t c summary opinion united_states tax_court paul roger tsai petitioner v commissioner of internal revenue respondent docket no 1450-12s filed date paul roger tsai pro_se rollin g thorley for respondent summary opinion armen special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined the following income_tax deficiencies and penalties in regard to petitioner’s and tax years year deficiency dollar_figure big_number penalty sec_6662 dollar_figure dollar_figure after concessions by petitioner the issues remaining for decision are whether petitioner is entitled to a deduction for legal fees he paid in and unless otherwise indicated all subsequent section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure petitioner concedes that he is not entitled to the following deductions claimed on his schedules c profit or loss from business for tax years and adjustment to income schedule c -- other expenses schedule c -- car and truck schedule c -- contract labor schedule c -- depreciation dollar_figure big_number --- big_number dollar_figure dollar_figure dollar_figure dollar_figure whether petitioner is entitled to a dependency_exemption deduction with respect to his son for tax years and whether petitioner is entitled to a dependency_exemption deduction with respect to his daughter for tax_year whether petitioner qualifies for head_of_household filing_status for and whether petitioner is liable for accuracy-related_penalties for and background some of the facts have been stipulated and they are so found we incorporate by reference the parties’ stipulation of facts and accompanying exhibits petitioner resided in the state of nevada when the petition was filed legal fees on date petitioner and his former spouse ms hsu married the former couple had two children a son and a daughter petitioner did not claim dependency_exemption deductions for his son on his and tax returns however this issue was tried to the court by the consent of the parties see rule b in during their marriage petitioner and ms hsu purchased acres of undeveloped land in las vegas nevada for dollar_figure property by date petitioner and ms hsu were in the midst of a divorce and petitioner had hired an attorney to represent him in the divorce proceedings divorce attorney beginning on date petitioner and ms hsu attended numerous hearings conducted by the district_court for clark county nevada family division family court during which the former couple reached agreement regarding child custody child_support and the division of community_property in connection with their divorce on date the family court filed an order order stating that the former couple would share joint legal custody of their children with ms hsu having primary physical custody the order further states that petitioner shall pay child_support of dollar_figure per month to ms hsu the order also states that the property shall be placed in trust for the children and that the former couple will be co-trustees of that property moreover the order states that should the property sell the proceeds from the property shall be either placed in trust or reinvested for the benefit of the children a quit claim deed shall be signed by the former couple placing the property in the children’s names with the former couple as trustees on or around date and in accordance with the order petitioner and ms hsu executed a quitclaim_deed and placed the property in trust for the benefit of their children children’s trust on or around date over a decade after the children’s trust was created the property was sold for dollar_figure when ms hsu attempted to place the proceeds from the sale into the children’s trust petitioner refused arguing that the value of the children’s trust exceeded the funds needed to finance the children’s education and that any funds not used for the children’s education should be equally divided between petitioner and ms hsu petitioner also argued that the sale proceeds for his children’s education should be split between two trusts with petitioner and ms hsu each maintaining his or her own trust for the children on date the family court issued findings_of_fact conclusions of law and an order order holding inter alia that petitioner and ms hsu never intended to retain an interest in the property rather they both agreed to transfer all the right title and interest in the property to their children’s trust in accordingly the family court ordered that all of the sale proceeds be distributed to the children’s trust petitioner appealed the order to the supreme court of the state of nevada nevada supreme court on appeal petitioner claimed that the family court erred by concluding that the former couple agreed to transfer their entire_interest in the property to their children’s trust in by permitting the trust to reimburse ms hsu for the children’s primary and secondary education in private_schools arguing that such payments constituted an improper retroactive modification to his child_support_obligations and by concluding that the family court had jurisdiction to clarify the children’s trust where neither he nor ms hsu joined the children’s trust as a party to the litigation the nevada supreme court affirmed the family court’s decision petitioner paid legal fees to his divorce attorney in and for appealing the order dependency_exemption deductions and filing_status in and petitioner resided in las vegas nevada during those years petitioner’s son was a full-time college student and resided in california alone or with college roommates in from january until august petitioner’s daughter resided with ms hsu in hong kong in august petitioner’s daughter reached the age of and moved from hong kong to new york to attend college full time residing in on- campus housing at the college for the remainder of from january to date petitioner paid dollar_figure per month of child_support for his daughter petitioner’s tax returns petitioner timely prepared and filed his and federal_income_tax returns claiming head_of_household filing_status and a dependency_exemption deduction with respect to his daughter attached to his return was a schedule a itemized_deductions on which petitioner claimed a deduction for legal fees of dollar_figure attached to his return was a schedule a on which petitioner claimed a deduction of dollar_figure described as sfty box legl invsmt expenses etc almost all of which were for legal fees in a notice_of_deficiency respondent disallowed inter alia the claimed deduction for legal expenses and dollar_figure of the claimed deduction for sfty box legl invsmt expenses etc allowing a dollar_figure deduction for expenses associated with petitioner’s safety deposit box respondent further disallowed petitioner’s claimed dependency_exemption deduction with respect to his daughter for in addition respondent determined that petitioner did not qualify for head_of_household filing_status in because petitioner did not furnish more than one-half the total cost of keeping up a home for himself and a dependent in that year discussion in general the commissioner’s determinations in a notice_of_deficiency are presumed correct and the burden is on the taxpayer to show that the determinations are erroneous see rule a 503_us_79 290_us_111 deductions are a matter of legislative grace and a taxpayer bears the burden of proving that the taxpayer is entitled to any deduction claimed 308_us_488 292_us_435 for however respondent did not adjust petitioner’s claimed dependency_exemption deduction for his daughter or his claimed head_of_household filing_status pursuant to sec_7491 the burden_of_proof as to factual matters may shift from the taxpayer to the commissioner under certain circumstances however petitioner neither alleges that sec_7491 applies nor has established that he complied with the requirements of sec_7491 accordingly the burden_of_proof remains on petitioner i legal fees petitioner contends that the legal expenses he reported on his and returns were paid in connection with litigation to collect income and are therefore deductible under sec_212 respondent maintains however that petitioner’s claimed legal expenses are nondeductible because those expenses derive from a suit that originated in a personal or family matter and therefore are personal living or family_expenses within the meaning of sec_262 we agree with respondent ordinary and necessary expenses paid for the production_or_collection_of_income are generally deductible by taxpayers sec_212 on the other hand personal_living_and_family_expenses are generally not deductible sec_262 moreover legal fees paid_or_incurred in perfecting title to a capital_asset are nondeductible capital expenditures sec_263 397_us_572 petitioner does not argue that the legal expenses he reported were paid for the management_conservation_or_maintenance_of_property_held_for_the_production_of_income see sec_212 moreover the record does not support such an argument see duntley v commissioner tcmemo_1987_579 acknowledging that the terms management conservation and maintenance do not refer to a taxpayer’s efforts to retain an ownership in land whether legal fees are deductible under sec_212 or nondeductible under sec_262 or sec_263 depends on the origin and character of the underlying claim not on its potential effects on the fortunes of the taxpayer or the taxpayer’s purpose for undertaking the litigation see woodward v commissioner u s pincite rejecting a subjective test founded on the motive or purpose of the taxpayer in undertaking litigation 372_us_39 legal fees paid_or_incurred in connection with a divorce are generally nondeductible because the claims underlying the legal fees typically originate from personal or family matters not from an income-producing activity 372_us_53 gilmore u s pincite 45_tc_439 however a deduction for legal expenses is not necessarily precluded simply because the taxpayer’s underlying claim arose in a divorce action hahn v commissioner tcmemo_1976_113 rather we must identify the underlying claim that gave rise to the legal expenses at issue and then determine whether the origin of that claim is personal in nature see peters gamm west vincent inc v commissioner tcmemo_1996_186 see also 688_f2d_675 9th cir setting forth a two-step test in the ninth circuit requiring the court to identify the transaction or event from which the claim originated and then to characterize that transaction or event aff’g tcmemo_1978_350 petitioner primarily argues that the legal expenses he claimed were paid for the purpose of collecting a portion of the property sale proceeds ie to collect income and are therefore deductible under sec_212 this argument is misplaced because as previously stated the tax treatment of the legal expenses at issue hinges on the origin and character of petitioner’s claims not the possible consequences on his fortunes if those claims were to prove successful or his purpose for undertaking the litigation see woodward v commissioner u s pincite gilmore u s pincite petitioner further argues that because the claims underlying his legal expenses derive from the property sale in over a decade after his divorce those claims were not personal living or family_expenses under sec_262 we disagree the parties stipulated that the and legal expenses at issue were paid to petitioner’s divorce attorney for appealing the order entered by the family court in his appeal of the order to the nevada supreme court petitioner claimed that the family court erred by concluding that the former couple agreed to transfer their entire_interest in the property to their children’s trust in by permitting the trust to reimburse ms hsu for the children’s primary and secondary education in private_schools arguing that such payments constituted an improper retroactive modification to his child_support_obligations and by concluding that the family court had jurisdiction to clarify the children’s trust where neither he nor ms hsu joined the children’s trust as a party to the litigation we agree with petitioner that the property sale was the event that prompted him to bring suit see keller street dev co v commissioner f 2d pincite however the record establishes and we conclude that the property sale was personal in character petitioner and ms hsu purchased the property as husband and wife pursuant to their child custody child_support and community_property_agreement as well as the order petitioner and ms hsu placed the property in their children’s trust to provide funds for their children’s education the former couple sold the property in their capacities as cotrustees of their children’s trust furthermore interest petitioner might have retained in the property would have been acquired during and because of his marriage to ms hsu see smith v commissioner tcmemo_1980_182 moreover petitioner has provided no evidence that the property sale was associated with a profit-seeking activity see gilmore u s pincite rather the evidence indicates that the property sale was personal in character although the property sale occurred over a decade after the former couple’s divorce the record establishes that the personal character of the transaction was not changed by the passage of time see smith v commissioner tcmemo_1980_182 therefore we conclude on the basis of the record as a whole that petitioner’s legal fees originated from a personal and family matter stemming from his marital relationship with ms hsu we do not question whether petitioner believed he retained an ownership_interest in the property and thus was entitled to a portion of the property sale proceeds however even if petitioner could point us to an income-producing activity from which his ownership claim arose such claim is fundamentally an attempt to perfect or establish title to the property and therefore any legal fees incurred with respect thereto would be characterized as nondeductible capital expenditures see woodward v commissioner u s pincite 323_f2d_913 9th cir aff’g tcmemo_1961_341 furthermore the claims underlying petitioner’s legal expenses not only relate to perfecting title to the property but also involve retroactive modification of child_support and the family court’s jurisdiction over the children’s trust petitioner provided no evidence regarding what portion of the legal fees was paid to specifically address his claim to perfect title to the property and thus we would be unable to determine what portion would be capitalized if the matter affected redetermination of the deficiency for either year in issue see hill v commissioner tcmemo_2010_268 in any event because petitioner was unsuccessful in perfecting title he has no asset against which to capitalize any portion of the claimed legal expenses see kellner v commissioner tcmemo_1982_729 in sum petitioner has not met his burden of proving that he is entitled to a deduction for any portion of the legal fees at issue instead the record indicates that petitioner’s claims underlying the legal expenses at issue originated from a personal and family matter and are therefore nondeductible accordingly we sustain respondent’s disallowance of petitioner’s claimed deductions for legal fees for and ii dependency_exemption deduction for petitioner’s son in general a taxpayer may claim a dependency_exemption deduction for each individual who is a dependent as defined in sec_152 of the taxpayer for the taxable_year sec_151 c as relevant herein sec_152 defines a dependent to include a qualifying_child of the taxpayer an individual must meet all of the following conjunctive tests to be a qualifying_child relationship_test residency test age_test and support_test sec_152 the parties agree that petitioner’s son satisfies the relationship_test in sec_152 and the age_test in sec_152 the parties disagree as to whether petitioner’s son meets the residency test in sec_152 and the support_test in sec_152 under the residency test a qualifying_child must share the same principal_place_of_abode as the taxpayer for more than one-half of each year in issue sec_152 petitioner and his son did not share the same principal_place_of_abode for more than one-half of or because his son resided in california alone or with college roommates and petitioner resided in las vegas nevada during those years see id thus petitioner’s son was not a qualifying_child under sec_152 for or accordingly we hold that in the case of divorced parents and only under certain limited circumstances a noncustodial_parent may be permitted to claim a child as a qualifying_child even though the residency test has not been satisfied if the custodial_parent signs a written release of the claim to the dependency_exemption deduction see sec_152 we note however that even if sec_152 were to apply in the instant case petitioner has provided no evidence that ms hsu signed a written release with respect to their son or daughter for or petitioner is not entitled to a dependency_exemption deduction with respect to his son for the years in issue iii dependency_exemption deduction for petitioner’s daughter in the notice_of_deficiency respondent disallowed petitioner’s claimed dependency_exemption deduction with respect to his daughter for like petitioner’s son the parties agree that petitioner’s daughter satisfies the relationship_test in sec_152 and the age_test in sec_152 the parties disagree however as to whether petitioner’s daughter meets the residency test in sec_152 and the support_test in sec_152 the record establishes that petitioner’s daughter like his son did not share with petitioner the same principal_place_of_abode for more than one-half of because she resided in hong kong with her mother from january until july and subsequently resided at her college in new york for the remainder of the year therefore we hold that petitioner’s daughter was not a qualifying_child under sec_152 in and we sustain respondent’s disallowance of the dependency_exemption deduction petitioner claimed for her for because of our holding and the conjunctive nature of the requirements in sec_152 we need not address the support_test provided by sec_152 insofar as sec_152 may otherwise apply see supra note iv head_of_household filing_status for as relevant herein sec_2 provides that a taxpayer qualifies as a head of a household if he maintains as his home a household that constitutes the principal_place_of_abode of a qualifying_child for more than one-half of the taxable_year respondent disallowed petitioner’s claimed head_of_household filing_status for we have previously held that petitioner is not entitled to a dependency_exemption deduction for his son or daughter for because neither is a qualifying_child accordingly we hold that petitioner is not entitled to elect head_of_household filing_status for v accuracy-related_penalty sec_6662 and b imposes a penalty equal to of the amount of any portion of an underpayment attributable to negligence or disregard of rules or regulations the term negligence includes any failure to make a reasonable attempt to comply with tax laws and disregard includes any careless reckless or intentional disregard of rules or regulations sec_6662 negligence also includes any failure to keep adequate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs sec_6664 provides an exception to the imposition of the accuracy- related penalty with respect to any portion of an underpayment if the taxpayer establishes that there was reasonable_cause for such portion and the taxpayer acted in good_faith with respect to such portion the decision as to whether the taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account the pertinent facts and circumstances sec_1_6664-4 income_tax regs circumstances indicating that a taxpayer acted with reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances including the experience knowledge and education of the taxpayer id sec_7491 places on the commissioner the burden of production with respect to any penalty thereby requiring the commissioner to come forward with sufficient evidence indicating that it is appropriate to impose the penalty 116_tc_438 once the commissioner meets his burden of production the taxpayer must come forward with persuasive evidence that the commissioner’s determination is incorrect see id see also rule a welch v helvering u s pincite the record indicates that petitioner’s underpayment was generally attributable to negligence either because of his failure to properly substantiate items or his failure to comply with tax laws accordingly we hold that respondent has satisfied his burden of production the record establishes that petitioner failed to properly substantiate the following items adjustment schedule c -- other expenses schedule c -- car and truck schedule c -- contract labor legal fees dollar_figure big_number --- --- dollar_figure dollar_figure dollar_figure dollar_figure petitioner concedes that he is liable for the accuracy-related_penalty with respect to these items petitioner argues however that he had reasonable_cause for and acted in good_faith with respect to the following claimed deductions adjustment legal fees schedule c -- depreciation dependency_exemption dollar_figure dollar_figure --- dollar_figure dollar_figure dollar_figure the single largest item by dollar amount adjusted by respondent for each year in issue was petitioner’s claimed deduction for legal fees and we respondent concedes that petitioner paid all of the dollar_figure of legal fees claimed on his return and dollar_figure of the legal fees claimed on his return but maintains that the legal fees were nevertheless nondeductible personal expenses acknowledge that a determination as to whether he is entitled to that deduction rests heavily on the particular facts of his case on the basis of his testimony and the evidence presented at trial we are satisfied that petitioner whose command of the english language is limited made a good-faith effort to determine his proper tax_liability with respect to the above items and that his underpayment attributable thereto results from an honest misunderstanding of law that was reasonable under the circumstancesdollar_figure likewise we are satisfied that on basis of the particular facts of this case petitioner had reasonable_cause for and acted in good_faith with respect to his claimed head_of_household filing_status for accordingly we hold that petitioner is not liable for the accuracy-related_penalty with respect to the portion of the underpayment attributable to the aforementioned items he claimed conclusion we have considered all of the arguments advanced by the parties and to the extent not expressly addressed we conclude that those arguments do not support a result contrary to our decision herein for instance petitioner substantiated much of his depreciation expenses during respondent’s examination of his and returns but was unaware that he was required to capitalize expenses associated with certain types of tools he used in his business moreover for respondent allowed both a head_of_household filing_status and a dependency_exemption deduction for petitioner’s daughter and petitioner continued to pay child_support for his daughter until date to give effect to our disposition of the disputed issues as well as petitioner’s concessions decision will be entered under rule


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-126753-18 date date in re --------------------------------- legend date settlor trust -------------------------------------------------------------------------------------------------------------- ----------------------- ------------------------- --------------------------------------------------------------------------------- bank son child child child child grandchild grandchild grandchild grandchild date agreement date court state statute ------------------------------------------------------- --------------------------------------- ----------------------------------------------------- ------------------------------------------------- ------------------------------------------------- ------------------------------------------------- -------------------------------------------- ------------------------------------------------------------- --------------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- ---------------- --------------------------------------------------------------------------------- -------------------------------- ------------------ ------------------------------------------------ ------------------------------------------------------------ plr-126753-18 dear -------------- this letter responds to your personal representative’s letter of date and subsequent correspondence in which rulings are requested on the income gift and generation-skipping_transfer gst tax consequences of a court-approved termination of trust the facts and representations submitted are as follows on date a date prior to date settlor created an irrevocable_trust trust for the benefit of son the material purpose of trust was to ensure that son receive an income stream for his support under the terms of the trust agreement the trustees are required to distribute all of the net_income of trust to son and upon his death distribute the remainder to his issue per stirpes the trust agreement does not authorize any distributions of principal during son’s life son has four living adult children current remaindermen and eight living grandchildren four of whom are adults successor remaindermen none of son’s descendants has a predeceased child with living issue son and bank are currently serving as co-trustees of trust state statute provides in relevant part that matters that may be resolved by a nonjudicial settlement include termination of the trust provided that court approval of such termination is obtained in accordance with this section and the court must conclude that continuance of the trust is not necessary to achieve any material purpose of the trust state statute further provides that upon such termination the court may order the trust property distributed as agreed by the parties to the agreement or otherwise as the court determines is equitably consistent with the purposes of the trust on date son the current remaindermen and the successor remaindermen entered into agreement agreement states that the continuance of trust is no longer necessary to achieve any clear material purpose of such trust because son ’s net_worth has grown significantly such that he does not need income from trust for his support agreement further provides for the termination of trust and the distribution of trust’s assets among son the current remaindermen and the successor remaindermen in accordance with the actuarial value of each beneficiary’s share proposed distribution specifically agreement provides that after the date of termination the trustees shall as expeditiously as possible value trust’s assets determine the appropriate distributions to be made upon trust’s termination pursuant to this agreement and terminate trust upon such termination the trustees shall distribute on a pro_rata or in-kind basis as the trustees shall in their sole discretion determine all of the trust’s assets to son current remaindermen and successor remaindermen plr-126753-18 in accordance with their actuarial interests calculated as of the termination_date the termination and proposed distribution is contingent upon court approval and a favorable private_letter_ruling from the internal_revenue_service on date court approved agreement it is represented that trust was irrevocable prior to date and that no additions actual or constructive have been made to trust the trustees request the following rulings the termination of trust and the proposed distribution will not cause trust or any distributions from trust to become subject_to gst tax under chapter of the code the termination of trust and the proposed distribution will not cause any of the beneficiaries of trust to be treated as making a taxable gift the termination of trust and the proposed distribution will cause son and the successor remaindermen to recognize long-term_capital_gain and will cause the current remaindermen to recognize capital_gain on the unrealized_appreciation of the assets received by son and the successor remaindermen upon termination ruling sec_2601 imposes a tax on every gst which is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip under a of the tax_reform_act_of_1986 act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the gst tax is generally applicable to generation-skipping transfers made after date however under b a of the act and sec_26_2601-1 of the regulations the tax does not apply to a 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 sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax will not cause the trust to lose its exempt status in general unless specifically provided otherwise the rules contained in this paragraph are applicable only for purposes of determining whether an exempt trust retains its exempt status for gst tax purposes thus unless specifically noted the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or plr-126753-18 may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of gain for purposes of sec_1001 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 sec_26_2601-1 b or c 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 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 or the creation of a new gst in the present case trust was irrevocable on date it is represented that no additions actual or constructive have been made to trust after that date based on the facts submitted and the representations made we conclude that the termination of trust and the proposed distribution will neither cause a beneficial_interest to be shifted to a beneficiary who occupies a generation lower than the beneficiaries who held the interests prior to the termination nor extend the time for vesting of any beneficial_interest in trust beyond the period provided for in the original trust as long as the actuarial values of the trust accurately represent the actuarial value of each beneficiary’s interest accordingly we rule that the court-approved termination and proposed distribution will not cause trust or any terminating distributions from trust to become subject_to gst tax under chapter of the code ruling 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 sec_2511 provides that subject_to certain limitations the gift_tax applies whether the transfer is in trust or otherwise direct or indirect and whether the property transferred is real or personal tangible or intangible sec_2512 provides that if the gift is made in property the value thereof at the date of the gift is considered the amount_of_the_gift sec_2512 provides that where property is transferred for less than an adequate_and_full_consideration in money or money’s worth then the amount by which plr-126753-18 the value of the property exceeded the value of the consideration is deemed a gift that is included in computing the amount of gifts made during the calendar_year in the present case the beneficial interests rights and expectancies of the beneficiaries will be substantially the same both before and after the termination and proposed distribution as long as the actuarial values of the trust accurately represent the actuarial value of each beneficiary’s interest thus we conclude that no transfer of property will be deemed to occur as a result of the termination and proposed distribution accordingly based on the facts submitted and representations made we conclude that the termination and proposed distribution will not result in a transfer by any beneficiary of trust that is subject_to the gift_tax under sec_2501 ruling sec_1015 provides that if property is acquired 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 the transfer sec_1_1015-2 of the income_tax regulations provides that the principles stated in sec_1_1015-1 apply in determining the basis_of_property where more than one person acquires an interest in property by transfer in trust sec_1_1015-1 provides that property acquired by gift has a uniform basis and that the proportionate parts of that basis represented by the interests of the life_tenant and remainder_interest holder are determined under rules provided in sec_1_1014-5 sec_1001 however provides that in determining gain_or_loss from the sale or disposition of a term_interest_in_property that portion of the adjusted_basis of the interest which is determined pursuant to sec_1015 to the extent that the adjusted_basis is a portion of the entire adjusted_basis of the property shall be disregarded under sec_1001 the term term_interest_in_property includes an income_interest in a_trust but does not include a remainder_interest sec_1001 provides that sec_1001 does not apply to a sale_or_other_disposition which is a part of a transaction in which the entire_interest in property is transferred to any person or persons see sec_1_1001-1 sec_1222 provides that the term long-term_capital_gain means gain from the sale_or_exchange of a capital_asset held for more than one year sec_1221 defines the term capital_asset as property held by the taxpayer with certain listed exceptions not applicable here plr-126753-18 sec_1223 provides that in determining the period for which a taxpayer has held property however acquired there shall be included the period for which the property was held by any other person if the property has the same basis in the taxpayer’s hands as it would have in the hands of that other person revrul_72_243 1972_1_cb_233 provides that the proceeds received by the life_tenant of a_trust in consideration for the transfer of the life tenant’s entire_interest in the trust to the holder of the remainder_interest are treated as an amount_realized from the sale_or_exchange of a capital_asset under sec_1222 the right to income_for_life from a_trust estate is a right in the estate itself see 157_f2d_235 2d cir cert_denied 330_us_826 in revrul_69_486 1969_2_cb_159 a non-pro rata distribution of trust property was made in_kind by the trustee although the trust instrument and local law did not convey authority to the trustee to a make a non-pro rata distribution_of_property in_kind the distribution was effected as a result of a mutual agreement between the trustee and the beneficiaries because neither the trust instrument nor local law conveyed authority to the trustee to make a non-pro rata distribution revrul_69_486 held that the transaction was equivalent to a pro_rata distribution followed by an exchange between the beneficiaries an exchange that required recognition of gain under sec_1001 although the proposed transaction takes the form of a distribution of the present values of the respective interests of son the current remaindermen and the successor remaindermen in substance it is a sale of son’s and the successor remaindermen’s interests to the current remaindermen revrul_69_486 the amounts received by son as a result of the termination of trust are amounts received from the sale_or_exchange of a capital_asset to the current remaindermen revrul_72_243 because son’s basis in the income_interest of trust is a portion of the entire basis of the property under sec_1015 and because the disposition of son’s term interests is not part of a transaction in which the entire_interest in trust is transferred to a third party son’s adjusted_basis in son’s interest in trust is disregarded under sec_1001 son’s holding_period in the life interests in trust exceeds one year accordingly based on the facts submitted and representations made the entire amount_realized by son as a result of the early termination of trust will be long-term_capital_gain under sec_1222 similarly the amounts received by the successor remaindermen as a result of the termination of trust are amounts received from the sale_or_exchange of a capital_asset to the current remaindermen cf 313_us_11 1941_1_cb_364 the phrase property held by the taxpayer under a prior_law holding_period rule relating to capital_gains_and_losses includes not only full ownership but also any interest owned whether vested contingent or conditional the successor remaindermen’s holding_period in their interests in trust also exceeds one year plr-126753-18 accordingly under sec_1222 the gain determined under sec_1001 by the successor remaindermen as a result of the early termination of trust will be long-term_capital_gain in addition to the extent that a current remainderman exchanges property including property deemed received from trust for the interests of son and the successor remaindermen the current remainderman will recognize gain_or_loss on the property exchanged accordingly based on the facts submitted and representations made for purposes of determining gain_or_loss the amount_realized by each current remainderman on the exchange of property for trust interests held by son and the successor remaindermen will be equal to amount of cash and fair_market_value of the trust interests received in exchange for the transferred assets sec_1_1001-1 and revrul_69_486 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely leslie h finlow leslie h finlow senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes copy of this letter


department of the treasury internal_revenue_service washington d c t a x e x e m p t a n d g o v e r n m e n t e n t i t i e s d i v i s i o n contact person telephone number identification_number employer_identification_number number release date se t eo ra t date uniform issue list legend a b c d e dear ------------------ scholarship grant-making procedures under sec_4945 of the internal_revenue_code foundation under sec_509 of the code of b a boys-only boarding school in c described in sec_170 of the code senior officials of b year of commencement of study who are advanced students in or graduates of u s high schools to be selected for a scholarship applicants are invited to submit official transcripts of grades from the educational_institution they currently attend results on standardized tests they have taken written references from educators and others as well as a personal letter explaining a’s scholarship grants program is for boys under the age of on july 1st of the intended the information submitted indicates that a will administer a scholarship program on behalf we have considered a’s ruling_request dated date requesting approval of a’s a is exempt from federal_income_tax under sec_501 of the code and is a private a’s board_of directors is composed of five members three of the members are the current all scholarships are funded according to the financial needs of the individuals as their interest in b all of these documents are screened initially by a’s vice president-u s operations or by officials of d in e a u s educational_institution similar to b screened applications are then forwarded to a’s other officers for review finally applications are forwarded to b’s admissions office in c where a decision is made on the application without regard to race creed or national origin determined by a in consultation with b’s admissions office financial needs analysts to the extent that a student’s parents have the financial means to pay tuition board travel and related expenses they will be expected to do so to the extent that they lack the financial means a will fill the gap with scholarship grants which are paid directly to b for the benefit of the recipient a’s scholarship grants will be used to cover tuition fees books supplies and equipment persons who select recipients of scholarship grants and their families are ineligible for a’s scholarships persons who select recipients do not receive any compensation_for their activities in the selection process furthermore such persons are not permitted to receive fees or payments of any kind from prospective grant recipients periodic progress reports are made to a’s board to determine whether the recipients have performed the activities the scholarships are intended to finance if such scholarships are not used as intended because a’s board is partially composed of senior officials of b a will be made aware so that a may investigate and take corrective action information a maintains all records relating to scholarship applications grants and follow-up sec_501 of the code provides for the exemption from federal_income_tax of nonprofit_organizations organized and operated exclusively for charitable and or educational_purposes sec_509 of the code provides that certain organizations exempt from federal_income_tax under sec_501 are private_foundations subject_to the provisions of chapter of the code sec_4945 of the code imposes excise_tax on a private foundation's making of any taxable_expenditure as defined in pertinent part by sec_4945 and sec_4945 sec_4945 of the code provides that a taxable_expenditure includes an amount_paid by a private_foundation as a grant to an individual for study or other similar purposes by such individual unless the grant meets the requirements under sec_4945 of the code for approval in advance by the service sec_4945 of the code provides that a taxable_expenditure under sec_4945 does not include any grant to an individual for study if the grant is made on an objective and nondiscriminatory basis under a procedure approved in advance by the service constitutes a scholarship under sec_117 of the code as in effect on the day before the tax reform act of date and is to be used for study at an educational_organization described in sec_170 sec_170 of the code refers to an educational_organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on sec_117 of the code indicates in general that gross_income does not include any amount received as a qualified_scholarship by an individual who is a candidate_for_a_degree at an educational_organization described in sec_170 sec_117 indicates that a qualified_scholarship means any amount received by an individual as a scholarship grant to the extent the individual establishes that in accordance with the conditions of the grant such amount was used for qualified_tuition_and_related_expenses sec_117 indicates in general that the term qualified_tuition_and_related_expenses means a tuition and fees required for the enrollment or attendance of a student at an educational_organization described in sec_170 and b fees books supplies and equipment required for courses of instruction at such an educational_organization sec_53_4945-4 of the foundation and similar excise_taxes regulations requires that grantees under sec_4945 of the code must be selected on an objective and non- discriminatory basis the group of eligible grantees must be broad enough to enable the giving of the grants to achieve an exempt_purpose the criteria for selection of grantees must be related to the exempt_purpose of the grant the persons selecting the grantees must not be in a position to derive a private benefit directly or indirectly if certain potential grantees are selected over others sec_53_4945-4 of the regulations provides that at least once per year the private_foundation must obtain a reporting verified by the educational_institution on the grantee's progress for each academic period sec_53_4945-4 of the regulations provides that if grantee reports submitted or other information including failure to submit reports indicates that any part of a grant is not being used for purposes of the grant the grantor foundation is under a duty to investigate and while conducting its investigation must withhold further payments the grantor's reasonable steps to recover misused grant funds must include legal action where appropriate unless legal action would not in all probability result in satisfaction of execution on the judgment sec_53_4945-4 of the regulations provides that the grantor private_foundation must retain adequate_records on all of its grants to individuals for study or similar purposes under sec_4945 of the code such records include all information which the foundation secures to evaluate the qualifications of potential grantees identification of all grantees including any relationship of a grantee to the grantor foundation sufficient to assure that such grantee is not a disqualified_person under sec_4946 of the code specification of the amount and purpose of each grant and the follow-up information which the grantor obtains from the grantees under sec_53_4945-4 and sec_53_4945-4 of the regulations cited above based upon the information a submitted and assuming that a’s program will be conducted as proposed with a view to providing objectivity and nondiscrimination in the awarding of grants we rule that a’s procedures in the awarding of scholarship grants comply with the requirements of sec_4945 of the code expenditures made in accordance with these procedures will not constitute taxable_expenditures within the meaning of sec_4945 of the code and as such are eligible for the exclusion from income provided for in sec_117 of the code to the extent that such grants are actually used for qualified_tuition_and_related_expenses within the meaning of sec_117 of the code this ruling letter is conditioned on the understanding that there will be no material_change in the facts upon which it is based it is further conditioned on the premise that no grants will be made to a’s creators officers directors trustees or members of the selection committee or for any purpose inconsistent with the purposes described in sec_170 of the code the approval of a’s grant-making procedures is a one-time approval of a’s system of standards and procedures for selecting recipients of grants that meet the requirements of sec_4945 of the code thus this approval will apply to succeeding grant programs only as long as the standards and procedures under which they are conducted do not differ materially from those described in this request we are informing the ohio te_ge office of this action because this ruling letter could help to resolve any questions about a’s status it should be kept with a’s permanent records this ruling letter is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited as precedent if there are any questions about this ruling please contact the person whose name and sincerely telephone number are shown in the heading of this letter enclosure notice robert c harper jr manager exempt_organizations technical group


internal_revenue_service number release date index number ------------------- --------------------------------- ------------------------------ in re ----------------------------------- 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-134456-17 date date legend decedent spouse trust trustee executor cpa attorney date date date year year -------------------------------------------------------- -------------------------------------------------- ---------------------------------------------------------- ------------------------- ------------------------------------------------- ----------------------------- ----------------------- ------------------ ---------------------------- ------------------- ------- ------- dear ------------------ this responds to your personal representative’s letter of date requesting an extension of time under sec_301 of the procedure and administration regulations and sec_2642 of the internal_revenue_code to allocate generation-skipping_transfer gst_exemption to a_trust facts the facts and representations submitted are summarized as follows decedent established trust an irrevocable_trust on date in year trust was created and funded for the benefit of decedents’s children and their descendants date is prior to date decedent died on date survived by spouse spouse and his children plr-134456-17 accountant prepared the form sec_709 united_states gift and generation-skipping_transfer_tax return for year reporting the transfer to trust decedent and spouse elected to gift split on the form sec_709 however decedent failed to allocate any of their gst_exemption to the year transfer to trust the error was discovered in year when attorney discovered that no gst_exemption had been allocated to the year transfer to trust on decedent’s year form_709 spouse has sufficient gst_exemption in year to allocate to the transfer to trust spouse requests an extension of time under sec_2642 and sec_301_9100-3 to allocate spouse’s gst_exemption to the year transfer to trust law and analysis sec_2513 provides that a gift made by one spouse to any person other than his spouse shall be considered as made one-half by him and one-half by his spouse but only if at the time of the gift each spouse is a citizen or resident_of_the_united_states sec_2513 only applies if both spouses have signified their consent to the application of this section in the case of all such gifts made during the calendar_year by either while married to the other sec_2601 imposes a tax on every generation-skipping_transfer a generation- skipping transfer is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2631 as in effect in year provided that for purposes of determining the gst tax every individual shall be allowed a gst_exemption amount of dollar_figure million which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_26_2632-1 of the generation-skipping_transfer_tax regulations provides that an allocation of gst_exemption to property transferred during the transferor’s lifetime other than in a direct_skip is made on form_709 sec_2642 provides that except as provided in sec_2642 if the allocation of the gst_exemption to any transfers of property is made on a gift_tax_return filed on or before the date prescribed by sec_6075 for such transfer the value of such property for purposes of sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 sec_2642 provides that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under plr-134456-17 sec_2632 or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of this paragraph sec_2642 provides that in determining whether to grant relief under this paragraph the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief under this paragraph the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_2_cb_189 provides that under sec_2642 the time for allocating the gst_exemption to lifetime transfers is to be treated as if not expressly prescribed by statute and taxpayers may seek an extension of time to make an allocation described in sec_2642 or b under the provisions of sec_301_9100-3 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore spouse is granted an extension of time of days from the date of this letter to allocate spouse’s available gst_exemption to the year transfer to trust the allocation will be effective as of the respective date of the transfer to trust and the value of the transfer to trust as plr-134456-17 determined for federal gift_tax purposes will be used in determining the amount of spouse’s gst_exemption to be allocated to trust this allocation should be made on a supplemental form709 and filed with the cincinnati service_center at the following address internal_revenue_service cincinnati service_center - stop cincinnati oh a copy of this letter should be attached to the supplemental form sec_709 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 specifically ruled herein we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely associate chief_counsel passthroughs special industries lorraine e gardner by ________________________ lorraine e gardner senior counsel branch office of the associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter cc


internal_revenue_service p o box cincinnati oh number release date date date legend b company c award x dollars amount y dollars amount department of the treasury employer_identification_number contact person - id number contact telephone number uil you asked for advance approval of your educational grant procedures under internal_revenue_code sec_4945 this approval is required because you are a private_foundation that is exempt from federal_income_tax our determination we approved your procedures for awarding educational grants based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding educational grants loans meet the requirements of code sec_4945 as a result expenditures you make under these procedures won't be taxable description of your request you will operate a grant making program your purpose is to advance innovative and neglected medical_research for concept studies the purpose of your program is to award funds for research in biomedical and life-sciences that further your charitable purposes in the united_states and internationally by working with individuals and organizations who have the expertise to evaluate such accomplishments with a focus on small proof-of- currently you will fund grants to encourage the publication in open scientific journals of innovative new technology which illustrates the promotes examples include topics such as the ‘ and for this endeavor you will work with b a foreign organization that has organized the international competition known as c the purpose of c is to encourage laboratory design a biomedical product that illustrates topics include the and the from around the world to so as to c is open to anyone worldwide in the broad biomedical and life-sciences fields there are no limitations or restrictions in the selection procedures based upon race religion national or ethnic origin or other illegally discriminatory criteria the portion of c in which you will participate will proceed in two stages first all the applications will be screened by senior staff at b based on the technical merit of the submission in an objective and nondiscriminatory manner during this screening the applications will be pared down to approximately semi-finalists second an expert panel of judges consisting of b representatives and independent experts in biotechnology will review the semi-finalist submissions before choosing the three most innovative and practical designs as the finalists at this point you will offer a grant of approximately x dollars to each of these three finalists on the condition that the finalist publish his or her scientific data in an open-access scientific publication you have also worked with and have reviewed the procedures developed by b and will continue to have oversight to ensure that the selection is made on an objective and nondiscriminatory process furthermore you are not granting any funds directly to b rather you will provide awards directly to individual recipients and will therefore have a direct relationship with each recipient and will directly verify that the required publication has happened before its awards grants you will verify that each finalist has published his or her scientific data in an open access journal before paying the grant if a finalist publishes their data within one year of the decision you will award the finalist a certain portion of the x dollars on which you have placed no further conditions after the one-year cutoff you will pay up to y dollars in publication fees that the finalist certifies to you if a finalist’s institution covers publication fees the grant in the same amount will be provided directly to the qualified finalist in the same amount in any event in order to receive any portion of the grant a finalist must publish his or her data in pure open-access journals you will not provide any portion of the proceeds if the publication is not available on the united_states government's free search engine immediately a finalist must verify that he or she has complied with all conditions and provide backup for publication fees coverage before any funds are paid you will not provide any grant to or for the benefit of disqualified persons including your officers or directors foundation managers members of any competition selection committee choosing semi-finalists or finalists substantial contributors to you family members of such persons or any other person who is a disqualified_person with respect to you within the meaning of sec_4946 of the code the grant together with the c competition as whole is being promoted through traditional print advertising and digital media including a dedicated website where letter catalog number 58222y members of the international public can download the application form and enter the competition you represent that you will arrange to receive and review grantee reports annually and upon completion of the purpose for which the grant was awarded investigate diversions of funds from their intended purposes and take all reasonable and appropriate steps to recover diverted funds ensure other grant funds held by a grantee are used for their intended purposes and withhold further payments to grantees until you obtain grantees’ assurances that future diversions will not occur and that grantees will take extraordinary precautions to prevent future diversions from occurring you represent that you will maintain all records related to the following individual grants including information to evaluate grantees grantees which are identified as a disqualified_person how the amount and purpose of each grant was established and how you established supervision and investigation of the grants basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that meets all of the following requirements of code sec_4945 is not a taxable_expenditure e e e the foundation awards the grant on an objective and nondiscriminatory basis the irs approves in advance the procedure for awarding the grant the grant is - - - ascholarship or fellowship subject_to sec_117 and is to be used for study at an educational_organization described in sec_170 or a prize or award subject_to the provisions of sec_74 if the recipient of the prize or award is selected from the general_public or to achieve a specific objective produce a report or similar product or improve or enhance a literary artistic musical scientific teaching or other similar skill or talent of the recipient to receive approval of its educational grant procedures sec_53_4945-4 requires that a private_foundation show e e e the grant procedure includes an objective and nondiscriminatory selection process the grant procedure results in the recipients performing the activities the grants were intended to finance the foundation plans to obtain reports to determine whether the recipients have performed the activities that the grants were intended to finance letter catalog number 58222y other conditions that apply to this determination e e e e e e this determination covers only the grant program described above this approval will apply to succeeding grant programs only if their standards and procedures don’t differ significantly from those described in your original request this determination applies only to you it may not be cited as precedent you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you must report any significant changes in your program to the cincinnati office of exempt_organizations at internal_revenue_service exempt_organizations determinations p o box cincinnati oh you cannot make grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives all funds distributed to individuals must be made on a charitable basis and must further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 you should keep adequate_records and case histories so that you can substantiate your grant distributions with the irs if necessary we've sent a copy of this letter to your representative as indicated in your power_of_attorney please keep a copy of this letter in your records if you have any questions please contact the person listed at the top of this letter sincerely stephen a martin director exempt_organizations rulings and agreements letter catalog number 58222y