internal_revenue_service number release date index number ----------------------------- --------------------------------- ------------------------------------------------ ------------------------------------------------------------ ---- ------------------------------- --------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-135945-04 date date - decedent spouse b c d e trust b-1 trust b-2 ---------------------------------- ----------------------- --------------------------- --------------------------------------- ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- -------------------------- -------------------------- ------------------------ ------------------------ -------------------------------------------------- trust c-1 trust c-2 -------------------------------------------- plr-135945-04 ------------------------ county state year ----------- ------- ------- ------- this letter responds to a letter dated date and subsequent the information submitted states that decedent died testate in ye ar prior to year year dear -------------------- correspondence submitted on behalf of trust b-1 and trust b-2 by their authorized representative requesting certain rulings under the internal_revenue_code both date and date decedent was predeceased by spouse who died testate in year decedent and spouse had two children b and c both of whom died in year after date c was never married and was survived by no descendants b was married and had two children d and e who survived b d is living and has two adult children e is living and has three adult children descendants trust b-1 and one for the benefit of c and c’s descendants trust c-1 in addition spouse’s will also created two residuary trusts one for the benefit of b and b’s descendants trust b-2 and one for the benefit of c and c’s descendants trust c- all four trusts contained substantially_similar dispositive provisions each trust provides that the income is to be paid in quarterly or more frequent installments to the respective child b or c for whom the trust was created each trust authorizes the trustee in its sole discretion to encroach upon the principal of the trust in such amounts as may be necessary in its judgment for the benefit of the respective child for whom the trust was established b and c had the power at any time to direct the trustee to distribute any part of the corpus in their respective trusts to or among decedent’s descendants or spouses of such descendants in such manner as b or c may direct or appoint however the property cannot be appointed to the child his estate his creditors or the creditors of his estate the property remaining in the trust is to be held by the remaining trustees item xi a of decedent’s will governing trust b-1 provides that on b’s death decedent’s will created two residuary trusts one for the benefit of b and b’s for_the_use_of and in trust for the children of b and the income paid to such children during the lifetime of d and e and upon the death of the survivor of plr-135945-04 my said two grandchildren above named the trustee is to hold the property in trust and pay the income to the surviving children of b and the surviving issue of deceased children of b for a period of twenty-one years at which time the corpus is to be distributed to the beneficiaries then receiving the income in the proportion in which they are entitled to income the grandchildren of b shall take per stirpes the share of their deceased parent in income and corpus t he trustees shall have an unlimited power of encroachment for all beneficiaries of this trust and may encroach for the benefit of the beneficiaries receiving the income at the time of encroachment trust c-1 and c-2 contain similar terms for the benefit of c in addition these item eight e of spouse’s will governing trust b-2 contains a substantially_similar provision regarding the disposition of the trust b-2 corpus on b’s death trusts provide that if c has no children at the time of c’s death the corpus of trust c-1 and trust c-2 shall be added to trust b-1 and trust b-2 respectively and administered in accordance with the terms of those trusts accordingly upon c’s death in year the corpus of trust c-1 was added to trust b-1 and the corpus of trust c-2 was added to trust b-2 thus at the present time there are two trusts trust b-1 and trust b-2 with substantially identical terms that a re each being held for the benefit of b’s children d and e and their descendants the trustee has identified several interpretative issues present under item xi a of decedent’s will trust b-1 and item eight e of spouse’s will trust b-2 specifically under these provisions trust income is to be paid to d and e during the lifetime of d and e and on the death of the survivor the income is to be paid to the surviving issue of the deceased child for an additional years however the provisions also state that the grandchildren of b shall take per stirpes the share of their deceased parent in income and corpus thus it is unclear whether on the death of the first to die of d and e the decedent’s share of income is to be paid to the survivor of d and e or to the issue of the decedent per stirpes the trustee also opined that the requirement for a per stirpes distribution on termination of the trust calls into question whether corpus can be distributed disproportionately among the two family lines pursuant to the trustees’ encroachment power trust b-1 into two identical separate trusts one for the benefit of d and d’s descendants and one for e and e’s descendants similarly trust b-2 will also be divided into two identical separate trusts one for the benefit of d and d’s descendants and one for e and e’s descendants it is represented that the assets of trust b-1 and trust b-2 will be divided on a fractional pro_rata basis into equal portions thereupon the two trusts for the primary benefit of d and d’s descendants will be merged into one resulting trust trust d and the two trusts for the primary benefit of e and e’s the parties have petitioned the superior court court of county state to divide plr-135945-04 descendants will be merged into a separate resulting trust trust e the two merged trusts will operate under identical restated trust provisions under these restated trust provisions the interpretative issues discussed above will be eliminated specifically the trustee of each merged trust will pay the net_income of the trust at least quarterly to d or e respectively the trustee is also authorized at any time or from time to time to pay to d or e as the case may be such part or all of the principal as the trustee deems best on the death of d or e the respective trust is to be divided into trust shares for d or e’s then living descendants per stirpes the trustee is to pay all income from a descendant’s share quarterly to that descendant and may encroach on principal for the benefit of the descendant that is the current income_beneficiary each merged trust will terminate upon the expiration of years after the last to die of b’s children d and e ruling sec_1 and sec_2601 imposes a tax on every generation-skipping_transfer gst under a of the tax_reform_act_of_1986 the gst tax is generally applicable to generation-skipping transfers made after date however under b a of the tax reform act and sec_26_2601-1 of the generation- skipping transfer_tax regulations the tax does not apply to a transfer from a_trust if the trust was irrevocable on date and no addition actual or constructive was made to the trust after that date under sec_26_2601-1 any trust in existence on date will be considered irrevocable unless the settlor had a power that would have caused inclusion of the trust in his or her gross_estate under sec_2038 or sec_2042 of the code if the settlor had died on date sec_26_2601-1 provides that any post-date addition to a_trust made pursuant to an instrument covered by the transition_rules contained in sec_26_2601-1 b or b is not treated as an addition to the trust for purposes of the applying the gst tax effective date rules sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the generation-skipping_transfer_tax under sec_26_2601-1 b or b will not cause the trust to lose its exempt status generally unless specifically noted otherwise the rules of sec_26_2601-1 are applicable only for purposes of determining whether an exempt trust retains its exempt status for generation-skipping_transfer_tax purposes the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 sec_26_2601-1 provides that a judicial construction of a governing instrument to resolve an ambiguity in the terms of the instrument or to correct a plr-135945-04 scrivener's error will not cause an exempt trust to be subject_to the gst provisions if the judicial action involves a bona_fide issue and the construction is consistent with applicable state law that would be applied by the highest court of the state sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy sec_26_2601-1 b or c of this section by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter but only if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust a modification of an exempt trust will result in a shift in a beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a generation-skipping_transfer or the creation of a new generation-skipping_transfer however a modification that is administrative in nature that only indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered a shift in a beneficial_interest in a_trust sec_26_2601-1 example considers a situation where prior to date grantor established an irrevocable_trust for the benefit of grantor’s two children a and b and their issue under the terms of the trust the trustee has the discretion to distribute income and principal to a b and their issue in such amounts as the trustee deems appropriate on the death of the last to die of a and b the trust principal is to be distributed to the living issue of a and b per stirpes in the appropriate local court approved the division of the trust into two equal trusts one for the benefit of a and a’s issue and one for the benefit of b and b’s issue the trust for the benefit of a and a’s issue provides that the trustee has the discretion to distribute trust income and principal to a and a’s issue in such amounts as the trustee deems appropriate on a’s death the trust principal is to be distributed equally to a’s issue per stirpes if a dies with no living descendants the principal will be added to the trust for b and b’s issue the trust for b and b’s issue is identical except for the beneficiaries and terminates at b’s death at which time the trust principal is to be distributed equally to b’s issue per stirpes if b dies with no living descendants principal will be added to the trust for a and a’s issue the example concludes that the division of the trust into two trusts does not shift any beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the division in addition the division does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided in the original trust therefore the two partitioned trusts resulting from plr-135945-04 the division will not be subject_to the provisions of chapter of the internal_revenue_code in sec_26_2601-1 example prior to date the grantor established an irrevocable_trust for grantor’s child and child’s issue also prior to date grantor’s spouse established a separate irrevocable_trust for the same child and issue the terms of the spouse’s trust and grantor’s trust are identical in the appropriate local court approved the merger of the two trusts into one trust to save administrative costs and enhance the management of the investments the example concludes that the merger of the two trusts does not shift any beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the merger in addition the merger does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust therefore the trust that resulted from the merger will not be subject_to the provisions of chapter in the present case trust b-1 and trust b-2 were irrevocable on date and it is represented that no additions actual or constructive have been made to the trusts after that date in particular the year transfers of the trust c-1 and trust c- corpus to trust b-1 and trust b-2 respectively do not constitute post-date additions to trusts b-1 and b-2 since trust c-1 and trust c-2 were also irrevocable on date see sec_26_2601-1 the court order construing item xi a of decedent’s will and item eight e of the division of trust b-1 and trust b-2 as construed by court will not result in a spouse’s will is consistent with applicable local law and resolved a bona_fide issue regarding the interpretation of the wills shift of any beneficial_interest in trust b -1 or b-2 to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons holding the beneficial interests prior to the division and merger in addition the divided trusts will terminate at the same time as provided in trust b-1 and b-2 thus the proposed division will not extend the time for vesting of any beneficial_interest in either trust beyond the period provided for under the original trust b-1 and trust b-2 similarly the terms of the merged resulting trusts will be the same as the terms of the divided trusts and the merged trusts will terminate at the same time as provided in the original trust instruments therefore the merger will not result in a shift of any beneficial_interest to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons holding the beneficial interests prior to the merger based on the facts presented and the representations made we conclude that court’s construction of item xi a of decedent’s will and item eight e of spouse’s will and the division of trust b-1 and trust b-2 and the subsequent mergers of the plr-135945-04 resulting trusts will not affect the status of trust b-1 or trust b-2 as exempt from the generation-skipping_transfer_tax further the proposed divisions and mergers will not cause distributions from or terminations of any interests in trust b-1 and b-2 or any resulting trusts to be subject_to the generation-skipping_transfer_tax ruling sec_643 provides that for purposes of subchapter_j of chapter of subtitle a under regulations prescribed by the secretary two or more trusts shall be treated as one trust if such trusts have substantially the same grantor or grantors and substantially the same primary beneficiary or beneficiaries and a principal purpose of such trusts is the avoidance of the tax_imposed_by_chapter_1 section b of the tax_reform_act_of_1986 provides that sec_643 shall apply to taxable years beginning after date except that in the case of a_trust which was irrevocable on date it shall apply only to that portion of the trust which is attributable to contributions to corpus after date based solely on the facts and representations submitted we conclude that as long as trust d and trust e are separately managed and administered they will be treated as separate trusts for federal_income_tax purposes ruling sec_61 provides that gross_income includes gains derived from dealings in property computing the taxable_income of a_trust other than a_trust to which subpart b applies for the sum of the amount of income for such taxable_year required to be distributed currently and any other_amounts_properly_paid_or_credited_or_required_to_be_distributed for such taxable_year but such deduction shall not exceed the distributable_net_income dni of the estate_or_trust realized by the trust or estate or the other beneficiaries by reason of a distribution_of_property in_kind if the distribution is in satisfaction of a right to receive a distribution of a specific dollar amount of specific property other than that distributed or of income as defined under sec_643 and the applicable regulations if income is required to be distributed currently beneficiary to whom an amount specified in sec_661 is paid credited or required to be sec_1_661_a_-2 of the income_tax regulations provides that gain_or_loss is sec_662 provides that there shall be included in the gross_income of a sec_661 provides that in any taxable_year a deduction is allowed in plr-135945-04 distributed by an estate_or_trust described in sec_661 the sum of the following amounts the amount of income_for_the_taxable_year_required_to_be_distributed_currently to such beneficiary whether distributed or not and all other_amounts properly paid credited or required to be distributed to such beneficiary for the taxable_year if the sum of a the amount of income_for_the_taxable_year_required_to_be_distributed_currently to all beneficiaries and b all other_amounts properly paid credited or required to be distributed to all beneficiaries exceeds the dni of the estate_or_trust then in lieu of the amount provided in the preceding sentence there shall be included in the gross_income of the beneficiary an amount which bears the same ratio to dni reduced by the amounts specified in a as the other_amounts properly paid credited or required to be distributed to the beneficiary bear to the other_amounts properly paid credited or required to be distributed to all beneficiaries sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in such section for determining loss over the amount_realized sec_1_1001-1 provides that except as otherwise provided in subtitle a the gain_or_loss realized from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or as loss sustained a partition of jointly owned property is not a sale_or_other_disposition of property where the co-owners of the joint property sever their joint_interests but do not acquire a new or additional interest as a result thereof thus neither gain nor loss is realized on a partition see revrul_56_437 1956_2_cb_507 in revrul_69_486 1969_2_cb_159 distinguished by revrul_83_61 1983_1_cb_78 a non-pro rata distribution of trust property was made in_kind by the trustee although the trust instrument and local law did not convey authority to the trustee to make a non-pro rata distribution_of_property in_kind the distribution was effected as a result of a mutual agreement between the trustee and the beneficiaries because neither the trust instrument nor local law conveyed authority to the trustee to make a non-pro rata distribution revrul_69_486 held that the transaction was equivalent to a pro_rata distribution followed by an exchange between the beneficiaries and was subject_to the provisions of sec_1001 and sec_1002 the present case is distinguishable from revrul_69_486 because it has been represented that the assets of the two initial trusts will be allocated according to their respective interests evenly among the four intermediary and two resulting merged trusts the assets of the original trusts will be divided fractionally and transferred to the intermediary and resulting trusts in accordance with the respective fractional interest of each of the resulting trusts each asset may not be transferred strictly pro_rata but the plr-135945-04 assets selected for each trust will be fairly representative of the appreciation depreciation and tax bases of the assets available for distribution accordingly the proposed transaction will not be treated as a pro_rata distribution followed by an exchange of assets among the beneficiaries of any of the subject trusts 499_us_554 concerns the issue of when a sale_or_exchange has taken place that results in realization of gain_or_loss under sec_1001 in cottage savings a financial_institution exchanged its interests in one group of residential mortgage loans for another lender's interests in a different group of residential mortgage loans the two groups of mortgages were considered substantially identical by the agency that regulated the financial_institution the supreme court in cottage savings concluded that sec_1_1001-1 reasonably interprets sec_1001 and stated than an exchange of property gives rise to a realization event under sec_1001 if the properties exchanged are materially different in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material so long as their respective possessors enjoy legal entitlements that are different in_kind or extent cottage savings pincite in cottage savings the court held that mortgage loans made to different obligors and secured_by different homes did embody distinct legal entitlements and that the taxpayer realized losses when it exchanged interests in the loans it is consistent with the supreme court's opinion in cottage savings to find that the interests of the beneficiaries of the four intermediary and two resulting merged trusts will not differ materially from their interests in the original trusts the proposed transaction will not change the interests of the beneficiaries instead the beneficiaries will be entitled to the same benefits after the proposed transaction as before the proposed transaction is similar to the kinds of transactions discussed in revrul_56_437 since the original trusts are to be divided but all other provisions of the trusts will remain substantially identical thus the proposed transaction will not result in a material difference in the kind or extent of the legal entitlements enjoyed by any trust_beneficiary based upon the facts submitted and the representations made and assuming the transaction is effectuated substantially as described we conclude that the proposed divisions of the assets of the trusts created under the wills of decedent and spouse and the subsequent mergers of the resulting trusts will not constitute a distribution under sec_661 or sec_1_661_a_-2 or a sale or other taxable disposition of the assets of any of the trusts under sec_1001 thus the proposed divisions and mergers will not result in the realization by trust b-1 and trust b-2 the four intermediary trusts resulting from the sec_1_1015-2 provides that in the case of property acquired after plr-135945-04 divisions of these trusts or trust d and trust e or by any beneficiary of any of these described trusts of any income gain_or_loss under sec_61 sec_662 or sec_1001 ruling sec_1015 provides that if property is acquired by a transfer in trust other than a transfer in trust by a gift bequest or devise the basis shall be the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on such transfer date by transfer in trust other than by transfer in trust by gift bequest or devise the basis_of_property so acquired is the same as it would be in the hands of the grantor increased by the amount of gain or decreased in the amount of loss recognized to the grantor on the transfer under the law applicable to the year in which the transfer was made if the taxpayer acquired the property by transfer in trust this basis applies whether the property be in the hands of the trustee or the beneficiary and whether acquired prior to termination of the trust and distribution of the property or thereafter because sec_1001 does not apply to the proposed trust divisions and mergers under sec_1015 the tax basis of the assets of trust d and trust e will be the same as the tax basis of trust b-1 and trust b-2 in such assets ruling based solely on the facts and representations submitted we conclude that sec_1223 of the code provides that i n determining the period for which the taxpayer has held property however acquired there shall be included the period for which such property was held by any other person if under this chapter such property has for the purpose of determining gain_or_loss from a sale_or_exchange the same basis in whole or in part in his hands as it would have in the hands of such other person inasmuch as we have determined that the basis of the assets transferred from trust b-1 and trust b-2 upon division will carry over under sec_1015 to the four divided resulting trusts and then to trust d and trust e we conclude that the holding periods for all assets allocated to the fo ur trusts resulting from the division of trust b-1 and trust b-2 and ultimately held by trust d and trust e will continue to be the same as the plr-135945-04 holding_period for the assets in trust b-1 and trust b-2 immediately before the division and merger under sec_1223 of the internal_revenue_code ruling sec_2036 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money or money s worth by trust or otherwise under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his deathb the possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom sec_2037 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in the case of a bona_fide sale for an adequate_and_full_consideration in money or money’s worth by trust or otherwise if possession or enjoyment of the property can through ownership of such interest be obtained only by surviving the decedent and the decedent has retained a reversionary_interest in the property and the value of such reversionary_interest immediately before the death of the decedent exceeds five percent of the value of such property sec_2038 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in the case of a bona_fide sale for an adequate_and_full_consideration in money or money s worth by trust or otherwise where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power in whatever capacity exercisable by the decedent alone or by the decedent in conjunction with any other person without regard to when or from what source the decedent acquired such power to alter amend revoke or terminate or where any such power is relinquished during the 3-year period ending on the date of the decedent s death in order for to apply the decedent must have made a transfer of property of any interest therein except in the case of a bona_fide sale for adequate_and_full_consideration in money or money’s worth under which the decedent retained an interest in or power over the income or corpus of the transferred property constitute a transfer within the meaning of the beneficiaries of the in the present case the proposed division and merger of trusts does not plr-135945-04 resulting trusts will have the same interest after the division and merger as they had prior to the division and merger we therefore conclude that the proposed division of trust b-1 or b-2 and merger of the resulting trusts will not cause the interest of any beneficiary of trust b-1 or b-2 or the resulting trusts to be includible in the beneficiary’s gross_estate under ruling sec_2501 imposes a tax for each calendar_year on the transfer of property by gift during such calendar_year by any individual resident or nonresident sec_2511 provides that subject_to the limitations contained in the gift_tax chapter the gift_tax imposed by sec_2501 will apply whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_2512 provides that if a gift is made in property the value thereof at the date of the gift will be considered the amount_of_the_gift sec_2512 states that where property is transferred for less than adequate_and_full_consideration in money or money s worth the amount by which the value of the property exceeds the value of the consideration received shall be deemed a gift in this case the beneficiaries of the resulting trusts will have the same interests after the proposed division and merger that they had under trust b-1 and trust b-2 prior to the division and merger because the beneficial interests rights and expectancies of the beneficiaries are substantially_similar both before and after the proposed transaction no transfer of property will be deemed to occur as a result of the division and merger accordingly we conclude that the division of trusts b-1 and b-2 as proposed the merger of the resulting trusts and the allocation of assets among the resulting trusts as proposed is not a transfer direct or indirect of property that will be subject_to the gift_tax imposed by sec_2501 except as specifically set forth above no opinion is expressed concerning the this ruling is directed only to the taxpayer requesting it sec_6110 of the federal tax consequences of the facts described above under any other provision of the code code provides that it may not be used or cited as precedent plr-135945-04 letter is being sent to the authorized representative of trust b-1 and trust b-2 in accordance with the power_of_attorney on file with this office a copy of this sincerely j thomas hines chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 p urposes


t c no united_states tax_court alan lee and debi marie kuykendall petitioners v commissioner of internal revenue respondent docket no 16232-06l filed date r mailed a notice_of_deficiency to ps’ last_known_address but ps did not receive it because they had moved during a subsequent examination of their return ps were informed that a notice_of_deficiency for had been sent to them at ps’ request the examiner faxed a copy of the notice_of_deficiency to them that day when only days remained in the day period within which to petition this court ps did not petition this court r then issued a final notice_of_intent_to_levy with respect to in response ps requested a sec_6330 i r c hearing r’s appeals_office determined that ps had an opportunity to petition this court for review and therefore they could not contest the underlying tax_liability ps now seek to challenge the underlying tax_liability before this court held under sec_301_6330-1 q a-e2 proced admin regs days was insufficient time to allow ps to petition this court for redetermination of a notice_of_deficiency therefore ps were not barred from contesting the underlying tax_liability at their sec_6330 i r c hearing alan lee and debi marie kuykendall pro sese emily giometti for respondent opinion haines judge this case is before the court on respondent’s motion for summary_judgment filed pursuant to rule respondent’s motion argues that petitioners were statutorily barred from challenging the existence or amount of the underlying tax_liability in their sec_6330 hearing because they received a notice_of_deficiency and therefore they are barred from challenging the liability before this court background petitioners alan lee and debi marie kuykendall husband and wife resided in middletown california at the time the petition was filed ms kuykendall was primarily employed as an accountant and bookkeeper she also worked part time as a shift lead supervisor at a restaurant on date while working at the 1unless otherwise indicated section references are to the internal_revenue_code as amended rule references are to the tax_court rules_of_practice and procedure amounts are rounded to the nearest dollar restaurant ms kuykendall was assaulted and robbed at gunpoint she suffered from severe physical and psychological difficulties as a result of the assault she was subsequently diagnosed with posttraumatic stress disorder mr kuykendall worked as a property manager until he began experiencing medical problems in he was diagnosed with postpolio syndrome a debilitating set of physiological changes in the nervous system which results in extreme weakness fatigue and pain among other symptoms mr kuykendall became unable to work and suffered from very poor short term memory in a letter dated date respondent notified petitioners that their federal_income_tax return had been selected for review on date ms kuykendall requested that respondent delay the examination because of her medical difficulties respondent’s examiner denied the request on date respondent sent petitioners an audit report showing the changes made to petitioners’ return petitioners were allowed until date to submit documents pertaining to their return petitioners did not respond on date respondent issued a notice_of_deficiency to petitioners’ last_known_address determining a tax_deficiency of dollar_figure for in the notice_of_deficiency respondent disallowed petitioners’ unreimbursed employee business_expenses claimed on schedule a itemized_deductions of dollar_figure and certain schedule c profit or loss from business_expenses totaling dollar_figure on date ms kuykendall called respondent’s examiner regarding a letter she had received related to petitioners’ tax_year during the conversation ms kuykendall was informed that a notice_of_deficiency for had been mailed to them ms kuykendall informed respondent that petitioners had moved and that they did not receive the notice_of_deficiency at ms kuykendall’s request the examiner faxed a copy of the notice_of_deficiency to petitioners that day with respect to the notice_of_deficiency petitioners did not file a petition with this court on date respondent sent petitioners a final notice_of_intent_to_levy and notice of your right to a hearing for on date petitioners submitted a form request for a collection_due_process_hearing in their request for relief petitioners disputed the underlying tax_liability by asserting that the disallowed business_expenses were valid they also disputed the examiner’s decision not to postpone the examination on date respondent’s appeals_office sent a letter to petitioners offering them a hearing on date ms kuykendall sent a letter to respondent’s appeals_office accompanied by several documents relating to the disallowed business deductions on date appeals officer terrence riddle conducted a face-to-face hearing with ms kuykendall at the hearing petitioners sought to challenge the underlying tax_liability by providing documentation to substantiate the disallowed deductions officer riddle determined that petitioners could not properly challenge the underlying tax_liability at the hearing because they previously had the opportunity to petition this court for review of the deficiency as to the examiner’s decision not to postpone the audit officer riddle determined that petitioners were allowed a reasonable amount of time in which to respond to the audit report on date respondent issued a notice_of_determination sustaining the proposed collection action for petitioners timely filed a petition with this court in the petition they sought to challenge the underlying tax_liability by asserting that the disallowed deductions were valid petitioners also challenged respondent’s failure to postpone the examination of their return on date respondent filed a motion for summary_judgment on all issues in the case on date petitioners filed their response discussion summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trials fla peach corp v commissioner 90_tc_678 the court may grant summary_judgment when there is no genuine issue of material fact and a decision may be rendered as a matter of law rule b 98_tc_518 affd 17_f3d_965 7th cir 90_tc_753 the moving party bears the burden of proving that there is no genuine issue of material fact 85_tc_812 85_tc_527 the court will view any factual material and inferences in the light most favorable to the nonmoving party dahlstrom v commissioner supra pincite naftel v commissioner supra pincite before the commissioner may levy on any property or property right the taxpayer must be provided written notice of the right to request a hearing during the 30-day period before the first levy sec_6330 if the taxpayer requests a hearing an appeals officer of the commissioner must hold the hearing sec_6330 at the hearing the taxpayer may raise any relevant issue relating to the unpaid tax or the proposed levy including appropriate spousal defenses challenges to the appropriateness of collection actions and offers of collection alternatives sec_6330 sec_6330 limits the taxpayer’s ability to challenge the underlying tax_liability during the hearing specifically the taxpayer may raise at the hearing challenges to the existence or amount of the underlying tax_liability for any_tax period if the person did not receive any statutory_notice_of_deficiency for such tax_liability or did not otherwise have an opportunity to dispute such tax_liability id receipt of a statutory_notice_of_deficiency for this purpose means receipt in time to petition the tax_court for a redetermination of the deficiency asserted in the notice_of_deficiency sec_301_6330-1 q a-e2 proced admin regs therefore sec_6330 contemplates actual receipt by the taxpayer tatum v commissioner tcmemo_2003_115 we have not previously addressed the issue of how much time is required under sec_301_6330-1 q a-e2 proced admin regs for a taxpayer to petition this court for redetermination of a deficiency however we have addressed similar questions in determining whether a taxpayer who failed to file a timely petition with this court was prejudiced by an improperly addressed notice our decisions in those cases inform our analysis of the current issue 2if however the notice_of_deficiency was not received because the taxpayers deliberately refused delivery they may not seek to challenge the underlying tax_liability at a sec_6330 hearing or before this court 114_tc_604 respondent does not argue nor would we find that petitioners deliberately refused delivery of the notice_of_deficiency the jurisdiction of this court is dependent on the timely filing of a petition rule c in a deficiency_suit a taxpayer is generally given days from the issuance of a notice_of_deficiency to petition this court for review sec_6213 however we have jurisdiction to decide whether a taxpayer had insufficient time to properly file a petition because he was prejudiced by an improperly addressed notice 73_tc_690 in general we have held that when a notice_of_deficiency is actually received by the taxpayer with at least days remaining in the filing period the taxpayer had sufficient time to petition this court for review see eg 81_tc_65 days remaining masino v commissioner tcmemo_1998_118 days remaining fileff v commissioner tcmemo_1990_452 days remaining george v commissioner tcmemo_1990_147 days remaining bulakites v commissioner tcmemo_1998_256 days remaining loftin v commissioner tcmemo_1986_322 days remaining eger v commissioner tcmemo_1984_325 days remaining however when a notice was received with only days remaining in the filing period we held that the taxpayer had insufficient time to petition this court looper v commissioner supra pincite similarly the court_of_appeals for the eleventh circuit held as a matter of law that receipt of a notice_of_deficiency with only days remaining in the filing period was insufficient to permit the timely filing of a petition 815_f2d_1400 11th cir in this case petitioners received the notice_of_deficiency with days remaining to petition this court petitioners did not deliberately avoid receipt of the notice in fact upon realizing that they did not receive it petitioners asked respondent’s examiner to fax it to them immediately since petitioners received the notice_of_intent_to_levy ms kuykendall has diligently sought to dispute the underlying tax_liability by requesting a sec_6330 hearing and providing respondent’s appeals officer documentation supporting the disallowed deductions applying the standards set forth in mulvania v commissioner supra and looper v commissioner supra to sec_301_6330-1 q a-e2 proced admin regs we hold that days was insufficient time for petitioners to petition this court for redetermination of the notice_of_deficiency therefore petitioners were entitled to challenge the existence or the amount of the underlying tax_liability during their sec_6330 hearing by setting forth specific facts petitioners have shown there is a genuine issue of material fact as to whether the deductions disallowed by the notice_of_deficiency should be allowed see rule d we shall therefore deny respondent’s motion for summary_judgment and remand the case to respondent’s appeals_office for further proceedings consistent with this opinion to reflect the foregoing an appropriate order will be issued


internal_revenue_service number release date index number ------------------------ -------------------------------------- --------------------------------------------------- ------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no -------------- telephone number ---------------------- refer reply to cc psi b01 plr-106675-15 date date x y -------------------------------------------- ------------------------- -------------------------------------------- ------------------------- country ----------------------- date ----------------- dear --------------- this ruling is in response to your request dated date submitted on behalf of y requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to elect to be treated as a disregarded_entity for federal_income_tax purposes facts according to the information submitted x is a domestic limited_liability_company treated as a partnership for federal_income_tax purposes on date x's wholly owned foreign_subsidiary y formed under the laws of country y represents that it intended to elect to be treated as a disregarded_entity effective date however y failed to timely file a valid form_8832 entity classification election to elect to be treated as a disregarded_entity for federal tax purposes plr-106675-15 law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with a single member having limited_liability may elect to be treated as a disregarded_entity pursuant to the rules of sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time 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_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result y is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center to elect to be treated as a disregarded_entity for federal tax purposes effective date a copy of this letter should be attached to the form_8832 plr-106675-15 this ruling is contingent on the owner of y filing within days of this letter all required returns for all open years consistent with the requested relief these returns may include but are not limited to the following forms i forms information_return of u s persons with respect to certain foreign_corporations and ii forms information_return of u s persons with respect to foreign disregarded entities such that these forms reflect the consequences of the relief granted in this letter a copy of this letter should be attached to any such returns except as specifically set forth above no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting 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 we are sending a copy of this letter to y’s authorized representatives sincerely associate chief_counsel passthroughs special industries by joy c spies joy c spies senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


t c no united_states tax_court james m galloway and sarah m galloway petitioners v commissioner of internal revenue respondent docket no filed date on their federal_income_tax return ps claimed a dollar_figure credit under sec_25a for expenses related to their children's postsecondary education petitioners failed to carry from form_8863 to form_1040 the dollar_figure nonrefundable portion of the credit claiming on form_1040 only the dollar_figure refundable portion which reduced the tax_shown_on_the_return from dollar_figure to dollar_figure in processing ps' return r adjusted ps' tax_liability to take into account the dollar_figure nonrefundable portion of the credit and refunded to ps dollar_figure more than the amount they had requested after examination r disallowed ps' claimed dollar_figure credit in full and ps now concede that they are not entitled to any credit under sec_25a for held when the commissioner makes a rebate to a taxpayer for a year in excess of the amount of tax shown on the taxpayer's return for the year that excess increases the taxpayer's deficiency within the meaning of sec_6211 thus ps' deficiency for is dollar_figure dollar_figure dollar_figure dollar_figure held further r's imposition of a dollar_figure accuracy-related_penalty under sec_6662 is sustained t keith fogg andrew r roberson and denise m mudigere for petitioners lori a amadei for respondent halpern judge respondent determined a deficiency of dollar_figure in petitioners' federal_income_tax and an accuracy-related_penalty for that year of dollar_figure the deficiency arises from respondent's disallowance of a dollar_figure american opportunity_credit aoc petitioners claimed under sec_25a on their federal_income_tax return petitioners reported a total credit of dollar_figure on form_8863 education credits american opportunity and lifetime learning credits including a refundable portion of dollar_figure they failed however to carry the dollar_figure nonrefundable portion of the credit to their form_1040 u s individual_income_tax_return respondent reduced petitioners' tax_liability by dollar_figure in processing their return to take into account the nonrefundable portion of the credit and refunded to petitioners dollar_figure more than 1all section references are to the internal_revenue_code in effect for unless otherwise indicated they had requested the parties agree that the dollar_figure additional refund was a rebate within the meaning of sec_6211 and sec_6664 flush language petitioners concede that they are not entitled to any aoc for the parties thus also agree that the tax imposed on petitioners for by subtitle a is dollar_figure the amount shown as total_tax on line of petitioners' form_1040 the issues remaining for decision are whether respondent correctly computed petitioners' deficiency in particular whether the excess of the rebate respondent made over the tax shown on petitioners' return net of the refundable_credit increases their deficiency from dollar_figure to dollar_figure and whether petitioners are liable for the accuracy-related_penalty that respondent determined findings_of_fact petitioners' reporting of education credits for on a form_8863 education credits hope_and_lifetime_learning_credits included with their form_1040 petitioners claimed a hope_credit for qualified expenses of two of their dependent_children g g and j g the total education credits reported on line of petitioners' form_8863 also appear on line of their form_1040 for that year reducing their total_tax to zero petitioners' reporting petitioners' form_1040 for also included a form_8863 which reported qualified expenses for each of j g g g and e g another dependent_child of petitioners g g and j g each completed his or her undergraduate degree in the spring term of petitioners' form_8863 reports a tentative aoc of dollar_figure per child or dollar_figure and a refundable aoc of dollar_figure dollar_figure the dollar_figure refundable aoc also appears on line of petitioners' form_1040 part iv of petitioners' form_8863 is incomplete it reports on line the dollar_figure difference between the total aoc claimed and the dollar_figure refundable portion of the credit but that difference is not carried to either line of the form_8863 nonrefundable education credits or line of petitioners' form_1040 petitioners' form_8863 provided no facts related to the claimed credit other than the qualified expenses attributable to each child petitioners who resided in california when they filed their petition reported dollar_figure of federal_income_tax withheld from their wages for their form_1040 for that year did not include a form_8275 disclosure statement petitioners' refund petitioners claimed a refund on their return of dollar_figure but respondent alleges--and petitioners concede--that he actually issued them a refund for that year of dollar_figure the record provides no indication that they returned any portion of their refund mr galloway's trial testimony mr galloway conceded at trial that petitioners were not entitled to any aoc for tuition or expenses paid on behalf of e g in but he did not explain the basis for that concession on brief petitioners concede that they are not entitled to any aoc for when we asked mr galloway at trial whether he had any testimony to show reasonable_cause for petitioners' belief that they were entitled to the claimed aoc he responded when we prepared the taxes we used a guide--i believe it was lassiter's guide--in doing so it is a confusing section with two options to take for educational credits and we did the best we could to follow the guidelines in there and the instructions on the forms opinion i the amount of petitioners' deficiency a applicable law sec_6211 defines deficiency to mean the amount by which the tax imposed by subtitle a exceeds the excess of -- the sum of a the amount shown as the tax by the taxpayer upon his return plus b the amounts previously assessed or collected without assessment as a deficiency over -- the amount of rebates as defined by subsection b made sec_6211 defines rebate as so much of an abatement credit refund or other repayment as was made on the ground that the tax imposed by subtitle a was less than the excess of the amount specified in subsection a over the rebates previously made before the enactment of the technical_and_miscellaneous_revenue_act_of_1988 tamra pub_l_no 102_stat_3342 taxpayers could not contest the commissioner's disallowance of refundable credits in deficiency proceedings before this court if they had no tax_liability even after disallowance of the credits and thus had no deficiencies see h_r rept no pincite s rept no pincite u s c c a n congress amended sec_6211 as part of tamra to remedy that situation tamra sec_1015 sec_102 stat pincite see also wilson v commissioner tcmemo_2001_139 wl at the legislative_history of sec_6211 reveals that the provision was enacted to expand the definition of a deficiency to permit taxpayers to contest the disallowance of the earned_income_credit in the tax_court h_r rept no supra pincite s rept no supra pincite u s c c a n pincite under sec_6211 any excess of refundable credits allowable over the tax imposed by subtitle a and any excess of reported refundable credits over the tax reported on a taxpayer's return shall be taken into account as negative amounts of tax for purposes of sec_6211 thus the disallowance of refundable credits claimed by a taxpayer with no tax_liability even after that disallowance would result in a deficiency because the tax imposed would be larger that is less negative than the tax shown on the taxpayer's return the refundable portion of the aoc is among the refundable credits to which sec_6211 by its terms applies sec_25a allows a hope scholarship credit of up to dollar_figure per year of an eligible student's qualified_tuition_and_related_expenses for postsecondary education sec_25a increased the limit to dollar_figure per year for a taxable_year beginning in or and referred to the increased hope scholarship credit as the american_opportunity_tax_credit a credit under sec_25a can be claimed for an eligible_student for no more than four taxable years sec_25a i although the aoc is generally limited to the taxpayer's tax_liability sec_26 sec_40 of the credit is refundable to the taxpayer to the extent it exceeds the taxpayer's tax_liability sec_25a the credits to which sec_6211 applies include the credits allowable under section 25a by reason of subsection i thereof b the parties' positions respondent's determination of a dollar_figure deficiency reflects the following calculation dollar_figure tax imposed dollar_figure tax shown on return dollar_figure rebate the dollar_figure tax shown on petitioners' return--an amount with which petitioners agree--equals the dollar_figure total_tax shown on line of their form_1040 reduced by the dollar_figure refundable_credit reported on line of that form cf sec_6211 providing that the tax imposed and the tax shown on a taxpayer's return are determined without regard to specified_credits that do not include the credit allowed by sec_25a 141_tc_376 2the parties agree that respondent did not previously assess any deficiencies against petitioners for and did not collect as deficiencies any amounts from petitioners for that year thus petitioners' deficiency turns on three amounts tax imposed tax_shown_on_the_return and rebates reasoning that credits not specified in sec_6211 reduce the tax shown on the taxpayer's return for the purpose of computing a deficiency respondent's position rests on the premise that the excess of the tax shown on a taxpayer's return over any rebates made can be a negative_amount that increases the taxpayer's deficiency when the amount of the rebate exceeds the amount of tax shown because the excess of the tax_shown_on_the_return over rebates is subtracted from the tax imposed to arrive at the taxpayer's deficiency if that excess is a negative number subtracting it from the tax imposed will increase the taxpayer's deficiency in normal parlance one might say that if amount b is larger than amount a then a does not exceed b by any amount--that is the excess of a over b is zero nonetheless it is both linguistically and mathematically possible for the excess of a smaller number over a larger one to be a negative_amount 115_f3d_430 7th cir moreover as respondent observes in applying the statutory formula provided in sec_6211 for determining a deficiency we have implicitly accepted the premise that the excess of the tax shown on a return over rebates can be negative see voigt v commissioner tcmemo_2004_62 wilson v commissioner wl blore v commissioner tcmemo_2000_326 each of those cases involved similar facts wilson for example involved a taxpayer who had a tax_liability of zero and claimed an overpayment on the basis of an earned_income_tax_credit of dollar_figure the commissioner disallowed the claimed credit we concluded that the disallowance of the credit resulted in a deficiency wilson v commissioner wl at r espondent's determination that petitioner's correct_tax liability is zero and that petitioner is not entitled to an earned_income_credit constitutes the determination_of_a_deficiency within the meaning of sec_6211 under sec_6211 the claimed credit resulted in a negative_amount of tax shown on the taxpayer's return specifically dollar_figure the tax imposed was zero the commissioner made no rebates to the taxpayer for the year in issue thus the tax imposed dollar_figure exceeded the excess of the tax_shown_on_the_return over rebates dollar_figure dollar_figure ' dollar_figure the amount of the rebate dollar_figure was larger than the negative_amount of tax_shown_on_the_return thus our determination_of_a_deficiency necessarily rested on the premise that the excess of tax shown over rebates can be a negative number were that not so the taxpayer in wilson would have had no deficiency and would have been unable to contest in this court the commissioner's disallowance of his claimed earned_income_tax_credit contrary to the purpose of sec_6211 in the face of our prior caselaw and the need to carry out the purpose of sec_6211 it is not surprising that petitioners do not challenge the general proposition that in computing a taxpayer's deficiency the excess of the tax shown on a return over rebates can be a negative number they allege however that that proposition holds only where no rebates exist they argue that it does not follow from the general proposition that an 'excess' of tax shown over the rebate exists when respondent has made a 'rebate' exceeding the positive tax_shown_on_the_return and why might it be that the excess of tax shown over rebates can be negative in some cases and not others petitioners profess concern about possible manipulation by the commissioner the logical extension of respondent's argument they warn would permit respondent to manipulate the calculation by unilaterally issuing rebates whenever it benefitted respondent on the basis of that concern petitioners argue that their deficiency is limited to the tax imposed of dollar_figure c analysis for several reasons we reject petitioners' proposed limitation on the amount of their deficiency and accept respondent's calculation to begin with the text of sec_6211 provides no basis for giving a different interpretation to the phrase the excess of the amount shown as the tax by the taxpayer upon his return over the amount of rebates made depending on whether any rebates have in fact been made second we are hard pressed to imagine cases in which the commissioner would find it to his advantage to pay a taxpayer an amount to which the taxpayer was not entitled simply to give him grounds to recover the overpayment as part of a deficiency third even were such prospects to arise the commissioner could not willy-nilly treat payments to taxpayers as rebates an amount_paid to a taxpayer qualifies as a rebate only to the extent that it was made on the ground that the tax imposed was less than the excess of the tax shown on a taxpayer's return plus prior assessments over any prior rebates see sec_6211 3although petitioners have not given us an example of a case in which the commissioner would be advantaged by making a strategic rebate to manipulate the amount of a taxpayer's deficiency petitioners may have in mind the possibility of payments made to a taxpayer to avoid the limitation on underpayment we established in 141_tc_376 as explained infra part ii a the definition of underpayment in sec_6664 is essentially the same as the definition of deficiency in sec_6211 a --that is the amount by which the tax imposed exceeds the excess of the tax_shown_on_the_return over any rebates because no rule analogous to that of sec_6211 then applied for the purpose of determining an underpayment we concluded in rand v commissioner t c pincite that for that purpose refundable credits could not reduce the tax shown on a return below zero but see consolidated appropriations act pub_l_no div q protecting americans from tax hikes act of path sec a stat pincite amending sec_6664 to provide that a rule similar to that of sec_6211 applies for purposes of sec_6664 continued petitioners concede that they received dollar_figure from the government to which they were not entitled they agree that they are liable for tax of dollar_figure for they had dollar_figure withheld from wages during that year thus they were entitled to a refund of dollar_figure dollar_figure dollar_figure instead they received a refund of dollar_figure--dollar_figure more than they deserved petitioners offer no logical reason why their deficiency should be limited to dollar_figure and the government forced to file an erroneous refund_suit under sec_7405 if still timely to collect the additional dollar_figure the commissioner would have no grounds for making a rebate to a taxpayer in excess of the tax shown on the taxpayer's return unless the continued suppose for example that petitioners had carried from form_8863 to their form_1040 the nonrefundable portion of their claimed aoc in that case the tax shown on their return for purposes of computing a deficiency would have been dollar_figure dollar_figure dollar_figure respondent's disallowance of the claimed aoc would have resulted in a deficiency of dollar_figure by reason of sec_6211 but under our holding in rand and leaving aside the possible impact of the path act amendment petitioners' underpayment for the purpose of computing accuracy- related penalties would have been limited to the dollar_figure tax imposed on them the dollar_figure refundable portion of petitioners' aoc would not have reduced the tax shown on their return for purposes of sec_6664 below zero petitioners might be suggesting that respondent's gratuitous payment to them of at least dollar_figure would have enabled him to increase their underpayment to dollar_figure thereby increasing their liability for an accuracy-related_penalty but respondent would not have made the imagined payment on the ground that the tax imposed by subtitle a on petitioners was less than dollar_figure thus the payment would not have been a rebate within the meaning of either sec_6211 or sec_6664 flush language and would not have affected the amount of petitioners' underpayment commissioner had reason to believe that the taxpayer was entitled to refundable credits sec_6211 reflects congress' intent to allow issues concerning refundable credits to be litigated in this court thus we not only agree with the parties that in a typical case involving no rebates the excess of the tax shown on a taxpayer's return over rebates can be negative and would be negative whenever the tax shown is itself negative because of claimed refundable credits we also see no basis in either the text or purpose of the relevant rules for reaching a different result in a case in which the commissioner made a rebate to the taxpayer within the meaning of sec_6211 d conclusion for the reasons described above we hold explicitly what was implicit in several of our prior cases the excess of the tax shown on a taxpayer's return over rebates made for the purpose of computing a deficiency can be a negative number regardless of whether the commissioner in fact made any rebates to the taxpayer for the year in issue thus the excess of the tax shown on a return over rebates can be negative not only when rebates are zero as was the case in blore wilson and voigt but also when as here the commissioner has made a rebate of a positive amount consequently petitioners' deficiency for under the definition provided in sec_6211 is dollar_figure the amount by which the dollar_figure tax imposed on them for that year under subtitle a exceeds dollar_figure which in turn is the excess of the tax shown on petitioners' return over the dollar_figure rebate made by respondent ii petitioners' liability for the accuracy-related_penalty a applicable law sec_6662 and b provides for an accuracy-related_penalty of of the portion of an underpayment_of_tax attributable to negligence or disregard of rules and regulations sec_6662 and b provides for the same penalty on the portion of an underpayment_of_tax attributable to a ny substantial_understatement_of_income_tax the definitions of underpayment and understatement provided in sec_6664 and sec_6662 respectively closely parallel the sec_6211 definition of deficiency sec_6664 defines underpayment to mean the amount by which any_tax imposed by this title exceeds the excess of-- the sum of-- a the amount shown as the tax by the taxpayer on his return plus b amounts not so shown previously assessed or collected without assessment over the amount of rebates made for purposes of sec_6664 the term 'rebate' means so much of an abatement credit refund or other repayment as was made on the ground that the tax imposed was less than the excess of the amount specified in sec_6664 over the rebates previously made sec_6664 flush language sec_6662 defines the term understatement to mean the excess of-- i the amount of tax required to be shown on the return for the taxable_year over ii the amount of tax imposed which is shown on the return reduced by any rebate within the meaning of sec_6211 in the case of an individual an understatement of income_tax is substantial if it exceeds the greater of of the tax required to be shown on the return or dollar_figure sec_6662 an understatement is reduced however by the portion attributable to the treatment of an item for which the taxpayer had substantial_authority or in the case of items adequately disclosed a reasonable basis sec_6662 a taxpayer's position has substantial_authority if the weight of the authorities in support of that position is substantial in the relation to the weight of any contrary authorities see sec_1_6662-4 income_tax regs disclosure is adequate if it includes the relevant facts affecting the item's tax treatment sec_6662 subject_to exceptions provided in an annual revenue_procedure disclosure must be made on a form_8275 or in the case of positions contrary to a regulation a form 8275-r sec_1_6662-4 and income_tax regs see also revproc_2012_15 2012_7_irb_369 identifying circumstances under which disclosure on a taxpayer' sec_2011 return is adequate for purposes of reducing an understatement of income_tax under sec_6662 the reasonable basis standard is a relatively high standard of tax reporting that generally requires a position to be reasonably based on relevant authorities see sec_1_6662-3 income_tax regs sec_6664 provides an exception to the imposition of the sec_6662 accuracy-related_penalty if it is shown that there was reasonable_cause for the underpayment and the taxpayer acted in good_faith sec_1_6664-4 income_tax regs provides the determination of whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all pertinent facts and circumstances generally the most important factor is the extent of the taxpayer's effort to assess the taxpayer's proper tax_liability circumstances that may indicate reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in light of all the facts and circumstances including the experience knowledge and education of the taxpayer the commissioner bears the burden of production with respect to penalties see sec_7491 to meet that burden he must produce evidence regarding the appropriateness of imposing the penalty 116_tc_438 if the commissioner carries his burden of production the taxpayer then bears the burden of proving that he or she is entitled to relief because of substantial_authority or an adequately disclosed position with a reasonable basis or under sec_6664 see id b respondent's satisfaction of his burden of production respondent calculates petitioners' underpayment and understatement to be dollar_figure applying the same formula he uses to compute their deficiency for that year that is according to respondent petitioners' underpayment and understatement is the tax imposed on petitioners for dollar_figure reduced by the excess of the tax shown on their return dollar_figure over the rebate he made to them for that year dollar_figure respondent supports his calculation of petitioners' underpayment by referring to prior cases in which we have implicitly accepted the proposition that in computing an underpayment as in computing a deficiency the excess of the tax shown on a taxpayer's return over any rebates can be a negative number see 141_tc_238 113_tc_99 rice v commissioner tcmemo_1999_65 petitioners initially argued that their underpayment for was limited to dollar_figure because the excess of the tax shown on their return over the rebate was zero later petitioners conceded that the term 'excess' means the same in the definitions of underpayment and deficiency and that prior case law has allowed the term to be a negative number when calculating underpayment although petitioners appear to accept that their underpayment for was dollar_figure they also seem to argue that by contrast their understatement is limited to dollar_figure according to petitioners sec_6662 does not apply to them because the amount they actually sought as a refund on their return would not satisfy the dollar_figure statutory threshold had respondent not issued the 'rebate' refund on which he now seeks to penalize them the amount of the deficiency would be under the dollar_figure threshold for penalty application we assume that petitioners mean to refer to sec_6662 and to the amount of their understatement rather than their deficiency if petitioners are claiming that the dollar_figure additional refund they received which they concede to have been a rebate should not be included in the calculation of their understatement that claim is contrary to the statutory definition of understatement provided in sec_6662 under that definition the amount of tax shown on a taxpayer's return is reduced by any rebate before the net amount is compared to the tax imposed on the taxpayer thus by definition rebates made to a taxpayer can increase the taxpayer's understatement for purposes of the accuracy-related_penalty that does not raise the prospect of a taxpayer's being penalized for the commissioner's actions again the commissioner cannot at his whim pay refunds that qualify as rebates for a refund to meet the definition of rebate it must rest on a determination that the tax imposed on a taxpayer is less than the tax shown on the taxpayer's return sec_6211 sec_6664 flush language any such determination would generally rely on information submitted by the taxpayer if the tax shown on a taxpayer's return was fully consistent with all information provided to the commissioner he would have no grounds for making a rebate in the present case respondent made a dollar_figure rebate to petitioners on the basis of their claim of a dollar_figure nonrefundable aoc on form_8863 that they failed to carry to their form_1040 in what appeared to be a clerical_error for the reasons explained above we conclude that petitioners' understatement for before considering any reduction under sec_4in theory the commissioner might make a rebate on the basis of erroneous third-party reporting that would increase the affected taxpayer's understatement for purposes of the accuracy-related_penalty were that to occur the taxpayer should be able to show that there was reasonable_cause for the portion of his underpayment attributable to the rebate and that he acted in good_faith with respect to that portion as long as he did nothing to initiate the rebate and bore no responsibility for the erroneous third-party reporting cf sec_6664 in the present case because respondent made the rebate on the basis of petitioners' erroneous reporting on their form_8863 in assessing their reasonable_cause defense under sec_6664 we must consider the grounds for those actions of petitioners that led to the rebate see infra part ii c d b equals their dollar_figure underpayment for that year because that amount exceeds dollar_figure which in turn is greater than of the dollar_figure tax required to have been shown on their return petitioner's understatement unless reduced under sec_6662 is a substantial_understatement consequently respondent has met his burden of production in regard to the accuracy-related_penalty he determined c petitioners' defense sec_1 reduction of understatement due to substantial_authority or adequate_disclosure and reasonable basis petitioners argue that even if the rebate they received increases their understatement as defined by sec_6662 their understatement is nonetheless limited to dollar_figure by reason of sec_6662 relating to positions supported by substantial_authority and adequately disclosed positions with a reasonable basis according to petitioners e ven if the dollar_figure is part of the understatement as an initial matter it is removed from the understatement because there is or was substantial_authority for the taxpayers' not claiming the nonrefundable portion of the credit it was respondent's position not petitioners' that petitioners should receive a refund of the dollar_figure further in the alternative there was disclosure on the form that is used to calculate education credits and a reasonable basis for the taxpayers not to claim the dollar_figure on the return we can readily dismiss petitioners' substantial_authority and adequate_disclosure arguments we do not view petitioners as having claimed only a dollar_figure refundable aoc their form_8863 reported a total aoc of dollar_figure petitioners are not subject_to the accuracy-related_penalty for their failure to claim a dollar_figure nonrefundable aoc on their form_1040 but instead for their claim of such a credit on their form_8863 because the refundable portion of the aoc is by definition of the total aoc to which a taxpayer is entitled sec_25a claiming a dollar_figure refundable aoc and no nonrefundable aoc cannot be supported by substantial_authority petitioners obviously failed to meet the standards for adequate_disclosure of their position in regard to the claimed aoc their return simply claimed the credit without disclosing all of the facts relevant to their claim moreover their return included no form_8275 revproc_2012_15 supra does not list the claim of an aoc among the positions for which disclosure on the relevant form without a form_8275 or form 8275-r constitutes adequate_disclosure finally petitioners do not explain how the claim of a refundable aoc and no claim of a nonrefundable aoc can possibly have a reasonable basis petitioners' understatement thus remains a substantial_understatement after taking into account sec_6662 because we conclude that petitioners' dollar_figure underpayment was attributable to a substantial_understatement_of_income_tax we need not consider respondent's alternative argument that petitioners' underpayment was also attributable to negligence reasonable_cause and good_faith petitioners argue that they acted reasonably and in good_faith under the circumstances and mistakenly believed that they were entitled to the credit at the time of filing they claim that they attempted to follow the instructions of the program used to self-prepare returns but made a mistake that was driven by confusion respondent observes that petitioners' reporting of a refundable aoc on their form_1040 was inconsistent with their failure to claim any nonrefundable aoc on that form and that this inconsistency suggests that petitioners did not make much effort to determine their entitlement to any part of the credit respondent further argues that petitioners' failure to return the excessive portion of the refund they received even after that excess had been brought to their attention demonstrates a lack of good_faith as noted above under the regulations an honest misunderstanding of law can be an indication of reasonable_cause and good_faith but only if that misunderstanding is reasonable in light of all the facts and circumstances sec_1_6664-4 income_tax regs petitioners have not described for us the source of their confusion or the nature of their mistake mr galloway conceded at trial without providing any explanation that petitioners were not entitled to an aoc for tuition or expenses paid on behalf of e g in their posttrial briefs petitioners have offered us no further elucidation of the basis for the belief which they now concede to have been mistaken that they were entitled to any portion of the aoc they claimed consequently petitioners have not met their burden of proving the existence of reasonable_cause for any portion of the underpayment resulting from respondent's disallowance of the claimed aoc the limited record before us suggests that petitioners conceded the aoc they claimed for j g and g g because they had claimed aocs for those children for each of the four prior taxable years petitioners claimed an aoc for for qualified expenses of j g and g g each of whom completed an undergraduate degree in we can reasonably surmise that petitioners also claimed aocs for j g and g g in each of and had that been the case petitioners would not have been entitled to claim an aoc for j g and g g for because of the four-taxable-year limitation provided in sec_25a and i perhaps petitioners were under the mistaken impression that they could claim aocs for each of their children for four academic years rather than four taxable years even if petitioners had established that that had been the basis of their misunderstanding however we would not have viewed that misunderstanding as reasonable under the circumstances in assessing the reasonableness of a taxpayer's misunderstanding of the law for the purpose of applying the reasonable_cause exception to the accuracy-related_penalty we have placed significant weight on the degree of clarity of the applicable law for example we have accepted taxpayers' reasonable_cause defenses when the relevant law was uncertain or ambiguous see 138_tc_213 given the ambiguity in this area of the law we find the strommes' confusion reasonable and honest 135_tc_471 g iven all the facts and circumstances including the uncertain state of the law we find that petitioners acted with reasonable_cause and in good_faith aff'd on other grounds 668_f3d_888 7th cir by contrast in remy v commissioner tcmemo_1997_72 wl we rejected the reasonable_cause defense of a taxpayer who had claimed a deduction that was contrary to settled law the taxpayer in remy was a physician who had attempted to deduct as an advertising expense the value of unpaid medical advice he provided by telephone we accepted that the taxpayer had attempted to research the tax law to find authority for his position and that he took steps to accurately document the extent of his telephone services by maintaining a log id wl at nonetheless we concluded that this is not enough to be relieved of the accuracy-related_penalty id because of the weight of authority against the taxpayer's position we could not find his position reasonable id remy thus stands for the proposition that a misunderstanding of settled unambiguous law cannot be honest or reasonable within the meaning of sec_1_6664-4 income_tax regs in the present case any confusion petitioners might have had over their entitlement to an aoc for j g and g g for a fifth taxable_year would not have been attributable to uncertainty or ambiguity in the relevant rules the law unambiguously provides that a credit can be claimed under sec_25a for an eligible_student for only four taxable years while the statutory provisions that impose that limitation may not be a model of clarity and simplicity the instructions for form_8863 which mr galloway professed to have followed state clearly and unambiguously on their front page that the aoc is available only for tax years per eligible_student including any year s hope_credit wa sec_5sec 25a b a provides an election to have this section apply with respect to any eligible_student for purposes of the hope scholarship credit under subsection a may not be made for any taxable_year if such an election is in effect with respect to such student for any prior taxable years sec_25a provides that sec_25a shall be applied by substituting '4' for '2' claimed given the clear directive in the instructions to the form_8863 even if petitioners' alleged confusion related to the number of years for which they could claim an education credit for each of their dependent_children that confusion would not have been reasonable under the circumstances because petitioners have not met their burden of establishing that they claimed the aoc in issue on the basis of an honest misunderstanding of law that was reasonable under the circumstances we need not consider whether as respondent alleges petitioners' failure to return the excessive portion of the refund they received demonstrates a lack of good_faith d conclusion because respondent has met his burden of producing evidence that the accuracy-related_penalty he determined is appropriate and because petitioners have not met their burden of demonstrating their eligibility for relief from the determined penalty we sustain respondent's imposition of a dollar_figure accuracy- related penalty on petitioners for under sec_6662 and b decision will be entered for respondent


id office uilc cca_2009022510232120 ----- number release date from ------------------------- sent wednesday date am to ------------------- cc --------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- subject re rev_proc no the signature must be of a person in part revproc_2005_39 provides officers or agents using a facsimile means of signature are personally responsible for ensuring that their facsimile signature is affixed to returns because a facsimile signature is an exception to the general_rule of requiring a manual signature any guidance involving facsimile signatures is narrowly interpreted as the signature on forms must otherwise be that of a person the owner of a sole_proprietorship or llc a duly authorized officer of a corporation a duly authorized partner or officer of a partnership or a fiduciary of a_trust or estate when a payroll service becomes the duly authorized agent for signature purposes that duly authorized agent must also be a person please let me know if you have any additional questions


internal_revenue_service number release date index number ----------------------------------- --------------------------------------- ---------------------------------- ----------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------------- id no ------------- telephone number --------------------- refer reply to cc corp b05 plr-130349-08 date date legend taxpayer statex exchange year1 dear ----------------- --------------------------------------------------------------- ------------ ------------------------------------ ------- this ruling responds to your letter dated date as well as subsequent correspondence submitted on behalf of taxpayer requesting a ruling under internal_revenue_code the code sec_301 and sec_305 the ruling_request the rulings contained in this letter are based upon facts and representations that were submitted on behalf of taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process summary of facts taxpayer is an accrual basis statex corporation that files its federal_income_tax returns as a real_estate_investment_trust reit on a calendar_year basis taxpayer represents that it qualifies as a reit under the code that it intends to maintain such qualification as a reit and that it regularly distributes its earnings_and_profits as required under sec_857 plr-130349-08 taxpayer has one class of common_stock outstanding the common_stock which is publicly traded and listed on the exchange all references below to stockholder refer to holders of common_stock subject_to the approval of its board_of directors taxpayer intends to make a special dividend the special dividend on its common_stock for the fourth quarter of year1 as described below the total amount of cash payable in the special dividend will be limited to approximately percent or more of the total value of the special dividend in no event will the total amount of cash available be less than percent of the total value of the special dividend notwithstanding the foregoing prior to declaring the special dividend taxpayer’s board_of directors may determine to increase the total amount of cash payable in the special dividend to more than percent of the total value of the special dividend but in such case it will not raise such cash limit amount to more than percent of the total amount of the special dividend in such event all references below to a percent cash limit including the mixed option as defined below will refer instead to the greater cash limit each stockholder will have the right to elect to receive cash common_stock of equivalent value determined as close to the distribution date as reasonably practicable or a combination thereof as follows option a - percent cash the cash_option option b - percent stock the stock_option or option c - a combination of percent cash and percent stock the mixed option taxpayer expects to declare the special dividend using the following election mechanism taxpayer will provide to each stockholder an election form for the special dividend shortly after the record_date for the special dividend each stockholder may elect to receive its dividend in the form of the cash_option the stock_option or the mixed option by the election deadline if a stockholder fails to make a valid election by the election deadline that stockholder will be deemed to have elected the stock_option to the extent necessary taxpayer will issue cash in lieu of fractional shares of common_stock any shares of common_stock paid in the special dividend will be subject_to the same limitations on share ownership as apply to other shares of common_stock currently outstanding that are imposed by taxpayer’s charter such limitations the excess share clause taxpayer does not anticipate that any stockholder’s receipt of the special dividend will be affected by the excess share clause taxpayer intends to distribute its special dividend as soon as reasonably practicable following the date of the election deadline plr-130349-08 while each stockholder will have the option to elect to receive cash in lieu of stock for all or a portion of the stockholder’s entire entitlement under the special dividend taxpayer intends to limit the amount of cash to be distributed in the aggregate to approximately percent or more of the special dividend such amount the cash limit any cash issued in lieu of fractional shares of common_stock will not count towards the cash limit in no event will the total amount of cash available be less than percent of the total value of the special dividend if the total number of shares of common_stock with respect to which the cash_option or the mixed option is made cash election shares would result in the payment of cash in an aggregate amount that is less than or equal to the cash limit then all holders of cash election shares will receive cash equal to the amount elected the stockholders who elect the cash_option will receive the special dividend entirely in cash and the stockholders who elect the mixed option will receive the special dividend in percent cash and percent stock if the number of shares with respect to which the cash_option and mixed option is made is such that the cash limit would be exceeded then i stockholders electing to receive the mixed option will receive percent of the special dividend in cash with the remainder being received in shares of common_stock and ii stockholders electing to receive the cash_option will receive a pro rated portion of the remaining available cash ie the cash limit minus the aggregate amount of cash payable to stockholders electing the mixed option with the remainder being received in shares of common_stock based on this formula in no case will cash election shares receive less than percent of the special dividend in cash rulings based solely on the information provided and the representations made we rule as follows with respect to the special dividend any and all of the cash and stock distributed in the special dividend as described above by taxpayer shall be treated as a distribution_of_property with respect to its stock to which sec_301 applies sec_301 and sec_305 the amount of the distribution of the stock received by any stockholder electing to receive stock will be considered to equal the amount of the money which could have been received instead sec_1_305-1 caveats except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular no opinion is expressed with regard to whether taxpayer qualifies as a reit under subchapter_m of the code furthermore no opinion plr-130349-08 is expressed with regard to whether the special dividend constitutes a preferential_dividend under sec_562 of the code procedural statements this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling pursuant to the power_of_attorney on file in this office a copy of this ruling letter will be sent to your authorized representative sincerely _t ian russell____ t ian russell senior counsel branch office of associate chief_counsel corporate