department of the treasury internal_revenue_service v washington d c nov tax_exempt_and_government_entities_division index no xxxxxkxxxkx xxxxxxxxxx xxxxxxxxkx attn legend employer m state a city e group b employees agreement c resolution n plan x board y union z dear ek ek eto sek sek oka ok ak see this is in response to a letter dated submitted by your authorized representative supplemented by correspondence dated and facsimiles dated and for a ruling concerning the federal_income_tax treatment under internal_revenue_code the code’ sec_414 of certain contributions to plan x your authorized representative submitted the following facts and representations re page employer m is a governmental agency established under the laws of state a to provide schools and other educational_services to the residents of city e in the course of collective bargaining in employer m proposed to the unions representing its employees that the two defined contribution plans it maintains for its employees be amended to provide among other things that employer m would no longer make contributions of percent of each participant’s_compensation to either plan the employees would be required to make mandatory_contributions to those plans in that amount and employer m would treat those amounts as pick up contributions employer m’s and union z’s agreement to the above changes are set forth in agreement c which you represent has been finalized agreement c provides that if the existing plans maintained by employer m were not amended to reflect the proposed changes employer m would establish another plan that provides for the employer pick up of the employees’ mandatory_contributions the new plan established by employer m is plan x employer m adopted plan x effective as of plan x is a money_purchase_pension_plan qualified under code sec_401 plan x contributions are invested at the direction of each group b employee in one or more annuity_contracts as described in section of plan x plan x’s most recent favorable determination_letter is dated agreement c provides that all group b employees must elect whether to participate in plan x in a letter dated employer m represented that it would adhere to the following procedure with respect to group b employees’ election to participate in plan x each eligible group b employee will have until the second anniversary of his or her date of hire or date of plan x eligibility if later to elect to participate in plan x failure to make an election before that date will be deemed an election not to participate in plan x a group b employee’s election with respect to plan x participation will be irrevocable and group b employees who became eligible to participate in plan x before but have not elected to do so will have until the later of or the date described in to elect to participate in plan x the election to participate is a one time irrevocable election section of plan x provides in pertinent part that each active group b employee is required to make a mandatory contribution of a specified percentage of his or her compensation to plan x for group b employees who are covered by a collective bargaining agreement the contribution_percentage shall be specified in the current agreement for all other group b employees the contribution_percentage shall be established by employer m employer m shall pay each group b employee’s contribution to plan x as a pick-up contribution under code sec_414 and shall reduce its payment of compensation to the group b employee by an equal amount section further provides that under no circumstances may a group b employee elect to receive his or her contribution amount as a cash payment of compensation to implement the pick up of the group b employee’s mandatory_contributions the president of board y on behalf of employer m enacted resolution n on resolution n acknowledges that employer m and union z have agreed that effective contributions to plan x will be designated as group b employee contributions and will be paid_by employer m as salary reduction pick-up contributions pursuant to code sec_414 section of resolution n provides that with respect to compensation earned on or after employer m shall pick up ak page under the provisions of sec_414 of the code and pay the contributions which each group b employee is required to make to plan x and that each group b employee’s compensation paid_by employer m shall be reduced by an equal amount resolution n further provides that although the contributions so picked up are designated as group b employee contributions such contributions shall be treated as contributions paid_by employer m in lieu of contributions by the group b employee in determining the tax treatment under the code and such picked up contributions shall not be includable in the gross_income of the group b employee until such amounts are distributed or made available to the group b employee or his or her beneficiary group b employees participating in plan x do not have any option to choose to receive the contributions so picked up directly based on the foregoing facts and representations your authorized representative has requested the following rulings the mandatory_contributions that are assumed and paid_by employer m through a reduction in employees’ compensation although designated as employee contributions pursuant to the plan x will be treated as employer contributions and will qualify as picked-up contributions under sec_414 of the code picked-up mandatory_contributions to plan x made through a reduction of an employee’s salary will not be included in the employee’s gross_income until paid or distributed picked-up mandatory_contributions to plan x will be excepted from wages under sec_3401 of the code and will therefore not be subject_to federal_income_tax withholding in the taxable_year in which they are contributed to plan x sec_414 of the code provides that contributions otherwise designated as employee contributions shall be treated as employer contributions if such contributions are made to a plan described in sec_401 established by a state government or a political_subdivision thereof and are picked up by the employing unit the federal_income_tax treatment to be accorded contributions which are picked up by the employer within the meaning of sec_414 of the code is specified in revrul_77_462 1977_2_cb_358 in that revenue_ruling the employer school district agreed to assume and pay the amounts employees were required by state law to contribute to a state pension_plan revrul_77_462 concluded that the school district’s picked-up contributions to the plan are excluded from the employees’ income until such time as they are distributed to the employees the revenue_ruling held further that under the provisions of sec_3401 of the code the school district’s contributions to the plan are excluded from wages for purposes of the collection of income_tax at source on wages therefore no withholding is required from the employees’ salaries with respect to such picked-up contributions the issue of whether contributions have been picked up by an employer within the meaning of code sec_414 is addressed in revrul_81_35 1981_1_cb_255 and revrul_81_36 1981_1_cb_255 these revenue rulings established that the following two criteria must be met the employer must specify that the contributions although designated as ar page employee contributions are being paid_by the employer in lieu of contributions by the employee and the employee must not be given the option of choosing to receive the contributed amounts directly instead of having them paid_by the employer to the pension_plan furthermore it is immaterial for purposes of the applicability of sec_414 whether an employer picks up contributions through a reduction in salary an offset against future salary increases or a combination of both in revrul_87_10 1987_1_cb_136 the internal_revenue_service considered whether contributions designated as employee contributions to a governmental_plan are excludable from the gross_income of the employee the service concluded that to satisfy the criteria set forth in revenue rulings and with respect to particular contributions the required specification of designated employee contributions must be completed before the period to which such contributions relate in this request resolution n satisfies the criteria set forth in revrul_81_35 and revrul_81_36 by specifically providing that contributions to plan x will be designated as group b employee contributions and will be paid_by employer m as salary reduction pick up contributions that although the contributions so picked up are designated as group b employee contributions such contributions shall be treated as paid_by employer m in lieu of contributions by the group b employee in determining the tax treatment under the code and that the group b employee participating in plan x does not have any option to choose to receive the contributions so picked up directly accordingly we conclude with respect to the ruling requests that the amounts picked up by employer m on behalf of group b employees who participate in plan x shall be treated as employer contributions and will not be includible in the group b employees’ gross_income in the year in which such amounts are contributed for federal_income_tax treatment these amounts will be includible in the gross_income of group b employees or their beneficiaries in the taxable_year in which they are distributed to the extent that the amounts represent contributions made by employer m because we have determined that the picked-up amounts are to be treated as employer contributions they are excepted from wages as defined in sec_3401 of the code for federal_income_tax purposes in addition no part of the amounts picked up by employer m will constitute wages for federal_income_tax purposes in the taxable_year in which they are contributed to plan x this ruling is based on the condition that a group b employee who makes a one-time irrevocable election to participate in plan x within employer m’s prescribed election_period may not subsequently alter or amend this election to participate in plan x this ruling is also based on the condition that a group b employee who makes a one-time irrevocable election not to participate in plan x within employer m’s prescribed election_period may not subsequently alter or amend this election to not participate in plan x further a group b employee who fails to make an affirmative election to participate in plan x within employer m’s prescribed election_period is deemed to have elected to not participate in plan x this deemed_election to not participate in plan x is treated as the one time irrevocable election for such group b employee and for purposes of this ruling and the conclusions reached under code sec_414 may not be subsequently altered or amended oka page this ruling is based on resolution n as submitted with your correspondence dated and employer m’s election to participate procedures as set forth in your correspondence dated these rulings apply only if the effective date for the commencement of the pick up is not earlier than the later of the date resolution n was signed by employer m or the date the pick up is put into effect no opinion is expressed as to whether the amounts in question are subject_to tax under the federal_insurance_contributions_act no opinion is expressed as to whether the amounts in question are paid pursuant to a salary reduction agreement within the meaning of code sec_3121 v b this letter is directed only to the taxpayer that requested it ‘ sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this ruling letter is being sent to your authorized representative if you have any questions regarding this ruling please contact t ep ra t2 at sincerely signed joyce e floyd joyce e floyd manager employee_plans technical group tax_exempt_and_government_entities_division enclosures deleted copy of ruling letter notice of intention to disclose form_437


department of the treasury internal_revenue_service te_ge eo examination fulton street room breeklyn ny peco noead ccs taxpayer_identification_number person to contact identification_number contact telephone number wet gs tax_exempt_and_government_entities_division release number release date date date uil code legend org organization name address last date for filing a pleading with the tax_court the claims_court or the united_states district_court for the district of columbia august 20xx dear this is a final_determination regarding your exempt status under sec_501 of the internal_revenue_code irc recognition of your exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 is retroactively revoked to january 19xx because it is determined that you are not operated exclusively for an exempt_purpose sec_501 exempts from taxation organizations which are organized and operated exclusively for religious charitable or educational_purposes no part of the net_earnings of which inure to the benefit of any private_shareholder_or_individual an organization it will be regarded as operated exclusively for one or more exempt purposes only if engages primarily in activities accomplishing one or more of the exempt purposes specified in sec_501 we have determined that you failed to operate exclusively for charitable educational or religious purposes thereby failing to meet the operational_test under sec_1_501_c_3_-1 your activities including your financial transactions more than insubstantially furthered non-exempt purposes moreover you failed to established that you were not operated for the benefit of private interests of your officers as required for continued recognition of exemption pursuant to sec_1_501_c_3_-1 ii we are revoking your exemption from federal_income_tax as an organization described in sec_501 of the internal_revenue_code effective january 19xx contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code you are required to file federal_income_tax returns on form_1120 these returns should be filed with the appropriate service_center for all years beginning january 19xx processing of income_tax returns and assessment of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination in court you must file a pleading seeking a declaratory_judgment in the united_states tax_court the united_states court of federal claims or the united_states district_court for the district of columbia before the day after the date this final_determination was mailed to you please contact the clerk of the appropriate court for rules regarding filing pleadings for declaratory judgments and refer to the enclosed publication you may write to these courts at the following addresses you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at internal_revenue_service we will notify the appropriate state officials of this action as required by sec_6104 of the internal_revenue_code if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours marsha a ramirez director eo examinations enclosure publication form 886a name of taxpayer org explanation of items schedule no or exhibit year period ended december department of the treasury - internal_revenue_service ein 20xx legend org organization name xx date xyz state co-1 company issue should the above named organization retain their exempt status as an organization described in sec_501 of the internal_revenue_code facts org hereafter referred to as org was organized as a non-profit corporation under the laws of the state of xyz by filing articles of incorporation with the state on january 19xx the purpose of the organization as stated in its articles is to assist in locating missing children and other such activities allowable for a non-profit corporation in connection with the foregoing the organization’s activities were to be funded through donations and grant monies received from the general_public the organization’s articles were amended on 19xx to include a purpose clause which specifically stated that the organization would be operated exclusively for charitable religious educational and scientific purposes and a powers clause prohibiting any part of its net_earnings from inuring to the benefit of or being distributable to its members trustees officers or other private persons org filed an application_for recognition of exemption under lr c sec_501 in march of 19xx in its application the organization stated that its exempt_purpose was to assist families and law enforcement agencies in locating missing children and provided a detailed list of proposed activities for furthering this purpose based on the information presented in its application org received a favorable ruling as an organization described in i r c sections c and b a vi on may 19xx org was administratively dissolved by the state on october 20xx for its failure_to_file the required annual statements with the state’s bureau of 20xx for 20xx 20xx and the attorney_general for the state of xyz began investigating the activities of org in 20xx based on reports filed with their office relating to the organization’s on-going solicitation of contributions and alleged false representations made in connection with those solicitations ’ circuit_court against the above referenced in july of 20xx a complaint was filed with the organization and its directors by the attorney_general in the complaint the attorney_general -_ounts of misconduct in violation of alleged that the organization and its directors committed xyz law governing charitable organizations and requested the court issue both a preliminary and form 886-acrev department of the treasury - internal_revenue_service page -1- form 886a name of taxpayer org explanation of items schedule no or exhibit year period ended december department of the treasury - internal_revenue_service ein 20xx a permanent injunction against the organization and its officers to bar any further business from being conducted in the name of org and requesting the dissolution of its assets included in the counts of miscount the attorney_general alleged that the organization never engaged in any meaningful charitable activities and its officers violated their fiduciary obligations in various ways including their failure to comply with applicable state and federal laws governing charitable organizations and by allowing all the organization’s charitable assets comprised primarily of boats and vehicles donated from 19xx to 20xx with an total estimated value over dollar_figure to be wasted or diverted for the private benefit of its principal officers on july 20xx a preliminary injunction was issued by the court prohibiting the organization’s officers from continuing to conduct business in the name of the charity and from continuing to waste divert or otherwise misuse charitable assets on november 20xx a permanent injunction was issued by the court ordering the directors to reimburse the value of all assets lost to the charity through their wrongful conduct transfer these funds and any remaining assets to a court designated charitable_organization under the doctrine_of cy pres and dissolve the corporation for its failure to conduct its activities in furtherance of any charitable purposes org was selected for examination based on a referral received from the xyz attorney general’s office the organization’s last filed form_990 was for fiscal_year ending december 19xx therefore the scope of the examination was limited to a review of the organization’s operations from calendar_year ending december 20xx to the present during the course of the examination no documentation was provided by the representatives of org for review however a thorough review was conducted on all evidentiary and court documentation relevant to the attorney generals court proceedings against the organization and its officers based on this review it was determined that the organization did not conduct any exempt_purpose activities during the years under review it was also determined that the organization’s officers solicited donations of both money and property from the general_public through false and or misleading representations about its true purpose and then utilized these assets exclusively for their own private interests law sec_501 provides tax exemption for corporations and foundations that are operated exclusively for re ligious charitable scientific testing for public safety literary or educational_purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_1 c -1 a states that in order to be exempt as an organization described in sec_501 an organization must be both organized and form 886-acrev department of the treasury - internal_revenue_service page -2- department of the treasury - internal_revenue_service explanation of items form 886a i name of taxpayet org ein schedule no or exhibit year period ended december 20xx operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1_501_c_3_-1 states that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 c states that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals sec_1_501_c_3_-1 provides that an organization is not organized or operated exclusively for exempt purposes unless it serves a public rather than a private interest to meet this requirement it not organized or operated for the benefit of private interests is necessary for an organization to establish that it is taxpayer’s position the responsible official of the organization agreed to the proposed revocation of the organization’s exempt status under lr c sec_501 by executing a form_6018 with an effective date of january 19xx government’s position the organization has failed to meet the operational_test described in sec_1_501_c_3_-1 above as stated in sec_1_501_c_3_-1 an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 since no charitable activities were conducted by org during the years under review the organization is clearly not engaging primarily in activities that accomplish exempt purposes under sec_501 further as indicated in sec_1_501_c_3_-1 the organization is not operated exclusively for exempt purposes because all of its net_earnings are inuring to the benefit of the organization’s directors the organization is also being operated for private rather than public interests since the organization’s primary activity is soliciting donations from the general_public specifically for the form 886-arev department of the treasury - internal_revenue_service page -3- form 886a name of taxpayer org explanation of items schedule no or exhibit year period ended december department of the treasury - internal_revenue_service ein 20xx personal benefit for its officers as stated in sec_1_501_c_3_-1 g i an organization is not operated for exempt purposes if it is being operated for private interests circuit court’s ruling has officially terminated the organization’s corporate in addition the status and ordered that its assets be recovered and distributed to a co-1 asa result of this ruling the organization no longer meets the organizational requirements described in sec_1_501_c_3_-1 because it is no longer organized as a non-profit organization under state law and barred from conducting any activities as a public charity in the future based on a review of all facts and circumstances and the legislative support referenced above it is the internal revenues service’s position that org is not organized or operated for any exempt_purpose and its net_earnings inured to the benefit of its principal officers during each of the years under review therefore org does not meet requirements for continued exemption as an organization described in ilr c section of c during any of the years under review and its exempt status should be revoked retroactively to january 19xx conclusion the organization is not organized or operated as a 501_c_3_organization the organization’s articles of incorporation have been dissolved by the state no activities are being conducted in furtherance of any charitable purposes and all of its net_earnings have inured to the private interest of its officers the exempt status of the organization should be revoked with an effective date of january 19xx form 886-acev department of the treasury - internal_revenue_service page -4- tax_exempt_and_government_entities_division org address department of the treasury internal_revenue_service commerce street dallas tx taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in if we issue a determination_letter to you based on technical_advice no publication further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter catalog number 34809f if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the airs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and thank you for your cooperation sincerely marsha a ramirez director eo examinations enclosures publication publication report of examination letter catalog number 34809f


internal_revenue_service number release date index number --------------------------- ------------------------------------------ ----------------------------- ------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ ------------------- telephone number --------------------- refer reply to cc psi b02 plr-140680-09 date october legend x ------------------------------------------------------------------------------------------------------ ----------------------- state --------- d1 d2 -------------------------- ---------------------- dear --------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x by x's authorized representative requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was formed in state on d1 it was intended for x to be an s_corporation effective d2 x represents that the form_2553 election by a small_business_corporation was prepared and timely filed for x effective d2 however its form_2553 was not received by the internal_revenue_service accordingly x requests a ruling that it will be treated as an s_corporation effective d2 sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective generally if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made sec_1362 provides that if an s election is made after the first two and one-half months of a corporation's taxable_year then the plr-140680-09 corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for such taxable_year and sec_1362 shall not apply based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation effective d2 accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective d2 within days following the date of this letter then such election will be treated as timely made for x's taxable_year beginning d2 a copy of this letter should be attached to the form_2553 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x's authorized representative sincerely bradford r poston senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury washington dc person to contact ------------------ id no ------------- telephone number --------------------- refer reply to cc psi b04 - plr-163579-03 date june internal_revenue_service number release date index number ---------------------------------------- ---------------------------- ----------------------------------------- --------------------- -------------------------------- ------------------------------- - re --------------------------------------- re --------------------------------------- ---------------------------------------------------- legend decedent ---------------------- spouse ---------------------- daughter -------------------------------------- date ------------------ date ---------------------- date ---------------------- year ------- trust ---------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- state statute -------------------------------------------- amount ------------ amount --------------- amount ------------ amount ------------ dear ---------------- this is in response to a letter dated date and prior correspondence requesting a ruling that the severance of trust is a qualified_severance under sec_2642 of the internal_revenue_code code and an extension of time under ' and of the procedure and administration regulations to make a reverse qualified_terminable_interest_property qtip_election under sec_2652 facts the facts submitted and representations made are as follows decedent died on date survived by spouse articles iv and v of decedent’s will dated date provide that decedent’s residuary_estate be divided pursuant to a formula into a marital trust and a credit_shelter_trust the credit_shelter_trust was initially funded with amount and the marital trust was funded with amount both the credit_shelter_trust and the marital trust provide for the distribution of all income to spouse during her life both trusts also provide the trustee with discretion to distribute principal to spouse for her support and maintenance upon the death of spouse the credit_shelter_trust is to be added to the marital trust and held in further trust for the benefit of the decedent’s only child daughter on the schedule m of decedent s form_706 united_states estate and generation-skipping_transfer_tax return the executor checked the box to elect qtip treatment for the marital trust on the schedule r the executor allocated amount of decedent’s generation-skipping_transfer gst_exemption to the credit_shelter_trust and amount to the marital trust the executor however inadvertently failed to make a reverse_qtip_election under ' a with respect to the marital trust and otherwise to divide the marital trust to reflect the allocation of gst_exemption these errors were discovered in year state statute authorizes a trustee without court authorization to sever any trust on a fractional basis into two or more separate and identical trusts for any reason each separate trust must be held and administered upon the identical terms and conditions of the trust from which it was severed the separate trust created by the severance must be treated as a separate trust for all purposes from the date the severance is effective the effective date of the severance may be retroactive to a date before the date in which the trustee exercises such power pursuant to state statute on date the trustee divided the marital trust on a fractional basis into two separate shares a gst exempt share and a nonexempt share the exempt share consists of that fraction of the fair_market_value of the marital trust on the date of severance equal to amount divided by amount the nonexempt share consists of that fraction of the fair_market_value of the marital trust on the date of severance equal to minus amount divided by amount a ruling is requested that the severance of marital trust is a qualified_severance under sec_2642 in addition an extension of time under sec_301_9100-1 and sec_301_9100-3 is requested for making a reverse_qtip_election under sec_2652 with respect to the gst exempt share of the marital trust law and analysi sec_3 sec_2001 imposes a tax on 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 shall except as limited by sec_2056 be 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 the surviving_spouse but only to the extent that such interest is included in determining the value of the gross_estate sec_2056 disallows this deduction 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 sec_2056 provides that in the case of qualified_terminable_interest_property for purposes of sec_2056 such property shall be treated as passing to the surviving_spouse and for purposes of sec_2056 no part of such property shall be treated as passing to any person other than the surviving_spouse sec_2056 defines the term qualified_terminable_interest_property as property i which passes from the decedent ii in which the surviving_spouse has a qualifying_income_interest_for_life and iii to which an election under sec_2056 applies sec_2056 provides that the surviving_spouse has a qualifying_income_interest_for_life if i the surviving_spouse is entitled to all the income from the property payable annually or at more frequent intervals or has a usufruct interest for life in the property and ii no person has a power to appoint any part of the property to any person other than the surviving_spouse sec_2056 provides that an election under sec_2056 with respect to any property shall be made by the executor on the return of tax imposed by sec_2001 such an election once made shall be irrevocable sec_2601 imposes a tax on every generation-skipping_transfer within the meaning of subchapter_b a generation-skipping_transfer is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the gst tax is determined by multiplying the taxable_amount by the applicable_rate sec_2641 provides that the term applicable_rate means with respect to any gst transfer the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer under ' a the inclusion_ratio with any property transferred in a generation- skipping transfer is generally defined as the excess of over the applicable_fraction the applicable_fraction as defined in sec_2642 is a fraction the numerator of which is the amount of gst_exemption under sec_2631 allocated to the trust or to property transferred in a direct_skip and the denominator is the value of the property transferred reduced by the sum of any federal estate_tax or state death_tax actually recovered from the trust attributable to such property and any charitable deduction allowable under ' or ' with respect to such property provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under sec_2631 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_2631 as in effect for decedents dying before date sec_2652 provides that for purpose of chapter the term transferor sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual's estate determined with regard to extensions regardless of whether such a return is required to be filed sec_2632 provides that in general any portion of an individual's gst_exemption which has not been allocated within the time prescribed by sec_2632 shall be deemed to be allocated as follows a first to property which is the subject of a direct_skip occurring at such individual's death and b second to trusts with respect to which such individual is the transferor and from which a taxable_distribution or a taxable_termination might occur at or after such individual's death means a in the case of any property subject_to the tax imposed by chapter the decedent and b in the case of any property subject_to the tax imposed by chapter the donor an individual shall be treated as transferring any property with respect to which such individual is the transferor respect to which a deduction is allowed to the decedent under sec_2056 the estate of the decedent may elect to treat all of the property in such trust for gst tax purposes as if the election to be treated as qualified_terminable_interest_property had not been made reverse_qtip_election sec_26_2652-2 of the generation-skipping_transfer_tax regulations provides in part that a reverse_qtip_election is not effective unless it is made with respect to all of the property in the trust to which the qtip_election applies sec_26_2652-2 provides that an election under sec_2652 is made on the return on which the qtip_election is made sec_2652 provides in pertinent part that in the case of any trust with sec_2642 was enacted as part of the taxpayer relief act of and provides for the qualified_severance of a_trust for gst tax purposes sec_2642 a is effective in the case of severances occurring after date and provides generally that if a_trust is severed in a qualified_severance the trusts resulting from such severance shall be treated as separate trusts thereafter for gst tax purposes sec_2642 provides that for purposes of sec_2642 the term qualified_severance means the division of a single trust and the creation by any means available under the governing instrument or under local law of two or more trusts if the single trust was divided on a fractional basis and the terms of the new trusts in the aggregate provide for the same succession of interests of beneficiaries as are provided in the original trust sec_2642 provides that if a_trust has an inclusion_ratio of greater than zero and less than a severance is a qualified_severance only if the single trust is divided into two trusts one of which receives a fractional share of the total value of all trust assets equal to the applicable_fraction of the single trust immediately before the severance in such case the trust receiving such fractional share shall have an inclusion_ratio of zero and the other trust shall have an inclusion_ratio of sec_2642 provides that the term qualified_severance includes any other severance permitted under regulations prescribed by the secretary sec_2642 provides that a severance pursuant to sec_2642 may be made at any time the secretary shall prescribe by forms or regulations the manner in which the qualified_severance shall be reported to the internal_revenue_service sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in and 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 internal_revenue_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 requests for relief under ' 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 plr-163579-03 professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election pursuant to state statute on date the marital trust was divided on a fractional basis in accordance with the applicable_fraction of the marital trust into two separate shares the gst exempt share and the nonexempt share state statute provides that each separate trust must be held and administered upon the identical terms and conditions of the trust from which it was severed under these circumstances we conclude that the date severance is a qualified_severance under sec_2642 therefore assuming the gst exempt share and the nonexempt share are funded as described above the gst exempt share will have an inclusion_ratio of zero and the nonexempt share will have an inclusion_ratio of finally based on the facts and representations made we have determined that the standards of and have been met therefore we rule that an extension of time to make a reverse_qtip_election with respect to the gst exempt share is granted until days from the date of this letter the reverse_qtip_election should be made on a supplemental form_706 united_states estate and generation-skipping_transfer_tax return the severance may be reported by filing a statement identifying a the trust that is severed the name of the transferor of the trust the date of creation the tax identification_number and the inclusion_ratio with respect to the trust before severance and b the new trusts created as a result of the severance the name and tax identification_number of the new trusts the fraction of trust assets received by each trust and the inclusion ratios with respect to the new trusts both the form and the statement are filed with the internal_revenue_service center cincinnati oh a copy of this letter should be attached except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer who requested it sec_6110 enclosure copy for sec_6110 purposes copy of this letter sincerely heather c maloy associate chief_counsel passthroughs and special industries


frank aragona trust paul aragona executive trustee petitioner v commissioner of internal revenue respondent docket no filed date t is a_trust that owned rental real-estate properties and engaged in other real-estate activities t’s rental real-estate activities would be considered per se passive activities under sec_469 unless t qualified for the exception found in sec_469 this exception is applicable if more verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a aragon jamie united_states tax_court reports than one-half of the personal services performed in trades_or_businesses by the taxpayer are performed in real-property trades_or_businesses in which the taxpayer materially partici- pates and if the taxpayer performs more than hours of services during the year in real-property trades_or_businesses in which the taxpayer materially participates held a_trust can qualify for the sec_469 exception a_trust is capable of performing personal services within the meaning of sec_469 services performed by individual trustees on behalf of the trust may be considered personal services per- formed by the trust held further t materially participated in real-property trades_or_businesses richard s soble for petitioner brett chmielewski and meso t hammoud for respondent morrison judge the respondent referred to here as the irs issued a notice_of_deficiency to the frank aragona trust sometimes referred to here as the trust deter- mining the following deficiencies in federal_income_tax and the following penalties year deficiency accuracy-related_penalty sec_6662 dollar_figure big_number big_number dollar_figure dollar_figure dollar_figure the trust filed a petition as permitted by sec_6213 we have jurisdiction to redetermine the deficiencies and pen- alties under sec_6214 after concessions the two issues remaining for decision are even though the petition was filed by paul v aragona the executive trustee for ease of reference we refer to the trust as having filed the peti- tion in any event we do not mean to suggest whether the petitioner in this case is the trustee or the trust see sec_7482 providing that default appellate venue for deficiency cases is the circuit in which is lo- cated the legal residence of the petitioner we do not reach that particular question all references to sections are to the internal_revenue_code_of_1986 as in effect for the years at issue the irs conceded that the trust is not liable for any accuracy-related_penalties for the and tax years the notice_of_deficiency did not determine a penalty for verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a aragon jamie aragona trust v commissioner does sec_469 apply to the trust yes are the fees that the trust paid to its trustees properly characterized as expenses of the trust’s rental real-estate activities we need not reach this issue because of our reso- lution of the first issue findings_of_fact some facts have been stipulated by the parties the stipu- lated facts are incorporated in the court’s findings_of_fact the trust is a complex residuary_trust that owns rental real- estate properties and is involved in other real-estate business activities such as holding_real_estate and developing real_estate its principal_place_of_business was in michigan when it filed the petition in frank aragona formed the trust with him as grantor and trustee and with his five children as beneficiaries according to the trust instrument the five children share equally in the income of the trust frank aragona died in he was succeeded as trustee by six trustees one of the six trustees was an independent_trustee the other five trustees were frank aragona’s five children including paul v aragona the executive trustee although the trustees formally delegated their powers to the executive trustee in order to facilitate daily business oper- ations the trustees acted as a management board for the trust and made all major decisions regarding the trust’s property during and the board met every few months to discuss the trust’s business each of the six trustees was paid a fee directly by the trust referred to here as a trustee fee or collectively as trustee fees in part for the trustee’s attending board meetings three of the chil- dren-paul v aragona frank s aragona and annette aragona moran-worked full time for holiday enterprises llc a michigan limited_liability_company that is wholly owned by the trust holiday enterprises llc is a dis- regarded entity for federal_income_tax purposes holiday enterprises llc managed most of the trust’s rental real- estate properties it employed several people in addition to the trust instrument gives the independent_trustee the power to dis- tribute the principal of the trust under limited circumstances when the petition was filed paul v aragona was a resident of michi- gan verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a aragon jamie united_states tax_court reports paul v aragona frank s aragona and annette aragona moran including a controller leasing agents maintenance workers accounts_payable clerks and accounts_receivable clerks in addition to receiving a trustee fee paul v aragona frank s aragona and annette aragona moran each received wages from holiday enterprises llc the trust conducted some of its rental real-estate activities directly some through wholly owned entities and the rest through entities in which it owned majority interests and in which paul v and frank s aragona owned minority interests it conducted its real-estate holding and real-estate development operations through entities in which it owned majority or minority interests and in which paul v and frank s aragona owned minority interests the table below summarizes the activities of the six trustees on behalf of the trust during and name of trustee salvatore s aragona paul v aragona anthony f aragona frank s aragona annette aragona moran charles e turnbull role annual trustee fee full-time dentist limited involve- ment in trust’s business executive trustee full-time em- ployee of holiday enterprises llc disabled limited involvement in trust’s business full-time_employee of holiday enterprises llc full-time_employee of holiday enterprises llc independent_trustee attorney with o’reilly rancilio p c limited involvement in trust’s business dollar_figure big_number big_number big_number big_number big_number total the dollar_figure annual trustee fee for anthony f aragona was reported as a dis- big_number tribution from the trust for tax purposes during the and tax years the trust incurred losses from its rental real-estate properties the losses were reported on the trust’s income-tax returns form sec_1041 u s income_tax return for estates and trusts and on schedules e supplemental income and loss and were reflected on line some of the losses were reported as being associated with holiday enterprises llc including dollar_figure the dollar_figure in trustee fees minus the dollar_figure in trustee fees paid to anthony f aragona the losses reported as being verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a aragon jamie aragona trust v commissioner associated with holiday enterprises llc were subdivided into various categories of expenses the dollar_figure was reported in the category of other expenses on its returns the trust treated its rental real-estate activities in which it engaged both directly and through its ownership interests in a number of entities as non-passive activities so treated the losses from these activities contributed to the amounts of net operating losses which the trust carried back to its and tax years while reporting losses for its rental real-estate activities the trust also reported gains from its other non-rental real- estate activities the trust owned interests in a number of entities engaged in real-estate holding activities and real- estate development projects on its form_1041 for each year the trust did not enter an amount on line the line for deductions for fiduciary fees in the notice_of_deficiency the irs determined that the trust’s rental real-estate activities were passive activities a determination that increased the passive-activity losses for and the increase in the passive-activity losses resulted in a decrease in the allowable deductions from gross_income for each of those years which decreased the net- operating-loss carrybacks to the and years the notice_of_deficiency determined that for each of and the trust should be allowed a deduction of dollar_figure for fiduciary fees the notice_of_deficiency also determined that the trust’s schedule e expenses which as reported on the returns included the dollar_figure in trustee fees should be reduced by dollar_figure thus the notice_of_deficiency reclassi- the notice_of_deficiency stated that t he rental losses_incurred are deemed passive a passive-activity loss is the amount by which aggregate losses from all the taxpayer’s passive activities for the year exceed the aggregate income from all the taxpayer’s passive activities for the year sec_469 the trust’s losses from its rental real-estate activities exceeded its income from the activities therefore characterizing the trust’s rental real-estate activi- ties as passive resulted in a net increase in the trust’s passive-activity loss for each year the existence of a passive-activity loss for the year results in the dis- allowance of current deductions in the amount of the passive-activity loss for the year sec_1_469-1t temporary income_tax regs fed reg date verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a aragon jamie united_states tax_court reports fied the dollar_figure amounts as fiduciary fees to be deducted on line of form_1041 instead of expenses deducted against rental income on schedule e and reflected on line of form_1041 in explaining the reclassification of the dollar_figure in fees the notice_of_deficiency stated it is determined your fiduciary fees of dollar_figure and dollar_figure should be reported on line on the face of the return form_1041 instead of dollar_figure and dollar_figure shown as a rental_expense_deduction on the schedule e for taxable years and respec- tively the adjustment was made to the rental loss claimed by holiday enter- prises to disallow the trustee fees as an other expense and the expense was moved to line on the face of the return where they are required to be shown as fiduciary fees computationally the notice_of_deficiency did not include the dollar_figure in the amount of the trust’s passive-activity-loss deductions for each year opinion the petitioner generally bears the burden_of_proof and therefore must prove the relevant facts by the preponderance_of_the_evidence except when the conditions of sec_7491 are satisfied tax ct r pract proc a 290_us_111 138_tc_382 our findings_of_fact in this opinion are based on the preponderance_of_the_evidence thus it is unnecessary to determine which party ie the trust or the irs has the burden_of_proof see 124_tc_95 does the sec_469 exception apply to the trust in congress enacted sec_469 tax_reform_act_of_1986 pub_l_no sec_501 stat pincite sec- tion a provides that a taxpayer’s passive-activity loss is disallowed for the year if the taxpayer is described in sec_469 the following taxpayers are described in sec_469 individuals estates trusts closely held c corporations and personal_service_corporations a passive- activity loss is the amount by which the aggregate losses a loss from an activity disallowed under sec_469 is treated as a de- duction allocable to such activity for the next tax_year sec_469 verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a aragon jamie aragona trust v commissioner from all the taxpayer’s passive activities for the year exceeds the aggregate income from all the taxpayer’s passive activi- ties for such year sec_469 see also sec_1_469-2t temporary income_tax regs fed reg date a passive_activity is any activity which involves the conduct of any trade_or_business in which the taxpayer does not materially participate sec_469 under sec_469 any rental_activity is considered a passive_activity even if the taxpayer materially participates in the activity sec_469 thus any rental_activity is passive per se in congress enacted sec_469 which provides that sec_469 does not apply to the rental real-estate activity of any taxpayer who meets the requirements of sec_469 omnibus_budget_reconciliation_act_of_1993 pub_l_no sec a and b stat pincite sec_469 consists of two tests the first test is met if more than one-half of the personal services per- formed in trades_or_businesses by the taxpayer during the taxable_year in real-property trades_or_businesses in which the taxpayer materially participates sec_469 the second test is met if the taxpayer performs more than hours of services during the year in real-property trades_or_businesses in which the taxpayer materially participates sec_469 both tests must be met is performed the following reason was given for the amendment the passive_loss_rules limit deductions and credits from passive_trade_or_business activities deductions attributable to passive activities to the extent they exceed income from passive activities generally may not be deducted against other income such as wages portfolio_income or busi- ness income that is not derived from a passive_activity the committee considers it unfair that a person who performs personal services in a real_estate trade_or_business in which he materially partici- pates may not offset losses from rental_real_estate_activities against in- come from nonrental real_estate activities or against other types of in- come such as portfolio investment_income h_r rept no pincite 1993_3_cb_1 sec_469 provides in part this paragraph shall apply to a taxpayer for a taxable_year if- i more than one-half of the personal services performed in trades_or_businesses by the taxpayer during such taxable_year are performed in continued verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a aragon jamie united_states tax_court reports sec_469 provides a special rule for deter- mining whether a closely_held_c_corporation meets the requirements of sec_469 in the case of a closely_held_c_corporation the requirements of subpara- graph b shall be treated as met for any taxable_year if more than percent of the gross_receipts of such corporation for such taxable_year are derived from real_property trades_or_businesses in which the corpora- tion materially participates thus the determination of whether a closely held c corpora- tion meets the requirements of sec_469 does not involve the one-half-of-personal-services test and the hour test the requirements of sec_469 can be met only by a taxpayer who materially participates in a real-property trade_or_business this is because the one-half-of-personal- services test the 750-hour test and the special rule for closely held c corporations all presuppose that the taxpayer materially participates in real-property trades_or_businesses sec_469 and ii see sec_469 see also sec_1_469-9 income_tax regs the term real_property_trade_or_business is defined as any real-property development redevelopment construction reconstruction acquisition conversion rental operation management leasing or brokerage trade_or_business sec_469 regulatory guidance regarding the sec_469 excep- tion is found in sec_1_469-9 income_tax regs this regu- lation states that only a qualifying taxpayer falls within the exception sec_1_469-9 income_tax regs sec_469 does not apply to any rental real_estate activity of a taxpayer for a taxable_year in which the taxpayer is a qualifying taxpayer the term qualifying taxpayer is defined by the regulation as a taxpayer that owns at least one interest in rental real_estate and meets the requirements of paragraph c of this section sec_1_469-9 income_tax regs sec_1_469-9 income_tax regs the para- real_property trades_or_businesses in which the taxpayer materially par- ticipates and ii such taxpayer performs more than hours of services during the taxable_year in real_property trades_or_businesses in which the taxpayer materially participates verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a aragon jamie aragona trust v commissioner graph c provision referred to in the quotation above pro- vides in general -a qualifying taxpayer must meet the requirements of sec_469 thus to be a quali- fying taxpayer within the meaning of the regulation a tax- payer must own at least one interest in rental real_estate and satisfy the requirements of sec_469 two other aspects of the regulation are of note first sec_1_469-9 income_tax regs provides in part that p ersonal services means any work performed by an indi- vidual in connection with a trade_or_business this is an interpretation of the term personal services used in the first test of sec_469 second sec_1_469-9 income_tax regs provides that a closely held c corpora- tion meets the requirements of paragraph c of this section by satisfying the requirements of sec_469 sec_469 provides that for the purposes of sec_469 a taxpayer is treated as materially participating in an activity only if the taxpayer is involved in the operation of the activity on a basis which is regular continuous and substantial the test in sec_469 has two functions first it is used to determine whether a particular activity is a passive_activity see sec_469 defining passive_activity as an activity involving the conduct_of_a_trade_or_business in which the taxpayer does not materially participate second it is used to determine whether a taxpayer materi- ally participates in real-property trades_or_businesses see sec_469 and ii thus a taxpayer is treated as materially participating in real-property trades_or_businesses if the taxpayer is involved in the operation of real-property trades_or_businesses on a basis which is regular continuous and substantial a can a_trust qualify for the sec_469 exception i the irs’s arguments for the sec_469 exception to apply there must be personal services performed by the taxpayer sec_469 because p ersonal services are defined by regulation as work performed by an individual in connection with a trade_or_business the irs contends that a_trust cannot perform personal services see sec_1_469-9 verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a aragon jamie united_states tax_court reports income_tax regs therefore the irs contends a_trust cannot qualify for the sec_469 exception the irs asserts that the legislative_history of sec_469 supports its view that congress did not intend the sec_469 exception to apply to trusts in describing the provision in the bill that would be adopted by the house and enacted by congress in amended form as sec_469 the report of the house ways and means com- mittee stated that the provision applies to individuals and closely held c corporations h_r rept no pincite 1993_3_cb_167 the report further stated that an individual taxpayer meets the requirements of the exception if more than half of the personal services the tax- payer performs in a trade_or_business are in real_property trades_or_businesses in which he materially participates id the bill adopted by the house had provided that the sec_469 exception was applicable if more than one-half of the personal services performed in trades_or_businesses by the taxpayer are performed in real_property trades_or_businesses in which the taxpayer materially participates h_r 103d cong sec the bill did not yet include sec_469 the report also stated that a closely_held_c_corporation meets the requirements of the sec_469 exception if more than percent of its gross_receipts for the taxable_year are derived from real_property trades_or_businesses in which the corporation materially participates within the meaning of sec_469 h_r rept no supra pincite c b pincite the report did not describe how any class of taxpayer other than an individual or a closely_held_c_corporation meets the requirements of the exception id the report of the conference committee also describing the bill adopted by the house similarly stated that an individual taxpayer meets the requirements of the exception if more than half of the personal services the tax- payer performs in trades_or_businesses during the taxable_year are in real_property trades_or_businesses in which he materially participates h_r conf rept no pincite 1993_3_cb_393 the conference_report fur- ther stated that a closely_held_c_corporation meets the requirements of the exception if more than percent of its gross_receipts for the taxable_year are derived from real prop- the 750-hour test now codified in verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a aragon jamie aragona trust v commissioner erty trades_or_businesses in which the corporation materially participates id the conference_report also discussed the final version of the bill id pincite c b pincite it described the sec_469 exception thus the conference agreement follows the house bill with a modification under the conference agreement an individual taxpayer meets the eligi- bility requirements if more than half of the personal services the tax- payer performs in trades_or_businesses during the taxable_year are per- formed in real_property trades_or_businesses in which the taxpayer mate- rially participates and such taxpayer performs more than hours of services during the taxable_year in real_property trades_or_businesses in which the taxpayer materially participates id ii analysis the irs argues that a_trust is incapable of performing personal services because the regulation defines personal services to mean any work performed by an individual in connection with a trade_or_business sec_1_469-9 income_tax regs we reject the irs’s argument a_trust is an arrangement whereby trustees manage assets for the trust’s beneficiaries restatement trust sec_3d sec_2 a_trust is a fiduciary relationship with respect to property subjecting the person who holds title to the property to duties to deal with it for the benefit of others see also sec_301_7701-4 proced admin regs in general the term ‘trust’ as used in the internal_revenue_code refers to an arrangement created either by will or by an inter_vivos declaration whereby trustees take title to property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery or probate courts if the trustees are individuals and they work on a trade_or_business as part of their trustee duties their work can be considered work performed by an individual in connection with a trade_or_business sec_1_469-9 income_tax regs we conclude that a_trust is capable of per- forming personal services and therefore can satisfy the sec_469 exception indeed if congress had wanted to exclude trusts from the sec_469 exception it could have done so explicitly by limiting the exception to any natural_person in sec_469 the internal_revenue_code does exactly that sec_469 grants a dollar_figure allowance to any natural_person who fulfills certain requirements that congress did not use verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a aragon jamie united_states tax_court reports the phrase natural_person but instead used the word tax- payer in sec_469 suggests that congress did not intend to exclude trusts from the sec_469 exception despite what the irs argues here we need not address the trust’s arguments regarding the regulation which are that the word individual in the regulation should be inter- preted to include a_trust and in the alternative even if the word individual does not include a_trust then the regulation is inapplicable to tax- payers that are trusts we now turn to the legislative_history of the sec_469 exception which the irs contends shows that trusts cannot qualify for that exception the ways and means com- mittee report states that the sec_469 exception applies to individuals and closely held c corporations h_r rept no supra pincite c b pincite the report does not say that the exception applies only to individ- uals and closely held c corporations therefore the report does not compel the conclusion that only individuals and closely held c corporations can qualify for the sec_469 exception the legislative_history states that an individual meets the requirements of sec_469 by meeting the one-half-of- personal-services test and in discussing the final version of the legislation the 750-hour test id h_r rept no supra pincite c b pincite it is true that an indi- vidual falls within the sec_469 exception by meeting the two tests but this does not mean that other types of tax- payers cannot fall within the exception b does the trust qualify for the sec_469 exception the irs’s fallback position is that even if some trusts can qualify for the sec_469 exception the trust does not qualify because it did not materially participate in real-prop- erty trades_or_businesses the irs concedes that the trust’s real-estate operations qualify as real_property trades_or_businesses therefore the question to be resolved is whether the trust materially participated in its real-estate operations we hold that it did so sec_469 supplies the definition of what it means to materially participate in an activity by that definition a verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a aragon jamie aragona trust v commissioner taxpayer is treated as materially participating in an activity only if the taxpayer is involved in the operations of the activity on a basis which is regular continuous and substan- tial sec_469 interpreting sec_469 the department of the treasury has promulgated regulations for determining whether taxpayers who are individuals materially participate in an activity see sec_1_469-5t b c and d tem- porary income_tax regs fed reg date sec_469 provides a method for determining whether certain types of corporation sec_11 have met the tests for mate- rial participation the statute does not provide a method for determining how a_trust may materially participate in an activity and no regulations have yet been promulgated for taxpayers that are trusts see sec_1_469-5t temporary income_tax regs fed reg date reserving a place for a regulation to be titled material_participation of trusts_and_estates therefore we must make the determination of whether a_trust materially participates in an activity in the absence of regulatory guid- ance the irs argues that in determining whether a_trust is materially participating in an activity only the activities of the trustees can be considered and the activities of that trust’s employees must be disregarded in support the irs cites s rept no pincite 1986_3_cb_1 which states that a_trust is treated as materially the irs does not take the position that the trust should be treated as a corporation see sec_301_7701-4 proced admin regs business trusts defined as devices created by beneficiaries to carry on profit-making businesses are to be treated for federal tax law purposes as corporations or partnerships a number of commentators have argued that there is a need for a reg- ulation that resolves questions regarding material_participation of trusts and generally coordinates the passive-activity-loss rules of sec_469 with the rules on taxation of trusts in subch j see eg byrle k abbin david k carlson and mark l vorsatz income_taxation of fiduciaries and beneficiaries sec_801 pincite to ed sec_469 does not easily comport with subchapter_j to date no regulatory explanation has been forthcoming on questions including where and how mate- rial participation is measured m carr ferguson james j freeland and mark l ascher federal income_taxation of estates trusts and beneficiaries para pincite to 3d ed leo l schmolka passive_activity_losses trusts_and_estates the regulations if i were king tax l rev verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a aragon jamie united_states tax_court reports participating in an activity if an executor or fiduciary in his capacity as such is so participating the senate com- mittee report also states that the activities of employees are not attributed to the taxpayer the ignore the activities of on the basis of these legal principles the irs would have us trust’s non-trustee employees additionally the irs would have us ignore the activities of the three trustees who are employees of holiday enterprises llc it reasons that the activities of these three trustees should be considered the activities of employees and not fiduciaries because the trustees performed their activities as employees of holiday enterprises llc and it is impossible to disaggregate the activities they performed as employees of holiday enterprises llc and the activities they performed as trustees if the court adopts all these arguments made by the irs then it should ignore the activities of the or so non-trustee employees and the trustee-employees paul v aragona frank s aragona and annette aragona moran this would leave only the relatively insignificant activities of the trustees who are not employees salvatore s aragona a den- tist anthony f aragona who is disabled and unable to work and charles e turnbull an outside attorney who is the independent_trustee even if the activities of the trust’s non-trustee employees should be disregarded the activities of the trustees- including their activities as employees of holiday enter- prises llc-should be considered in determining whether the trust materially participated in its real-estate operations the trustees were required by michigan statutory law to the senate committee report states the fact that a taxpayer utilizes employees or contract services to per- form daily functions in running the business does not prevent such tax- payer from qualifying as materially participating however the activities of such agents are not attributed to the taxpayer and the taxpayer must still personally perform sufficient services to establish material partici- pation s rept no pincite 1986_3_cb_1 the irs disagrees with carter trust v united_states 256_fsupp2d_536 n d tex which held that the activities of the trust’s non- trustee employees and of the trustee are considered in determining whether the trust materially participated in ranching activity we need not and do not decide whether the activities of the trust’s non-trustee employees should be disregarded verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a aragon jamie aragona trust v commissioner administer the trust solely in the interests of the trust bene- ficiaries because trustees have a duty to act as a prudent person would in dealing with the property of another ie a beneficiary mich comp laws sec before amendment by mich pub acts no see also in re estate of butterfield n w 2d mich con- struing mich comp laws sec a statute in effect from to that was a similarly-worded prede- cessor to mich comp laws sec trustees are not relieved of their duties of loyalty to beneficiaries by con- ducting activities through a corporation wholly owned by the trust cf in re estate of butterfield n w 2d pincite trustees who also happen to be directors of the corporation which is owned or controlled by the trust cannot insulate themselves from probate scrutiny ie duties imposed on trustees by michigan courts under the guise of calling them- selves corporate directors who are exercising their business judgment concerning matters of corporate policy therefore their activities as employees of holiday enterprises llc should be considered in determining whether the trust mate- rially participated in its real-estate operations considering the activities of all six trustees in their roles as trustees and as employees of holiday enterprises llc the trust materially participated in its real-estate operations three of the trustees participated in the trust’s real-estate operations full time the trust’s real-estate operations were substantial the trust had practically no other types of oper- ations the trustees handled practically no other businesses on behalf of the trust the irs argues that because paul v aragona and frank s aragona had minority ownership interests in all of the entities through which the trust oper- we need not consider the effect of sec_469 which provides that for purposes of sec_469 personal services performed as an em- ployee are generally not treated as performed in real-property trades_or_businesses this rule has no application to the resolution of this case be- cause as we explain infra the irs has confined its challenges to the trust’s qualification for sec_469 treatment to two challenges that trusts are categorically barred from sec_469 treatment and the trust did not materially participate in real-property trades_or_businesses thus we need not and do not determine how many hours of personal services were performed by the trust in real-property trades_or_businesses we also note that the irs does not cite sec_469 in its brief verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a aragon jamie united_states tax_court reports ated real-estate holding and real-estate development projects and because they had minority interests in some of the enti- ties through which the trust operated its rental real-estate business some of these two trustees’ efforts in managing the jointly held entities are attributable to their personal por- tions of the businesses not the trust’s portion despite two of the trustees’ holding ownership interests we are convinced that the trust materially participated in the trust’s real- estate operations first frank s and paul v aragona’s com- bined ownership_interest in each entity was not a majority interest-for no entity did their combined ownership_interest exceed second frank s and paul v aragona’s com- bined ownership_interest in each entity was never greater than the trust’s ownership_interest third frank s and paul v aragona’s interests as owners were generally compatible with the trust’s goals-they and the trust wanted the jointly held enterprises to succeed fourth frank s and paul v aragona were involved in managing the day-to-day oper- ations of the trust’s various real-estate businesses we hold that the trust materially participated in real-prop- erty trades_or_businesses for a taxpayer who has materially participated in real-property trades_or_businesses the next steps in ascertaining whether the taxpayer benefits from the sec_469 exception are to determine whether more than one-half of the personal services performed in trades_or_businesses by the taxpayer during the year are performed in real-property trades_or_businesses and to determine whether the taxpayer performed more than hours of services during the year in the real-property trades_or_businesses as to whether the trust qualifies for the sec_469 exception however the irs has limited its argu- ments to the two arguments discussed above namely that trusts are categorically barred from qualifying under the sec_469 exception and that the trust did not materi- ally participate in real-property trades_or_businesses in the context of the arguments raised in this case therefore we hold the trust meets the sec_469 exception for the years at issue c conclusion once it is determined that the trust qualifies under the sec_469 exception and that therefore the trust’s verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a aragon jamie aragona trust v commissioner rental real-estate activities are not per se passive activities a theoretical next step is to determine whether the trust materially participated in its rental real-estate activities if the trust materially participated in its rental real-estate activities then its rental real-estate activities are not passive activities if the trust did not materially participate in its rental real-estate activities then its rental real-estate activi- ties are passive activities the irs argues only that the trust is not excepted by sec_469 it does not argue that-in the event that we determine that the trust is excepted by sec_469 -the trust did not materially participate in its rental real-estate activities we hold that in the context of the arguments presented in this case the trust’s rental real-estate activities are not passive activities are the fees that were paid_by the trust to its trustees properly characterized as expenses of the trust’s rental real-estate activities the notice_of_deficiency determined that the trust’s rental real-estate activities were passive activities a determination that if correct meant that all deductions related to the rental real-estate activities were passive-activity-loss deductions the notice_of_deficiency treated the dollar_figure in trustee fees as deductions other than passive-activity-loss deductions and allowed the full deduction of dollar_figure the treat- in determining whether a taxpayer who qualifies for the sec_469 exception has materially participated in a rental real-estate activity each interest in rental real_estate is treated as a separate rental real-estate ac- tivity unless the taxpayer has made an election under sec_469 if the taxpayer has made such an election then all interests in rental real_estate are treated as a single rental real-estate activity sec_469 before the years at issue the trust made an election under sec_469 a -an election that was binding for subsequent tax years absent changed circumstances-to treat all of its interests in rental real_estate as a single activity a passive-activity loss is generally defined as the amount if any by which the passive-activity deductions for the year exceed the passive-activ- ity gross_income for the tax_year sec_1_469-2t temporary income_tax regs fed reg date passive-activity gross_income is generally all items of gross_income from a passive_activity sec_1 2t c temporary income_tax regs supra a passive-activity deduction is generally defined as a deduction arising in connection with the conduct of a passive_activity sec_1_469-2t temporary income_tax regs continued verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a aragon jamie united_states tax_court reports ment of the dollar_figure in trustee fees as deductions other than passive-activity-loss deductions assumes that the trustee fees were not expenses of the trust’s rental real-estate activities on brief the irs appears to defend this assumption it apparently contends that the trustee fees were not the expenses of the trust’s rental real-estate activities the trust appears to disagree with the assumption in the notice_of_deficiency the trust apparently contends that the trustee fees were the expenses of the trust’s rental real-estate activi- ties the question of whether the trustee fees were the expenses of the trust’s rental real-estate activities is relevant only if the trust’s rental real-estate activities are passive activities contrary to the notice_of_deficiency we hold that the trust’s rental real-estate activities were not passive activities see supra part c because of this holding the losses associated with the trust’s rental real-estate activities are not passive- activity-loss deductions therefore it is unnecessary to decide whether the trustee fees were expenses of the trust’s rental real-estate activity conclusion we have considered all of the arguments the parties have made and to the extent that we have not discussed them we find them to be irrelevant moot or without merit fed reg date in its brief the irs frames the issue of proper characterization of the trustee fees as whether petitioner should have reported trustee fee ex- penses on the front of its u s income_tax return for estates and trusts form_1041 or on the schedule e for the and years it also frames the issue as trustee fees are an expense of the trust and not holiday enterprises llc both phrasings appear to be an obscure ref- erence to the notice of deficiency’s assumption that the trustee fees are not the expenses of the trust’s rental real-estate activity in its reply brief the trust argues that the trustee fees are properly included in the determination of the trust’s losses from its real_estate ac- tivities strictly speaking however the computations in the notice of defi- ciency assumed that the trustee fees were not the expenses of the trust’s rental real-estate activities verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a aragon jamie aragona trust v commissioner to reflect the foregoing decision will be entered under tax ct r pract proc f verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a aragon jamie


t c memo united_states tax_court gabriel gutierrez and connie gutierrez petitioners v commissioner of internal revenue respondent docket no filed date gabriel gutierrez pro_se derek b matta for respondent memorandum opinion parr judge this matter is before the court on petitioners' motion filed date and supplemental motion filed date for administrative and litigation costs pursuant to sec_7430 and rule at the time of filing of all section references are to the internal_revenue_code and all rule references are to the tax_court rules_of_practice continued the petition herein petitioners resided in austin texas references to petitioner are to gabriel gutierrez the determinations by respondent that gave rise to the present case primarily involved unreported gross_receipts from petitioner's law practice and additions to tax for fraud before trial respondent conceded that petitioner was not liable for fraud for tax_year and that mrs gutierrez was not liable for fraud for any of the years in issue after concessions by both parties and before trial the correct deficiencies for each of the years in issue through were stipulated the only issues for trial were the additions to tax for fraud for and as to petitioner and or negligence as to petitioners for all of the years in issue and additions for substantial_understatement for tax years through in our opinion filed date gutierrez v commissioner tcmemo_1995_252 we accepted the stipulated deficiencies and held that petitioner was not liable for the fraud addition for any of the years in issue we held both petitioners liable for the additions for negligence and substantial_understatement for tax years and but not for petitioners request this court to award them reasonable administrative and litigation costs in the amount of dollar_figure continued and procedure unless otherwise indicated in general sec_7430 allows a taxpayer who is a prevailing_party in a civil tax proceeding to recover reasonable administrative and litigation costs incurred in such proceeding a taxpayer bears the burden of proving that he or she is entitled to the claimed costs rule e 88_tc_1329 to achieve this end petitioners must demonstrate that they have exhausted the administrative remedies available to them within the internal_revenue_service irs sec_7430 that they are the prevailing_party sec_7430 and that they did not unreasonably protract the proceedings sec_7430 a prevailing_party is one who establishes that respondent's position was not substantially justified substantially prevailed with respect to the amount in controversy or with respect to the most significant issue or set of issues presented and has a net_worth which does not exceed dollar_figure million at the time the civil tax proceeding commences sec_7430 respondent agrees that the moving parties have substantially prevailed that they meet the net_worth requirements and that the moving parties exhausted available administrative remedies respondent does not agree that her position was not substantially justified respondent agrees that petitioners did not unreasonably protract the court_proceeding but contends that they did unreasonably protract the administrative_proceeding by delaying the production of relevant information until after the appeals_division had issued the notice_of_deficiency respondent was unable to either admit or deny that the costs claimed were reasonable for lack of specific information petitioner argues that our finding of no fraud and the computation of tax and additions to tax which is minimal in comparison to the notice_of_deficiency indicates that respondent was not substantially justified in her determinations in this case we disagree a position is substantially justified if the position is justified to a degree that could satisfy a reasonable person 487_us_552 additionally the position must have a reasonable basis both in law and in fact id petitioners have not demonstrated that respondent's position was not substantially justified they have not proved that respondent's position lacked a reasonable basis in law or fact at the time the notice_of_deficiency was issued or the answer was filed in light of the information then available to respondent first we do not agree with petitioners' calculation of the total amount of taxes and additions to tax due in accordance with our opinion which they now assert is dollar_figure respondent originally determined income_tax deficiencies totaling dollar_figure plus additions to tax including the fraud addition petitioners stipulated total deficiencies in the amount of dollar_figure in addition we found them liable for the negligence and substantial_understatement additions for and the years of the largest deficiencies despite their stipulations petitioners now claim in their computation for entry of decision under rule they are not liable for the taxes and additions determined by the court for and because the notice_of_deficiency was issued more than years after they filed their income_tax returns they claim they do not fall within sec_6501 which provides a 6-year statute_of_limitations if the taxpayer omits_from_gross_income more than percent although they raised this affirmative defense in their petition which respondent denied in the answer they did not mention it as an issue in their opening statement at trial on opening brief or reply brief or in their motion for reconsideration of our opinion respondent and the court had every reason to believe this argument had been waived more importantly par of the stipulation states the petitioners agree that they are liable for deficiencies in tax in the amounts of dollar_figure dollar_figure dollar_figure and dollar_figure for tax years and respectively emphasis added rule e provides that a stipulation shall be treated to the extent of its terms as a conclusive admission by the parties to the stipulation unless otherwise permitted by the court or agreed upon by those parties the court will not permit a party to a stipulation to qualify change or contradict a stipulation in whole or in part except that it may do so where justice requires id petitioners' stipulation as to their liability is unqualified and unambiguous petitioner is an attorney and he knows how to write qualifying language if that is his intention the amounts agreed to were the result of compromises by both sides and it would be a grave injustice to respondent if we were now to permit petitioners to read a statute_of_limitations exception into this stipulation second we found that petitioner was not guilty of fraud but was irresponsible in his recordkeeping and breach of ethics in commingling funds in his escrow account we also found that he underreported his income in all four of the years in issue although the underreporting for two of the years was not caused by petitioner but by an error made by his accountant we found that petitioner's judgment was clouded by his severe alcoholism during the years in issue and that he did not have a fraudulent intent however such a finding turned on the credibility of petitioner's testimony and that of other witnesses in view of the substantial underpayments to which petitioner has agreed and the badges_of_fraud that were present consistent underreporting poor recordkeeping and commingling of funds we believe respondent was substantially justified in bringing the case to trial it was not unreasonable for respondent to put petitioner's credibility before the finder of fact consequently petitioners are not a prevailing_party as defined in sec_7430 as a result of this holding we need not address the question of whether petitioner has satisfied the other requirements of sec_7430 petitioners are not entitled to an award for reasonable administrative and litigation costs to reflect the foregoing an order denying petitioners' motions will be issued we note however that petitioner's affidavit in support of costs claimed is woefully inadequate it simply lists total_amounts paid to various persons without listing the dates number of hours spent the hourly rate charged or the specific work performed by these individuals therefore the request does not meet the requirements of rule d


department of the treasury internal_revenue_service washington d c office_of_chief_counsel date number info release date uil conex-160454-02 cc tege eoeg et2 dear i am responding to your letter dated date on behalf of your constituent who inquired about the status of a federal_insurance_contributions_act fica tax_refund claim made for her husband’s services as a medical resident during the years i hope the following information will be helpful to you and through we received many refund claims filed as a result of the eighth circuit’s decision in state of minnesota v apfel in state of minnesota the eighth circuit held that medical residents employed in residency programs the university of minnesota sponsored were students within the meaning of the social_security act therefore they did not need to pay fica tax on their wages many institutions and some individuals have filed claims for refund as a result of this decision these refund claims are based on sec_3121 of the internal_revenue_code that section provides that services students perform are excepted from fica_taxes a student is defined as an individual who is employed by a school_college_or_university at which the individual is enrolled and regularly attending classes we are considering a representative sample of refund claims involving medical and dental residents and interns we hope to apply our conclusions from these cases to refund claims involving similarly situated residency programs we believe this approach will ensure consistent application of the law and minimize the taxpayer burden that would result if we examined each claim we hope to complete this process within the next few months then we will grant or deny claims as appropriate under the freedom_of_information_act we will make this letter available to the public after we delete names addresses and other identifying information if we can assist you further in this matter please contact me at or sincerely sarah hall ingram division counsel associate chief_counsel tax exempt and government entities