internal_revenue_service number release date index number -------------------------- ----------------------------------------------- -------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------------ telephone number ---------------------- refer reply to cc psi b04 plr-119625-13 date date legend taxpayer --------------------------- ------------------------------------------------------------------------ spouse ---------------------------- ------------------------------------------------------------------------ year date date date date antenuptial agreement revocable_trust marital trust llc operating_agreement ------- -------------------- ---------------------- ------------------- ------------------- ------------------------------------------------------------------------ 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-------------------------------------------------------------------------------------------------------------- b w -------------------------------- -------------- plr-119625-13 x y z dear ------------------- -- -------- ------------ this letter responds to your authorized representative’s letter dated date requesting rulings under sec_2056 of the internal_revenue_code code facts antenuptial agreement taxpayer and spouse executed antenuptial agreement in anticipation of their marriage in year under article third of antenuptial agreement taxpayer and spouse each waived their respective right of election to take against the will or other instrument of disposition article eighth provides that upon taxpayer’s death if spouse survives taxpayer and if taxpayer and spouse are married and living together at the time of taxpayer’s death spouse will receive a sum of dollar_figurew outright such amount will be free and net of any and all estate transfer and income taxes in article ninth taxpayer agrees that in the event of taxpayer’s death i while taxpayer and spouse are married and living together and ii at least years have elapsed since the parties’ marriage in year taxpayer will fund a marital trust the principal sum of which will be not less than x percent of taxpayer’s taxable_estate prior to the deduction of any amounts due for federal estate_tax purposes under antenuptial agreement such amount will be held in trust as a separate trust with all of the income to be paid to spouse at least annually for as long as she lives revocable_trust taxpayer established revocable_trust under an agreement dated date pursuant to the laws of state such agreement has been amended and restated several times most recently on date currently taxpayer is the sole trustee sec_3a of revocable_trust provides that if spouse survives taxpayer and if taxpayer and spouse are married and living together at the time of taxpayer’s death the trustee will allocate and make distributions to spouse as provided in sec_3a a however if spouse makes a timely election as provided in sec_3a b then the trustee will allocate and make distributions to spouse as provided in that section elective marital portion sec_3a a provides that spouse will take under the terms of antenuptial agreement and that the trustee will make any distributions to marital trust to be added to the principal of marital trust and to be held and distributed as may be required by the antenuptial agreement the terms of revocable_trust specify that the trustee has plr-119625-13 the discretion to satisfy any distribution to marital trust under the antenuptial agreement with llc preferred units preferred units sec_3a b provides that if within days following taxpayer’s death spouse elects pursuant to sec_3a b to receive the elective marital portion in lieu and instead of any distributions under antenuptial agreement the trustee will distribute to spouse outright the sum of dollar_figurew and will distribute those property interests specified in sec_3 to be added to the principal of marital trust and to be held and distributed as may be required by the marital trust agreement if spouse elects to receive the elective marital portion marital trust will still be funded in part with preferred units marital trust taxpayer established marital trust under an agreement dated date pursuant to the laws of state such agreement has been amended and restated several times most recently on date taxpayer is the sole trustee taxpayer intends that marital trust will become irrevocable at his death and qualify as a qualified_terminable_interest_property qtip_trust under sec_2056 marital trust will terminate upon the death of the survivor of taxpayer and spouse sec_3b of marital trust provides that the net_income of marital trust will be distributed to spouse in at least quarter-annual installments during the lifetime of spouse no distributions of principal will be made sec_3b provides that distributions to marital trust must be eligible to qualify for the marital_deduction for purposes of taxpayer’s federal estate_tax and any state estate or inheritance_tax imposed upon taxpayer’s estate further the trustee will administer marital trust so as to accord to spouse that degree of beneficial_enjoyment of the trust assets which the principles of the law of trusts accord to a person unqualifiedly designated as the life_beneficiary of a_trust including at the written request of spouse making unproductive or underproductive assets productive section 6a provides that except as otherwise specifically provided in marital trust including without limitation any provision specifically applicable to any distribution to spouse the trustee will hold manage administer invest reinvest and otherwise deal with the trust estate and will have the specific powers and authority as provided in section 6b specific powers section 6b a of marital trust provides that the trustee has the power to accept and retain in the form received and for such time as the trustee deems advisable all property or undivided interests in property received or acquired as part of the trust estate including without limitation the trustee’s own securities without regard to lack plr-119625-13 of diversification or nonproductivity subject_to the provisions of sec_3b unproductive property section 6e provides in relevant part that the trustee is prohibited from exercising any right power authority or discretion granted by this section or any other provision of marital trust or by any statute or rule_of law that would be inconsistent with the qualification of marital trust for the marital_deduction for purposes of taxpayer’s federal estate_tax or any state estate or inheritance_tax section 7a provides in relevant part that in no event will the amount of the income from the preferred units which is required to be distributed to spouse from marital trust pursuant to sec_3b be less than the amount required in order to allow marital trust to qualify for the marital_deduction marital trust does not contain a provision that gives any person a power to appoint any interest in trust property to any person other than the surviving_spouse llc and llc’s operating_agreement llc is a limited_liability_company organized and operated under the laws of state the capital structure of llc includes voting common units non-voting common units and preferred units non-voting llc’s primary asset is a y percent limited_partnership_interest in a a state limited_partnership generally engaged in the ownership management development and financing of shopping centers taxpayer in his capacity as trustee of revocable_trust holds voting and non-voting common units of llc and all of the preferred units and as such is a preferred member of llc llc receives monthly distributions from a pursuant to a’s operating_agreement which requires the distribution of all of its income to its partners llc also holds z shares in b a state corporation b is the managing general_partner of a and operates as a publicly traded real_estate_investment_trust reit llc receives quarterly dividends from b in order to preserve the tax_benefit of reit status for purposes of sec_857 sec_4 of llc’s operating_agreement generally provides that profits and losses will be determined after considering the effect of any items that are specially allocated pursuant to sec_4 sec_4 provides for a gross_income allocation to the preferred members in proportion to the priority return distributed to them pursuant to sec_4 and sec_4 plr-119625-13 sec_4 provides that available cash will be distributed to the llc members as set forth in a written payment schedule and as a first priority provides for the payment to the preferred members of any outstanding priority return that is the aggregate amount of the priority return payable to the preferred members for all preceding fiscal years which has not yet been paid to the preferred members the term priority return is defined as the right of a preferred member to receive annually with respect to the preferred units owned by him priority cash distributions equal to a fixed rate of eight percent per preferred unit sec_4 also provides for distributions to common members if and to the extent that there will be available cash in excess of the amount necessary to satisfy any outstanding priority return and to pay all of the priority payments paid to preferred members during the fiscal_year sec_4 provides that no payments will be made to the common members with respect to their common units at any time that there is an outstanding priority return sec_4 provides in relevant part that any distribution to a preferred member with respect to a preferred unit in excess of the full priority return will not exceed the greater of face value or preferred redemption value ie fair_market_value as determined by an independent_appraiser or appraisers selected by a majority in interest section of operating_agreement provides that a preferred member of llc may transfer all or any portion of his preferred units to i another member ii a qualified institutional transferee iii taxpayer taxpayer’s children and or any affiliate of the same in each case without obtaining the prior written consent of a majority in interest member s holding in excess of percent of the outstanding voting common units notwithstanding the foregoing no transfer will be permitted if it would violate applicable federal securities law further no transfer will be permitted without the consent of a majority in interest if it would i violate any agreement to which llc or any entity in which llc has a direct or indirect interest or a right to acquire a direct or indirect interest is a party or ii jeopardize the status of b as a reit section of operating_agreement provides that llc may redeem at any time all or a portion of the preferred units on a pro_rata basis without the consent of preferred members the redemption price of llc preferred units is the greater of their face value or fair_market_value as determined by an independent_appraiser see sec_4 of operating_agreement discussed above a qualified institutional transferee qit is generally defined as a pension fund profit sharing fund pooled_fund for keogh_plan individual_retirement_plan insurance_company bank mutual_fund or registered investment_company plr-119625-13 sec_8_1 provides that notwithstanding anything in operating_agreement to the contrary if at any time there is an outstanding priority return then llc will make no distributions to the common members and will not initiate the redemption or purchase of or otherwise acquire for consideration any units and will not pay any monies into a sinking_fund for the redemption of units sec_8_1 provides that notwithstanding anything in operating_agreement to the contrary so long as any preferred units are outstanding there will not be any change in the distributions payable to any common members so as to entitle the common members to receive distributions or liquidation proceeds at a higher level of priority currently provided further without the affirmative vote or consent of all of the preferred members the voting common members cannot amend restate alter or repeal the operating_agreement whether by merger consolidation or otherwise so as to directly materially and adversely affect any right or preference of the preferred units or preferred unit holders taxpayer has demonstrated that a substantial number of qualified institutional investors currently own interests in b and that they are common purchasers of reits rulings requested spouse’s right to elect under sec_3a a and sec_3a b of revocable trust is not a contingency within the meaning of sec_2056 the revocable_trust property actually distributed outright to spouse and to marital trust if it otherwise satisfies the requirements of sec_2056 will be property passing from the decedent to his surviving_spouse for purposes of sec_2056 a marital_deduction will be allowed under sec_2056 for llc preferred unit sec_2 distributed at taxpayer’s death to marital trust provided taxpayer’s executor timely makes the appropriate election under sec_2056 ruling sec_2001 of the code imposes a tax upon the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2056 provides that for purposes of the tax imposed by sec_2001 the value of the taxable_estate is determined by deducting from the value of the gross_estate an amount equal to the value of any interest in property which passes or has passed_from_the_decedent_to_his_surviving_spouse but only to the extent that such interest is included in determining the value of the gross_estate sec_2056 provides that a deduction is not allowed under sec_2056 where on the lapse of time on the occurrence of an event or contingency or on the failure of an event or contingency to occur an interest passing to the surviving_spouse plr-119625-13 will terminate or fail and a an interest in the property passes or has passed for less than an adequate_and_full_consideration in money or money’s worth from the decedent to any person other than the surviving_spouse or the estate of such spouse and b by reason of such passing the person or his heirs or assigns may possess or enjoy any part of the property after the termination or failure of the interest passing to the surviving_spouse sec_20_2056_c_-1 of the estate_tax regulations provides that any property interest transferred during life bequeathed or devised by the decedent or inherited from the decedent is considered as having passed to the person to whom he transferred bequeathed or devised the interest or to the person who inherited the interest from him sec_20_2056_c_-2 generally provides that the definition stated in sec_20_2056_c_-1 with respect to a property interest which passes_from_the_decedent_to_his_surviving_spouse is qualified by a special rule in the case of an election by the surviving_spouse see sec_20_2056_c_-2 sec_20_2056_c_-2 provides that the surviving_spouse may elect between a property interest offered to her under the decedent’s will or other instrument and a property interest to which she is otherwise entitled such as dower a right in the decedent’s estate or her interest under community_property_laws of which adverse disposition was attempted by the decedent under the will or other instrument if the surviving_spouse elects to take against the will or other instrument then the property interest offered under the instrument is not considered as having passed_from_the_decedent_to_his_surviving_spouse and the dower or other_property interest retained by her is considered as having so passed if it otherwise so qualifies if the surviving_spouse elects to take under the will or other instrument then the dower or other_property interest relinquished by her is not considered as having passed_from_the_decedent_to_his_surviving_spouse and the interest taken under the will or other instrument is considered as having so passed if it otherwise so qualifies in revrul_54_446 1954_2_cb_303 a decedent and his wife were parties to an antenuptial agreement in which the wife relinquished any marital rights she might acquire in the decedent’s property or estate by reason of their marriage the decedent’s will bequeathed property to his wife that was different from and of a greater value than the amount due to her under the antenuptial agreement the will specifically provided that the bequests to wife were in lieu of any rights she might have under the antenuptial agreement the revenue_ruling determined that the amount bequeathed to the wife under the will passed_from_the_decedent_to_his_surviving_spouse and therefore qualified for the estate_tax_marital_deduction in revrul_68_271 1968_1_cb_409 a decedent and his wife entered into an antenuptial agreement pursuant to which wife renounced and relinquished any marital rights she might acquire in his property or estate by reason of their marriage in return for a stated sum from his estate provided she survived him following the decedent’s plr-119625-13 death the estate paid the required sum to the widow pursuant to a claim filed by her decedent’s will did not mention wife and there was no will_contest the revenue_ruling determined that the value of the interest transferred to the surviving_spouse pursuant to the antenuptial agreement passed_from_the_decedent_to_his_surviving_spouse and therefore qualified for the estate_tax_marital_deduction in 68_tc_912 acq 1982_1_cb_1 a decedent gave his surviving_spouse a life_estate in trust by codicil he provided that she could elect to take an outright cash bequest in lieu of the life_estate to elect the cash bequest the surviving_spouse was required to file an election with the executor of the decedent’s estate within sixty days after his qualification as executor the spouse elected the cash bequest and the estate deducted the amount_paid to the spouse the court noted that it has never considered the mere procedural requirement of a personal election by the surviving_spouse to be a contingency for purposes of sec_2056 it went on to state that it is well established that the mere presence of a right of election against a will is not a disqualification so long as the interest which passes to the surviving_spouse is nonterminable it further stated that the result is the same whether the right of election is encompassed by will or by statute the court held that the cash bequest was a nonterminable interest because the requirement of a written election is a mere procedural formality revrul_82_184 1982_2_cb_215 considers a situation similar to that of tompkins there the decedent bequeathed to his spouse a life income_interest in a_trust and granted her an election to take an outright bequest of dollar_figure in lieu of the life income_interest the revenue_ruling held that a cash bequest in lieu of a life_estate payable unconditionally at the election of the surviving_spouse within a reasonable_time after the decedent’s death qualifies for the estate_tax_marital_deduction under sec_2056 in the instant case spouse will receive certain property interests under the terms of the antenuptial agreement pursuant to sec_3a a of revocable_trust unless within days following taxpayer’s death spouse elects pursuant to sec_3a b of revocable_trust to receive certain other_property interests elective marital portion in each event spouse will have an absolute right to any property passing outright to her as well as an absolute right to the income from any property passing to marital trust therefore the property interest passing outright to spouse will be a nonterminable interest and the property interest passing to marital trust will be treated as a nonterminable interest if it otherwise satisfies the requirements of sec_2056 the requirement that spouse make a timely election is a mere procedural formality tompkins t c pincite and is not a contingency within the meaning of sec_2056 consequently based on the facts submitted and the representations made we conclude that spouse’s right to elect under sec_3a of revocable_trust is not a contingency within the meaning of sec_2056 the revocable_trust property plr-119625-13 actually distributed outright to spouse and to marital trust if it otherwise satisfies the requirements of sec_2056 will be property which passes_from_the_decedent_to_his_surviving_spouse for purposes of sec_2056 ruling sec_2056 provides that a deduction is not allowed under sec_2056 where on the lapse of time on the occurrence of an event or contingency or on the failure of an event or contingency to occur an interest passing to the surviving_spouse will terminate or fail and a an interest in the property passes or has passed for less than an adequate_and_full_consideration in money or money’s worth from the decedent to any person other than the surviving_spouse or the estate of such spouse and b by reason of such passing the person or his heirs or assigns may possess or enjoy any part of the property after the termination or failure of the interest passing to the surviving_spouse sec_2056 provides that in the case of qualified_terminable_interest_property the property will be treated as passing to the surviving_spouse for purposes of sec_2056 and no part of the property will be treated as passing to any person other than the surviving_spouse for purposes of sec_2056 sec_2056 defines qualified_terminable_interest_property as property which passes from the decedent in which the surviving_spouse has a qualifying_income_interest_for_life and to which an election under sec_2056 applies sec_2056 provides that the surviving_spouse has a qualifying_income_interest_for_life if the surviving_spouse is entitled to all the income from the property payable annually or at more frequent intervals and no person has a power to appoint any part of the property to any person other than the surviving_spouse sec_20_2056_b_-7 provides that the principles of sec_20_2056_b_-5 relating to whether the spouse is entitled_for_life to all of the income from the entire_interest or a specific_portion of the entire_interest apply in determining whether the surviving_spouse is entitled_for_life to all of the income from the property regardless of whether the interest passing to the spouse is in trust sec_20_2056_b_-5 provides in part that if an interest is transferred in trust the surviving_spouse is entitled_for_life to all of the income from the entire_interest or a specific_portion of the entire_interest if the effect of the trust is to give her substantially that degree of beneficial_enjoyment of the trust property during her life which the principles of the law of trusts accord to a person who is unqualifiedly designated as the life_beneficiary of a_trust such degree of enjoyment is given only if it was the decedent’s intention as manifested by the terms of the trust instrument and the plr-119625-13 surrounding circumstances that the trust should produce for the surviving_spouse during her life such an income or that the spouse should have such use of the trust property as is consistent with the value of the trust corpus and with its preservation the designation of the spouse as sole income_beneficiary for life of the entire_interest or a specific_portion of the entire_interest will be sufficient to qualify the trust unless the terms of the trust and the surrounding circumstances considered as a whole evidence an intention to deprive the spouse of the requisite degree of enjoyment sec_20_2056_b_-5 provides in part that provisions granting administrative_powers to the trustee will not have the effect of disqualifying an interest passing in trust unless the grant of powers evidences the intention to deprive the surviving_spouse of the beneficial_enjoyment required by the statute for example the power to retain trust assets which consist substantially of unproductive property will not disqualify the interest if the applicable rules for the administration of the trust require or permit the spouse to require that the trustee either make the property productive or convert it within a reasonable_time sec_20_2056_b_-5 provides in part that an interest passing in trust fails to satisfy the condition that the spouse be entitled to all the income to the extent that the income is required to be accumulated in whole or in part or may be accumulated in the discretion of any person other than the surviving_spouse to the extent that the consent of any person other than the surviving_spouse is required as a condition_precedent to distribution of the income or to the extent that any person other than the surviving_spouse has the power to alter the terms of the trust so as to deprive her of her right to the income in the instant case marital trust instructs the trustee to distribute the entire net_income of marital trust to spouse in at least quarter-annual installments during the lifetime of spouse neither revocable_trust nor marital trust grants any person a power to appoint the marital trust estate to any person other than spouse marital trust also directs the trustee to administer marital trust so as to accord to spouse that degree of beneficial_enjoyment of marital trust assets which the principles of the law of trusts accord to a person unqualifiedly designated as the life_beneficiary of a_trust including at the written request of spouse making unproductive or underproductive assets productive accordingly marital trust evidences an intention by taxpayer to give spouse after his death the beneficial_enjoyment of the marital trust estate requisite to a qualifying_income_interest_for_life for purposes of sec_2056 the surrounding circumstances also manifest taxpayer’s intention that after his death marital trust should produce for spouse during her life that degree of beneficial_enjoyment of the llc preferred units which the principles of the law of trusts accord to a person who is unqualifiedly designated as the life_beneficiary of a_trust under the terms of operating_agreement as the owner of llc preferred units marital trust will be entitled to an eight percent return on the aggregate face value of its llc preferred plr-119625-13 units payable no less often than annually llc cannot redeem marital trust’s llc preferred units for less than the greater of their face value or fair_market_value in addition without the affirmative vote or consent of all of the preferred members llc’s voting common members cannot amend restate alter or repeal operating_agreement whether by merger consolidation or otherwise so as to directly materially and adversely affect any right or preference of the preferred units or preferred unit holders moreover the sale of llc preferred units is not unreasonably restricted at the written request of spouse the trustee of marital trust may sell the llc preferred units to permitted purchasers without the consent of other llc members subject only to reasonable administrative restrictions these purchasers will become substitute preferred members the permitted purchases are other members of llc taxpayer’s children and qualified institutional investors as defined by operating_agreement taxpayer has demonstrated that a substantial number of qualified institutional investors currently own interests in b and that they are common purchasers of reits with respect to the actual receipt of income from an investment in b an indirect owner of interests in b who owns llc preferred units is in a similar position as a direct owner of interests in b because llc is required to distribute an eight percent preferred_return annually to owners of llc preferred units consequently based on the facts submitted and the representations made we conclude that spouse will have a qualifying_income_interest_for_life in the llc preferred units and a marital_deduction will be allowed under sec_2056 for llc preferred units distributed at taxpayer’s death to marital trust provided that taxpayer’s executor timely makes the appropriate election under sec_2056 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent 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 plr-119625-13 in accordance with a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely leslie h finlow senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


t c memo united_states tax_court adel abdalla petitioner v commissioner of internal revenue respondent docket no filed date linda s bednarz and kenneth j rubin for respondent memorandum opinion vasquez judge this case is before the court on respondent's motion for entry of default judgment pursuant to rule a by separate notices of deficiency respondent determined additions to petitioner's federal_income_tax for fraud under sec_6653 as follows all rule references are to this court's rules_of_practice and procedure and all section references are to the internal_revenue_code in effect for the years in issue prior to the issuance of the notices of deficiency but continued additions to tax3 sec sec sec year deficiency b a b b b -0- dollar_figure dollar_figure --- -0- --- --- dollar_figure background petitioner invoked the jurisdiction of this court on date by timely filing a petition for redetermination petitioner resided in schnecksville pennsylvania at the time the petition was filed respondent's answer filed on date after an extension to file the answer was granted asserted affirmative allegations of fact in support of the foregoing additions to tax for fraud respondent's answer reads in pertinent part as follows further answering the petition and in support of the determination that a part of the underpayments of tax required to be shown on the petitioner's income_tax returns for the taxable years and are due to fraud the respondent alleges continued subsequent to being contacted by the internal_revenue_service regarding the examination of his originally filed and returns petitioner filed amended returns wherein he admitted understating his tax_liabilities for and in the amounts of dollar_figure and dollar_figure respectively the filing of amended returns however does not vitiate any fraud perpetrated when the returns were due see 464_us_386 the additions to tax for fraud determined by respondent in the notices of deficiency were based on the understated tax_liabilities reported by petitioner on his amended and returns a during each of the taxable years and the petitioner owned and operated papa's restaurant in schnecksville pennsylvania a sole_proprietorship b during the taxable years and petitioner's restaurant earned gross_receipts of dollar_figure and dollar_figure respectively on his original income_tax returns for and petitioner reported gross_receipts of dollar_figure and dollar_figure respectively c during the taxable years and petitioner's cost_of_goods_sold were dollar_figure and dollar_figure respectively on his original income_tax returns for and petitioner reported cost_of_goods_sold of dollar_figure and dollar_figure respectively d the petitioner understated his taxable_income on his income_tax returns for the taxable years and in the amounts of dollar_figure and dollar_figure respectively e the petitioner understated his income_tax liabilities on his income_tax returns for the taxable years and in the amounts of dollar_figure and dollar_figure respectively f petitioner adel abdalla fraudulently and with intent to evade taxes for the taxable years and filed false income_tax returns for said years that omitted the skimmed cash receipts and understated cost_of_goods_sold g respondent's determination of the omission_of_income and cost_of_goods_sold is corroborated by the fact that petitioner filed two documents captioned amended united_states individual income_tax returns for the years and with the internal_revenue_service center in philadelphia pennsylvania including all the omitted income for these years these amended returns were received at the internal_revenue_service center on date said documents were not sent to the internal_revenue_service center until the examination_division had contacted the petitioner regarding his and federal_income_tax returns h respondent's determination of the understatement of cost_of_goods_sold has also been corroborated by documenting cost_of_goods_sold through contact with petitioner's suppliers i in an effort to avoid detection of the skimmed cash receipts petitioner purchased a large amount of his supplies with cash and only reported a portion of his cost_of_goods_sold during and j petitioner fraudulently and with intent to evade taxes falsely informed his return preparer in and that all gross_receipts and cost_of_goods_sold were reported on the original income_tax returns and that he had no additional income or expenses for those years k petitioner adel abdalla's fraudulent understatements of his gross_receipts and cost_of_goods_sold on his income_tax returns for and is part of a two year pattern of intent to evade taxes l the petitioner fraudulently and with intent to evade taxes omitted from his income_tax returns for the taxable years and substantial amounts of gross_receipts from his schedule c restaurant business in the amounts of dollar_figure and dollar_figure respectively m the petitioner fraudulently and with intent to evade taxes omitted from his income_tax returns for and substantial amounts of cost_of_goods_sold from his schedule c restaurant business in the amounts of dollar_figure and dollar_figure respectively n a part of each deficiency in income_tax for the taxable years and is due to fraud with intent to evade taxes petitioner filed a reply on date wherein he denied generally portions of respondent's answer relating to petitioner's alleged fraudulent conduct by notice dated date the court set this case for trial at the philadelphia pennsylvania trial session beginning on date this notice specifically stated that your failure to appear may result in dismissal of the case and entry of decision against you on date petitioner's counsel filed a motion to withdraw their representation of petitioner that motion recites that petitioner removed himself from the united_states subsequent to filing the petition in this case following a criminal indictment against him in the u s district_court for the eastern district of pennsylvania and that thereafter petitioner had not cooperated with his counsel in preparing this case for trial the motion also provided a mailing address in egypt where petitioner's counsel believed mr abdalla could be reached the court by order dated date granted the motion of counsel to withdraw and stated the following ordered that if petitioner fails to appear in person or by counsel at the trial session and if petitioner continues to be a fugitive from justice and fails to prepare his case for trial the court will consider dismissing this case for failure properly to prosecute and will enter decision for respondent the court served a copy of the date order and a copy of the court's standing_pretrial_order on petitioner at both the schnecksville pennsylvania address provided by him in his petition and the address in egypt provided by petitioner's counsel in their motion to withdraw representation there is no indication in the court's records that petitioner did not receive the pretrial order the date order or the notice setting this case for trial which was previously served on petitioner at his schnecksville pennsylvania address rule b requires parties to notify the court of any change_of mailing address this case was called at the court's trial calendar in philadelphia pennsylvania on date petitioner did not appear at that time respondent filed her motion for default judgment pursuant to the provisions of rule a discussion rule a provides that if any party fails to plead or otherwise proceed as provided by the rules or as required by the court such party may be held in default on the motion of the other party 91_tc_1049 affd 926_f2d_1470 6th cir the action or nonaction on the part of a taxpayer that constitutes sufficient grounds to apply rule a in proceedings before us is a matter within this court's discretion id in light of the affirmative allegations in respondent's answer petitioner's failure to appear and to proceed with prosecution of his case despite the court's warning in its notice setting this case for trial its pretrial order and its date order granting the motion of petitioner's counsel to withdraw constitutes sufficient grounds for the entry of a default judgment against him the entry of default under rule a has the effect of admitting all well-pleaded facts in the commissioner's answer id pincite8 87_tc_1403 this is true even when a reply has been filed by a taxpayer which addresses the facts pleaded by the commissioner in her answer smith v commissioner f 2d pincite 79_tc_132 ndollar_figure the necessary effect of defaulting petitioner is to deem admitted the affirmative allegations in the answer irrespective of petitioner's denial in the reply the sanction thus converts the denial into an admission affd 703_f2d_1063 8th cir entry of a default decision as to the additions to tax for fraud on which the commissioner has the burden_of_proof is appropriate upon a determination which is within this court's discretion that the pleadings set forth sufficient facts to support such a decision smith v commissioner t c pincite- based upon the pleadings in this case there is ample support for finding that petitioner fraudulently underpaid his taxes for the years in issue the facts contained in the answer are sufficient to establish the existence of fraudulent conduct by petitioner prominent among the matters contained in the pleadings are petitioner's admissions that the omission of specific items of income for the years in issue is part of a 2-year pattern of intent to evade taxes petitioner understated taxable_income for those years and a part of each understatement for the years in issue is due to fraud with intent to evade taxes the above-pleaded facts clearly establish that petitioner fraudulently underpaid his income taxes for the years in issue thus we are satisfied that the additions to tax for fraud for the years in issue should be sustained by the entry of a default against petitioner pursuant to rule a to reflect the foregoing an appropriate order will be issued and decision will be entered for respondent we are mindful of the decision of the u s court_of_appeals for the third circuit to which an appeal of this case would lie in 41_f3d_103 3d cir revg tcmemo_1993_213 however the situation in estate of spear and that of this case are wholly dissimilar petitioner has simply failed to participate in the preparation for or trial of his case before us


t c memo united_states tax_court insel v gaitor jr petitioner v commissioner of internal revenue respondent docket no filed date insel v gaitor jr pro_se derek p richman for respondent memorandum findings_of_fact and opinion wells judge respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax for his tax_year we must decide the following issues whether petitioner is entitled to dependency_exemption deductions for two of his minor children pursuant to sec_151 whether petitioner is entitled to a child_tax_credit pursuant to sec_24 for each of those children and whether petitioner is entitled to head-of-household filing_status findings_of_fact some of the facts and certain exhibits have been stipulated the stipulations of fact are incorporated in this opinion by reference and are found accordingly at the time the petition was filed petitioner resided in miami florida petitioner is employed by the florida state courts petitioner has four minor children i d g born in c l g born in d s g born in and r a g born in hereinafter collectively the children three of petitioner’s children i d g c l g and d s g are from a previous relationship with evelyn casiano petitioner’s fourth child r a g is from his current relationship with lecreshia 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure 2the court refers to minor children by their initials see rule a 3petitioner and ms casiano were never married neal ms neal petitioner was not married to ms neal during his tax_year during his taxable_year the children lived with petitioner for most of the year petitioner provided the children with food clothing and housing while making biweekly child_support payments of dollar_figure to ms casiano on his tax_return petitioner claimed head-of-household filing_status dependency_exemption deductions for i d g and r a g and child tax_credits on date respondent sent petitioner a notice_of_deficiency that determined his filing_status as single and disallowed his claimed dependency_exemption deductions and child tax_credits petitioner timely filed a petition with this court opinion generally the commissioner’s determinations in the statutory_notice_of_deficiency are presumed correct see rule 4respondent did not dispute that petitioner was not married to ms neal during his tax_year accordingly we deem that matter conceded by respondent 5amounts are rounded to the nearest dollar 6petitioner disputes which of his children were claimed as dependents on his tax_return the stipulated return lists petitioner’s dependents as i d g and c l g however petitioner testified that he claimed i d g and r a g on his original return petitioner signed the stipulation of facts on the condition that the stipulated return represented only his return that was on file with respondent but not that it correctly represented the return that he actually filed with respondent a 290_us_111 deductions are a matter of legislative grace and taxpayers bear the burden of proving that they are entitled to the deductions claimed see rule a 503_us_79 292_us_435 we first address petitioner’s dependency_exemption deductions sec_151 allows a taxpayer to deduct an annual exemption_amount for each dependent of the taxpayer sec_152 defines dependent to include a qualifying_child or a qualifying_relative generally a qualifying_child is a child of the taxpayer who has the same principal_place_of_abode as the taxpayer for more than one-half of the taxable_year and meets an age restriction and a self-support prohibition that are not at issue here sec_152 there is a special rule in cases of divorced parents or parents who live apart at all times during the last months of the calendar_year and who provide over one-half of the child’s support during such calendar_year sec_152 in those instances the child may be treated as the qualifying_child of the noncustodial_parent if the custodial_parent signs a written declaration waiving his or her right to claim the child and 7petitioner has not raised any issue regarding sec_7491 and therefore it does not apply attaches the written declaration to the return sec_152 and the custodial_parent is the parent who has custody of the child for the greater portion of the calendar_year sec_152 petitioner and ms casiano who provided more than one-half of i d g ’s support for lived apart for the last months of petitioner did not introduce an agreement that establishes legal custody of the children if neither a divorce decree nor an agreement establishes who has custody then custody will be deemed to be with the parent who as between both parents has the physical custody of the children for the greater portion of the calendar_year sec_1_152-4 income_tax regs petitioner had physical custody of i d g for more than one-half of accordingly we hold that i d g is a qualifying_child of petitioner moreover petitioner did not waive the dependency_exemption by attaching a written declaration to his return consequently petitioner is entitled to a dependency_exemption deduction for i d g sec_152 applies whether or not parents have ever been married to one another 121_tc_245 sec_152 as interpreted in king was amended by the working families tax relief act of wftra publaw_108_311 sec 118_stat_1169 and by the gulf_opportunity_zone act of publaw_109_135 119_stat_2632 however those amendments do not affect our holding in king that sec_152 applies whether or not parents have ever been married because they do not alter the language being interpreted following the birth of r a g in date ms neal and r a g lived with petitioner and petitioner provided most of r a g ’s support for the remainder of the period preceding the birth of a child does not prevent such child from qualifying as a dependent sec_1_152-1 income_tax regs moreover ms neal did not claim r a g as a dependent accordingly r a g is a qualifying_child consequently petitioner is entitled to a dependency_exemption deduction for r a g we next address the child_tax_credit subject_to limitations based on adjusted_gross_income a taxpayer is entitled to a child_tax_credit with regard to each qualifying_child of the taxpayer sec_24 a qualifying_child for purposes of the child_tax_credit is a child who is a qualifying_child under sec_152 and who is under the age of sec_24 as we held above petitioner is entitled to treat r a g and i d g as qualifying children for his tax_year additionally the age_test is not in dispute accordingly we hold that petitioner is entitled to child tax_credits for r a g and i d g for his tax_year we next address petitioner’s filing_status sec_1 provides a special tax_rate for an individual filing as a head of sec_1_152-1 income_tax regs applies to a prior definition of dependent this definition was amended by wftra sec however the regulations were not amended and remain in effect see eg instruction sec_21 household as relevant herein sec_2 defines a head of a household as an unmarried individual who maintains as his home a household that for more than one-half of the year constitutes the principal_place_of_abode of a qualifying_child as defined in sec_152 determined without regard to sec_152 the record shows that i d g lived with petitioner for more than one-half of as stated above i d g is petitioner’s child and i d g meets age and self-support restrictions that are not in issue additionally petitioner is unmarried accordingly we hold that petitioner is entitled to head-of- household filing_status for his tax_year we have considered all of the contentions and arguments of the parties that are not discussed herein and we find them to be without merit irrelevant or moot to reflect the foregoing decision will be entered for petitioner


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 4-plr-121507-01 date date re legend settlor settlor beneficiary trust trust date trustee state dear this is in response to your letter of date in which you request a ruling on the application of the generation-skipping_transfer gst tax provisions of chapter of the internal_revenue_code to the proposed modification of trust and trust on date settlor and settlor who were sisters created identical irrevocable inter_vivos trusts trust was created by settlor and trust was created by settlor trust and trust provide that during the life of the respective settlor trustee is to pay all of the net_income to a charitable_trust after the death of the respective settlor trustee is to pay the net_income of trust and trust to eight named nieces and nephews of settlor and settlor in equal shares if any of the named nieces and nephews die leaving lawful issue the issue are to take per stirpes the net_income which a deceased niece or nephew would have been entitled to receive if living in the plr-121507-01 event that any niece or nephew shall die leaving no lawful issue trustee will pay that share of net_income to the surviving named nieces and nephews and the lawful surviving issue if any of any named deceased niece or nephew said issue to take per stirpes trust and trust will terminate twenty years after the death of the last survivor of the named nieces and nephews all assets of the trust estate will be distributed outright to the persons entitled to the income at the time the trusts terminate in the same proportions that the persons are entitled to the income immediately prior to termination if there are no surviving issue of the named nieces and nephews the property is to be distributed to the settlors’ heirs at law under the laws of descent of state of the eight named beneficiaries only one is currently living of the seven deceased beneficiaries one died without surviving descendants six other named beneficiaries died and are survived by second third and fourth generation descendants at the request of the descendants of beneficiary the trustee proposes to segregate one-seventh of the assets in trust and establish a separate_account to be administered for the benefit of the descendant’s of beneficiary trustee also proposes to segregate one-seventh of the assets in trust and establish a separate_account to be administered for the benefit of the descendant’s of beneficiary these separate_accounts will be administered in accordance with the terms of trust and trust respectively except that only descendants of beneficiary will receive income from the accounts and on termination of the trusts the corpus held in the segregated accounts will be paid to the descendant’s of beneficiary as provided in the trust instruments in all other respects the segregated accounts will be administered as provided under the terms of trust and trust it is represented that trusts were created and irrevocable before date and that no additions have been made to trusts since date you have requested a ruling that the partition of one-seventh of the assets of trust and trust into a segregated account will not result in the imposition of the gst tax sec_2601 imposes a tax on every generation-skipping_transfer section b a of the act and sec_26_2601-1 of the generation- skipping transfer_tax regulations provide that the generation-skipping_transfer_tax shall not apply to any generation-skipping_transfer under a_trust that was irrevocable on date but only to the extent that such transfer is not made out of corpus added to the trust after date or out of income attributable to corpus so added plr-121507-01 sec_26_2601-1 provides that any trust in existence on date will be considered an irrevocable_trust except as provided in sec_26_2601-1 b or c relating to property includible in the grantor’s gross_estate under sec_2038 and sec_2042 sec_26_2601-1 provides that if an addition is made after date to an irrevocable_trust which is excluded from the application of chapter by b a of the act a pro_rata portion of subsequent distributions from and terminations of interests in property held in the trust is subject_to the provisions of chapter sec_26_2601-1 provides rules for determining under what circumstances judicial actions settlements trustee actions and trust modifications will not cause a_trust created before date to lose exempt status sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause the 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 modifications 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 in this case trust and trust were created and irrevocable before date also it is represented that no additions have been made to trust since date consequently trust and trust are currently exempt from gst tax the proposed segregation of a one-seventh share of trust and trust into separate_accounts as discussed above will not shift any beneficial_interest in trust or 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 division in addition the proposed segregation will not extend the time for vesting of any beneficial_interest in the trusts beyond the period provided for in the original trust accordingly based on the facts submitted and the representations made the separate_accounts resulting from the segregation of one-seventh of the assets of trust and trust will not be subject_to the provisions of chapter plr-121507-01 in accordance with the power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours george masnik chief branch office of the associate chief_counsel passthroughs and special industries enclosure copy for purposes


internal_revenue_service department of the fan uniform issue list washington dc ek kek kk ek kkk kek ek kkk kk kk kkk ke kakkkkkkrkkkark kkk kkk kkk contact person kkk kkk kkkkk kk kk ke kk telephone number kkk kkk kk kkk kek kkk kk kh kkk kk keke kkk kk kk kkk kk kkk kk kkk kk kkk kk kkk kkk kkk rk ke in reference to _ eexeeeeets epo ra ty date attention kk kkk k kk kkk kk kk kk ek legend employer rrr kr kr kkk kkk kkk kkk keke kee kar kkk kk keke kek medical school kk raa kr kr aka kkk kkk keke university state a kkk kkk k kkk kkk kkk kkk kkk keke kkk kkk keke k ok a te kk ke ke kk ok tek ok kok ok kk kk kk ek kkk ek kakkkkk kek state a board tek tek ok ke ke kkk kk kk kkk kk kok kkk kok head of state a board w h eee ee ee kkk kekek plan x kk kkk kkk kkk kkk kek kr ke kek eh ee ee ee kkk karr kkk ek kk kk kkk kk kk rk kk eee ee ee ee ee ee ee kk ek rk kkk kr kkk kkk kr kkk kkk kkk keke kkkeek ladies and gentlemen this is in response to a request submitted on your as supplemented by a letter dated june for a letter_ruling concerning whether plan x is behalf by your authorized representative in a letter dated date governmental_plan as defined in sec_414 internal_revenue_code code and whether plan x meets the requirements of sec_403 of the code of the a the following facts and representations have been made in support of the governmental_plan ruling_request the employer is a medical faculty practice incorporated the employer received a letter dated august from the internal_revenue_service recognizing it as a professional_service_corporation under the laws of state a and is associated with the university through the medical school as exempt from federal_income_tax under sec_501l a the code as an organization described in sec_501 c the letter also stated that the employer is not a private_foundation under sec_509 of the code the employer established plan x as a tax-deferred annuity plan pursuant to sec_403 of the code effective january plan x has been amended and restated incorporating amendments one and two b to meet the requirements of section of as stated in the employer's charter the employer's the employer was chartered to advance the purposes of the medical educational program and related activities of the medical school at the university which is a state university chartered as part of the state a university system purpose is primarily to conduct medical education medical_research medical_care and the practice of medicine in order to improve the medical school and its affiliated teaching hospitals their teaching and research resources their facilities and their service opportunities the employer fulfills its duties by providing physicians to render patient care in hospitals operated in connection with the university furnishing assistance in the training and education of students of the medical school and assisting in certain research activities of the medical school 2y2 erk kkk kkk krkekkkkkkeke kk kkk kk kkk kek the employer provides facilities for students and resident physicians to see patients and to observe the members in the practice of medicine required as part of the students’ curriculum at the medical school the employer will not provide care to any patients who are uncomfortable being seen by students and resident physicians building owned by state a employer performs a legitimate government function by educating students of the medical school through clinical instruction and research activities the medical services are carried out ina is represented that the the activities are it under the by laws of the employer a physician member if any physician member leaves the faculty of of the employer must be a faculty_member of the medical school and the medical school membership in the employer terminates automatically under the private practice regulations of the employer the appropriate department chairperson with the approval of the dean of the medical school shall specify the maximum portion of time to be devoted to medical_health_services of the employer by physician members the medical school has the authority to restrict the physician members from participating in the medical health practice carried on by the employer if such services interfere with the proper performance of academic duties of the medical school the medical school the university and state a retain the directors at large must be members of the under the by laws of the employer the board_of control_over the administration and operation of the employer directors is composed of the dean of the medical school the chairperson of each clinical department of the medical school the president of the university the head of state a board or their designees and three elected directors at large employer all of whom are faculty members of the medical school state a board was required to approve the charter of the employer its by laws and the employer and its private practice regulations employer’s by laws may not be altered or amended without approval of the dean of the medical school the president of the university and the head of state a board as set forth in the employer’s by laws the agreement between the university the head of the hy4 kr kkk kkk ree keke kee kkk kkk kkk kkk kk kkk although the employer was not created under any specific statute of state a implied statutory authority was necessary for the creation and use of the employer employer was created by the state a board board was established pursuant to state a statute state a board has the authority to do all things necessary for the creation proper maintenance and successful and continuous operation of the state a university system employer was created to benefit the medical school which is a part of the state a university system the state a the the the under the employer's charter no part of its net_earnings shall inure to the benefit of its members trustees officers or other private persons except that the employer shall be authorized to pay reasonable_compensation to its employees for services rendered including physician members’ supplemental salaries and to make payments and distributions in furtherance of its purposes the agreement between the university and the employer it also prohibits any the agreement approves of all gifts to contributions bequests devises provides that the employer may create implement and operate a medical services plan the by laws of the employer amendments to the employer’s charter or by laws without the written approval of the university and the state a board under the agreement the employer in the conduct of its independent activities may provide medical and health care services and charge fees for such services all income and funds received for patient care activities belong to the employer or grants negotiated with or by the employer shall be subject_to the prior approval of the president of the university and employer all real_property acquired by gifts or bequests or purchased with the employer's funds shall be subject_to the approval of the president of the university and approved shall become the property of the employer in general article v of the agreement provides that total collections of the employer shall be applied in the following priorities first payment of all expenses of the employer excluding salary supplements of the members if so approved shall belong to the second a percentage of all funds will be used if so for 2yy kkkkkkkkkkkrkkkkekkkkk kkk kkk kkk kkk kkk third expenses such percentage shall not exceed cash receipts will be contributed to a specific fund for the medical school fund without approval of the employer's membership may be paid from the fund subject_to the annual employer's any monies remaining in the fund at year operating budget end will be contributed to the university for the exclusive use of the medical school funds will be used for the salary supplements of individual members as stipulated in their professional services agreements pro_rata based on individual total collections to establish a corporate reserve residual income at year end department of the medical school will be used for educational research and service purposes residual departmental revenues at the end of the fiscal_year be redistributed to individual faculty in that department based upon their percentage of contribution to the total cash collected for that year school must approve such distribution such portion determined by the departmental chair may fifth a department's that of a clinical the dean of the medical funds will be used a portion of fourth ie the employer shall keep financial records in accordance with generally_accepted_accounting_principles and the accounting system of the employer shall be subject_to the approval of the university the state a board and the comptroller of the treasury of state a financial records shall be audited annually by a certified_public_accountant recommended by the employer and approved by the university the university the state a board and the comptroller of the treasury of state a shall have access to financial or other records of the employer at any time copies of the employer's audited financial statements for the and years were submitted with the ruling_request primarily from patient service revenue and most of the expenses are wages salaries and benefits the statements show that the employer is funded under the employer’s by laws the employer may be dissolved by the head of the state a board subject_to the approval of the state a board the charter of the employer provides that upon dissolution the board_of directors shall after paying or making provision for payment of all of ya kaa ak kr keke kkk kee kkk kkk kkk kk liabilities distribute the remaining assets of the employer to the university for the benefit of the medical school in the event that the university ceases to be an exempt_organization as an agency of state a assets shall be distributed to the state a board event the state a board ceases to be an exempt_organization as an agency of state a then all remaining assets shall be distributed to state a then all remaining in the separate payrolls are maintained by the employer and the university the physicians employed by the employer receive income_tax form w-2s from the employer as well as from the university physicians are considered to be employees of both the employer and the university it has also been represented that the employer has always paid fica tax with respect to its employees it has been represented that the based on the foregoing your authorized representative has requested the following ruling that the employer through its affiliation with the university and direct oversight by state a instrumentality of state a under sec_414 of the code and consequently that plan x which is sponsored by the employer is sec_414 of the code a governmental_plan as that term is defined by is an sec_414 of the code provides in part that for purposes of chapter 1d the term governmental_plan means a plan established and maintained for its employees by the government of the united_states by the government of any state or political_subdivision thereof or by any agency_or_instrumentality of any of the foregoing part i revrul_89_49 1989_1_cb_117 provides that a plan will not be considered a governmental_plan merely because the sponsoring_organization has a relationship with a governmental_unit or some quasi- governmental power the most important factors to be considered in determining whether an organization is an agency_or_instrumentality of the united_states or any state or political_subdivision is the degree of control that a governmental entity or one of 4b - j- kak kkkkrkkkkkkkkkkk kkk kkk kk kkk kkk rk kk other factors include entities exercises over the organization's everyday operations specific_legislation creating the organization source of funds for the organization which the organization's trustees or operating board are selected and whether the applicable governmental_unit considers the employees of the organization to be employees of the applicable governmental_unit the the manner in whether there is the employer performs a governmental function by educating students through clinical instruction and research activities and through observation of the physician faculty members of the medical school in the practice of medicine these educational_services are performed on behalf of the medical school which is part of the university and which in turn the university is chartered as part of the state a university system the employer is governed by its board_of directors the as previously indicated the at large state a through its representation on the board_of directors substantially controls the employer employer's board_of directors is composed of the dean of the medical school the chairperson of each clinical department of the medical school the president of the university the head of state a board or their designees and three elected directors at large directors must also be full-time employees of the medical school consequently they must act in a manner which will not jeopardize their employment with the medical school and the university in order to remain on the board result state a through the state a board the university and the medical school exercises substantial control_over the employer the charter the by laws university and the employer and the employer’s private practice regulations employer is controlled and supervised by a public authority the head of the state a board must approve under these circumstances the the agreement between the asa implied statutory authority was necessary for the creation and use of the employer by the state a statute granting the state a board such powers not otherwise prescribed by law carry out the board’s responsibility for the efficient the employer was created as are necessary to ka rak kkk kk keke kek kkk ke administration and operation of the university system employer was created to benefit the medical school which is part of the state a university system the the employer is funded primarily by income generated the university monitors the from a medical services plan employer's finances and its expenditures accounting is audited annually and is subject_to approval of the university and the comptroller of the treasury of state a the employer may be dissolved by the state a board in the event that the employer is dissolved all remaining assets of the employer shall be distributed to the university for the benefit of the medical school or to the state a board or to state a the employer's the provisions of plan x show that the plan was established by the employer and will be maintained for its employees based on the information submitted we conclude that the employer through its affiliation with the university and oversight by state a under sec_414 of the code and consequently that plan x which is sponsored by the employer is governmental_plan as that term is defined by sec_414 d of the code is an instrumentality of state a a no opinion is expressed as to the federal tax consequences of the transaction described above under any other provision of the code we do not express an opinion on whether wages paid_by the employer are subject_to tax under the federal_insurance_contributions_act this ruling is based on the assumption that an official or officials of the employer formally execute plan x amended and restated to incorporate amendments one and two as because the request presents more than one issue and because your authorized representative requested separate letter rulings a separate letter_ruling will be issued with respect to the ruling_request that plan x meets the requirements of sec_403 of the code wok kkk kok kk kk kk ke kkk ke eo ek this letter_ruling is directed only to the taxpayer that requested it that it may not be used or cited by others as precedent sec_6110 of the code provides a copy of this letter has been sent to your authorized representative in accordance with a power_of_attorney on file in this office sincerely thr riddle tr john g riddle jr manager employee_plans technical group tax exempt government entities division enclosures deleted copy of this letter notice of intention to disclose notice


department of the treasury internal_revenue_service washington d c date number release date cc dom fs it a uilc internal_revenue_service national_office field_service_advice memorandum for from deborah a butler assistant chief_counsel field service cc dom fs subject addition of interest accrued but uncollected while the taxpayer was an exempt_organization in the basis_of_property for purposes of bad_debt deductions and consistency of position with treatment of intangibles this field_service_advice responds to your memorandum dated date received here on date it is not binding on examination or appeals and is not a final case determination this document may not be cited as precedent legend taxpayer year year issues whether the taxpayer may include interest amounts it accrued but did not collect while it was a tax-exempt_organization in basis_of_property for purposes of computing its bad_debt losses on that property in or after year when it actually became a taxable entity whether there is an inconsistency between application of the position taken on issue and the position taken in a technical_advice_memorandum tr-32-0149-91 hereinafter tam where this taxpayer was required to use its ostensibly adjusted_basis to calculate any allowable amortization notwithstanding the requirements of sec_1016 conclusions taxpayer may not increase its basis so as to include interest amounts it accrued but did not actually collect prior to year while it was a tax-exempt_organization taxpayer must under sec_1016 adjust the basis of capitalized intangible_property by the amount of amortization allowable for that property since the asset acquisition_date regardless of the fact that taxpayer did not actually claim any amortization deduction in the years when it was tax-exempt facts details concerning the creation and operation of taxpayer are set out at length in the technical_advice_memorandum cited above for present purposes those facts may be summarized here taxpayer was created in year from its inception until year it was exempt from all federal state and local_taxes other than real_property_taxes the issues presented herein revolve around that transition in operation taxpayer links residential mortgages meeting specific guidelines from a designated group of lenders with the financial capital markets it accomplishes this objective by buying mortgages from lenders originators pooling these obligations and issuing securities identified with specific pools to the investing public taxpayer does not actually orginate mortgages taxpayer obtains mortgages either for cash or for its marketable_securities in connection with certain guarantees it makes with respect to principal and interest payments taxpayer acquires some mortgages which are in default in addition taxpayer acquires some mortgages for cash which go into default later with respect to these properties taxpayer claimed bad_debt deductions in and from foreclosure losses included in these claimed losses was unpaid but accrued interest which had accrued prior -when the taxpayer lost exempt status the accrued interest amounts increased any losses on the -3- foreclosures because taxpayer added those amounts to its purported basis on the properties foreclosed these pre-1985 additions to basis by taxpayer were specifically addressed by the tam and found to be improper since the amounts were never actually returned as income law and analysis issue as you have asked we have reviewed the position taken in the tam and requested the technical division to do the same in both cases we believe the position set forth therein ie that the accrued unpaid interest should not be added to the basis_of_property is correct issue part ii of subchapter_o of the internal_revenue_code code sets forth basis rules of general application provides no rule or guidance for calculating the adjusted_basis for purposes of depreciating intangible_property the adjusted_basis must be determined under existing provisions of the code the applicable provisions are found in part ii of subchapter_o under sec_1012 of the code the basis_of_property is the cost of such property the cost_basis is then adjusted under sec_1016 as it relates to depreciation sec_1016 provides that the cost_basis of property shall be decreased for exhaustion wear_and_tear obsolescence amortization and depletion by the greater of two amounts the amount allowed as deductions in computing taxable_income to the extent resulting in a reduction of the taxpayer’s income taxes or the amount allowable for the years involved if the taxpayer has not taken a depreciation deduction in any prior taxable_year the adjustment to the basis of the property for depreciation allowable is to be determined by using the straight-line method_of_depreciation sec_1_1016-3 thus if the cost of an intangible asset is capitalized pursuant to sec_263 and added to basis under sec_1012 under the plain language of sec_1016 petitioner must adjust the basis of any intangible_property it seeks to depreciate by the amount of depreciation allowable for that asset since acquisition_date this is true regardless of the fact that petitioner did not actually claim any deductions for depreciation in the years when petitioner was not subject_to tax unlike the analysis in the tam supporting the position that accrued interest not returned as income is excluded from the cost_basis of real_estate owned for purposes of calculating bad_debt losses under sec_166 petitioner is not required to receive a tax_benefit before basis is adjusted for allowable but not taken depreciation the legislative_history of sec_1016 supports the foregoing proposition in the predecessor to sec_1016 was amended in order to correct a supreme court interpretation of an earlier amendment added by the revenue act of the intended purpose of the amendment was to prevent a taxpayer from claiming a double deduction by requiring any excessive_depreciation claimed and subsequently allowed to reduce the basis of the property however in 319_us_523 the supreme court construed the amendment to mean that even in the case of a taxpayer who had received no tax_benefit from mistakenly claiming excessive_depreciation in earlier years now closed the taxpayer was required to reduce his basis in the depreciable_property by that amount the amendment in relevant part corrected the seemingly unjust interpretation in virginian hotel corp by providing that the adjusted_basis of property is to be reduced by excessive_depreciation shown in a return only to the extent that such excessive_depreciation resulted in a reduction in the taxpayer’s taxes the determination of whether a deduction resulted in a tax_benefit is only necessary when excessive_depreciation is claimed when a taxpayer claims an appropriate deduction for depreciation for basis_adjustment purposes it is immaterial whether the deduction results in a tax_benefit to the taxpayer consistent with this proposition is the fact that a taxpayer is required to adjust basis in an asset by the amount of depreciation allowable even in the case where a taxpayer did not claim any deduction the legislative_history illustrates this point the committee continues the provisions of existing law also included in the house bill which require that the basis_of_property shall be reduced in any case by amounts allowable whether or not any_tax benefit is derived therefrom s rep no pincite h_r amendment makes no change in the law with reference to the deduction of allowable_depreciation the law has been and will remain that depreciation which was allowable in a prior year must be deducted in computing basis even though in the light of later events it develops that the depreciation in such prior year was actually less than it was then properly estimated to be and this is true regardless of whether depreciation allowable in such prior year had any effect on tax_liability in the prior year such depreciation must be deducted even though there was no income against which it could be offset cong rec statement of mr camp emphasis added thus in the instant case the fact that petitioner did not receive a tax_benefit from amortization in previous years is not relevant depreciation is centered on the concept that property has a limited useful_life depreciation represents the decline in value of property that occurs over time due to wear_and_tear obsolescence amortization exhaustion etc assuming petitioner has any amortizable intangible_property the decline in the value of such assets in petitioner’s hands began at the time of acquisition or creation not at the time petitioner became taxable accordingly petitioner is required under sec_1016 to calculate the allowable_depreciation for its intangible assets from the year acquired and adjust the basis of these assets accordingly case development hazards and other considerations by thomas d moffitt acting chief income_tax accounting branch


internal_revenue_service number info release date index number - ------------------------------ -------------------------- ------------------------ -------------------------------- - department of the treasury washington dc person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc psi - genin-166668-03 date jan dear ------------ we are responding to correspondence submitted by your representative requesting relief in order to establish date as the effective date for your s_corporation_election based on the information provided the form_2553 was sent but the internal_revenue_service failed to receive it in a timely manner automatic relief is unavailable under revproc_97_48 because the irs notified you about the missing election within six months of receiving your first form_1120s tax_return although we are unable to respond to your request as submitted this letter provides information relating to your situation announcement copy enclosed provides guidance on seeking relief for late s_corporation elections generally to request relief for a late s_corporation_election you must request a private_letter_ruling from the national_office the information forwarded to our office is insufficient for us to process a private_letter_ruling request the procedures for requesting a private_letter_ruling are set forth in revproc_2003_1 copy enclosed in addition taxpayers must submit a user_fee along with their ruling_request the standard user_fee for a private_letter_ruling is dollar_figure however taxpayers with gross_income of less than dollar_figure million on their tax_return for the most recent 12-month taxable_year qualify for a reduced user_fee in the amount of dollar_figure if you qualify for the reduced fee you must include a statement claiming that your gross_income for the last 12-month taxable_year was less than one million dollars if you decide to submit a formal request for a private_letter_ruling please follow the sample format provided in appendix b of revproc_2003_1 your request should include all required procedural statements a check for the user_fee and any documents that substantiate your intent to be an s_corporation from inception please refer your request to our office by adding the following to the address room direct to cc psi in addition the irs has developed two new cd-roms to help educate small internal_revenue_service attn cc pa t p o box ben franklin station washington dc business owners on their tax responsibilities introduction to federal taxes for small_business self-employed and a virtual small_business workshop these two cd- roms are free and can be ordered by calling the irs also provides a special website www irs gov businesses small which is dedicated to providing information to small_business taxpayers please keep this letter with your tax records and feel free to provide a copy of it to your authorized representative we hope that the above information proves helpful s dianna k miosi enclosures announcement revproc_2003_1 dianna k miosi chief branch associate chief_counsel passthroughs and special industries sincerely yours