t c memo united_states tax_court b albert and betty m holowinski petitioners v commissioner of internal revenue respondent docket no filed date scott m estill for petitioners robert a varra for respondent memorandum opinion powell special_trial_judge this case was assigned pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_182 unless otherwise indicated section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined deficiencies in petitioners' federal income taxes and accuracy-related_penalties as follows years deficiencies sec_6662 penalties dollar_figure big_number big_number dollar_figure the issues are whether petitioners' antique glassware sales activity was engaged in for profit within the meaning of sec_183 and whether petitioners are liable for the accuracy-related_penalties pursuant to sec_6662 background petitioners resided in littleton colorado at the time they filed their petition the facts may be summarized as follows petitioner betty m holowinski obtained a high school degree and attended years of college where she studied political science petitioner b albert holowinski served in the united_states military for many years and after his military retirement worked in the aerospace industry during his military service he obtained a bachelor's degree in business and a master's degree in urban affairs in both petitioners had retired early that year mrs holowinski became interested in buying and selling victorian glassware she thought they could make money and that they would have fun traveling around to various antique shops and flea markets looking for the glass to gain some background knowledge mrs holowinski read a book entitled how to make money in antiques mr holowinski spoke with an accountant alan myers mr myers about bookkeeping and tax matters in date petitioners began buying antique glassware petitioners continued to purchase antique glassware throughout the years in issue focusing primarily on glass produced by a company named westmoreland glass westmoreland that conducted business from to petitioners traveled to antique conventions and to antique shops throughout the central united_states in search of westmoreland glassware petitioners' travels took them to various states including kansas ohio tennessee iowa nebraska oklahoma texas arkansas and illinois petitioners envisioned purchasing glassware for approximately to percent of its potential resale value during the taxable years and petitioners spent dollar_figure dollar_figure and dollar_figure respectively for glassware petitioners stored the glassware in their home placing the inexpensive pieces in their basement and the more valuable pieces upstairs where the temperature remained constant some glassware was displayed on the walls of various living areas of petitioners' home and in china cabinets mrs holowinski spent approximately hours per week on the antique glassware sales activity which petitioners called albe's antiques and mr holowinski spent to hours per week sales were generated by three methods through advertisements in antique newsletters newsletter sales at antique conventions by selling out of their hotel room and at auctions convention sales and by renting a showcase at the colorado antique gallery showcase sales sales were approximately evenly divided between the three methods while the bulk of the glassware collection was located in their home for security reasons petitioners never gave out their home telephone number or address rather petitioners paid dollar_figure a month plus a commission equal to percent of sales to rent the showcase which held approximately pieces of merchandise for and petitioners' sales from the three methods before paying commissions on showcase sales totaled dollar_figure dollar_figure and dollar_figure respectively petitioners kept detailed inventory records and a mileage log they maintained a separate bank account for albe's antiques in and part of but closed the account in to save money on fees petitioners insured their inventory on their homeowners' policy albe's antiques was licensed to do business and collect sales_tax in colorado petitioners did not prepare any financial statements or income projections for albe's antiques at the end of each taxable_year mr myers prepared petitioners' tax returns based on information petitioners provided to him petitioners have not prepared profit and loss statements for the years subsequent to those before the court mrs holowinski summarized the antique glassware sales activity as follows very few people know that we deal in antiques there's no sign at the house -- first of all because of where we live we couldn't have a business so the business is very low-keyed we keep a low profile and it's only through the mail or when we go on these conventions on their and federal_income_tax returns petitioners reported losses from the antique glassware sales activity in the amounts of dollar_figure dollar_figure and big_number respectively in summary the losses were computed as follows sales cost_of_goods_sold gross_profit expenses dollar_figure dollar_figure dollar_figure big_number commissions and fee sec_2 car truck travel all other expense sec_63 big_number big_number big_number big_number big_number big_number net_loss big_number big_number big_number in the notice_of_deficiency respondent determined that petitioners were not entitled to deductions for the net losses listed above because their antique glassware sales activity wa sec_2 the commission expenses are listed in the amounts reported on petitioners' tax returns for the years in issue we recognize that these numbers do not square with the reported sales figures and the formula provided by petitioners for computing commissions on showcase sales we speculate that petitioners may have sold some items and incurred commissions at auctions and at antique conventions they attended not engaged in for profit respondent further determined that petitioners were liable for an accuracy-related_penalty for each year in issue pursuant to sec_6662 for negligence or disregard of rules or regulations in addition respondent made certain computational adjustments as a result of the disallowance of the schedule c losses discussion a activity for profit sec_162 allows deductions for ordinary and necessary expenses in carrying_on_a_trade_or_business sec_183 generally provides that an individual's deductions attributable to an activity_not_engaged_in_for_profit shall only be allowed to the extent provided in sec_183 sec_183 generally limits the deductions from an activity_not_engaged_in_for_profit to the sum of otherwise allowable deductions and any other deductions attributable to the activity to the extent the gross_income from the activity exceeds the otherwise allowable deductions sec_183 defines an activity_not_engaged_in_for_profit as any activity other than one for which deductions are allowable under sec_162 or under paragraph or of sec_212 the test for determining whether an individual is carrying_on_a_trade_or_business under sec_162 or whether an the computational adjustments affect the amount of petitioners' social_security_benefits that are taxable for certain years and petitioners' medical_expense_deduction for individual is engaged in an activity for the production_or_collection_of_income or for the management_conservation_or_maintenance_of_property_held_for_the_production_of_income under sec_212 is whether the individual is engaged in the activity with the predominant purpose and intention of making a profit 962_f2d_973 10th cir affg brock v commissioner tcmemo_1989_641 72_tc_28 while the taxpayer's expectation need not be reasonable it must be a good-faith expectation allen v commissioner supra pincite in resolving the factual question of the taxpayer's intent greater weight is given to the objective facts than to the taxpayer's statements of intention 84_tc_1244 affd 792_f2d_1256 4th cir sec_1_183-2 income_tax regs sets forth a nonexclusive list of nine factors to be used to determine whether an activity is engaged in for profit the factors are the manner in which the taxpayer carries on the activity the expertise of the taxpayer or his advisers the time and effort expended by the taxpayer in carrying on the activity the expectation that the assets used in the activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar activities the taxpayer's history of income or losses with respect to the activity the amount of occasional profits if any which are earned the financial status of the taxpayer and elements of personal pleasure or recreation no single factor nor a simple numerical majority of factors is necessarily controlling 949_f2d_345 10th cir affg tcmemo_1990_148 several factors weigh slightly in petitioners' favor first petitioners generally carried on the activity in a businesslike manner they maintained accurate inventory records obtained a colorado business license registered with the state to collect sales_tax advertised in antique newsletters although in a limited fashion and rented a showcase at the colorado antique gallery on the other hand some factors weigh heavily in favor of respondent petitioners reported no profits but rather substantial losses for the years in issue see 72_tc_411 affd without published opinion 647_f2d_170 9th cir while losses in the early years of an activity may not be indicative of the absence of a profit_motive several facts convince us otherwise in this case first petitioners reported losses of more than eight times the total sales reported for the years in issue total sales petitioners incurred traveling expenses in excess of six times the total sales considering only cost_of_goods_sold and direct selling_expenses commission expenses and the dollar_figure a month showcase rental petitioners posted a cumulative loss for the years in issue indeed assuming petitioners liquidated all of the inventory they purchased during the years in issue and that they were able to purchase it pincite percent of the hypothetical sale value the ensuing gross_profit would not even cover the cost of their traveling expenses stated more bluntly petitioners' traveling expenses were so grossly in excess of their total sales that petitioners had no prospect of ever turning a profit furthermore we find it telling that for subsequent years petitioners have not even prepared a profit and loss statement surely if a person were concerned with making a profit she or he would be interested in whether in fact there was or would be a profit or loss from the activity finally petitioners admittedly derived personal pleasure from antique hunting and possibly from displaying their more valuable pieces of antique glassware in their home we are cognizant of the fact that there is no general prohibition on pursuing a business that one enjoys see larson v commissioner tcmemo_1991_99 we are also cognizant that the federal fisc should not help underwrite personal pursuits see stanley v commissioner tcmemo_1980_217 in sum after considering all the relevant factors we conclude that while petitioners may have intended to earn a we note that petitioners' travel records showed that of the days traveling in were spent in the dallas fort worth area where petitioners' daughter lived profit on individual items of glassware when the activity is viewed in its entirety petitioners did not engage in the antique glassware sales activity for profit b penalties sec_6662 and b impose a penalty equal to percent of any portion of an underpayment attributable to negligence or disregard of rules or regulations negligence is defined as the lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances 85_tc_934 sec_6664 provides that no penalty shall be imposed under sec_6662 with respect to any portion of an underpayment if it is shown that there was a reasonable_cause for such portion and the taxpayer acted in good_faith whether the taxpayer acted with reasonable_cause and in good_faith is determined on a case-by-case basis taking into account all of the pertinent facts and circumstances remy v commissioner tcmemo_1997_72 relevant factors include the taxpayer's efforts to assess his or her proper tax_liability the knowledge and experience of the taxpayer and reliance on the advice of a professional such as an accountant drummond v commissioner tcmemo_1997_71 an honest misunderstanding of fact or law that is reasonable in light of the experience knowledge and education of the taxpayer may indicate reasonable_cause and good_faith remy v commissioner supra the determination of whether petitioners engaged in their antique glassware sales activity for profit involves a difficult factual question see eg cavalaris v commissioner tcmemo_1996_308 petitioners substantiated all of the claimed expenses and employed an accountant to prepare their tax returns and advise them nothing in the record suggests that their reliance on mr myers was less than reasonable particularly considering petitioners' lack of prior business experience and educational backgrounds accordingly we find that petitioners acted with reasonable_cause and in good_faith and therefore the penalties do not apply decision will be entered for respondent with respect to the deficiencies and decision will be entered for petitioners with respect to the penalties under sec_6662 while mr holowinski did obtain his undergraduate degree in business administration he did so many years prior to those in issue his work experience did not focus on business or financial skills and he does not appear to have any special training in accounting or tax matters


id office uilc cca_2011121914075137 ---------- number release date from ------------------- sent monday date pm to -------------------------- cc ----------- subject re tefra exams with bankrupt partner yes for a bankrupt partner whose partnership items have converted to nonpartnership_items under sec_301_6231_c_-7 we must issue a converted item notice_of_deficiency under section a a ii within the later of the partner's sec_6501 period for assessment or one year from the date of conversion under section f


internal_revenue_service number release date index number ------------------------------ ------------------------------------- --------------------------- -------------------------------------------- --------------------- --------------------------------------- in re --------------------------------------------- ------------------ department of the treasury washington dc third party communication date of communication month dd yyyy person to contact -------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b09 plr-140208-04 date date legend legend child grantor spouse college trust --------------------------- ------------------------------ ---------------------------------- ----------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ------------------------------------------------------ -------------------- ------------- -------------------------------------- ------------------------------------------ ------------------------------------------ ------------------- -------------------------- ------- state state partnership statute statute date date year dear ---------- this is in response to your letter dated date requesting rulings on the income gift and generation-skipping_transfer gst tax consequences of certain proposed modifications to a_trust the facts submitted and the representations made are as follows during his life grantor created nine trusts trust is one of the nine trusts and is the subject of this ruling_request trust was created on date for the benefit of grantor’s son child and grantor’s issue currently child is the sole income_beneficiary of trust plr-140208-04 article second subparagraph a of trust provides that after date all of trust’s net_income is to be paid to child upon child’s death the net_income is to be paid to child’s issue per stirpes if any if none the net_income is to be paid to grantor’s issue per stirpes upon the termination of trust the trust estate is to be distributed to child if he is living if not to child’s issue per stirpes if living if not to grantor’s issue if living if not to the issue other than grantor of grantor’s father and mother per stirpes if living if not to the trustee of a named trust if in existence if not to college article second subparagraph c provides that trust will terminate at the earlier of the following two events years after the death of the last survivor of certain named persons and the death of the last survivor of grantor’s spouse spouse and all of grantor’s issue article third subsection n provides that trust is to be governed under the laws of state article seventh provides that trust may be amended in any manner that does not directly or indirectly give grantor any interest in the trust estate_or_trust income involve any other_disposition or change in the disposition made of the beneficial_enjoyment of the trust estate_or_trust income confer upon grantor any power of disposition over the trust estate_or_trust income or provide grantor with any administrative control_over the trust estate exercisable primarily or to any degree for the benefit of grantor in year the nine trusts entered into a partnership partnership with three other trusts to coordinate investment activities under the partnership_agreement partnership is required to distribute annually to the partner trusts an amount equal to the net accounting_income determined by applying the broadest definition of net_income under the laws of the states whose laws govern the administration of each of the trusts respectively currently the laws of five different states govern the nine different trusts due to the administrative complexity and high costs involved in determining the proper distribution amount under the respective state laws of each separate trust it was suggested that each of the partner trusts be amended to change governing local law to state the trustees of trust intend to change the governing law of trust to state effective as of date state amended its laws governing the administration of trusts by enacting legislation that adopts a new uniform principal and income act statute it also enacted statute which permits a trustee of a_trust that is subject_to state’s prudent investor rule to make adjustments between income and principal under specified circumstances statute plr-140208-04 statute provides in part that a trustee has a duty to invest and manage property held in a fiduciary capacity in accordance with the prudent investor standard defined therein statute also provides that where statute applies to a_trust and the terms of the trust describe the amount that may or must be distributed to a beneficiary by referring to the trust's income the prudent investor standard also authorizes the trustee to adjust between principal and income to the extent the trustee considers it advisable to enable the trustee to make appropriate present and future distributions if the trustee determines after applying the rules in statute that such an adjustment would be fair and reasonable to all of the beneficiaries so that current beneficiaries may be given the use of the trust property as is consistent with preservation of its value the trustee has represented that trust was irrevocable on date and there were no additions to trust after date trustee is requesting the following three rulings the proposed amendment of trust to change its governing law and the administration of trust under the new governing law will not result in trust or any beneficiary of trust being treated as having made a taxable_exchange for federal_income_tax purposes the proposed amendment of trust to change its governing law and the administration of trust under the new governing law will not be treated as a modification of trust within the meaning of sec_26_2601-1 of the generation-skipping_transfer_tax regulations that will cause trust to lose its exemption from the application of chapter of the internal_revenue_code and that after the proposed amendment distributions from trust and terminations with respect to trust will continue to be exempt from chapter pursuant to sec_26_2601-1 the proposed amendment of trust to change its governing law and the administration of trust under the new governing law will not result in any beneficiary of trust being treated as having made a taxable gift_for federal gift_tax purposes law and analysis ruling sec_61 of the code provides that gross_income includes gains derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized 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 sec_1011 for determining loss over the amount_realized plr-140208-04 sec_1001 states that the amount_realized from the sale_or_other_disposition of property shall be the sum of any money received plus the fair_market_value of the property other than money received under sec_1001 except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1_1001-1 provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained the supreme court of the united_states in 499_us_554 concluded that sec_1_1001-1 reasonably interprets sec_1001 and stated that 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 to the code so long as their respective possessors enjoy legal entitlements that are different in_kind or extent cottage savings u s pincite 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 cottage savings u s pincite in the present case it is consistent with the supreme court's opinion in cottage savings to find that the interests of the beneficiaries in trust after the modification will not differ materially from their current interests under the proposed modification trust will be amended to change governing local law however trust possesses the authority to make this change see article seventh of trust therefore the proposed modification will not result in a material difference in_kind or extent of the legal entitlements enjoyed by the beneficiaries accordingly based upon the facts submitted and the representations made a change in governing local law will not cause trust or trust beneficiaries to be treated as having a taxable_exchange and no gain_or_loss is recognized for purposes of sec_1001 ruling sec_2 and sec_2501 imposes a tax on the transfer of property by gift by an individual sec_2511 provides that the tax imposed by ' applies 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 shall be considered the amount_of_the_gift plr-140208-04 sec_2601 imposes a tax on every gst made after date a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2612 provides that the term taxable_termination means a termination by death lapse of time release of a power or otherwise of an interest_in_property_held_in_trust where the property passes to a skip_person with respect to the transferor of the property sec_2612 provides that the term taxable_distribution means any distribution from a_trust to a skip_person other than a taxable_termination or a direct_skip under sec_2612 a direct_skip is a transfer subject_to federal estate or gift_tax made by a transferor to a skip_person under a of the tax_reform_act_of_1986 act and sec_26_2601-1 the gst is generally applicable to gsts made after date however under b a of the act and sec_26_2601-1 the gst does not apply to a transfer under a_trust that was irrevocable on date but only to the extent that such transfer is not made out of corpus added to the trust after date or out of income attributable to corpus so added 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 if the settlor had died on date sec_26_2601-1 provides that in general this paragraph b provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax under paragraph b or of this section hereinafter referred to as an exempt trust will not cause the trust to lose its exempt status in general unless specifically provided otherwise the rules contained in this paragraph are applicable only for purposes of determining whether an exempt trust retains its exempt status for gst tax purposes thus unless specifically noted the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of gain for purposes of sec_1001 sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy paragraph b i a b or c of this section by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust sec_26_2601-1 provides that for purposes of this section a plr-140208-04 modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer to determine whether a modification of an irrevocable_trust will shift a beneficial_interest in a_trust to a beneficiary who occupies a lower generation the effect of the instrument on the date of the modification is measured against the effect of the instrument in existence immediately before the modification if the effect of the modification cannot be immediately determined it is deemed to shift a beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification a modification that is administrative in nature that only indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered to shift a beneficial_interest in the trust in addition administration of a_trust in conformance with applicable local law that defines the term income as a unitrust_amount or permits a right to income to be satisfied by such an amount or that permits the trustee to adjust between principal and income to fulfill the trustee's duty_of impartiality between income and principal beneficiaries will not be considered to shift a beneficial_interest in the trust if applicable local law provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust and meets the requirements of sec_1_643_b_-1 of this chapter sec_26_2601-1 example provides as follows in grantor who was domiciled in state x executed an irrevocable_trust for the benefit of grantor's issue naming a state x bank as trustee under the terms of the trust the trust is to terminate in all events no later than years after the death of the last to die of certain designated individuals living at the time the trust was executed the provisions of the trust do not specify that any particular state law is to govern the administration and construction of the trust in state x the common_law rule_against_perpetuities applies to trusts in a state y bank is named as sole trustee the effect of changing trustees is that the situs of the trust changes to state y and the laws of state y govern the administration and construction of the trust state y law contains no rule_against_perpetuities in this case however in view of the terms of the trust instrument the trust will terminate at the same time before and after the change in situs accordingly the change in situs 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 transfer furthermore the change in situs does not extend the time for vesting of any beneficial_interest in the trust beyond that provided for in the original trust therefore the trust will not be subject_to the provisions of chapter if in this example as a result of the change in situs state y law governed such that the time for vesting was extended beyond the period prescribed under the terms of the original trust instrument the trust would not retain exempt status sec_26_2601-1 example provides as follows in grantor a resident of state x established an irrevocable_trust for the benefit of grantor's child a and a's issue the trust provides that trust income is payable to a for life and upon a's plr-140208-04 death the remainder is to pass to a's issue per stirpes in state x amends its income and principal statute to define income as a unitrust_amount of percent of the fair_market_value of the trust assets valued annually for a_trust established prior to the statute provides that the new definition of income will apply only if all the beneficiaries who have an interest in the trust consent to the change within two years after the effective date of the statute the statute provides specific procedures to establish the consent of the beneficiaries a and a's issue consent to the change in the definition of income within the time period and in accordance with the procedures prescribed by the state statute the administration of the trust in accordance with the state statute defining income to be a percent unitrust_amount will not be considered to shift any beneficial_interest in the trust therefore the trust will not be subject_to the provisions of chapter further under these facts no trust_beneficiary will be treated as having made a gift_for federal gift_tax purposes and neither the trust nor any trust_beneficiary will be treated as having made a taxable_exchange for federal_income_tax purposes similarly the conclusions in this example would be the same if the beneficiaries' consent was not required or if the change in administration of the trust occurred because the situs of the trust was changed to state x from a state whose statute does not define income as a unitrust_amount or if the situs was changed to such a state from state x sec_26_2601-1 example provides as follows the facts are the same as in example except that in state x amends its income and principal statute to permit the trustee to make adjustments between income and principal when the trustee invests and manages the trust assets under the state's prudent investor standard the trust describes the amount that shall or must be distributed to a beneficiary by referring to the trust's income and the trustee after applying the state statutory rules regarding allocation of receipts between income and principal is unable to administer the trust impartially the provision permitting the trustees to make these adjustments is effective in for trusts created at any time the trustee invests and manages the trust assets under the state's prudent investor standard and pursuant to authorization in the state statute the trustee allocates receipts between the income and principal accounts in a manner to ensure the impartial administration of the trust the administration of the trust in accordance with the state statute will not be considered to shift any beneficial_interest in the trust therefore the trust will not be subject_to the provisions of chapter further under these facts no trust_beneficiary will be treated as having made a gift_for federal gift_tax purposes and neither the trust nor any trust_beneficiary will be treated as having made a taxable_exchange for federal_income_tax purposes similarly the conclusions in this example would be the same if the change in administration of the trust occurred because the situs of the trust was changed to state x from a state whose statute does not authorize the trustee to make adjustments between income and principal or if the situs was changed to such a state from state x in this case trust was irrevocable on date and there were no additions to trust after date pursuant to the terms of article seventh of trust trust will be amended to change governing law from state to state the law plr-140208-04 governing trusts in state permits a trustee of a_trust to make adjustments between income and principal to enable the trustee to make appropriate present and future distributions that are fair and reasonable to all of the beneficiaries of the trust this situation is similar to the situation set forth in example in sec_26_2601-1 which concludes that a change similar to the one that the trustees propose to make to the trust will not be considered to shift any beneficial_interest in a_trust and therefore will not be subject_to the provisions of chapter in addition under article second subparagraph c of the trust agreement trust will terminate at the earlier of the following two events years after the death of the last survivor of certain named persons and the death of the last survivor of spouse and all of grantor’s issue because the termination_date is specifically provided for in the trust instrument the change in governing law from state to state will not change the termination_date of trust this situation is similar to the situation set forth in sec_26_2601-1 example in this case the date the trust will terminate before and after the change in governing law will be the same and therefore the change will not extend the time for vesting of any beneficial_interest in the trust finally as noted above the facts in this case are similar to those set forth in example in sec_26_2601-1 in addition to the conclusions relating to chapter example concludes that no trust_beneficiary will be treated as having made a gift_for federal gift_tax purposes and neither the trust nor any trust_beneficiary will be treated as having made a taxable_exchange for federal_income_tax purposes accordingly based upon the facts submitted and the representation made we conclude that the change in the trust’s governing law from state to state and the administration of trust under the new governing law will not be treated as a modification of trust within the meaning of sec_26_2601-1 that will cause trust to lose its exemption from the application of chapter and that the change will not cause distributions from trust and terminations with respect to trust to not be exempt from chapter pursuant to sec_26_2601-1 we also conclude that the change in governing law and the administration of trust under the new governing law will not result in any beneficiary of trust being treated as having made a taxable gift_for federal gift_tax purposes except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative plr-140208-04 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely james f hogan senior technician reviewer branch passthroughs special industries enclosures copy for ' purposes


office_of_chief_counsel internal_revenue_service memorandum number release date cc psi b02 jkeeney postn-123061-07 uilc date date to territory director gulf states area examination psp third party communication none date of communication not applicable from branch chief branch passthroughs special industries --------------------------------------- subject this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent ----------------------------------------- ------------------------ ------------------------------- ------------------------ ----------------------- ----------------- ------------------- ------------------ legend trust x a date date date issue will a net_operating_loss nol_carryover to which trust succeeded pursuant to postn-123061-07 sec_642 of the internal_revenue_code be permitted as a deduction of the s portion of that trust following its election to be an electing_small_business_trust esbt conclusion trust is not entitled to deduct any amount attributable to the nol to which it succeeded pursuant to sec_642 from the s portion of trust following its esbt election facts trust was created pursuant to the last will and testament of a who died on date trust a residuary testamentary_trust was funded on date with various assets including the stock of x an s_corporation prior to a’s death a held the x stock directly during the administration of a’s estate the estate did not have sufficient income to absorb losses attributable to the x stock which gave rise to a nol as defined under sec_172 the nol_carryover remained unused upon the termination of a’s estate on date the same date that trust was funded as a residuary testamentary beneficiary of a’s estate_trust succeeded to the nol_carryover that was unused by a’s estate at the time of its termination under sec_642 trust qualified as a permissible s_corporation shareholder under sec_1361 during the 2-year period beginning on date the date the x stock was transferred to it pursuant to a’s will in order to remain an eligible trust following the 2-year period the trustee made an election for trust to be an esbt under sec_1361 effective date law and analysis sec_642 provides that a nol_carryover under sec_172 or a capital_loss_carryover under sec_1212 shall be allowed as a deduction in accordance with regulations prescribed by the secretary to the beneficiaries succeeding to the property of the estate_or_trust sec_1_642_h_-3 of the income_tax regulations provides that the phrase beneficiaries succeeding to the property of the estate_or_trust means those beneficiaries upon termination of the estate_or_trust who bear the burden of any loss for which a carryover is allowed or of any excess of deductions over gross_income for which a deduction is allowed under sec_642 postn-123061-07 sec_1_642_h_-3 provides that in the case of a testate estate the phrase normally means the residuary beneficiaries including a residuary_trust and not specific legatees or devisees pecuniary legatees or other nonresiduary beneficiaries sec_1361 defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect for the taxable_year sec_1361 provides that the term small_business_corporation is a domestic_corporation which is not an ineligible_corporation and which does not have as a shareholder a person other than an estate and other than a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides that a_trust all of which is treated under subpart e of part of subchapter_j of chapter as owned by an individual who is a resident_of_the_united_states is an eligible shareholder sec_1361 provides that for purposes of sec_1361 a_trust with respect to stock transferred to it pursuant to the terms of a will may be a shareholder but only for the 2-year period beginning on the day on which such stock is transferred to it sec_1361 provides that an esbt is an eligible shareholder sec_1361 defines an esbt sec_1361 provides that except as provided in sec_1361 an esbt means any trust if i such trust does not have as a beneficiary any person other than i an individual ii an estate iii an organization described in sec_170 or or iv an organization described in sec_170 which holds a contingent_interest in such trust and is not a potential_current_beneficiary ii no interest in such trust was acquired by purchase and iii an election under sec_1361 applies to such trust sec_1361 provides that an election under sec_1361 shall be made by the trustee any such election shall apply to the taxable_year of the trust for which made and all subsequent taxable years of such trust unless revoked with the consent of the secretary sec_1_641_c_-1 provides that an esbt is treated as two separate trusts for purposes of determining income_tax the portion of an esbt that consists of stock in one or more s_corporations the s portion is treated as one trust the portion of an esbt that consists of all the other assets in the trust is treated as a separate trust the non-s portion sec_641 provides that the taxable_income of the s portion is determined by taking into account only items of income loss deduction or credit that are i the items required to be taken into account under sec_1366 ii any gain_or_loss from the disposition of stock in an s_corporation and iii to the extent provided in regulations state or local_income_taxes or administrative expenses to the extent allocable to items described in sec_641 or sec_641 no deduction or credit shall be allowed for any amount not described in sec_641 and no item described in sec_641 shall be apportioned to any beneficiary postn-123061-07 we conclude that sec_641 provides a complete list of the items of income loss deduction or credit that the s portion of an esbt may take into account sec_642 flush language provides that no deduction or credit shall be allowed for any amount not described in this paragraph the nols that trust succeeded to under sec_642 are not described in sec_641 therefore the s portion of trust is precluded from taking deductions attributable to those nols however the nols should be available as a deduction to the non-s portion trust following trust’s esbt election case development hazards and other considerations this memorandum responds to a private_letter_ruling request from trust requesting a ruling that the nols to which it succeeded from the terminating estate will be available to trust following the esbt election after we informed the taxpayer’s representative that this office would require as part of the private_letter_ruling that no portion of the nols shall be available as a deduction to the s portion of trust the taxpayer withdrew its ruling_request this memorandum is necessary to inform your office of our position on the transaction the taxpayer does not agree that the nols should not be available to the s portion of trust the taxpayer argues that the nol should be allocated to the s portion of trust because the nol is attributable to losses sustained by x an s_corporation whose stock is held within the s portion of the trust we disagree with this interpretation we conclude that the plain language of sec_641 excludes the nol from being available to the s portion of trust this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call ------------------------------------------- if you have any further 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 psi plr-106228-15 date date legend x y z count ry date ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- ----------------------- -------------------------- ---------------------------- -------- ----------------------- dear -------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a partnership for federal tax purposes facts the information submitted states that x was formed under the laws of country on date y and z own all of the outstanding interests in x x represents that as of date it was a foreign_entity eligible to elect to be a partnership for u s federal tax purposes and at all times y and z intended x to be treated as a partnership x represents that it was not advised of the need to make an election for u s federal_income_tax purposes to be treated as a partnership as a result x failed to timely file a form_8832 entity classification election electing to be treated as a partnership for u s federal tax purposes effective date plr-106228-15 x represents that y and z consistently filed u s tax returns treating x as a partnership x also represents that granting relief will not prejudice the interests of the government and that hindsight is not involved in seeking relief to file a late election x further represents that such relief would not result in a lower tax_liability in the aggregate for all years to which the request applies as the owners of x properly reported the net_income of x on their respective returns finally x represents that it acted reasonably and in good_faith 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 at least two members can elect to be classified as either an association or a partnership and 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 eligible_entity may elect to be classified other than as provided under sec_301_7701-3 by filing form_8832 with the appropriate service_center under sec_301_7701-3 this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified the date specified on form_8832 cannot be more than days prior to the date on which the election is filed and no more than months after the date the election 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 provides that the term regulatory election includes 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_extension of time for making certain elections sec_301_9100-3 provides the standards the plr-106228-15 commissioner will use to determine whether to grant an extension of time for the 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 a taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonable and in good_faith and granting relief will not prejudice the interests of the government conclusion based solely on the facts submitted and representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 accordingly x is granted an extension of time of one hundred twenty days from the date of this letter to file form_8832 with the appropriate service_center to elect to be treated as a partnership for federal tax purposes effective date a copy of this letter is attached for that purpose this ruling is contingent on the owners of x filing within days of this letter all required returns for all open years consistent with the requested relief to the extent appropriate these returns must include but are not limited to form_8865 information_return of u s persons with respect to certain foreign_partnerships such that the forms and returns reflect the consequences of the relief granted in this letter a copy of this letter should be attached to any such returns except as expressly set forth herein no opinion is expressed or implied concerning the federal tax consequences any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representatives sincerely associate chief_counsel passthroughs special industries by david r haglund david r haglund branch chief branch passthroughs special industries enclosures copy of letter plr-106228-15 copy for purposes


internal_revenue_service department of the treasury washington dc person to contact telephone number refer reply to cc tege eoeg teb - plr-126231-00 date date number release date index number legend city city state company county county region date date iso puc bondholder council r council w a b c bonds y z dear this letter is in response to a request submitted by your authorized representatives for a ruling about the effect on the bonds of certain aspects of the electric industry restructuring within state bondholder is the holder of least one of the bonds the bonds were issued for the benefit of company facts generally city and city the issuers are both cities and political subdivisions of state the issuers are authorized by their charters and by enabling ordinances to issue revenue bonds and lend the proceeds to the company the company is an investor-owned utility iou engaged in the business of generating transmitting and distributing electric energy and natural_gas under puc regulation the company has the exclusive right to distribute electric energy to retail customers the native load customers within a service area consisting of county and a contiguous portion of county the electric service area the company wholly owns and operates or by long-term power purchase agreement controls an integrated system of electric generation transmission and distribution facilities the local system that are directly connected to each other and that comprise the majority of the company’s facilities used to provide electric service throughout the company’s electric service area the local system operates at voltage levels ranging from a volts to b kilovolts kv consistent with national energy policy the local system is connected with other transmission systems located within region the company’s interconnection and transmission contracts require the company to operate the transmission components of the local system within standards imposed by regional authorities such as council r see section c of the federal power act which authorizes the ferc to require electric utilities including the company to interconnect for the emergency transfer of power and council w council w’s operating procedures specifically created a security coordinator which was authorized to direct load curtailments interchange curtailments generation dispatch adjustments transmission configuration adjustments and other actions deemed necessary to maintain the integrity of the national transmission grid excess transmission capacity on the local system is used to wheel electricity for the benefit of other utilities and to make wholesale sales of electricity for consumption outside the electric service area wholesale electric supply customers and persons other than the native load customers who purchase transmission service that uses the local system pay or have paid rates established by the federal energy regulatory commission ferc based in part upon the company’s blended costs of capital including the cost of interest on tax-exempt_bonds the bonds were issued to finance or refinance a portion of the company's costs of improvements to the local system approximately dollar_figurey of the bonds financed or refinanced electric transmission facilities which are part of the local system the local transmission system substantially_all of the remaining proceeds financed or refinanced electric distribution facilities the bonds were issued for the benefit of the company pursuant to letter rulings to the company that concluded the local system consists of facilities for the local furnishing of electric energy herein referred to as a local furnishing system within the meaning of sec_103 of the internal_revenue_code of the code and sec_142 and sec_142 of the internal_revenue_code_of_1986 the 1986_code the company also received a letter_ruling that the local system would continue to qualify as a local furnishing system despite the use of excess transmission capacity on the local system for wheeling transactions to benefit customers other than native load customers so long as there is a net inbound flow of electric energy into the local system on an annual basis the company represents that it has met and will in the future continue to meet this requirement in connection with these rulings the company represented that the local system was not acquired or constructed sooner larger or of a different character than was reasonably considered necessary to provide reliable electric service to the company’s native load customers other than as described herein the company represents that the local system continues to operate as a local furnishing system in the manner described in its previous letter rulings electric industry restructuring iso control see infra p for additional discussion of ferc established rates assets of a utility that can be financed as part of a local furnishing system under sec_142 are sometimes referred to herein as local furnishing assets the company and other major ious in state have entered into a transmission control agreement tca with the iso that affects transmission facilities owned by the ious including the local transmission system the iou transmission network the tca became effective on date the relationship between the iso and the ious is also governed by the iso tariff and the transmission owners tariff the tariffs under the tariffs the iso is authorized and obligated to perform the following functions ensure that transmission service is offered over the iou transmission network on a nondiscriminatory basis ensure reliability of the iou transmission network ensure compliance with guidelines standards and policies of council r and other bodies participate actively with transmission owners and market participants in transmission planning schedule transmission service over the iou transmission network oversee maintenance of the iou transmission network control the dispatch and maintenance of the transmission network propose augmentations to the iou transmission network and develop procedures to monitor the iou transmission network all of these functions are performed by the iso’s employees and other personnel all other functions including the physical operation of the iou transmission network continue to be performed by the company and by other owners of the iou transmission network subject_to directions of the iso the tariffs incorporate specific encumbrances and operating procedures that limit the iso’s ability to take actions in connection with the local transmission system the encumbrances specifically limit the iso’s authority take any_action that i would cause the company to become a net annual exporter of electricity or ii would abridge priority service rights on the local transmission system previously enjoyed by the native load customers or iii otherwise might jeopardize the tax-exempt status of the bonds the tca itself limits the iso’s authority to require the company to construct additions or improvements to the local transmission system except under an order of the ferc that would meet the requirements of sec_142 the operating procedures implemented by the company specify acts that must be taken to ensure implementation of the encumbrances electric industry restructuring rate making the rates the company charges its customers for electric service are subject_to both state and federal regulation ferc establishes rates and tariffs for transmission service and for wholesale electric supply service provided by the company and by other ious in interstate commerce the commission establishes rates and tariffs for distribution service and retail sales of electricity provided by the company and by other ious within state historically the ferc and the commission have established iou rates through cost of service based rate regulation the ferc has established electric transmission rates and the commission has established retail electric rates based on a revenue requirement that takes into account the company’s overall blended cost of capital because the company is the beneficiary of tax-exempt_bonds a portion of the company’s capital structure consists of debt obligations bearing interest at lower rates than would apply if interest on the bonds were taxable the lower rate of interest attributable to tax-exempt_bonds results in a lower overall blended cost of capital than otherwise would be the case this lower blended cost of capital produces a lower revenue requirement and hence lower rates for the company’s ferc-approved cost-of-service-based transmission rates and for the company’s commission-approved cost-of-service-based distribution rates the ferc recently authorized the iso to implement a new rate making approach effective on date the iou transmission network and transmission systems of other participating utilities within state the state transmission network will be segregated for rate making purposes into high voltage transmission hvt facilities which operate at c kv or greater and low voltage transmission facilities which operate below c kv the revenue requirements of all hvt facilities of the state transmission network will be aggregated and each user receiving hvt service will pay uniform rates for the service that reflect an allocated portion of the aggregate hvt facility revenue requirement as a result consumers of electricity in state other than native load customers who will have an hvt service component as part of their electric service bills will pay rates for hvt service that reflect up to approximately z percent of the company’s tax-exempt_financing of the local system law and analysis generally the fundamental question presented by this case is whether implementation of electric industry restructuring in state will cause the local system to no longer be a local furnishing system for purposes of sec_142 and sec_142 two aspects of restructuring are at issue the iso control of the local transmission system which includes the company’s hvt facilities and statewide pricing of hvt service which will cause an increased portion of company's tax-exempt financings to be shared with consumers of electricity in state other than native load customers geographic limitation under sec_142 sec_142 of the code provides that exempt_facility_bond means any bond issued as part of an issue percent or more of the net_proceeds of which are to be used to provide facilities_for_the_local_furnishing_of_electric_energy_or_gas for purposes of sec_142 sec_142 of the code provides that the local furnishing of electric energy or gas shall only consist of furnishing solely within an area consisting of a city and one contiguous county or two contiguous counties revrul_83_56 1983_1_cb_224 provides guidance for determining whether the geographic limitation of sec_142 on local furnishing assets has been exceeded in the revenue_ruling a regulated electric utility was required by the state public_utility commission to provide electric service to retail customers in an electric service area that included several counties the utility satisfied that obligation with an integrated system consisting of electric generation transmission and distribution facilities that served all of the customers in its service area the utility proposed to finance a hydroelectric generating plant all the electric energy from which would be consumed within a single county within its multi-county electric service area as a facility for the local furnishing of electricity within the meaning of sec_103 of the code the predecessor to sec_142 electricity was currently supplied to customers in the county by other generating plants owned by utility these plants would continue to supplement the electric needs of the single county’s population after completion of the proposed facility the public_utility commission established utility's retail electric rates which were uniform throughout the multi-county electric service area as a consequence the rates in part would be based on the tax-exempt_financing for the proposed plant the revenue_ruling concluded that the proposed plant would serve more than two contiguous counties or more than a city and one contiguous county and therefore would not be a facility for the local furnishing of electric energy three factors significantly contributed to the conclusion in the revenue_ruling because electric rates were based on the utility's blended cost of capital all of the utility's customers in the multi-county area rather than only its customers in the single county would benefit from the tax-exempt_financing of the proposed the proposed hydroelectric plant would enhance the utility’s capacity to serve customers in the entire electric service area rather than only its customers in the single county and the electric energy produced at the proposed hydroelectric plant would simply replace electric energy previously supplied by the utility’s other regional generating plants certain factors in this case are analogous to those in revrul_83_56 the ferc like the public_utility commission in revproc_83_56 will establish uniform statewide revrul_83_56 was issued under sec_103 of the internal_revenue_code of the predecessor to sec_142 to the extent not amended congress intended that principles of law under the code continue apply under the 1986_code h conf rept vol ii at ii-686 pricing for hvt transmission transactions on the hvt portion of the state transmission system which includes the hvt portion of the local transmission system these prices will be based on the blended cost of capital of the hvt portion of the state transmission system and will cause an increased portion of the benefits of the company’s tax-exempt financings to be shared throughout state also some of the iso's management responsibilities with respect to the iou transmission system which includes the local transmission system are similar to those of the regional utility in revrul_83_56 toward its regional transmission system scheduling transmission service maintenance oversight and assurance of transmission reliability these responsibilities are designed to insure the local transmission system like the proposed hydroelectric plant operates efficiently and reliably as part of a larger regional system the state transmission network other factors in this case however indicate that electric industry restructuring has not fundamentally altered the character of the local system first unlike the proposed hydroelectric plant in revrul_83_56 which replaced and could be replaced by other generating units in the multi-county area for purposes of supplying electricity to the utility's customers the local transmission system after the iso control continues under puc regulation to be the sole system devoted on a priority basis to the conveyance of electric energy to the native load customers second the encumbrances and operating procedures effectively prevent the iso from using anything other than excess capacity on the local transmission system to transmit electric energy for other utilities in addition the tca limits the iso's authority except under an order from the ferc to require the company to augment the local transmission system beyond that required to serve the native load customers third the iso itself is not like the utility in revrul_83_56 that proposed building the hydroelectric the plant to generate electric energy for retail customers in its service area it does not own or operate substations or transmission lines it also has no service area or retail electric customers instead its function is to ensure the reliability and efficiency of the iou transmission system for the general benefit of retail customers of utility systems in state including the local system specific relationships with retail customers like the native load customers continue to be the responsibility of the owners of the iou transmission system including the company there is an additional reason why the analogous sharing of the benefits of tax- exempt financing in this case is not given significant weight in our determination that there has not been a change_of use of the local system prior to the iso control the company used excess capacity on the local transmission system to wheel power for other utilities based on regulated rates these rates which in part were based on the company's tax-exempt financings caused some sharing of the benefits tax-exempt_bonds with customers other than-native load customers nevertheless the congress has acknowledged that wheeling transactions like those undertaken by company will not cause properly issued local furnishing bonds to lose their tax-exempt status when sec_142 was enacted as part of the energy policy act of the congress describing present law indicated that transmission for the benefit of other parties wheeling did not violate local furnishing requirements as long as the system of which the local transmission assets were a part was not designed differently sized larger built sooner or constructed in a more costly fashion than is required to serve the customers in the electric service area h_r rept 102d cong 2d sess page conclusion consequently based solely on the facts supplied and representations of the company we conclude that on balance the company’s execution of and compliance with the tca together with the specified changes in rate making for hvt service has not and will not adversely affect the continued qualification of the local system as a system for the local furnishing of electric energy within the meaning of sec_142 and sec_142 of the code and corresponding provisions of prior_law we express no opinion whether augmentations of the local transmission system can be financed with tax-exempt_bonds under sec_142 and sec_142 sincerely timothy l jones acting branch chief tax exempt bonds cc


internal_revenue_service department of the treasury index number u i l no washington dc number release date person to contact telephone number refer reply to cc dom p si plr-108840-99 date date legend company state shareholder a this letter responds to a letter dated date requesting a ruling on behalf of company under sec_1362 of the internal_revenue_code the information submitted discloses that company was incorporated on a in state company’s principal_shareholder is shareholder it is represented that company has intended to be an s_corporation since its incorporation believing itself to be an s_corporation company has operated accordingly since a after the end of its taxable_year beginning on a however company discovered that its s election had not been timely filed company requests a ruling that its sec_1362 election will be treated as timely made for its taxable_year that begins on a sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 explains when an s election will be effective generally if an s election is made within the first two and one half months of a corporation's taxable_year plr-108840-99 then that corporation will be treated as an s_corporation for the year in which the election is made sec_1362 provides that if an s election is made after the first two and one half months of a corporation’s taxable_year then that corporation will not be treated as an s_corporation until the taxable_year following the year in which the s election is made sec_1362 provides that if no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply applying the relevant law to the facts submitted and representations made we rule that company's sec_1362 election will be treated as timely made for its taxable_year that begins on a however this ruling is contingent on company filing form_2553 election by a small_business_corporation with an effective date of a with the appropriate service_center within days from the date of this ruling a copy of this letter should be attached to the form_2553 except as specifically set forth above we express no opinion concerning the federal tax consequences of the foregoing facts specifically we express no opinion on whether company otherwise qualifies as an s_corporation this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours william p o’shea chief branch office of the assistant chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes


internal_revenue_service number release date index number ---------------------------------------------------- ---------------------------------------------- ------------------------------ ------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ------------- telephone number --------------------- refer reply to cc corp plr-127257-09 date date in re legend parent sub sub sub sub note intercompany account state x date date date date date ty ------------------------ ------------------------ ------------------------ ------------------------ ------------------------ ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- ------------- ---------------- ---------------- ------------- ---------------------- -------------------------- --------- plr-127257-09 dear this letter responds to your date request for rulings on certain federal_income_tax consequences of a partially completed and proposed transaction the information submitted in that request and in later correspondence is summarized below the rulings contained in this letter are based on the facts and representations submitted by the taxpayer and accompanied by a penalty 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 specifically this office has not reviewed any information and no determination has been made regarding whether the note or intercompany account represents debt or equity for federal_income_tax purposes summary of facts parent a state x corporation is the common parent of an affiliated_group_of_corporations that files a consolidated federal_income_tax return the parent group sub is a corporation wholly owned by parent sub is a corporation wholly owned by sub sub is a corporation wholly owned by sub and sub is a corporation wholly owned by sub sub sub sub and sub became members of parent group on date as a result of the acquisition of all the stock of sub which was the common parent of another consolidated_group on date sub issued and distributed the note to sub between date and date interest accrued on the note but some amounts were unpaid between date and date sub made multiple loans to sub intercompany account on date sub merged under state law into sub the dissolution on the day before date sub contributed the note to sub as a result of the dissolution the note including the obligation for accrued but unpaid interest was extinguished and sub became the obligor on the intercompany account that sub owed to sub all the transactions pre-dated the effective date of t d parent has made the following representations representation sec_1 the note including any accrued and unpaid interest constitutes indebtedness of sub to sub under general principles of federal_income_tax the note was not publicly offered and was not issued for property and is not described in sec_1273 plr-127257-09 the intercompany account constitutes indebtedness of sub to sub under general principles of federal_income_tax law sub was insolvent for federal_income_tax purposes at the time of the dissolution based solely on the information submitted and on the representations set forth above we rule rulings the contribution of the note by sub to sub on the day before the dissolution will be disregarded for all federal_income_tax purposes under sec_1_1502-13 as in effect with respect to consolidated_return years beginning before date immediately before the dissolution sub will be deemed to contribute cash to sub in an amount equal to the balance of the amount of the note less the fair_market_value of sub 4’s assets sub will be treated as satisfying the note including accrued but unpaid interest owed to sub with its assets and the cash deemed contributed by sub to sub for an amount equal to the issue_price determined under sec_1273 of a new debt issued on the date of the dissolution with identical terms accordingly except as provided in ruling below no income gain deduction or loss will be recognized by sub or sub from the deemed satisfaction of the note immediately before the dissolution sub will recognize gain_or_loss upon the satisfaction of a portion of the note by the difference between the fair_market_value of its assets transferred to sub and the basis of those assets in sub 4’s hands immediately before the dissolution sub will be deemed to lend cash to sub for a new note with terms identical to the intercompany account owed by sub to sub sub will be treated as contributing the loan proceeds to sub which will be treated as satisfying the intercompany account owed to sub for an amount equal to the issue_price determined under sec_1273 of a new debt issued on the date of the dissolution with identical terms accordingly no income gain deduction or loss will be recognized by sub or sub from the satisfaction of the intercompany account sub will not be treated as a successor of sub under sec_1_1502-13 sub 4’s tax_attributes not otherwise reduced under sec_1_1502-36 through will be eliminated under sec_1_1502-36 plr-127257-09 caveats no opinion is expressed about the tax treatment of the transaction under other provisions of the code and regulations or the tax treatment of any conditions existing at the time of or effects resulting from the transaction that are not specifically covered by the above rulings procedural statements this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter must be attached to any federal_income_tax return to which it is relevant alternatively if you file your return electronically you may satisfy this requirement by attaching to your return a statement that provides the date and control number of the letter_ruling in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely ________________________ lawrence m axelrod special counsel office of associate chief_counsel corporate


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to plr-103426-99 cc dom p si date date legend company state y z d1 d2 d3 a b properties plr-103426-99 dear this letter responds to a letter dated date and subsequent correspondence written by your authorized representative on behalf of company requesting a ruling that company’s rental income from the properties is not passive_investment_income within the meaning of sec_1362 of the internal_revenue_code facts plr-103426-99 according to the information submitted company was organized on d1 as a state business_trust and elected under sec_1362 to be an s_corporation effective d2 company which has accumulated_earnings_and_profits has two shareholders a and b company is in the business of owning operating and managing the properties which are commercial rental real_estate the properties are used as office buildings and for light industrial use through its owners and through a management company that company subcontracts company provides various services in operating the properties these include maintenance and repair of the structures grounds roofs and parking areas and hvac landscaping janitorial services and snow and rubbish removal in additional to these customary services company provides additional services not ordinarily provided by commercial lessors for example company will serve as an intermediary between tenants and their contractors in resolving disputes and will assist tenants in planning the layout of their space in the fiscal_year ending d3 company received or accrued approximately y in rents and paid_or_incurred z in relevant expenses company represents that it anticipates future figures to be consistent with the income and expense figures for prior periods law sec_1361 defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect for the taxable_year sec_1362 provides than an election under sec_1362 shall be terminated whenever at any time after the first day of the first taxable_year for which corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides that an election under sec_1362 shall be terminated whenever the corporation has accumulated_earnings_and_profits at the close of each of consecutive taxable years and has gross_receipts for each of such taxable years more than percent of which are passive_investment_income any termination under this paragraph shall be effective on and after the first day of the first taxable_year beginning after the third consecutive taxable_year referred to above sec_1362 provides that except as otherwise provided the term passive_investment_income means gross_receipts derived from royalties rents dividends interest annuities and sales or exchanges of stock_or_securities sec_1_1362-2 of the income_tax regulations provides that rents does not include rents derived in the active trade_or_business of renting property rents received by a corporation are derived in an active trade_or_business of renting property only if based on all the facts and circumstances the corporation provides significant services or incurs substantial costs in the rental business generally significant services are not rendered and substantial costs are not incurred in plr-103426-99 connection with net leases whether significant services are performed or substantial costs are incurred in the rental business is determined based upon all the facts and circumstances including but not limited to the number of persons employed to provide the services and the types and amounts of costs and expenses_incurred other than depreciation after applying the relevant law to the facts submitted and the representations made we conclude that the rents company receives from the properties are not passive_investment_income under sec_1362 except for the specific ruling above no opinion is expressed or implied concerning the federal tax consequences of the facts of this case under any other provision of the code specifically no opinion is expressed regarding company's eligibility under sec_1361 to be an s_corporation further the passive_investment_income rules of sec_1362 are completely independent of the passive_activity rules of sec_469 unless an exception under sec_469 applies the rental_activity remains passive for purposes of sec_469 pursuant to a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative plr-103426-99 this ruling is directed only to the taxpayer who requested it according to sec_6110 of the code this ruling may not be used or cited as precedent sincerely yours william p o'shea chief branch office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number -------------------- ------------------------- ---------------------------- department of the treasury washington dc person to contact ------------------ id no ------------- telephone number -------------------- refer reply to cc psi b04 - plr-122751-08 date date re --------------------------------------------- re --------------------------------------------- legend donor ------------------------------------------------ spouse ------------------------------------------------ accountant --------------------------------------------- trust a ---------------------------------------------------------------------- trust b ----------------------------------------------------------------------------- trust c -------------------------------------------------------------- trust d ------------------------------------------------------ trust e -------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- trust f ------------------------------------------------------------- dear -------------- this responds to the letter dated date and subsequent correspondence submitted by your authorized representatives requesting an extension of time under sec_2642 and sec_301_9100-3 of the procedure and administration regulations to make an election under sec_2632 of the internal_revenue_code to have the automatic allocation rules contained in sec_2632 not apply to transfers to trusts for generation-skipping_transfer gst tax purposes facts prior to date spouse created trust a_trust b_trust c and trust d donor and spouse created trust e and donor created trust f trust c was created as a grantor_retained_annuity_trust grat with a 5-year term pursuant to the terms of trust c at the expiration of the 5-year term which plr-122751-08 occurred in trust c is to continue in trust until the death of the survivor of donor and spouse the beneficiaries of each trust are certain members of donor’s and or spouse’s family including the issue of donor and spouse’s children for each year in which gifts were made to one or more of the trusts donor and spouse each timely filed a form_709 united_states gift and generation-skipping_transfer_tax return and elected under sec_2513 to treat the gifts as made one-half by each spouse donor and spouse have filed form sec_709 with respect to transfers to one or more of the trusts from through the tax returns were prepared by certified public accountants at accounting firm donor did not intend to allocate her gst_exemption to the transfers to the trusts and no allocation was made on the form sec_709 filed for through with respect to the transfers to trust a_trust b_trust d trust e and trust f however accounting firm failed to advise donor of changes made to the gst tax effective for gifts made after date by the economic_growth_and_tax_relief_reconciliation_act_of_2001 p l as described below these changes automatically allocate a taxpayer’s unused gst_exemption to transfers that are indirect skips to gst trusts unless the taxpayer makes an affirmative election to have the automatic allocation rules not apply donor made additional gifts to one or more of the trusts in calendar_year sec_2001 through due to accounting firm’s failure to advise her of the automatic allocation rules donor’s unused gst_exemption was automatically allocated to the transfers to the trusts in these years in addition the estate_tax exclusion period etip described in sec_2642 with respect to trust c closed in it is represented that to date no taxable_distributions taxable terminations or any other events have occurred with respect to any of the trusts that would result in a gst tax_liability on the part of any of the trusts or their beneficiaries donor requests an extension of time under sec_2642 and sec_301_9100-3 to elect out of the automatic allocation rules under sec_2632 for all transfers made to trust a_trust b the continuing trust under trust c trust d trust e and trust f after date law and analysis sec_2513 provides generally that for gift_tax purposes if the parties consent a gift made by one spouse to any person other than his or her spouse shall for gift_tax purposes be considered as made one-half by the donor spouse and one-half by his or her spouse sec_2601 imposes a tax on every generation-skipping_transfer gst within plr-122751-08 the meaning of subchapter_b a generation-skipping_transfer is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the gst tax is determined by multiplying the taxable_amount by the applicable_rate sec_2641 provides that the term applicable_rate means with respect to any gst transfer the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer under sec_2642 the inclusion_ratio with respect to any property transferred in a generation-skipping_transfer is generally defined as the excess of over the applicable_fraction the applicable_fraction as defined in sec_2642 is a fraction the numerator of which is the amount of gst_exemption under sec_2631 allocated to the trust or to property transferred in a direct_skip and the denominator of which is the value of the property transferred to the trust or involved in the direct_skip sec_2631 as in effect for generation-skipping transfers made before date provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under sec_2631 which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor in the case of transfers after date the gst_exemption is equal to the applicable_exclusion_amount under sec_2010 sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_26_2632-1 of the generation-skipping_transfer_tax regulations provides that an allocation of gst_exemption to property transferred during the transferor’s lifetime is made on form_709 under sec_2632 effective for transfers made after date if any individual makes an indirect_skip transfer a transfer to a gst_trust as defined in sec_2632 any unused portion of such individual's gst_exemption shall be allocated to the property transferred to the extent necessary to make the inclusion_ratio for such property zero sec_2632 provides that for purposes of the automatic allocation rule contained in sec_2632 an indirect_skip to which sec_2642 applies describing transfers subject_to an estate_tax_inclusion_period shall be deemed made only at the close of the estate_tax_inclusion_period sec_2632 provides in part that an individual may elect to have the automatic allocation rule in sec_2632 not apply to an indirect_skip that is a transfer to a gst_trust or any or all transfers made by such individual to a particular trust an election shall be deemed to be timely if filed on a timely filed gift_tax_return for the calendar_year in which the transfer was made or deemed to have been made pursuant to sec_2632 or on such later date or dates as may be prescribed by the secretary plr-122751-08 sec_26_2632-1 iii a provides that a transferor may prevent the automatic allocation of gst_exemption elect out with respect to one or more prior- year transfers subject_to sec_2642 regarding etips made by the transferor to a specified trust or trusts one or more or all current-year transfers made by the transferor to a specified trust or trusts one or more or all future transfers made by the transferor to a specified trust or trusts all future transfers made by the transferor to all trusts whether or not in existence at the time of the election out sec_26_2632-1 iii b provides that to elect out the transferor must attach an election out statement to a form_709 filed within the time period provided in sec_26_2632-1 in general the election out statement must identify the trust and specifically must provide that the transferor is electing out of the automatic allocation of gst_exemption with respect to the described transfer or transfers prior- year transfers that are subject_to sec_2642 and to which the election out is to apply must be specifically described or otherwise identified in the election out statement under sec_26_2632-1 to elect out a form_709 with the attached election out statement must be filed on or before the due_date for timely filing the form_709 for the calendar_year in which for a transfer subject_to sec_2642 the etip closes or for all other elections out the first transfer to be covered by the election out was made sec_2642 provides that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of this paragraph sec_2642 provides that in determining whether to grant relief under sec_2642 the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief the time for making the allocation or election shall be treated as if not expressly prescribed by statute accordingly taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 see notice_2001_50 2001_2_cb_189 sec_2652 and sec_26_2652-1 provide that if under sec_2513 one-half of a gift is treated as made by an individual and one-half of such gift is treated as made by the spouse of the individual then for purposes of the gst tax each spouse is treated as the transferor of one-half of the entire value of the property transferred by the donor spouse regardless of the interest the electing spouse is actually deemed to have transferred under sec_2513 plr-122751-08 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government under sec_301_9100-3 a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and representations made we conclude that the requirements of sec_301_9100-3 are satisfied therefore donor is granted an extension of time of days from the date of this letter to elect pursuant to sec_2632 to have the automatic allocation rules contained in sec_2632 not apply to all transfers made by the donor to trust a_trust b continuing trust c trust d trust e and trust f that were made after date the elections should be made on supplemental form sec_709 for the appropriate calendar years prescribed under sec_26_2632-1 and filed with the internal_revenue_service cincinnati service center-stop cincinnati ohio a statement must be attached to each form_709 identifying the trust s and specifically providing that the donor is electing pursuant to sec_2632 to have the automatic allocation rules contained in sec_2632 not apply to any transfers donor has made or will make to the identified trust s after date see sec_26_2632-1 and iv a copy of this letter should be attached to each supplemental form_709 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury plr-122751-08 statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely curtis g wilson associate chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes copy of this letter cc


department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date cc tege eoeg et2 conex-112218-10 o f f i c e o f t h e c h i e f c o u n s e l number info release date uil ----------------------- ----------------------- ---------------------------------- dear --------------- i am responding to your inquiry to senator richard shelby you asked why the withholding on your monthly retirement pay increased senator shelby wrote to us on your behalf and asked that i respond directly to you withholding tables generally apply to wage payments from employers to employees withholding tables also generally determine the withholding on retirement pay the increase in withholding on payments occurred as a result of changes made to the withholding tables for the making_work_pay_credit the making_work_pay_credit provides a credit against income_tax for a taxable_year to an eligible_individual in an amount equal to the lesser_of percent of earned_income or dollar_figure dollar_figure in the case of a joint_return we issued revised withholding tables in date to reflect the effect of the making_work_pay_credit these tables were effective for wage payments beginning no later than date we compressed the reduction in withholding equal to the entire amount of the making_work_pay_credit into the nine remaining months of however for wage withholding we spread the same dollar amount of reduction over months thus the reduction for the credit is smaller each month of and the amount withheld from each monthly payment is greater the tax regulations generally provide for the same income_tax_withholding treatment for retirement pay as wages therefore payors of retirement pay must use wage withholding tables even though we do not count retirement income in determining a taxpayer’s making_work_pay_credit however retirement_plan administrators can make an additional adjustment to withholding which effectively removes the benefit of the making_work_pay_credit for withholding purposes conex-112218-10 i hope this information is helpful if you have any questions please contact -------- ------- ---------- ---------------------------------------- at -------------------- sincerely nancy j marks division counsel associate chief_counsel tax exempt government entities the honorable richard shelby cc