and sec_1017 sec_1_1015-2 provides that in the case of property acquired after date by transfer in trust other than by a transfer in trust by a gift bequest or devise the basis_of_property so acquired is the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor upon such transfer under the law applicable to the year in which the transfer was made if the taxpayer acquired the property by a transfer in trust this basis applies whether the property be in the hands of the trustee or the beneficiary and whether acquired prior to the termination of the trust and distribution of the property or thereafter sec_1_1015-2 provides that the principles stated in sec_1_1015-1 concerning the uniform basis are applicable in determining the basis_of_property where more than one person acquires an interest in property by transfer in trust after date sec_1223 provides that in determining the period for which the taxpayer has held property however acquired there shall be included the period for which such property was held by any other person if under chapter of the code such property has for the purpose of determining gain_or_loss from a sale_or_exchange the same basis in whole or in part in his hands as it would have in the hands of such other person see also sec_1_1223-1 of the income_tax regulations based on the information submitted and representations made we conclude that after the proposed partition of trust into four separate trusts the assets of the partitioned trusts received from trust will have the same basis as those assets formerly had when held by trust under sec_1015 furthermore because under sec_1015 each plr-111234-00 partitioned trust’s basis in an asset transferred to it by trust will equal trust’s basis in the asset at the time of transfer under sec_1223 each partitioned trust’s holding_period for an asset transferred to it by trust will include trust’s holding_period for the asset at the time of transfer except as specifically ruled herein we express or imply no opinion concerning the federal tax consequences of this transaction under the cited provisions or any other provisions of the code this ruling is directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely james c gibbons assistant to the chief branch office of the associate chief_counsel passthroughs and special industries enclosure copy of sec_6110 purposes


internal_revenue_service number release date index number -------------------------------- --------------------------------------- ----------------------------- ------------------------------------------- ------------------- --------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------- id no ---------------- telephone number ------------------ refer reply to cc corp plr-137386-13 date date legend distributing ---------------------------------------------------------------------- ---------------------------------------------------------- ------------------------------------------ controlled ---------------------------------------------------------------------------------- ---------------------------------------------------------- ----------------- sub ---------------------------------------------------------------------- ---------------------------------------------------------- ------------------------------------ sub sub ---------------------------------------------- ---------------------------------- ---------------------- ----------------------------------------------------------------- --------------------------------------------------------------------------------- ------------------------------------------------------------------ ---------------------------------------------------------- dre ----------------------------------------------------------------------------------------- ---------------------------------------------------------- --------------------------- dre ---------------------------------------------------- ----------------------------------------------------------------------------------------- plr-137386-13 ---------------------------------------------------------- dre ----------------------------------------------------------------------------------------- ---------------------------------------------------------- ------------------------------------------------- dre ----------------------------------------------------------------------------------------- ---------------------------------------------------------- ---------------------------- dre --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------- --------------------------------------- dre -------------------------------------------------------------------------------------- ---------------------------------------------------------- ---------------------------------------- dre ----------------------------------------------------------------------------------------- ---------------------------------------------------------- ---------------------------- dre ----------------------------------------------------------------------------------------- ---------------------------------------------------------- ----------------------------------------- dre distributing business controlled business controlled business expansions ------------------ ---------------------------------------------------------------- ------------------------ ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- -------------------------- ------------------------------------------------------------------------------ ----------------------------------------------------------------------------------- ------------------------- ---------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- plr-137386-13 distributing activities controlled activities controlled services a activities b activities c activities equipment facilities transition services --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ------------------------------------------------------------- -------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ------------------------------ ----------------------------------------------------------------------- ----------------------------------------------------------------------------------- -------------------- -------------------- --------------------------------------- ---------------------------------------------- ---------------------------------------------- --------------------------------------------- ----------------------------------------------------------------------------------- ---------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ---------------------------- transition_period ------------------------------------------------------------------ -------------- amended services agreement - ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------ -------------------------------------------------------------------------------- -------------------- plr-137386-13 sublease arrangement dc plan director dc plan state a a b dear ----------------- ------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------------------------------------- -------------------------------- ----------------------------------------------------------------------------------- ----------------------------------- ------------- -- -- this letter responds to your request dated date for rulings on certain federal_income_tax consequences of the proposed transactions the information in that request and in later correspondence is summarized below 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 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 summary of facts distributing is the common parent of a consolidated_group distributing has a single class of publicly-traded common_stock distributing common_stock and a series of preferred_stock certain shares of distributing common_stock currently are held in rabbi trusts under the dc plan and the director dc plan the right to receive common_stock of controlled in the distribution defined below will be waived with plr-137386-13 respect to the shares of distributing common_stock that are held by rabbi trusts under the dc plan and the director dc plan therefore those trusts will not hold any common shares of controlled immediately after the distribution distributing wholly owns sub and sub sub wholly owns dre dre and sub dre wholly owns dre dre wholly owns dre dre and dre dre wholly owns dre dre wholly owns dre each of dre dre dre dre dre dre dre and dre is and dre will be upon its formation an entity disregarded as separate from its owner under sec_301_7701-3 all of the entities described above are domestic entities distributing through its separate_affiliated_group as defined in sec_355 the distributing sag is engaged in various business activities including the distributing business and the controlled business following the distribution the distributing sag will continue to conduct the distributing business and controlled through its separate_affiliated_group as defined in sec_355 the controlled sag will conduct the controlled business financial information has been submitted which indicates that each of the distributing business and the controlled business has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years management of distributing believes that the distribution will help achieve the following corporate business purposes i to enhance the flexibility of the management teams of each of distributing and controlled to make business and operational decisions that are in the best interests of the distributing activities and the controlled activities respectively ii to optimize the allocation of capital and corporate resources between the distributing activities and the controlled activities in a manner that focuses on achieving the strategic priorities of distributing and controlled iii to enhance the ability of each of distributing and controlled to attract employees with appropriate skill sets to incentivize its key employees with equity based compensation that is aligned with the performance of its own operations and to retain key employees for the long term iv to enhance controlled’s reputation as an independent provider of the services included within the controlled activities v to enhance the ability of controlled to obtain customers other than distributing and its subsidiaries for the services provided in connection with the controlled activities by eliminating customer competitor conflicts and vi to enhance the ability of the constituent companies to more efficiently attract capital collectively the corporate business purposes in connection with the proposed transactions defined below the distributing group and the controlled_group will enter into agreements to provide for i transition services for a period not expected to extend beyond the transition_period ii the allocation and sharing of tax_liabilities and obligations and iii certain other contractual relationships relating to employee matters and other terms of the separation of distributing and controlled collectively the transition agreements the transition plr-137386-13 services will be compensated on an arm’s-length basis if the transition_period is extended in addition to the transition agreements to accomplish an orderly long-term separation of the controlled activities and the distributing activities it is expected that dre and its subsidiaries will be required pursuant to the amended services agreement to utilize specified minimum levels of controlled services from controlled and its subsidiaries for a period of up to b not more than years after the distribution controlled and its subsidiaries may continue to provide controlled services to distributing and its subsidiaries after the expiration of the amended services agreement on an arm’s length basis and without any utilization guarantee pursuant to the sublease arrangement dre may continue to sublease certain equipment from dre until such time as the equipment can be purchased from or leases can be entered into directly with the owners of the equipment it is anticipated that dre will purchase all or substantially_all of the equipment that is subject_to the sublease arrangement before the distribution and that the term of any continuing sublease of equipment from dre will not continue after the transition_period distributing and its subsidiaries and controlled and its subsidiaries may become obligated to make indemnity payments to one another under the transition agreements the amended services agreement or the sublease arrangement any such payments would be for liabilities that i relate to a taxable_period ending on or before the date of the distribution or a taxable_period beginning on or before and ending after the distribution and ii will not become fixed and ascertainable until after the distribution such indemnity payments the indemnity payments the proposed transactions for what are represented to be valid business purposes distributing proposes the following series of transactions together constituting the proposed transactions in a transaction intended to qualify as a reorganization described in sec_368 sub will convert into a limited_liability_company ie dre pursuant to state a law the sub conversion sub will transfer the facilities to dre either by direct sale or through a distribution to sub or to dre as the case may be if such distribution occurs after the sub conversion and a series of contributions to dre this step may occur at any time prior to the dre conversion as described in step below at any time prior to the dre conversion i all the membership interests in dre will be distributed to sub or to dre as the case may be if such distribution occurs after the sub conversion ii dre will plr-137386-13 distribute its assets relating to a activities and b activities to dre the dre distribution iii all of the membership interests of dre will be distributed to sub or dre as the case may be if such transfer occurs after the sub conversion iv dre will transfer its assets relating to c activities to an unrelated third party the dre transfer and v any consideration received by dre from the dre transfer or if the dre transfer cannot be consummated prior to the dre conversion the assets relating to c activities will be distributed to sub or dre as the case may be if such distribution occurs after the sub conversion the transactions described in i through v may occur in any sequence provided that iii will follow ii and if iv is consummated prior to the dre conversion v will follow iv dre will issue senior notes to the public new senior notes and will distribute to dre a portion of the proceeds the distributed proceeds such portion not to exceed the balance of dre 1’s intercompany note to dre dre will use the distributed proceeds to repay all or a portion of the balance of its intercompany note to dre dre will convert into a corporation ie controlled pursuant to state a law the dre conversion controlled will have outstanding one class of common_stock controlled common_stock distributing believes that the dre conversion will be treated for tax purposes as a contribution by distributing of all of the assets of dre the contributed assets to controlled in exchange for all of the controlled common_stock and controlled’s assumption of the liabilities of dre and any liabilities to which the contributed assets are subject all such liabilities the assumed_liabilities and such exchange the contribution dre will distribute all of the controlled common_stock to dre dre will distribute all of the controlled common_stock to distributing following any necessary recapitalization of the controlled common_stock into a sufficient number of shares the recapitalization distributing will distribute at least by vote and value of the controlled common_stock to the holders of the distributing common_stock on a pro_rata basis the distribution solely to avoid the expense and inconvenience to controlled of issuing and maintaining fractional shares distributing will cause a transfer agent to aggregate and sell on the open market all fractional shares of controlled common_stock to which the holders of distributing common_stock would otherwise be entitled such holders will then receive a cash payment in an amount equal to their pro_rata share of the total net_proceeds of those sales plr-137386-13 stock_options in distributing whether vested or unvested and certain shares of distributing restricted_stock with respect to which no sec_83 election has been made that are held by distributing officers directors and employees who will be assigned to controlled in connection with the distribution will be replaced with adjusted stock_options and similar restricted_stock respectively in controlled and any such stock_options or restricted_stock awards held by the remaining distributing officers directors and employees will be adjusted and remain outstanding representations the following representations have been made regarding transactions the proposed any indebtedness owed by controlled or its subsidiaries to distributing or its subsidiaries after the distribution will not constitute stock_or_securities no part of the consideration to be distributed by distributing in the distribution will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing shares of controlled common_stock not distributed by distributing in the distribution the retained shares will not exceed of the outstanding controlled common_stock the business_purpose for distributing’s retention of the retained shares is to enhance distributing’s liquidity which will allow distributing to achieve its strategic objectives by providing capital flexibility after the distribution there will be no common officers or directors between distributing and controlled distributing will vote the retained shares in the same proportion and manner as the votes cast by the other holders of controlled common_stock after the distribution the retained shares will be disposed of as dispositions are warranted consistent with distributing’s business_purpose for not distributing such shares in the distribution but in any event not later than years after the date of the distribution each of distributing and controlled will treat all members of its respective separate_affiliated_group sag as defined in sec_355 as one corporation in determining whether the requirements of section plr-137386-13 b a regarding the active_conduct_of_a_trade_or_business are satisfied the five years of financial information submitted on behalf of the distributing business conducted by the distributing sag is representative of the present business operations of the distributing business conducted by the distributing sag and there have been no substantial operational changes since the date of the last financial statements submitted the five years of financial information submitted on behalf of the controlled business conducted by the distributing sag is representative of the present business operations of such business conducted by the distributing sag and there have been no substantial operational changes since the date of the last financial statements submitted the distributing sag neither acquired the distributing business nor control of any entity conducting the distributing business during the five year period ending on the date of the distribution the five-year period in a transaction in which gain_or_loss was recognized or treated as recognized in whole or in part except for the controlled business expansions the distributing sag neither acquired the controlled business nor control of any entity conducting the controlled business during the five-year period in a transaction in which gain_or_loss was recognized or treated as recognized in whole or in part following the distribution except as contemplated by the transition agreements the distributing sag and the controlled sag will each continue the active_conduct of its business independently and with its separate employees the distribution is being carried out for the corporate business purposes the distribution is motivated in whole or substantial part by one or more of these corporate business purposes the distribution is not being used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the distribution except for payables arising under the transition agreements amended services agreement or sublease arrangement or indebtedness otherwise arising in the ordinary course of business plr-137386-13 immediately before the distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations except for indemnity payments and payments made pursuant to the transition agreements amended services agreement or sublease arrangement any payments made in connection with all continuing transactions between distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled stock entitled to vote or percent or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 or ii attributable to distributions on distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 the distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a percent or greater interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of any such corporation immediately after the distribution either i no person will hold a percent or greater interest within the meaning of sec_355 in the stock of distributing or controlled who did not hold such an interest immediately before the distribution or ii neither distributing nor controlled will be a disqualified_investment_corporation within the meaning of sec_355 the payment of cash in lieu of fractional shares of controlled common_stock is solely for the purpose of avoiding the expense and inconvenience plr-137386-13 to controlled of issuing and maintaining fractional shares and does not represent separately bargained for consideration the total cash that will be paid in the distribution to any distributing shareholder instead of issuing fractional shares of controlled common_stock will not exceed one percent of the total consideration that will be distributed in the distribution any fractional share interests of each distributing shareholder will be aggregated and it is intended that no distributing shareholder will receive cash in an amount equal to or greater than the value of one full share of controlled common_stock i the fair_market_value of the contributed assets equals or exceeds the assumed_liabilities and ii the assumed_liabilities were incurred in the ordinary course of business and are associated with the assets being transferred no party to the distribution is an investment_company as defined in sec_368 and iv distributing and controlled and their respective shareholders each will pay their own expenses if any incurred in connection with the contribution and the distribution no investment_tax_credit determined under sec_46 has been or will be claimed with respect to any property transferred by distributing to controlled in the contribution distributing neither accumulated its receivables nor made extraordinary payables in anticipation of the proposed transactions ruling sec_24 based solely on the information submitted and representations made we rule as follows regarding the contribution and distribution the contribution pursuant to the distribution plan will constitute a reorganization within the meaning of sec_368 distributing and controlled will each be a party to the reorganization within the meaning of sec_368 except to the extent that the assumed_liabilities exceed the total adjusted_basis of the contributed assets distributing will not recognize any gain_or_loss on the contribution sec_361 sec_361 and sec_357 controlled will not recognize any gain_or_loss on the contribution sec_1032 plr-137386-13 controlled’s basis in the contributed assets will equal the basis of such assets in the hands of distributing immediately before the contribution increased by the amount of any gain recognized by distributing on the contribution sec_362 controlled’s holding_period in the contributed assets will include the period during which distributing held such assets sec_1223 distributing will not recognize any gain_or_loss on the distribution sec_361 the holders of distributing common_stock will not recognize any gain_or_loss and will not otherwise include any amount in income upon receipt of the controlled common_stock in the distribution sec_355 the aggregate basis of the controlled common_stock and distributing common_stock in the hands of each holder of distributing common_stock including any fractional share interest in controlled common_stock to which such holder may be entitled will be the same as the shareholder’s aggregate basis in the distributing common_stock with respect to which the controlled common_stock was received allocated between the distributing common_stock and controlled common_stock in proportion to the fair_market_value of each immediately following the distribution in accordance with sec_1_358-2 sec_358 sec_358 and sec_358 the holding_period of the controlled common_stock received by each holder of distributing common_stock in the distribution including any fractional share interest in controlled common_stock to which such holder may be entitled will include the holding_period of the distributing common_stock with respect to which the controlled common_stock was received provided the shares of distributing common_stock are held as a capital_asset by such holder on the date of the distribution sec_1223 a shareholder who receives cash in lieu of fractional shares of controlled common_stock will recognize gain_or_loss measured by the difference between the basis of the fractional share interest in controlled common_stock to which the shareholder would otherwise be entitled and the amount of cash received sec_1001 and revrul_66_365 1966_2_cb_116 provided that the fractional share interest is a capital_asset in the hands of the shareholder on the date of the distribution any gain_or_loss will be capital_gain or loss sec_1221 and sec_1222 earnings_and_profits will be allocated between distributing and controlled in accordance with sec_312 and sec_1_312-10 and sec_1_1502-33 plr-137386-13 except for purposes of sec_355 any indemnity payments will be characterized in the same manner as if such payments had occurred immediately before the distribution see 344_us_6 revrul_83_73 1983_1_cb_84 controlled will not be a successor to distributing for purposes of sec_1504 therefore after the distribution controlled and its direct and indirect subsidiaries that are includible corporations under sec_1504 and satisfy the ownership requirements of sec_1504 will be members of an affiliated_group_of_corporations eligible to file a consolidated federal_income_tax return with controlled as the common parent caveats no opinion is expressed about the federal_income_tax treatment of the proposed transaction under other provisions of the code and regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transactions that are not specifically covered by the above rulings in particular no opinion is expressed regarding whether the proposed transaction i ii iii satisfies the business_purpose requirement of sec_1_355-2 is being used principally as a device for the distribution of the earnings_and_profits of the distributing_corporation or the controlled_corporation or both see sec_355 and sec_1_355-2 or is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a percent or greater interest in the distributing_corporation or the controlled_corporation see sec_355 and sec_1_355-7 procedural matters this ruling letter is directed only to the taxpayer who requested sec_6110 provides that it may not be used or cited as precedent it a copy of this letter must be attached to any federal_income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of this letter sincerely plr-137386-13 lawrence m axelrod special counsel to the associate chief_counsel corporate cc


t c memo united_states tax_court steven l ertelt petitioner v commissioner of internal revenue respondent docket no 10739-14l filed date steven l ertelt pro_se erik w nelson and jeffery rice for respondent memorandum findings_of_fact and opinion thornton judge petitioner seeks review pursuant to sec_6320 and sec_6330 of the determination by the internal_revenue_service irs to uphold the filing of a notice_of_federal_tax_lien nftl relating to petitioner’s unpaid federal_income_tax liabilities for and the issues for decision are whether the court should grant petitioner’s motion to reopen the record whether respondent properly verified that notices of deficiency for and were mailed to petitioner whether petitioner may challenge his underlying tax_liabilities for and whether respondent abused his discretion by denying petitioner a face-to-face hearing and whether petitioner should be required to pay the united_states a penalty pursuant to sec_6673 findings_of_fact when petitioner filed his petition he resided in california petitioner failed to file his and federal_income_tax returns consequently the irs prepared substitutes for returns for petitioner’s and tax years pursuant to sec_6020 on date the irs issued to petitioner notices of deficiency for tax years and determining deficiencies on the basis of income reported by third-party sources as paid to petitioner on forms w-2 wage and tax statement forms w-2g certain gambling winnings and forms 1099-misc 1all section references are to the internal_revenue_code in effect at all relevant times and all rule references are to the tax_court rules_of_practice and procedure miscellaneous income the notices of deficiency were addressed to petitioner at a california address that california address was petitioner’s last_known_address as shown in irs records the address at which he in fact received subsequent correspondence from the irs and the address that he listed on his petition petitioner failed to petition this court within days in response to the notices of deficiency the irs therefore assessed the liabilities set forth in those notices on date the irs mailed petitioner a notice_of_federal_tax_lien filing and your right to a hearing under sec_6320 with respect to his outstanding income_tax liabilities for and petitioner timely submitted a form request for a collection_due_process or equivalent_hearing in an attachment to the form petitioner stated i respectfully request for a face-to-face collection_due_process_hearing in an appeals_office that is closest to my place of residence i will be audio recording the said proceedings there are a few issues i would like to address including but not limited to the following i wish to verify whether or not the irs complied with all proper procedures as required_by_law i don’t believe i am liable for the assessed tax i should not be held responsible for the penalties accrued i wish to challenge this alleged liability being that i never had an opportunity to challenge it previously in the case that this alleged liability is indeed a proper assessment and that it can be proven to be authentic and owed i would like to discuss what alternatives to collection are available to me including but not limited to installment agreements offer_in_compromise and any other payment arrangements that may be available to me it is not my intention to discuss any issues that the irs or the courts have considered to be frivolous arguments if you have considered any of the issues i have brought up in the past to be frivolous i hereby abandon them on date settlement officer macaulay so macaulay from the irs office of appeals appeals sent petitioner a letter scheduling a telephone collection_due_process cdp hearing for date the letter explained that petitioner must provide additional financial or return_information to qualify for a face-to-face hearing the letter requested that petitioner provide a form 433-a collection information statement for wage earners and self-employed individuals and p roof that estimated_tax payments are paid in full for the year to date petitioner did not submit the information requested in the date letter on date so macaulay called petitioner to conduct the telephone cdp hearing but had to leave a message thereafter so macaulay sent petitioner a letter dated date stating that she had tried calling petitioner at the scheduled time but he had not been available indicating that she would make a determination by reviewing the administrative file and requesting that petitioner provide within days any additional information for consideration after so macaulay sent petitioner the letter dated date she received a letter from petitioner dated date in the letter petitioner stated i will not be able to participate in this telephone conference you scheduled for i am under the impression that i am entitled to a face- to-face collection_due_process_hearing he stated that he did not receive any statutory notices of deficiency for the tax years at issue and reiterated the statement included in the attachment to the form so macaulay sent petitioner a letter dated date stating that the face-to-face hearing was denied because the account is not current with her letter so macaulay provided petitioner with transcripts of income reported to the irs by third parties for taxable years through the letter indicated that in order for petitioner to dispute the assessments made based on the reported income he had to submit completed federal_income_tax returns for through and the required estimated payments for taxable_year so the account can be current so macaulay requested that the information be received no later than date petitioner did not submit the requested information in a letter dated date petitioner stated that he had already provided the information necessary for appeals to consider the issues raised in his cdp hearing request and reiterated that he had not received statutory notices of deficiency for the tax years at issue on date the irs issued petitioner a notice_of_determination concerning collection action s under sec_6320 and or sustaining the lien at issue on date petitioner filed a letter with this court stating in part as follows dear tax_court judge i recently requested for a collection_due_process_hearing and i strongly believe that my request was ignored i received a notice_of_determination from the internal_revenue_service for the years and the letter states that i should file a petition with the united_states tax_court if i believe that the internal_revenue_service has made a wrong determination i do believe that they have made the wrong determination and i’m not sure which route to take after this the irs claims that i owe them some amount of funds and i still have been unsuccessful in obtaining any kind of proof as to how they support their claims 2the court notes that the letter petitioner filed is nearly identical to letters continued by an order served date the court directed petitioner to file by date a proper amended petition in his amended petition petitioner claimed among other things that he had never received notices of deficiency for the years in issue and therefore had not had a previous opportunity to challenge his underlying liabilities petitioner further alleged that r espondent did not meet all of the applicable_requirements during the collection_due_process_hearing including a face-to-face hearing on date the parties filed a joint motion to submit this case for decision without trial under rule the court granted that motion and entered a decision in favor of respondent on date on date petitioner filed a motion to vacate on the grounds that he had not received notices of deficiency for and an order dated continued filed in snodgrass v commissioner tcmemo_2016_235 garrett v commissioner tcmemo_2016_179 silva v commissioner tcmemo_2015_229 knudsen v commissioner tcmemo_2015_69 portwine v commissioner tcmemo_2015_29 aff’d ___ f app’x ___ wl 10th cir date and caudle v commissioner t c dkt no 24408-14l date aff’d 651_fedappx_147 4th cir the facts pleadings and arguments made by petitioner in this case and by the taxpayer in portwine bear a striking similarity in portwine the court sustained the irs’ nftl and warned the taxpayer that the court would strongly consider imposing a penalty under sec_6673 if he returned to the court and proceeded in a similar fashion in the future date granted petitioner’s motion to vacate and remanded the case to appeals for clarification of the record as to the basis for the determination that all requirements of applicable law were met and specifically whether a statutory_notice_of_deficiency for and was sent to petitioner’s last_known_address on date respondent filed a response to the order dated date and attached to the response a supplemental notice_of_determination concerning collection action s under sec_6320 and or dated date the supplemental notice_of_determination stated that the mailing of the notices of deficiency for and was verified with a certified mail list indicating that the notices were mailed to petitioner at his last_known_address the same california address listed on his petition after trial the parties filed simultaneous briefs with his brief petitioner filed a motion to reopen the record requesting that the court take judicial_notice of exhibits a-p and b-p i petitioner’s motion to reopen the record opinion before we address the substantive issues in this case we consider petitioner’s motion to reopen the record reopening the record to receive additional evidence is a matter within the discretion of the trial_court 114_tc_276 citing 401_us_321 abrogated on other grounds 132_tc_203 we will not grant a motion to reopen the record unless among other requirements the evidence relied on is not merely cumulative or impeaching the evidence is material to the issues involved and the evidence probably would change some aspect of the outcome of the case butler v commissioner t c pincite petitioner seeks to reopen the record to submit what appear to be undated screenshots of the u s postal service usps web site usps com purporting to show that the usps web site was unable to find certain tracking information entered into the web site at some unspecified date these documents have not been properly authenticated in particular the screenshots do not show when they were made and there has been no showing that the purported tracking information would not have expired as of the date the screenshots were made at trial a similar objection was raised and sustained with respect to similar documents petitioner offered into evidence in any event because the positions of the parties and the relevant facts are fully disclosed in the record and the documents petitioner seeks to submit do not change the outcome of this case reopening the record would be pointless accordingly petitioner’s motion to reopen the record will be denied ii standard of review sec_6320 and sec_6330 provide procedures for administrative and judicial review of the commissioner’s lien and levy actions sec_6321 imposes a lien in favor of the united_states on all property and rights to property of a person who is liable for and fails to pay taxes after demand for payment has been made for the lien to be valid against certain third parties the secretary must file a notice_of_federal_tax_lien and within five business days thereafter provide written notice to the taxpayer sec_6320 sec_6323 the taxpayer may then request an administrative hearing before an appeals officer sec_6320 once the appeals officer issues a determination the taxpayer may seek review in the tax_court sec_6320 sec_6330 sec_6330 prescribes the matters that a person may raise at an appeals hearing including spousal defenses challenges to the appropriateness of the collection action and collection alternatives in addition to considering issues raised by the taxpayer under sec_6330 the appeals officer must verify that the requirements of any applicable law or administrative procedure have been met sec_6330 the existence or amount of the underlying tax_liability may be contested at an appeals hearing only if the taxpayer did not receive a notice_of_deficiency or did not otherwise have an opportunity to dispute the tax_liability sec_6330 see 114_tc_604 114_tc_176 if the validity of the underlying tax_liability is properly at issue the court will review the taxpayer’s liability de novo see sego v commissioner t c pincite where there is no dispute concerning the underlying tax_liability the court reviews the irs decision for abuse_of_discretion goza v commissioner t c pincite abuse_of_discretion exists when a determination is arbitrary capricious or without sound basis in fact or law see 125_tc_301 aff’d 469_f3d_27 1st cir iii verification at trial and on brief petitioner argued that appeals failed to verify that respondent mailed to petitioner the notices of deficiency on which respondent’s tax assessments and lien are based petitioner alleges that the usps form_3877 certified mailing list contained in the record is defective because it does not expressly indicate the number of items respondent delivered to the usps and does not include the signature of the usps employee who received the items for mailing from respondent sec_6330 requires appeals as part of its review to verify that a valid notice_of_deficiency was issued to the taxpayer 134_tc_1 131_tc_197 where as in this case a taxpayer identifies an irregularity in the assessment procedure an appeals officer cannot rely solely on the tax transcripts in order to verify that a notice_of_deficiency was sent see hoyle v commissioner t c pincite n w here a taxpayer alleges no notice_of_deficiency was mailed he has ‘ identified an irregularity ’ alteration in original see also 118_tc_162 instead the appeals officer must examine underlying documents in addition to the tax transcripts such as the taxpayer’s return a copy of the notice_of_deficiency and the certified mailing list chief_counsel notice cc-2006-019 pincite date see marlow v commissioner tcmemo_2010_113 slip op pincite casey v commissioner tcmemo_2009_131 slip op pincite noting that the appeals officer examined 3the usps’ mailing procedures require postal employees to enter on the form_3877 the total number of items received and to sign and postmark the form usps registered mail handbook dm-901 pincite date http www apwu org sites apwu files resource-files dm-901 20registered mail 20mb pdf notices of deficiency that were in the administrative file and concluded that a notice_of_deficiency had been mailed to the taxpayer in deficiency cases the commissioner bears the initial burden of proving by competent and persuasive evidence that the notice_of_deficiency was properly mailed to the taxpayer 119_tc_183 94_tc_82 54_tc_1535 we have also required the commissioner in deficiency cases to show that the notice_of_deficiency was properly delivered to the usps for mailing see clough v commissioner t c pincite the act of mailing the notice_of_deficiency is generally proven by documentary_evidence of mailing or by evidence of the commissioner’s mailing practices corroborated by direct testimony coleman v commissioner t c pincite 89_tc_321 exact compliance with usps form_3877 mailing procedures raises a presumption of official regularity in favor of the commissioner hoyle v commissioner t c pincite coleman v commissioner t c pincite although this is not a deficiency case we have applied these same principles in a cdp setting see meyer v commissioner tcmemo_2013_268 where the existence of a notice_of_deficiency is not in dispute an appeals officer can rely on a properly completed postal service form to meet his verification obligation under sec_6330 hoyle v commissioner t c pincite petitioner correctly points out that respondent is not entitled to the presumption of official regularity in this case because the certified mailing list is incomplete respondent may still prevail however if the evidence of mailing is otherwise sufficient see coleman v commissioner t c pincite see also wheat v commissioner tcmemo_1992_268 although an incomplete certified mailing list that does not contain all of the information required by form_3877 is insufficient to create a presumption of proper mailing it nevertheless has some probative value see portwine v commissioner tcmemo_2015_29 at aff’d ___ f app’x ___ wl 10th cir date massie v commissioner tcmemo_1995_ aff’d without published opinion 82_f3d_423 9th cir in bobbs v commissioner tcmemo_2005_272 wl at the court found that the irs had established by a preponderance of evidence that a notice_of_deficiency was mailed to the taxpayer’s last_known_address where the form_3877 bore a usps date stamp and listed the taxpayer’s undisputed address but lacked any indication of how many items were received by and the signature of the usps employee furthermore if a notice_of_deficiency is mailed to the taxpayer at the taxpayer’s last_known_address actual receipt of the notice is immaterial the notice is valid see eg 724_f2d_808 9th cir like the list in bobbs the certified mailing list in this case lacks any indication of the number of items received by and the signature of the usps employee however the certified mailing list bears a date stamp and shows petitioner’s name his address and the certified mail article numbers of the corresponding notices of deficiency petitioner has not argued that the address recorded on the certified mailing list was not his last_known_address nor has he argued that respondent failed to follow his established mailing procedures at trial petitioner objected to the introduction of the form_3877 because it was not an original document at trial and on brief petitioner questioned the authenticity of the document pointing to a purported discrepancy in that the form lists the sender as the irs in holtsville new york whereas the usps date stamp indicates the notices of deficiency were postmarked in detroit michigan respondent explained at trial that the issuance of the notices of deficiency was automated and although they were issued from holtsville new york they were routed through the computing center and mailed in detroit michigan in the supplemental notice_of_determination so macaulay did not rely solely on the certified mailing list to verify that the notices of deficiency had been mailed to petitioner so macaulay also reviewed the copies of the notices of deficiency for the years at issue each notice_of_deficiency bears the same mailing date mailing address and certified mail article number as those on the corresponding certified mailing list we conclude that the dated copies of the notices of deficiency combined with the form_3877 certified mailing list bearing matching certified mail article numbers suffice to show that the notices of deficiency for the years at issues were mailed to petitioner at his last_known_address we further conclude and hold that the verification requirement of sec_6330 has been met iv challenge to the underlying liabilities the parties disagree as to whether petitioner received the notices of deficiency for and respondent asserts that petitioner received the notices of deficiency and consequently is not entitled to challenge his underlying liabilities in this collection proceeding nevertheless respondent contends petitioner’s actual receipt of the notices of deficiency is immaterial because he was given an opportunity to challenge his liabilities in the cdp hearing but refused to take advantage of that opportunity at the cdp hearing the taxpayer may raise any relevant issue relating to the unpaid tax or the proposed collection method sec_6330 generally a taxpayer must raise an issue at a cdp hearing to preserve it for this court’s consideration 129_tc_107 sec_301_6330-1 q a-f3 proced admin regs the merits are not properly raised if the taxpayer challenges the underlying tax_liability but fails to present appeals with any evidence regarding that liability after being given a reasonable opportunity to do so delgado v commissioner tcmemo_2011_240 slip op pincite sec_301_6320-1 q a-f3 f q a-f3 proced admin regs although petitioner disputed his underlying liabilities on form he failed to provide any evidence to the appeals officer to dispute respondent’s calculations of the underlying liabilities which were based on income reported by third-party sources on forms w-2 forms w-2g and forms 1099-misc as paid to petitioner petitioner declined to participate in the telephone hearing he failed to submit returns for the years at issue as the so instructed him or any other documentation to address his tax_liabilities for those years although petitioner sent some letters to the so none of them included even a summary of what he believed to be his true underlying liabilities accordingly we conclude that petitioner did not properly raise his underlying liabilities during the cdp hearing and therefore he cannot dispute them in this proceeding in any event in this proceeding petitioner has raised no meaningful dispute as to his underlying liabilities consequently we review respondent’s determination for abuse_of_discretion only v face-to-face cdp hearing request petitioner argues that so macaulay abused her discretion in refusing to conduct a face-to-face cdp hearing respondent argues that petitioner was not entitled to a face-to-face cdp hearing because among other reasons he failed to provide the requested information including federal_income_tax returns for through and a completed form 433-a this court has held that a face-to-face hearing is not required under sec_6330 see 115_tc_329 williamson v commissioner tcmemo_2009_188 slip op pincite stockton v commissioner tcmemo_2009_186 slip op pincite leineweber v commissioner tcmemo_2004_17 slip op pincite we have also held that an appeals officer’s denial of a face-to-face hearing does not constitute an abuse_of_discretion where a taxpayer fails to present relevant arguments refuses to provide requested financial information and has not filed all required tax returns see zastrow v commissioner tcmemo_2010_215 slip op pincite moline v commissioner tcmemo_2009_110 slip op pincite aff’d 363_fedappx_675 10th cir summers v commissioner tcmemo_2006_219 slip op pincite the regulations further provide that if a face-to-face hearing is not held a hearing conducted by telephone by correspondence or by review of documents will suffice for purposes of sec_6330 see sec_301_6330-1 q a-d7 proced admin regs the record convinces us that a face-to-face hearing would not have been productive petitioner was given an opportunity to participate in a telephone cdp hearing but did not take advantage of that opportunity aside from his argument that he had not received notices of deficiency for the years at issue petitioner did not present any relevant arguments during his correspondence cdp hearing additionally although requested to do so on several occasions petitioner failed to submit financial documentation ie form 433-a and file past-due returns for through thus so macaulay did not abuse her discretion in determining that petitioner was not entitled to a face-to-face hearing the record reflects that so macaulay verified that respondent satisfied all applicable legal and administrative requirements considered all relevant issues petitioner raised and balanced the intrusiveness of the proposed collection action against the need for effective tax collection see sec_6330 we therefore conclude that so macaulay did not abuse her discretion by sustaining the collection action vi sec_6673 penalty sec_6673 authorizes the court to impose a penalty of up to dollar_figure for frivolous and groundless arguments or whenever it appears to the court that proceedings before us have been instituted or maintained by the taxpayer primarily for delay sec_6673 petitioner has taken positions that could well be considered frivolous or groundless and the circumstances suggest that these proceedings were instituted and maintained primarily for purposes of delay although we do not impose a penalty today we warn petitioner that he may expect a penalty in the future if he persists despite our warning in maintaining groundless positions or instituting or maintaining proceedings primarily for delay to reflect the foregoing an appropriate order and decision will be entered


t c memo united_states tax_court david m priestly jr petitioner v commissioner of internal revenue respondent docket no 13537-99l filed date david m priestly jr pro_se irene scott carroll for respondent memorandum opinion carluzzo special_trial_judge on date respondent issued to petitioner a notice_of_determination concerning collection action s under section and or for unpaid section references are to the internal_revenue_code_of_1986 as amended and in effect at the time the petition was filed rule references are to the tax_court rules_of_practice and procedure federal_income_tax and related liabilities of dollar_figure in response to that notice petitioner timely petitioned this court for review of respondent’s determination to proceed with collection our jurisdiction in this case is established by sec_6330 background some of the facts in this case have been stipulated and are so found at the time the petition was filed petitioner was a resident of california petitioner’s untimely federal_income_tax return was filed on date on the return petitioner’s address is shown as palomino dr diamond bar california the diamond bar address petitioner reported wages of dollar_figure from his employment as an engineer with general dynamics corp there were no federal_income_tax withholdings on petitioner’s wages from general dynamics corp there are two schedules c profit or loss from business included with petitioner’s return one is for a business described as a tax preparation consulting service the other is for a business described as a property management service approximately dollar_figure of gross_income is reported and approximately dollar_figure of expenses are deducted on other liabilities were referenced in the notice but this court has no jurisdiction over respondent’s determination with respect to those liabilities see the date order granting respondent’s motion to dismiss for lack of jurisdiction and to strike as to the tax_return_preparer penalty each schedule c together with the wage income referred to above and dollar_figure in dividend income the losses reported on the schedules c are taken into account in the adjusted_gross_income of dollar_figure reported on petitioner’s return a personal_exemption deduction two dependency_exemption deductions and the standard_deduction applicable to a head_of_household are subtracted from the adjusted_gross_income and result in reported taxable_income of dollar_figure applying the sec_1 income_tax rate applicable to a head_of_household petitioner reported an income_tax_liability of dollar_figure which was reduced to zero by a claimed credit for child and dependent care expenses a dollar_figure earned_income_credit was claimed which gave rise to a refund in the same amount petitioner was married as of the close of his spouse debra a priestly was employed as a registered nurse during that year her untimely federal_income_tax return which was prepared by petitioner was filed in late date the return shows the diamond bar address as her home address the income reported on the return includes wages of dollar_figure interest of dollar_figure and dividends of dollar_figure included with her return is a schedule c for a business described as a property management service with one minor exception the income and deductions reported on this schedule c are identical to the items reported on the property management schedule c included with petitioner’s return the dollar_figure adjusted_gross_income reported on her return takes into account the above items of income and the loss reported on the schedule c a personal_exemption deduction a dependency_exemption deduction for an individual not listed on the return and the standard_deduction applicable to a head_of_household are subtracted from the adjusted_gross_income and result in reported taxable_income of dollar_figure applying the sec_1 income_tax rate applicable to a head_of_household petitioner’s spouse reported an income_tax_liability of dollar_figure which was reduced to zero by a claimed credit for child and dependent care expenses the dollar_figure refund claimed on the return consists of an dollar_figure earned_income_credit plus dollar_figure of federal_income_tax withholdings petitioner’s federal_income_tax return was examined as a result respondent issued a notice_of_deficiency in which a deficiency of dollar_figure in petitioner’s federal_income_tax was determined it appears that the deficiency results from the disallowances of the earned_income_credit and the deductions claimed on the schedules c the details of the examination and deficiency determination cannot be determined with precision because respondent’s administrative file has been destroyed according to respondent the file was destroyed in the ordinary course of business we interpret this to mean that the destruction of the file was consistent with respondent’s record retention requirements in any event petitioner does not claim that the file was destroyed for other reasons petitioner describes the examination of his return as uncontested he did not petition this court in response to the above-mentioned notice_of_deficiency and the deficiency additions to tax and interest were assessed on date some time in the middle of a criminal tax investigation against petitioner was initiated he was charged and convicted of aiding_and_abetting the filing of false federal_income_tax returns the criminal activity that resulted in petitioner’s conviction involved the preparation of fraudulent schedules c for his clients his sentence included a prison term and he was incarcerated from date until date in the course of the criminal investigation petitioner’s residence was searched pursuant to a search warrant issued in date some or all of the items seized during the search have not been returned to petitioner on date respondent mailed to petitioner a final notice_of_intent_to_levy with respect to his outstanding federal_income_tax liability on date respondent received from petitioner a form request for a collection_due_process_hearing the form is signed by petitioner and the diamond bar address is shown as petitioner’s address on the form itself as well as on the envelope in which the form was mailed to respondent in the area of the form where the taxpayer is prompted to explain his or her disagreement with respondent’s proposed collection activity petitioner wrote i do not owe the amount shown i do have receipts to substantiate my deductions they are with the irs downtown los angeles branch i need time to retrieve them ms snoody sic rev agt is aware of this i did not have the opportunity to dispute tax in response to petitioner’s request for a hearing in a letter dated date addressed to petitioner at the diamond bar address an appeals officer who was unaware that petitioner was incarcerated at the time scheduled a hearing for date petitioner apparently contacted the appeals officer by telephone and requested that the hearing be rescheduled for another date petitioner did not notify the appeals officer that he was incarcerated the appeals officer was aware that petitioner had been convicted of criminal tax offenses but believed that petitioner’s incarceration had been deferred pending appeal of his criminal conviction the hearing was rescheduled for date petitioner failed to attend the june hearing because he was incarcerated in a notice_of_determination concerning collection action s under sec_6320 and or dated date addressed to petitioner at the diamond bar address respondent determined to proceed with the proposed collection activity because all statutory requirements have been met petitioner’s allegations that the tax is not owed are unsubstantiated and the proposed collection methods are not too intrusive in the notice respondent also notes that petitioner raised the issue of the amount or the existence of his federal_income_tax liability but that he failed to present anything to change the amount of tax assessed and further that petitioner offered no other alternatives to enforced collection discussion petitioner’s incarceration prevented him from attending either of the scheduled hearings with the appeals officer we could remand the case to respondent’s appeals_office to allow for an administrative hearing see eg tatum v commissioner tcmemo_2003_115 nestor v commissioner tcmemo_2002_251 however under the circumstances we elect not to do so petitioner makes no claim that the appeals officer failed to obtain verification that the requirements of any applicable law or administrative procedure have been met see c furthermore petitioner does not raise a spousal defense challenge the appropriateness of the proposed collection action or offer any collection alternatives see sec_6330 instead petitioner’s challenge to respondent’s determination raises issues exclusively related to the existence or amount of his federal_income_tax liability see sec_6330 because we review de novo respondent’s determination with respect to the existence or amount of petitioner’s federal_income_tax liability see 114_tc_604 114_tc_176 it is appropriate to consider and resolve those issues at this time in this proceeding remanding the case to respondent’s appeals_office would more_likely_than_not needlessly delay the collection of petitioner’s federal_income_tax liability plus related additions to tax and interest which if the proper amount has been assessed is already long overdue see 117_tc_183 thomas v commissioner tcmemo_2003_231 moore v commissioner tcmemo_2003_1 sec_6330 states b underlying liability --the person may also raise at the hearing challenges to the existence or amount of the underlying tax_liability for any_tax period if the person did not receive any statutory_notice_of_deficiency for such tax_liability or did not otherwise have an opportunity to dispute such tax_liability petitioner claims that he never received a notice_of_deficiency for respondent’s records indicate that one was sent but because respondent’s administrative file has been destroyed respondent cannot refute petitioner’s contention and concedes that petitioner may challenge the existence or the amount of his federal_income_tax liability in this proceeding after careful consideration of the evidence presented in this proceeding we find that petitioner has failed to establish that there should be any adjustment to or reduction in the assessments made with respect to his federal_income_tax liability our reasons for this finding are summarized below the disputed liabilities in this case result from respondent’s deficiency determination made more than years ago the commissioner’s determination_of_a_deficiency is presumptively correct and the taxpayer bears the burden_of_proof to establish that a deficiency determination is erroneous rule a 290_us_111 as we have observed in countless opinions deductions are a matter of legislative grace 292_us_435 a taxpayer claiming a deduction on a federal_income_tax return must demonstrate that the deduction is allowable pursuant to some statutory provision and must further substantiate that the expense to which the deduction relates has been paid_or_incurred id a taxpayer’s obligation to substantiate a claimed deduction is not eliminated merely because the taxpayer’s records have been lost stolen destroyed or otherwise made unavailable to the taxpayer 71_tc_1120 villarreal v commissioner tcmemo_1998_420 a taxpayer’s inability to sec_7491 is not applicable to this proceeding produce records does not relieve the taxpayer of the burden_of_proof certain expenses eg interest real_estate_taxes items paid_by check or credit card etc can be substantiated by records maintained by third parties if the taxpayer’s own records are not available we expect the taxpayer to make some attempt to obtain substantiating records from third parties in those situations where it is reasonable to expect that third party records exist cf 65_tc_342 cook v commissioner tcmemo_1991_590 petitioner admits that he has few if any records that substantiate the deductions claimed on the schedules c according to petitioner most if not all of the records that would substantiate the deductions here in dispute were seized in the search of his residence we note that the search of petitioner’s residence occurred after petitioner’s return had been examined and the resulting deficiency additions to tax and interest had been assessed petitioner describes the examination as uncontested and does not claim that substantiating records were produced for respondent’s agent during the course of that examination furthermore to the extent that substantiating records exist and were in his possession at the time of the examination he does not explain why those records were not provided to respondent’s examining agent instead of attempting to substantiate the disallowed deductions through third-party or duplicate records eg statements from banks credit card companies local property_tax records etc petitioner produced various documents that he claims remained in his possession after the search these documents include an unsigned blank check and deposit slip from a business account illegible copies of credit card receipts automobile repair bills several bank statements for a joint checking account a notice advising petitioner and his spouse that their automobile insurance had expired and another notice indicating that the insurance had been reinstated a notice that petitioner’s real_estate_taxes for and were delinquent a bill for a newspaper classified advertisement a deed a copy of a check made payable to fleet funding assumption department which appears not to have been negotiated copies of mortgage statements and copies of utility bills when describing these documents at trial petitioner acknowledged that some of them had nothing to do with deductions claimed on his return only some of the documents introduced into evidence by petitioner relate to according to petitioner these documents were not seized along with his other records for that year because the agents conducting the search missed them furthermore to the extent a document seems to relate to a deduction claimed by petitioner it is equally plausible that the document relates to a deduction claimed on the schedule c included with his spouse’s return we reject petitioner’s testimony that he at one time had substantiating documents for the deductions claimed on the schedules c included with his federal_income_tax return but that those documents were seized in the search of his residence petitioner has otherwise failed to produce in this proceeding sufficient substantiation for any of the deductions claimed on the schedules c and he has not given us a basis upon which we can reasonably estimate the amount of the expenses to which the deductions relate see 939_f2d_874 9th cir 245_f2d_559 5th cir 39_f2d_540 2d cir 85_tc_731 petitioner has failed to establish that respondent’s determination_of_a_deficiency in his federal_income_tax was in any way erroneous respondent’s appeals officer has verified that the assessments made as a result of that determination are otherwise valid respondent’s determination to proceed with collection is therefore sustained to reflect the foregoing decision will be entered for respondent


tcmemo_2009_108 united_states tax_court noel nelson petitioner v commissioner of internal revenue respondent docket no 13212-05l filed date noel nelson pro_se bradley c plovan for respondent memorandum opinion goeke judge this case is before the court for review of a lien action with respect to petitioner’s unpaid tax_liabilities for and the issue for decision is whether the settlement officer abused his discretion in sustaining the lien we hold that the settlement officer did not abuse his discretion background some of the facts have been stipulated the stipulation of facts and the accompanying exhibits are incorporated by this reference petitioner resided in maryland at the time of filing his petition petitioner did not file income_tax returns for and respondent prepared substitutes for returns for petitioner for both years pursuant to sec_6020 respondent mailed notices of deficiency for and to petitioner’s last_known_address which has been petitioner’s address since at least petitioner denies receiving the notices a copy of the deficiency_notice sent by certified mail was returned to respondent because petitioner did not claim it timely petitioner did not petition this court in response to the notices and respondent assessed the income_tax deficiencies for and thereafter respondent issued to petitioner notices of intent to levy for and petitioner did not request a collection_due_process_hearing cdp hearing in response to either levy notice respondent began to levy upon petitioner’s monthly social_security_benefits on date respondent issued to petitioner a notice_of_federal_tax_lien for and petitioner timely 1unless otherwise indicated all section references are to the internal_revenue_code requested a cdp hearing the appeals_office gave petitioner approximately weeks to submit form 433-a collection information statement for wage earners and self-employed individuals collection information statement petitioner requested additional time in a letter dated date the settlement officer assigned to petitioner’s case again requested a collection information statement advised petitioner that he had to file all delinquent tax returns before the appeals_office could consider an offer-in-compromise and specifically pointed out that petitioner had not filed returns for and the settlement officer also set a date for a telephone conference petitioner requested a face-to-face hearing the settlement officer responded that petitioner would have a face-to-face hearing if he provided the requested collection information statement before the scheduled date for the telephone conference petitioner responded by reiterating his request for a face-to-face hearing and sought additional time to provide the requested collection information statement on the scheduled date for the telephone conference the settlement officer called petitioner’s representative and left a message that he was closing the case because petitioner had not provided the collection information statement and had not responded to the scheduled telephone conference throughout this time petitioner’s representative was hospitalized following an accident that left him a quadriplegic on date respondent issued a notice_of_determination sustaining the filing of a tax_lien for and petitioner timely filed a petition with this court seeking review upon respondent’s motion the court remanded the case to the appeals_office for a face-to-face hearing in a letter dated date the settlement officer again requested petitioner to provide a collection information statement advised petitioner that he had to file all delinquent tax returns before the appeals_office could consider an offer-in- compromise and specifically identified the years for which petitioner had not filed returns during a hearing on date petitioner requested an offer-in-compromise based on both doubt as to collectibility and doubt as to liability petitioner also stated that he had not received the notices of deficiency for and the settlement officer stated that the notices were mailed to petitioner’s last_known_address which is petitioner’s current address and has been his address since the settlement officer explained that petitioner had to file all delinquent tax returns to qualify for an offer-in- compromise the settlement officer informed petitioner that he could pursue an offer-in-compromise with respondent’s compliance division once he had filed his delinquent returns and provided a collection information statement on date respondent issued a supplemental notice_of_determination sustaining the lien for and discussion sec_6321 imposes a lien on all property and property rights of a taxpayer liable for taxes where a demand for the payment of the taxes has been made and the taxpayer has failed to pay upon request the taxpayer is entitled to an administrative hearing before an impartial officer_or_employee of the appeals_office sec_6320 at the hearing a taxpayer may raise any relevant issue regarding the collection action including possible collection alternatives such as an offer-in-compromise sec_6330 the taxpayer may also contest the existence or amount of the underlying tax_liability if the taxpayer did not receive a notice_of_deficiency for the tax_liability or otherwise have an opportunity to dispute the tax_liability sec_6330 114_tc_604 following the hearing the appeals officer must determine whether the collection action should proceed the appeals officer must consider whether the requirements of applicable law and administrative procedure have been met any issues the taxpayer raised and whether the collection action balances the need for efficient collection_of_taxes with the taxpayer’s legitimate concern that any collection action be no more intrusive than necessary sec_6330 where the validity of the underlying tax_liability is properly at issue the court reviews the tax_liability de novo 114_tc_176 where the underlying tax_liability is not properly at issue we review determinations regarding collection actions for abuse_of_discretion id pincite the abuse_of_discretion standard requires the court to decide whether the appeals officer’s determination was arbitrary capricious or without sound basis in fact or law 91_tc_1079 petitioner’s underlying tax_liabilities for and are not at issue because petitioner previously had an opportunity to dispute them the parties stipulated that respondent issued notices of deficiency for and petitioner testified that he did not receive either notice and the settlement officer acknowledged that the notice was returned to respondent a taxpayer’s ability to contest the underlying tax_liability depends on whether the taxpayer received a notice_of_deficiency or otherwise had an opportunity to dispute the tax_liability sec_6330 petitioner had such an opportunity with respect to the and tax_liabilities because respondent also sent notices of intent to levy for both years to petitioner at his last_known_address before issuing the lien notice at issue petitioner did not dispute that he received the levy notices because petitioner had an opportunity to dispute the underlying tax_liabilities in response to the levy notices petitioner is precluded from raising his tax_liabilities in this case see 126_tc_356 sec_301_6320-1 q a-e7 proced admin regs moreover petitioner did not present any records relating to his or taxable_income at either the cdp hearing or the trial the settlement officer’s determination to sustain the lien was reasonable in view of petitioner’s repeated failure to provide the requested collection information statement and to file his delinquent returns petitioner did not raise any appropriate defenses to the lien or any possible collection alternatives although petitioner requested an offer-in- compromise at the cdp hearing he had not prepared one in addition he did not provide the necessary collection information statement or file the delinquent returns rather he sought additional time to prepare the collection information statement and the returns petitioner stated that he did not know that he was required to file the delinquent returns to qualify for an offer-in- compromise however the settlement officer had previously advised petitioner in two separate letters that he had to file all delinquent returns to qualify for an offer-in-compromise and specifically identified years for which petitioner had failed to file in addition to the years at issue at the hearing the settlement officer advised petitioner to prepare the delinquent returns and pursue an offer-in-compromise with respondent’s compliance division since the hearing petitioner has taken steps to resolve his tax_liabilities has retained a new accountant and has started to prepare his delinquent returns we hold that respondent did not abuse his discretion in sustaining the lien on the basis of petitioner’s failure to submit the requested collection information statement and the delinquent returns see 129_tc_107 cavazos v commissioner tcmemo_2008_257 gazi v commissioner tcmemo_2007_342 prater v commissioner tcmemo_2007_241 roman v commissioner tcmemo_2004_20 rodriguez v commissioner tcmemo_2003_153 to reflect the foregoing decision will be entered for respondent