t c memo united_states tax_court michael j burke and jane s burke petitioners v commissioner of internal revenue respondent docket no filed date stephen lee christian joseph e mudd and gregory michael beck for petitioners jenny r casey hans famularo and miles d friedman for respondent memorandum findings_of_fact and opinion holmes judge michael burke dove into a business venture with a friend and continued to advance it funds even as it started to sink when it failed he tried to deduct the money he’d lost the commissioner thinks burke is trying to disguise an equity_investment as a debt and disallowed the loss findings_of_fact burke is currently a retiree but before that he enjoyed a long and lucrative career as an urban planner at a firm called rbf consulting but this case began when he met an old friend from santa ana college hugh parkey burke and parkey had taken a scuba-diving instructor-training program there together and for a short while they worked together as instructors parkey then moved to belize and for a long time these old friends lost touch then many years later parkey let burke know that he was getting married and the old friends reconnected burke learned that scuba diving had become parkey’s vocation--a vocation that had led parkey to become a scuba-diving instructor and the manager of a diving and fishing resort in belize burke himself had left scuba diving behind in favor of urban planning but belize is a popular vacation spot and burke and his wife found several occasions to visit parkey over the years the parkeys eventually opened a restaurant and guesthouse in belize city but parkey missed the scuba-diving business and came to burke for money to start his own burke credibly testified that he and parkey discussed his business plans in great detail burke decided that he’d loan money to parkey but only if parkey gave him an interest in the business so sometime in burke sent dollar_figure to parkey and together they formed hugh parkey’s belize dive connection belize dive as a belizean corporation burke never prepared formal loan documents for the payment but instead recorded it in his personal books and gave a copy of that record to parkey the two of them owned belize dive together as shareholders until when parkey passed away after his friend’s death burke tried to sell the business to a local resort but just as burke was about to accept the resort’s offer mrs parkey asked him to stop the sale she didn’t like the resort’s manager and thought it would be a slight to her husband’s reputation to sell the business to him burke was happy to oblige and he let mrs parkey assume her husband’ sec_50 interest mrs parkey had her own vision for belize dive she was interested in pursuing cruise-line companies for business she thought it was a great opportunity she was wrong belize dive did grow after it started to fish for business with the cruise lines but it started to need more capital for boats and diving equipment it also needed more staff burke continued to send money--money he says he was meant to get back--toward the company but the business never quite ran at a profit burke did keep a personal record of the advances he sent to belize dive and at the end of each year he turned it over to belize dive for inclusion in the corporate records he never saw these records though belize dive’s need for capital continued to grow it at first provided only scuba-diving services to the cruise lines but thought it would make sense to offer snorkeling too to do that it needed yet more boats and yet more equipment-- masks fins and life preservers cruise lines keep their passengers on a tight schedule which gave belize dive only a short time to get its customers from the ship get them to a place to snorkel and then return them to make that work belize dive leased a 186-acre island between the cruise-ship dock in belize city and the snorkeling reefs after a short time belize dive bought the island this cost yet more money and burke testified that he loaned the money to belize dive to buy the island but admitted that he did not get a promissory note in exchange burke continued to send money to belize dive to make improvements after the purchase of the island but he was reaching his limit and found it necessary to seek outside financing in came a third partner--a man named wayne mcnab--to help bear the burden in mcnab became a shareholder through dilution of mrs parkey's stake when he kicked in dollar_figure burke himself continued to advance funds though and with growing worry about belize dive’s future he asked for and received an additional share in the company for himself mrs parkey however continued to have new ideas and her ideas continued to be expensive in belize dive built a man-made lagoon on its island where customers could swim with four dolphins revenues were less than expected that was enough after one last multimillion-dollar spasm of money transfers burke finally gave up the numbers are a bit cloudy but we find it more_likely_than_not from our review of the evidence that this table accurately summarizes burke’s advances to the corporation year amount dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure total dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure burke now claims that each advance to belize dive was a loan other than the summary above which he claims is the result of contemporaneous recordkeeping burke did not obtain formal loan documents for any of these payments before each time burke advanced money he did so without setting a time for repayment and at the time of trial he had not received a single repayment of any advance or even of interest he didn’t expect to receive payment until the business was profitable and he’d be paid his share of the profits in contrast when belize dive obtained loans from other lenders over the years it signed formal written documents and paid the lenders back burke said during trial that belize dive owed him interest on the loans but he was unable to point to any proof of that burke started to work with tax attorneys in laguna hills california to file his returns when he disposed of an unrelated investment on which he had made a substantial capital_gain burke and his attorneys were focused on tax planning and more specifically review ing alternatives for creating capital_loss to offset capital_gain it was out of this tax-planning process that three promissory notes from belize dive surfaced each note was created on date burke claims that he had them drawn up under his attorneys’ suggestion to give or pass some of his debt to mrs parkey to encourage her not to leave belize dive the first note was a junior promissory note for dollar_figure the second was a junior promissory note for dollar_figure and the third was a senior promissory note for dollar_figure we find that mrs parkey did sign each note on behalf of belize dive though neither she nor anyone else from the company testified burke claims that after they signed the note for dollar_figure they discovered an error and drew up the second note for dollar_figure so the second note was meant burke claims that the third note for dollar_figure is senior to the others because he believed he’d be able to recoup only dollar_figure from belize dive’s sale to replace the first note but burke offered no explanation as to why they were signed on the same day or cover different periods in date burke sold his dollar_figure junior promissory note to mrs parkey for dollar_figure burke claims that he wanted to give mrs parkey the debt for free but that his attorneys told him there was a tax advantage to selling it to her instead then in date belize dive retired both mrs parkey’s and burke’s debt burke received in exchange an additional interest in belize dive bringing his total to and mrs parkey’s interest sank from to burke then signed a deferred_compensation agreement with the company to create a book reserve for dollar_figure for mrs parkey we specifically find that the promissory notes the sale of the note to mrs parkey and the deferred_compensation agreement were more_likely_than_not orchestrated by burke and his attorneys to offset the large capital_gains burke had from unrelated interests in hi sec_2010 and sec_2011 tax years they are not proof of what they purport to show happened before they were all executed the third note also bobbed up only at trial at the audit burke provided only the notes for dollar_figure and dollar_figure mcnab’s interest in belize dive shriveled from to with all this paper in place burke’s attorneys review ed the tax consequences of debt sale or compromise with related_party entity in date and they advised burke that he was entitled to claim some losses burke claimed a short-term_capital_loss of nearly dollar_figure and a long-term_capital_loss of more than dollar_figure million on hi sec_2010 tax_return he then claimed short-term and long- term capital losses on hi sec_2011 tax_return the commissioner audited these returns and determined that burke had deficiencies for the and tax years and owed accuracy-related_penalties besides tax_year tax sec_6662 penalty dollar_figure big_number dollar_figure dollar_figure the only issues are whether burke’s advances to belize dive were loans or capital contributions and whether he is also liable for accuracy-related_penalties under sec_6662 the parties did not stipulate and the commissioner has not unless stated otherwise all section references are to the internal_revenue_code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure moved to introduce any evidence that a supervisor had approved in writing the initial determination to include these penalties in the notice_of_deficiency i debt or equity opinion the parties’ arguments here are simple burke argues that his advances to belize dive were bona_fide debts and the commissioner argues that the advances look more like equity a bona_fide debt is one that arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money sec_1_166-1 income_tax regs see also 91_tc_575 whether a purported loan is a bona_fide debt is determined by the facts and circumstances of each case see eg a r lantz co v united st424_f2d_1330 9th cir 74_tc_476 the ninth circuit6 has identified eleven factors to consider in a debt-equity analysis but strongly cautions us not to overemphasize any one of them a r lantz co f 2d pincite the factors are the names given to the certificates evidencing the indebtedness burke was a california resident when he filed his petition which makes the case appealable to the ninth circuit under sec_7482 the presence or absence of a maturity_date the source of the payments the right to enforce the payment of principal and interest participation in management a status equal to or inferior to that of regular corporate creditors the intent of the parties thin or adequate capitalization identity of interest between creditor and stockholder payment of interest only out of dividend money and the ability of the corporation to obtain loans from outside lending institutions id quoting 279_f2d_123 9th cir aff’g t c memo we of course follow this caselaw and discuss each of these factors but will not let ourselves be poked by any of these prongs away from our goal of discerning the parties’ intent at the time of the advances 748_f2d_1365 9th cir rev’g tcmemo_1983_120 a names formal loan documentation such as a bond a debenture or a note tends to show that an advance is a bona_fide debt see 827_f2d_1409 9th cir pepsico puerto rico inc v commissioner tcmemo_2012_269 at it is undisputed here that burke did not get formal loan documentation when he made each advance instead his first advance got him a interest in belize dive and his later advances got him a increase in his ownership share burke points to the date promissory notes as evidence of bona_fide indebtedness but we’ve already found those promissory notes were parts of some post hoc tax planning so they are of little help in determining burke’s intent when he made the advances post hoc papering inconsistent with how belize dive treated unrelated lenders in fact more strongly reinforces a finding that this factor supports characterization of the advances as equity b maturity_date the presence of a fixed maturity_date indicates a fixed obligation to repay a characteristic of a debt obligation 464_f2d_394 5th cir see also pepsico puerto rico inc at burke’s alleged loans to belize dive had no fixed maturity_date and burke credibly explained that he expected to be paid only when belize dive was sold or profitable this too weighs in favor of finding the advances to be equity c source of the payments if the source of repayments depends on earnings an advance is more likely to be equity estate of mixon f 2d pincite am offshore inc v commissioner 97_tc_579 provost v commissioner tcmemo_2000_177 wl at that’s exactly what we had here burke admitted that he didn’t expect to receive payment until the business was profitable and he’d be paid his share of the profits d right to enforce an enforceable and definite obligation to repay an advance indicates the existence of a bona_fide debt see hardman f 2d pincite estate of mixon f 2d pincite burke argues that belize dive had an enforceable and definite obligation to repay his advances both after and before the execution of the promissory notes he argues that before the notes belize dive’s financial statements recorded his advances as loans but points to no authority that this would give him a right to enforce their repayment and even if we view the promissory notes as having created an enforceable right to repayment failure to take customary steps to ensure repayment is an indication of equity shedd v commissioner tcmemo_2000_292 wl at burke stumbles on these steps here--he never asked for repayment and we find that he never intended to enforce the notes as part of his tax planning he sold one and relied on the possible sale of belize dive to pay the other this factor weighs in favor of finding the advances to be equity e participation in management when a taxpayer receives a right to participate in management or an increase in his ownership stake in exchange for an advance it suggests that the advance was an equity_investment and not a bona_fide debt hardman f 2d pincite am offshore inc t c pincite provost wl at because burke’s initial transfer to belize dive in came with a share in the company that advance definitely indicates an equity_investment after that however burke’s participation in management at belize dive is unclear he testified that his only role was to lend money but later said that he reviewed tax documents and cashflow statements it does not however seem he was involved in the day-to-day operations of belize dive and any involvement he did have was minimal burke didn’t receive additional stock for later contributions until after he’d already advanced millions of dollars to belize dive and this was only a increase in a flailing company he credibly testified that he wanted the additional so that he’d have more control_over belize dive’s direction given its unstable business and the substantial funds he’d already advanced and he emphasized that he needed it if he was going to give belize dive any more money an increased interest or participation needed to prevent a company’s collapse does not by itself mean an advance is an equity_investment owens v commissioner tcmemo_2017_157 at flint indus inc v commissioner tcmemo_2001_276 wl at but burke received an extra interest in belize dive in when it retired his debt with elements cutting both ways we find this factor to be neutral f status equal or inferior to other creditors taking a subordinate position to other creditors indicates an equity_investment see pepsico puerto rico inc at cma consol inc v commissioner tcmemo_2005_16 wl at burke readily admitted during trial that his purported loans were subordinate to those of belize dive’s secured creditors he argues on brief however that they were not subordinate to those of belize dive’s unsecured creditors but there is nothing in the record to support this position and burke in fact testified during trial that his debt was subordinate to several other of belize dive’s financial arrangements thus this factor supports a finding of equity g the parties’ intent t he inquiry of a court in resolving the debt-equity issue is primarily directed at ascertaining the intent of the parties a r lantz co f 2d pincite but the ninth circuit includes intent itself as a factor in this multifactor analysis id this might otherwise be confusing but caselaw seems to treat this factor as the place to look for contemporaneous evidence of subjective intent id pincite that evidence shows that burke never received or demanded payments of either interest or principal from belize dive and he expected to be paid back only out of profits that evidence also shows no contemporaneous documentation from belize dive that stated the advances were loans--a lack which is particularly telling because belize dive did borrow money from more conventional lenders and did paper those transactions as conventional loans burke admits that during the time he was making advances to belize dive he didn’t even know for sure that they were being recorded as loans in its books while belize dive’s financial statements do show that they included burke’s advances in their total debt we give this little weight no one from belize dive other than burke testified on his behalf this factor also favors a finding of equity h thin or adequate capitalization thin or inadequate capitalization is strong evidence of a capital_contribution where the debt to equity ratio was initially high the parties realized that it would likely go higher and substantial portions of these funds were used for the purchase of capital assets and for meeting expenses needed to commence operations am offshore inc t c pincite because neither party argued on brief that evidence in the record directly supports or negates this factor we treat it as neutral see eg provost wl at i identity of interest advances in proportion to the stockholder’s capital interest indicate a finding that the advance was an equity_investment hardman f 2d pincite am offshore inc t c pincite what financial records we have for belize dive in the record indicate that from through with the exception of belize dive’s liabilities exceeded its assets and when belize dive lacked money to cover its operating_expenses burke just handed over the funds we’ve found before that these circumstances create an identity of interest between the purported creditor and the controlling shareholder cma consol inc wl at this factor weighs in favor of finding that the advances were equity j payment of interest out of dividend money the presence of a fixed rate of interest and the actual payment of interest indicate a bona_fide debt see am offshore inc t c pincite there is no evidence here--aside from burke’s own testimony--that his advances were even supposed to accrue interest it is also undisputed that belize dive never paid any interest even if it was required and that burke didn’t ask for it or intend to the failure to insist on interest payments indicates that the payors are not expecting substantial interest_income but are more interested in the future earnings_of the corporation or the increased market_value of their interest id this weighs in favor of a finding that the advances were equity k the ability of the corporation to obtain loans from outside lending institutions if a corporation is able to borrow funds from an outside source at the time of the advance the transaction looks more like a bona_fide debt hardman f 2d pincite am offshore inc t c pincite the commissioner mistakenly distorts this factor to say that although belize dive was able to obtain financing from other lenders those transactions were at arm’s length and burke’s were not and so should count against him while belize dive’s treatment of third- party lenders is important we’ve already dealt with it this one factor does favor a finding that burke’s advances to belize dive were bona_fide debts having swum through each of these prongs we have to make a finding about the parties’ intent at the times burke advanced funds to belize dive we conclude that the absence of the normal incidents of a loan--especially a maturity_date and a stated_interest rate--are most telling here without those aspects of a loan the advances look much more like capital contributions--and the peculiar advantage to burke of generating a capital_loss in to offset a large capital_gain means that the papering his tax advisers did that year to make the advances look more like loans just makes it more_likely_than_not that at the time he made them burke and the parkeys intended those advances to be capital contributions our conclusion is only reinforced by the strong evidence of the old friendship of burke and parkey and burke’s desire to help his old friend turn their old hobby into a new business--a practical partnership where burke contributed money and parkey contributed his labor and expertise and both hoped to share in the profits burke also tries to salvage some loss out of this situation and insists that the transfer of the note to mrs parkey in was at the least the disposition of a capital_asset of some sort we disagree--the deal was made to seem as if it were the sale of a portion of the debt owed by belize diving to burke but we have found that there was no debt to sell and insufficient evidence that there was a sale at all we suspect though we don’t actually have to find anything because no party raised it that burke and mrs parkey’s agreement that led to burke’s owning of the stock in belize dive was a simple tax-free recapitalization under sec_368 e --a reshuffling of a capital structure within the framework of an existing corporation see 315_us_194 burke may well be entitled to a capital_loss when he disposes of that stock but not until then and not for the years at issue here ii penalties the commissioner also asserts that burke is liable for accuracy-related_penalties under sec_6662 for hi sec_2010 and sec_2011 tax years sec_6662 imposes a penalty when there is an underpayment attributable to a ny substantial_understatement_of_income_tax sec_6662 part of whether the commissioner met his initial burden of production is a simple math problem an understatement_of_tax is substantial if it exceeds the greater of dollar_figure or percent of the tax required to be shown on the return sec_6662 c burke’s understatements for the and tax years surpass both dollar_figure and of the tax required burke asserts however that he had reasonable_cause and acted in good_faith see sec_6664 sec_1_6664-4 income_tax regs he specifically argues that he is not liable for the penalties because he relied on the advice of a tax adviser reliance on an adviser can excuse a taxpayer from an accuracy-related_penalty but only if his reliance was reasonable 115_tc_43 aff’d 299_f3d_221 3d cir reliance is reasonable if the adviser was a competent professional with sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied on the adviser’s judgment in good_faith id pincite the commissioner does not dispute that burke’s attorneys were competent professionals and burke credibly testified that he gave his attorneys the records he kept that detailed his advances to belize dive we find this sufficient proof of the first two requirements for reasonable reliance what troubles us is the tax-planning strategy those lawyers came up with when they got this information they recharacterized burke’s advances to belize dive as loans and did some last-minute papering to make it seem as if they were after listening to burke we don’t find that he could have reasonably relied on their advice that this would work--there were just too many red flags that a sophisticated businessman should have noticed first he went along with their plan even though he himself had never treated his advances to belize dive as if they were loans he couldn’t fully explain why he was selling debt to mrs parkey or how that would give her an incentive to stay with belize dive and it seems just way too convenient to draft promissory notes for advances already made just as he’d given up on the company we do not however sustain the sec_6662 accuracy-related_penalties for the years at issue the commissioner failed to present any evidence that the penalties were personally approved in writing by the immediate supervisor of the individual making such determination see sec_6751 851_f3d_190 2d cir aff’g in part rev’g in part tcmemo_2015_42 graev v commissioner t c ___ ___ slip op pincite date supplementing t c ___ date accordingly he did not meet his burden of production and burke is not liable for the determined penalties see sec_7491 graev t c at ___ slip op pincite there were settlements and concessions on other issues so decision will be entered under rule


sionificant index no l department of the treasury internal_revenue_service washington d c tax exempt and coven apr yep ra a plan re ein - pn taxpayer acquiring company dear this letter is in response to your request of date for an excise_tax waiver for the plan for the quarterly liquidity_shortfall due for the including associated penaities and interest plan years and under sec_430 of the internal_revenue_code code a defined_benefit_plan is required to maintain liquid_assets sufficient to pay three years of pension benefits sec_430 of the code provides an exemption to the accelerated quarterly installment_payment requirement for plans with less than participants including all participants in qualified defined benefit plans sponsored by the controlled_group under section f of the code if a plan’s liquid_assets fall short of this three-year threshold a percent excise_tax is imposed on the shortfall if a plan has a liquidity_shortfall for any quarter and each of the following quarters sec_4971 of the code imposes an additional percent excise_tax on the liquidity_shortfall for the first quarter sec_4971 of the code provides that a taxpayer may request a waiver of the excise_taxes under sec_4971 of the code to obtain a waiver the taxpayer must demonstrate to the satisfaction of the irs that the shortfall was due to reasonable_cause and not willful neglect and the taxpayer has taken steps to remedy the shortfall the irs may waive all or part of the tax imposed by this section according to the information submitted to the internal_revenue_service the plan was exempt from the liquidity_shortfall requirement until the taxpayer was acquired by the acquiring company since the plan had fewer than participants a q-sub election was made after the taxpayer was acquired making it a disregarded_entity for tax purposes during the plan_year ended june employees were terminated many participants took the lump sum option significantly reducing the funded status of the plan and triggering a liquidity_shortfall the taxpayer’s plant closed and all active initially an incorrect interpretation of the q-sub election was made that the taxpayer was not a member of the acquiring company’s controlled_group for purposes of determining whether the plan was subject_to the liquidity_shortfall requirements since the plan had fewer than participants the taxpayer believed it was exempt from the quarterly liquidity_shortfall requirements of sec_430 of the code however early in the plan’s enrolled_actuary was provided with the correct interpretation of the q-sub election that the taxpayer is part of the acquiring company's controlled_group for purposes of determining whether the pian is subject_to the liquidity_shortfall requirements because the participant count of all participants in defined benefit plans maintained within the controlled_group was greater than the plan was subject_to the liquidity_shortfall requirements of sec_430 of the code effective with the plan_year beginning july taxpayer's authorized representative the plan had unpaid liquidity_shortfall contributions for quarters in the plan years beginning july the impacted quarters as summarized in the table below based on information submitted by the and july impacted quarter ending unpaid liquidity_shortfall contribution september december june september december march june the taxpayer was notified in date by the plan’s enrolled_actuary that the plan was subject_to the liquidity_shortfall requirements of sec_430 of the code three days after the taxpayer was notified of the unpaid liquidity_shortfall contributions the taxpayer made a substantial contribution to the plan in an amount sufficient to eliminate the liquidity_shortfall for the plan_year beginning july the excise_tax under section f of the code applies for each of the impacted quarters the excise_tax under f of the code applies only for the quarter ended june that quarter and in each of the following four quarters because this was the only quarter with a shortfall in form_5330 was filed for the plan promptly within weeks of the taxpayer being notified of the liquidity_shortfall for each of the two years affected based on the information provided with your request the liquidity shortfalls were due to reasonable_cause and not willful neglect based on the original interpretation of the q- sub election the taxpayer believed that the plan’s controlled_group had less than participants and was exempt from the liquidity requirements the taxpayer took immediate steps to remedy the liquidity_shortfall and made a corrective contribution within three days of being notified of the unpaid liquidity_shortfall contributions accordingly your request to waive the excise_tax under sections f and plan years is granted because the liquidity f of the code for the shortfalls were due to reasonable_cause and not willful neglect because the excise_tax is waived any interest or penalties associated with the excise_tax are eliminated and this ruling does not affect the adjustments for interest on late or unpaid liquidity installments under sec_1_430_j_-1 of the income_tax regulations regulations and the increase to minimum required contributions for additional interest in sec_1_430_j_-1 of the regulations an amended schedule sb of form_5500 must be filed to reflect any changes to the amounts reported on schedule sb as a result of this ruling your attention is drawn to section e of the employee retirement income security act prohibiting the payment of certain benefits including lump sum payments while a plan has a liquidity_shortfall this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent we have not sent a copy of this letter to your authorized representative pursuant to the power_of_attorney form on file in this office if you have any questions regarding this matter please contact david ziegler id jat - sincerely yours catherine l jones acting director employee_plans


internal_revenue_service number release date index number -------------------- ------------------------------------- -------------------------- ---------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------- id no ------------------ telephone number ---------------------- refer reply to cc psi b01 plr-118898-18 date date legend x ------------------------- -------------------------------------------- a ---------------------------- trust ----------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------- -------------------------------------------------------------------------------------------------- trust --------------------------------------------------------------------------------------------------------------- -------------------------------------------- -------------------------------------------------------------------------------------------------- trust ---------------------------------------------------------------------------------------------------------------- -------------------------------------------- date ------------------- date date ----------------------- --------------------------- date -------------------------- date -------------------------- plr-118898-18 state --------------------- dear --------------- this responds to a letter dated date and supplemental correspondence submitted on behalf of x by x’s authorized representative requesting relief under sec_1362 of the internal_revenue_code the code facts according to the information submitted and representations within x was formed on date and made a timely s_corporation_election effective date under the laws of state prior to her death a an eligible shareholder owned shares in x on date a died pursuant to a’s will on date a’s shares were transferred to trust trust and trust trust trust and trust were eligible shareholders of x from date to date under sec_1361 x represents that trust trust and trust were eligible to make an electing_small_business_trust esbt elections as of date however the trustees of trust trust and trust failed to file esbt elections as a result x’s s_corporation_election terminated as of date x represents that the circumstances resulting in the termination of x’s s_corporation_election and the failure to make timely esbt elections were inadvertent and not motivated by tax_avoidance or retroactive tax planning x represents that other than the failure_to_file esbt elections for trust trust and trust on date x has qualified as a small_business_corporation at all times since its election on date lastly x and its shareholders agree to make any adjustments required as a condition of obtaining relief under sec_1362 that may be required by the secretary law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for the year sec_1361 provides that the terms small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate plr-118898-18 a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than class of stock 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 is a permitted shareholder but only for the 2-year period beginning on the day on which such stock is transferred to it sec_1361 provides that for purposes of sec_1361 an esbt is a permissible shareholder 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 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_1361-1 provides that the trustee of a_trust must make the esbt election by signing and filing with the service_center where the s_corporation files its income_tax return a statement that meets the requirements of sec_1_1361-1 sec_1_1361-1 provides that the trustee of an esbt must file the esbt election within the time requirements prescribed in sec_1_1361-1 generally within the 16-day-and-2-month period beginning on the day that the stock is transferred to the trust sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the 1st day of the 1st taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides in relevant part that if an election under sec_1362 by any corporation was terminated under sec_1362 or the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination steps were taken so that the corporation for which the termination occurred is a small_business_corporation and the corporation for which plr-118898-18 the termination occurred and each person who was a shareholder in such corporation at any time during the period specified pursuant to sec_1362 agrees to make the adjustments consistent with the treatment of such corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such termination such corporation shall be treated as an s_corporation during the period specified by the secretary conclusion based solely on the facts submitted and the representations made we conclude that the failure of trust trust and trust to file esbt elections effective date caused an inadvertent termination of x’s s_corporation_election within the meaning of sec_1362 on date pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation beginning on and after date unless x's s_corporation_election is otherwise terminated under sec_1362 this letter_ruling is contingent upon the filing of esbt elections within days from the date of this letter effective date for trust trust and trust with the appropriate service_center a copy of this letter should be attached to the esbt elections this letter_ruling is also contingent upon x and its shareholders filing within days from the date of this letter original and amended returns for all open years consistent with the relief in this letter except as specifically ruled upon above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code specifically we express or imply no opinion regarding x’s eligibility to be an s_corporation or whether trust trust and trust were or are otherwise eligible to be esbts this ruling is directed only to the taxpayer who requested it according to sec_6110 this ruling may not be used or cited as precedent plr-118898-18 pursuant to the power_of_attorney on file with this office we are sending a copy of this letter to your authorized representatives sincerely faith p colson faith p colson senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes


- ondorn atesuclat hs7s department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division nov - legend company a plan x dear this letter is in response to a request for a ruling letter submitted on your behalf by your authorized representative on date as supplemented by correspondence dated date and date concerning the prepayment of an exempt loan upon termination of an employee_stock_ownership_plan esop company a established plan x an esop effective te for the benefit of its employees company a is wholly owned by plan x plan x is intended to be qualified under sec_401 of the internal_revenue_code code and to meet the requirements of sec_4975 of the code _in connection with the establishment of plan x the trustees of its related trust borrowed iia loan from company a on borrowed the funds loaned to plan x from a bank as described in code sec_4975 the loan was secured_by the pledge of a continuing security_interest in the company a shares that were purchased by plan x with the proceeds of the loan these shares were all placed in the plan x suspense_account company a fully intended that plan x would continue until the loan was entirely repaid and all shares of company a stock were allocated to participants company a has made consistent and substantial contributions to plan x resulting in significant payment of the loan approximately one-third of the shares have been allocated to participants’ accounts a company a the loan was intended to be an exempt loan page at the time the purchase and sale transaction took place the anticipated contributions to plan x calculated based on company a’s payroll were not sufficient to make the payments required under the loan under the limitations then in effect the shortfall was projected to be made up using a reasonable level of dividends_paid by company a on both allocated and unallocated shares company a elected to be taxed as an s_corporation as of subsequently company a concluded at that time that using dividends on s_corporation shares held in participants’ accounts to make loan payments might be inconsistent with the service’s interpretation of code sec_404 from be rough plan x was able to make the required loan payments plan x has never used dividends on shares held in participants’ accounts to make loan payments because company a paid higher dividends than was planned however due to decreased demand for company a’s products company a began to reduce the number of its employees resulting in a corresponding decrease in eligible compensation also dividends have not to date been paid for and i forithrough largest amount it could without exceeding the limits of code sec_415 and sec_404 but such contributions were less than of the required loan payment default did not occur because of substantial extension in on shares held in the plan x suspense_account prepayments on the loan in earlier years and because company a granted an these prepayments were funded by employer contributions and by dividends company a contributed very nearly the company a does not anticipate that its board_of directors will declare any substantial dividend because company a is not performing well enough company a’s contribution to plan x plus the dividends on shares held in the plan x suspense_account are no longer sufficient to make the required_payments on the loan and this situation is not expected to change in the future company a has concluded that the only feasible and cost effective way to avoid defaulting on the loan in jis to terminate plan x which it proposes to do company a proposes to redeem a sufficient number of the unallocated shares in plan x’s suspense_account based on the fair_market_value of the shares redeemed to repay the outstanding principal balance of the loan plus accrued interest the fair_market_value of the shares to be redeemed will be determined by an independent_appraiser as of the date of redemption unallocated shares will not be sufficient to repay the loan in which event company a will forgive the loan balance if said value of the unallocated shares exceeds the loan balance the excess will be allocated among participants’ accounts as earnings the redeemed shares will be retired company a expects that the total value of the as a result of the proposed transaction participants’ accounts will increase in value because the redemption of the unallocated shares will not reduce the value of company a thus the same total value will be divided by a lesser number of shares that is the original number less the redeemed shares the higher per share value will increase the value of the participants’ accounts page your authorized representative has requested rulings to the effect of the following on your behalf the repayment of the loan in connection with the termination of plan x with the proceeds of the redemption of the unallocated stock held in the plan x suspense_account will not cause the loan or any part thereof to fail to meet the exemption requirements under code sec_4975 and its related regulations neither the forgiveness of the balance of the loan by company a nor the resulting increase in the value of the allocated shares will constitute annual_additions to participants’ accounts for purposes of code sec_415 with respect to your first requested ruling an esop is designed to invest primarily in employer_securities an esop must be part of a stock_bonus_plan qualified under sec_401 a of the code or a stock_bonus_plan in a money purchase plan qualified under sec_401 a leveraged_esop borrows funds which it uses to purchase employer_securities usually from the employer the esop_loan or loans are generally from the employer or guaranteed by the employer the acquired employer_securities are held in a suspense_account pending allocation to the accounts of plan participants in accordance with the rules of sec_54_4975-11 of the excise_tax regulations regulations an esop generally uses employer contributions to the plan and cash dividends on employer stock held by the plan to repay the exempt loan sec_54_4975-7 of the regulations provides that all of under sec_4975 of the code an esop_loan generally is exempt from the prohibitions provided in sec_4975 and the excise_taxes imposed by sec_4975 and b only if the loan is primarily for the benefit of the participants and beneficiaries of the plan primary benefit requirement the surrounding facts and circumstances will be considered in determining whether an esop_loan satisfies the primary benefit requirement among the relevant facts and circumstances are whether the transaction promotes employee ownership of the employer stock whether contributions to the esop are recurring and substantial and the extent to which the method of repayment of the loan benefits the employees all aspects of the loan transaction including the method of repayment will be scrutinized to determine whether the primary benefit requirement is satisfied sec_54_4975-7 of the regulations indicates that the employer has the primary responsibility for the repayment of an exempt loan through contributions to the plan sec_54_4975-7 provides for the repayment of an exempt loan in the event of default however the exemption provided by sec_4975 of the code and described in the associated regulations will not fail to be met merely because the trustee sells the unallocated suspense_account shares and uses the proceeds to repay the exempt loan if the transaction satisfies the primary benefit requirement based on all the surrounding facts and circumstances sec_54_4975-7 of the regulations also provides that the only assets of an esop that may be given as collateral on an exempt loan are qualifying employer_securities of two classes those acquired with the proceeds of the loan and those that were used as collateral on a prior exempt page loan repaid with the proceeds of the current exempt loan no person entitled to payment under the exempt loan shall have any right to assets of the esop other than i collateral given for the loan ii contributions other than contributions of employer_securities that are made under an esop to meet its obligations under the loan and iii earnings attributable to such collateral and the investment of such contributions sec_54_4975-7 of the regulations does not establish a per se prohibition against exempt loan prepayment by an esop however as noted above if an esop contemplates prepaying an exempt loan the funds used to prepay the loan must be limited as described in this regulation in this case company a has made consistent and substantial contributions to plan x since its inception in approximately one-third of the shares purchased with the proceeds of the loan have been allocated to participants’ accounts at the time plan x was established and at the time the subsequent loan occurred company a intended that plan x would continue until the loan was repaid and all shares of common_stock held in the suspense_account were allocated to participants however company a decided to terminate plan x for financial and business reasons the decreased demand for company a’s products has caused company a to reduce the number of its employees the corresponding decrease in eligible compensation together with the limits of code sec_404 and sec_415 will prevent company a from making contributions to plan x in an amount sufficient for plan x to make payments on the loan company a intends to terminate plan x to prevent plan x from defaulting on the loan company a also intends to redeem a sufficient number of the unallocated shares in plan x’s suspense_account based on the fair_market_value as described above of the shares redeemed to repay the outstanding principal balance of the loan plus accrued interest company a expects that the total value of the unallocated shares will not be sufficient to repay the loan in which event company a will forgive the loan balance accordingly with respect to your first requested ruling we conclude that the repayment of the loan in connection with the termination of plan x with the proceeds of the redemption of the unallocated stock held in the plan x suspense_account will not cause the loan or any part thereof to fail to meet the exemption requirements under code sec_4975 and its related regulations with respect to your second requested ruling sec_415 of the code provides that contributions and other additions under a defined_contribution_plan including an esop with respect to a participant for any taxable_year may not exceed the limits of subsection c sec_415 of the code states that contributions and other additions with respect to a participant exceed the limitation of this subsection if when expressed as an annual_addition to the participant’s account such annual_addition is greater than the lesser_of dollar_figure or of the participant’s_compensation sec_415 generally defines annual_addition as the sum for any year of employer contributions the employee contributions and forfeitures _ sec_1 g of the income_tax regulations sets forth special rules for esops sec_1 g provides in part that for purposes of applying the limitations of sec_415 of the code and sec_1 g of the income_tax regulations to an esop to which an exempt page loan has been made the amount of employer contributions which is considered an annual_addition for the limitation_year is calculated with respect to employer contributions of both principal and interest used to repay the exempt loan for that limitation_year sec_1 b i of the income_tax regulations provides in part that the commissioner may in appropriate cases considering all of the facts and circumstances treat transactions between the plan and the employer as giving rise to annual_additions in the present case company a does not expect that any shares will remain in the suspense_account following the redemption shares will increase because there will be fewer outstanding shares to reflect the value of company a after the redemption under the facts and circumstances described above there will be no annual_additions within the meaning of sec_415 of the code or sec_1 b i of the income_tax regulations the value of participants’ accounts containing company a accordingly we conclude with respect to your second requested ruling that neither the forgiveness of the balance of the loan by company a nor the resulting increase in the value of the allocated shares will constitute annual_additions to participants’ accounts for purposes of code sec_415 this ruling letter is based on the assumption that plan x is qualified under code sec_401 a at all times relevant to the transaction described herein and that it is an esop as described in sec_4975 this ruling letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited by others as precedent the original of this ruling letter has been sent to your authorized representative in accordance with a power_of_attorney on file with this office if you have any questions please contact please refer to se t ep ra t3 sincerely yours ea mey va ty frances v sloan manager employee_plans technical group enclosures notice deleted copy of ruling letter


id office uilc cca_2008121709475841 ----------------------------- number release date from --------------- sent wednesday date am to --------------- cc subject re sec_4 of i'll look at the discussion doesn't apply if intentionally disregard would assert they intentionally disregarded in that situation i guess we -------------------------------------------------------------------------------------------------


internal_revenue_service number release date index numbers ---------------- ------------------------------ ----------------------------- --------------------------- 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-132683-10 date date legend company ---------------------------------------------------------- ---------------- state a date year -------------- ----------------------------------- ---------------- ------- dear -------------- this letter responds to a letter dated date and subsequent correspondence requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_754 of the internal_revenue_code code facts the information submitted states that company is a state limited_liability_company that is treated as a partnership for federal tax purposes a a member of company died on date of year company’s partnership return for year was timely filed but a sec_754 election to adjust the basis of partnership property was inadvertently not filed with the return law and analysis plr-132683-10 sec_754 provides that if a partnership files an election in accordance with the regulations prescribed by the secretary the basis of partnership property is adjusted in the case of a transfer of a partnership_interest in the manner provided in sec_743 such an election shall apply with respect to all distributions of property by the partnership and to all transfers of interests in the partnership during the taxable_year with respect to which the election was filed and all subsequent taxable years sec_1_754-1 of the income_tax regulations provides that an election under sec_754 to adjust the basis of partnership property under sec_734 and sec_743 with respect to a distribution_of_property to a partner or a transfer of an interest in a partnership shall be made in a written_statement filed with the partnership return for the taxable_year during which the distribution or transfer occurs for the election to be valid the return must be filed not later than the time prescribed by sec_1 e including extensions thereof for filing the return for that taxable_year under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result company is granted an extension of time of days from the date of this letter to make an election under sec_754 effective for its year taxable_year and thereafter the election should be made in a written_statement filed with the applicable service_center plr-132683-10 for association with company’s year return a copy of this letter should be attached to the sec_754 election except as specifically set forth above we express or imply no opinion concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion as to whether company is a partnership for federal tax purposes 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 we are sending a copy of this ruling to company’s authorized representatives sincerely associate chief_counsel passthroughs special industries by _____________________________________ mary beth carchia senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


t c memo united_states tax_court miranda e everett petitioner v commissioner of internal revenue respondent docket no filed date larry d harvey for petitioner randall l preheim for respondent memorandum opinion vasquez judge this case is before the court on respondent’s motion for summary_judgment pursuant to rule unless otherwise indicated all rule references are to the tax_court rules_of_practice and procedure and all section references are to the internal_revenue_code in effect for the year in issue after a concession the sole issue for decision is whether petitioner can exclude from income wages earned during from working in antarctica background at the time she filed the petition petitioner resided in broomfield colorado during petitioner performed services at mcmurdo station in ross island antarctica on her federal_income_tax return petitioner excluded wage income earned and received during for services performed in antarctica i summary_judgment discussion rule a provides that either party may move for summary_judgment upon all or any part of the legal issues in controversy full or partial summary_judgment may be granted only if it is demonstrated that no genuine issue exists as to any material fact and that the legal issues presented by the motion may be decided as a matter of law see rule b 98_tc_518 affd 17_f3d_965 7th cir we conclude that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law respondent concedes that no penalty pursuant to sec_6662 is due from petitioner for ii in general sec_61 provides that gross_income means all income from whatever source derived accordingly citizens of the united_states generally are taxed on income earned outside the geographical boundaries of the united_states unless the income is specifically excluded from gross_income 117_tc_95 affd sub nom 68_fedappx_44 9th cir affd sub nom 357_f3d_1108 10th cir exclusions from income are construed narrowly and taxpayers must bring themselves within the clear scope of the exclusion id iii sec_911 in 126_tc_89 473_f3d_790 7th cir arnett ii we addressed the arguments made by the parties herein regarding sec_911 the u s court_of_appeals for the seventh circuit agreed with our analysis of sec_911 and affirmed our conclusion that antarctica is not a foreign_country pursuant to sec_911 and the regulations thereunder arnett v commissioner f 3d pincite we shall not repeat our analysis from arnett i herein we follow our analysis and holding in arnett i and the analysis and holding of the court_of_appeals in arnett ii in 126_tc_89 affd 473_f3d_790 7th cir we concluded our opinion with a continued iv conclusion accordingly for the reasons stated in arnett i arnett ii and herein we conclude that petitioner cannot exclude from gross_income wages earned during from working in antarctica to reflect the foregoing an appropriate order and decision will be entered continued citation of sec_863 suggesting that sec_863 provided an additional reason to rule against the taxpayer id pincite see also sec_863 providing that income earned in antarctica by a u_s_person is sourced in the united_states in arnett v commissioner f 3d pincite the u s court_of_appeals for the seventh circuit addressed sec_863 in greater detail stating at the outset we think that it is important to note that considering antarctica not to be a foreign_country is compatible with the general statutory scheme notably sec_911 is found under subtitle a chapter subchapter_n of the irc which is designated tax based on income from sources within or without the united_states part i of this subchapter entitled source_rules and other general rules relating to foreign_income deems any activity in antarctica to be space_or_ocean_activity in turn the united_states is designated the source country of income from such activity when earned by a citizen_of_the_united_states sec_863 although this provision does not provide a definitive answer as to whether antarctica is a foreign_country it supports the conclusion that sec_911 is not intended to apply to income earned for services provided in antarctica we take this opportunity to state our agreement with the court of appeals’ conclusion set forth above see also 450_us_1


internal_revenue_service department of the treasury number release date index number 2207a washington dc person to contact telephone number refer reply to cc psi plr-109472-00 date date legend a grantor spouse b c_corporation a d e f children state dear sir in a letter dated you requested rulings under sec_2207a sec_2519 and sec_2702 of the internal_revenue_code this letter responds to your request the information submitted and the representations made are summarized as follows on a grantor executed an amended and restated trust the trust article ii b of the trust provides that at all times during grantor’s life whether or not the trustee is exercising investment responsibilities the trustee at least quarterly is to pay to grantor or apply for grantor’s benefit so much of the net_income and principal of the trust property as grantor requests at any time and in the absence of such request so much as the trustee in its sole discretion may decide to pay or apply in the event of grantor’s incapacity or unavailability as determined by the trustee in its sole discretion the trustee may from time to time pay to or apply for the benefit of grantor or spouse or any one or more of grantor’s issue so much of the income and principal as the trustee in its sole discretion deems advisable the trustee in its sole discretion may also make gifts of trust principal outright or in trust in order to continue any gift program previously commenced by grantor or make use of available federal gift_tax annual exclusions any income not expended under the terms of this article is to be accumulated and added to principal annually article iv b of the trust provides that on grantor’s death the trustee is to divide the balance of the trust property after payment of taxes funeral_expenses and expenses of administration as of the date of grantor’s death and according to the fair_market_value of the assets constituting the balance of the trust property at the time or times of allocation into two separate trusts one named the marital election trust and one named the non-exempt marital trust the trustee is to allocate to the marital election trust a fraction equal to the smaller of a one-half of the remaining trust property or b a fraction the numerator of which is to be an amount equal to the generation-skipping_transfer gst tax exemption allowed to grantor at the time of grantor’s death under sec_2631 of the internal_revenue_code_of_1986 after taking into account any other transfers during grantor’s lifetime or occurring at grantor’s death which will result in a portion of grantor’s gst tax exemption being allocated to those other transfers and the denominator of which is to be an amount equal to the value of the balance of the trust property as finally determined for federal estate_tax purposes the remainder of the trust property is to be allocated to the non-exempt marital trust the trustee is to hold manage invest and distribute the non-exempt marital trust as provided in paragraph c of article iv article iv c of the trust provides that the trustee is to pay to or apply for the benefit of spouse during spouse’s lifetime the entire net_income from the non-exempt marital trust in installments at least quarter-annually and may in its discretion pay to spouse or apply for spouse’s benefit amounts of the principal of the non-exempt marital trust provided however that if only a portion of the non-exempt marital trust has qualified for the marital_deduction in the federal estate_tax proceeding relating to grantor’s estate principal distributions are to be made first from that portion of the non-exempt marital trust article iv c of the trust provides that if at any time spouse is taxed with all or any part of the income of the non-exempt marital trust whether or not spouse actually receives the income the trustee may on spouse’s written request distribute to spouse principal in an amount sufficient in the trustee’s discretion to pay any federal or state income taxes directly attributable to the income article iv c of the trust provides that in addition to the income and discretionary payments of principal from the non-exempt marital trust the trustee is to pay to spouse during spouse’s lifetime from the principal of the non-exempt marital trust on spouse’s written request during the last month of each fiscal_year of the non- exempt marital trust an amount not to exceed during the fiscal_year the greater of b or c percent of the total value of the principal of the non-exempt marital trust on the last day of the fiscal_year without reduction for the principal payment for the fiscal_year this right to withdrawal is noncumulative so if spouse does not withdraw during the fiscal_year the full amount to which spouse is entitled spouse’s right to withdraw the amount not withdrawn is to lapse at the end of that fiscal_year article iv c of the trust provides that on the death of spouse the trustee is to pay on the request of spouse’s personal representative the amount of any incremental death taxes attributable to the inclusion of any of the marital trusts in spouse’s taxable_estate and is to pay over convey and distribute the entire remaining principal of the non-exempt marital trust to or in trust for the appointee or appointees from among grantor’s issue and the spouses of grantor’s issue in the manner and in the proportions as spouse may appoint in and by the last will of spouse making specific reference to this power_of_appointment in default of the exercise of the power_of_appointment by spouse or insofar as any part of the non-exempt marital trust is not effectively appointed then on spouse’s death or at the death of grantor if spouse does not survive grantor the trustee is to divide the balance of each trust into a sufficient number of equal shares to create one equal share for each child of grantor who is then living and one equal share for the then living issue of each child of grantor who is then deceased in determining the shares the trustee may allocate cash or other assets to the shares in such manner as it deems appropriate but in allocating assets other than cash it is to use values determined as of the date of the allocation or distribution all shares of corporation are to be allocated to the share created for a if a is then living up to the full amount of the share each share is to be distributed by the trustee as follows a a share of the non-exempt marital trust created for a child of grantor is to be distributed to that child absolutely and free of trusts b a share created for the issue of a deceased child of grantor is to be paid over to the then living issue of the deceased child per stirpes subject_to the provisions made for trusts for persons under age d grantor died on e on grantor’s estate_tax_return grantor’s estate elected to treat the non-exempt marital trust as qualified_terminable_interest_property qtip as provided in sec_2056 the trustee of the trust proposes to sever the non-exempt marital trust into two separate trusts trust a and trust b_trust a will contain sufficient assets to make gross gifts in the aggregate amount of f to children and pay all of the gift_taxes attributable to those gifts trust b would contain the remaining balance of the assets in the non-exempt marital trust each of trust a and trust b will contain a strictly proportional amount of each asset contained in the non-exempt marital trust both trust a and trust b will be held under the same terms and conditions as the non-exempt marital trust it is represented that the severance is authorized under the laws of state under state law a separate trust created by severance must be treated as a separate identical trust for all purposes from the effective date of the severance after the severance spouse will make a nonqualified disclaimer of all of spouse’s interest in trust a you have requested the following rulings if spouse renounces spouse’s interest in the property in trust a spouse will not be deemed to have made a gift of property in trust b under sec_2519 if spouse renounces spouse’s interest in the property in trust a the value of spouse’s income_interest in trust b will not be valued at zero under sec_2702 if spouse renounces spouse’s interest in the property in trust a and the renunciation is conditioned on spouse’s children paying all gift_taxes attributable to the transfer the amount_of_the_gift will be reduced by the gift_taxes paid_by the children sec_2501 imposes a tax computed as provided in sec_2502 for each calendar_year on the transfer of property by gift during the calendar_year by an individual resident or nonresident sec_2502 provides that the tax imposed by sec_2501 shall be paid_by the donor sec_2511 provides that the tax imposed by sec_2501 shall apply whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_2512 provides that where property is transferred for less than adequate_and_full_consideration in money_or_money's_worth the amount by which the value of the property exceeded the value of the consideration is deemed a gift and shall be included in computing the amount of gifts made during the calendar_year sec_2519 a provides that any disposition of all or part of a qualifying_income_interest_for_life in any property to which this section applies shall be treated as a transfer of all interests in the property other than the qualifying_income interest sec_2519 b provides that sec_2519 applies to any property if a deduction was allowed with respect to the transfer of such property to the donor- under sec_2056 by reason of subsection b thereof or under sec_2523 by reason of subsection f thereof for gift_tax purposes sec_2207a b provides that if for any calendar_year tax is paid under chapter with respect to any person by reason of property treated as transferred by such person under sec_2519 such person shall be entitled to recover from the person receiving the property the amount by which- the total_tax for such year under chapter exceeds the total_tax which would have been payable under such chapter for such year if the value of such property had not been taken into account for purposes of chapter sec_2702 provides special valuation rules in the case of transfers of interests in trusts to or for the benefit of a member of the transferor’s family sec_2702 provides that solely for purposes of determining whether a transfer of an interest in trust to or for the benefit of a member_of_the_transferor's_family is a gift and the value of such transfer the value of any interest in such trust retained by the transferor or any applicable_family_member shall be determined as provided in sec_2702 sec_2702 provides that the value of any retained_interest that is not a qualified_interest shall be treated as being zero the value of any retained_interest that is a qualified_interest is determined under sec_7520 sec_25_2519-1 of the gift_tax regulations provides that if a donee spouse makes a disposition of all or part of a qualifying_income_interest_for_life in any property for which a deduction was allowed under sec_2056 or sec_2523 for the transfer creating the qualifying interest the donee spouse is treated for purposes of chapter sec_11 and sec_12 of subtitle b of the internal_revenue_code as transferring all interests in property other than the qualifying_income interest for example if the donee spouse makes a disposition of part of a qualifying_income_interest_for_life in trust corpus the spouse is treated under sec_2519 as making a transfer subject_to chapter sec_11 and sec_12 of the entire trust other than the qualifying_income_interest_for_life therefore the donee spouse is treated as making a gift under sec_2519 of the entire trust less the qualifying_income interest and is treated for purposes of sec_2036 as having transferred the entire trust corpus including that portion of the trust corpus from which the retained income_interest is payable a transfer of all or a portion of the income_interest of the spouse is a transfer by the spouse under sec_2511 sec_25_2519-1 provides that the amount treated as a transfer under sec_2519 upon a disposition of all or part of a qualifying_income_interest_for_life in qtip property is equal to the fair_market_value of the entire property subject_to the qualifying_income interest determined on the date of the disposition including any accumulated income and not reduced by any amount excluded from total gifts under sec_2503 with respect to the transfer creating the interest less the value of the qualifying_income interest in the property on the date of the disposition the gift_tax consequences of the disposition of the qualifying_income interest are determined separately under sec_25_2511-2 sec_25_2511-2 provides that the gift_tax is not imposed upon the receipt of the property by the donee nor is it necessarily determined by the measure of enrichment resulting to the donee from the transferor nor is it conditioned upon the ability to identify the donee at the time of the transfer on the contrary the tax is a primary and personal liability of the donor is an excise upon the donor’s act of making the transfer is measured by the value of the property passing from the donor and attaches regardless of the fact that the identity of the donee may not then be known or ascertainable revrul_75_72 1975_1_cb_310 holds that gift_tax imposed on a transfer that is paid_by the donee may be deducted from the value of the transferred property in determining the amount_of_the_gift if it is established that the payment of the tax by the donee or from the property itself is a condition of the transfer if at the time of the transfer the gift is made subject_to a condition that the gift_tax is to be paid_by the donee or out of the transferred property then the donor receives consideration for the transfer in the amount_of_the_gift tax to be paid_by the donee thus under sec_2512 the value_of_the_gift is measured by the fair_market_value of the property passing from the donor minus the amount_of_the_gift tax to be paid_by the donee revrul_81_223 1981_2_cb_189 holds that in determining the amount_of_the_gift the tax_liability assumed by the donee may be deducted from the value of the transferred property if the payment of the tax by the donee is a condition of the transfer although sec_2502 provides that the tax on the gift is the liability of the donor in revrul_75_72 and revrul_81_223 the burden of the tax was shifted to the donees by agreement the amount_of_the_gift on which the gift_tax was computed was reduced by the amount of gift_tax paid_by the donee as discussed above with respect to the gift_tax imposed as a result of a transfer under sec_2519 sec_2207a b statutorily shifts the burden but not the liability for paying the gift_tax to the donee in reimbursing the donor for the gift_tax paid pursuant to the statute the donee provides consideration for the gift the donee's payment inures to the benefit of the donor because it reimburses the donor for gift_tax that the donor was liable for and would otherwise be required to pay out of the donor’s own funds see revrul_75_72 accordingly net_gift treatment of a transfer under sec_2519 is implicit under sec_2207a b based on the information submitted and the representations made we conclude that if spouse renounces spouse’s interest in trust a after the non-exempt marital trust is severed into trust a and trust b then spouse will not be deemed to have made a gift of the property in trust b under sec_2519 the value of spouse’s income_interest in trust b will not be valued at zero under sec_2702 and provided that spouse’s renunciation is conditioned upon spouse’s children paying all gift_taxes attributable to the transfer the amount of spouse’s gift with respect to the renunciation of spouse’s interest in trust a will be reduced by the amount_of_such_gift taxes paid_by the children except as specifically ruled above we express or imply no opinion concerning the federal tax consequences of this transaction under the cited provisions or any other provision of the code this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely yours frances d schafer counsel to the associate chief_counsel passthroughs and special industries


department of the treasury internal_revenue_service te_ge eo examinations commerce street ms dal dallas tx tax_exempt_and_government_entities_division number release date uil legend org organization name org address date xx date address address taxpayer_identification_number person to contact id number c numbers numbers ontact telephone fax internal_revenue_code sec_501 dear last date for filing a petition with the tax_court august 20xx this is a final adverse determination as to your exempt status under sec_501 of the internal_revenue_code our adverse determination was made for the following reasons failure to provide records of the organization and failure to meet the reporting requirements under sec_6001 and sec_6033 of the internal_revenue_code exemption from income_tax is a matter of legislative grace and taxpayers have the burden of establishing their entitlement to exemptions sec_6033 requires organizations exempt from tax to keep such records and render such statements as are required by such rules and regulations as the secretary may prescribe sec_1_6033-2 h requires organizations exempt from tax to submit such additional information as may be required by the internal_revenue_service for the purpose of inquiring into the organization’s exempt status despite numerous requests to you to provide information to conduct an examination of your form_990 for the year ended 20xx and 20xx no requested information has been provided to us based on the above we are revoking your organization's exemption from federal_income_tax under sec_501 of the internal_revenue_code effective july 20xx you are required to file form_1120 u s_corporation income_tax return these returns should be filed with the appropriate service_center for the year ending june 20xx and all years thereafter processing of income_tax returns and assessment of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the united_states tax_court the united_states claim court or the district_court of the united_states for the district of columbia before the day after the date this determination was mailed to you contact the clerk of the appropriate court for the rules for initiating suits for declaratory_judgment you also have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or if you prefer you may contact the local taxpayer_advocate at taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations nor extend the time fixed by law that you have to file the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling a petition in the united_states tax_court we will notify the appropriate state officials of this action as required by sec_6104 of the internal_revenue_code if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours marsha a ramirez director eo examinations tax_exempt_and_government_entities_division org address department of the treasury internal_revenue_service north eighth street room box richmond virginia taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter catalog number 34809f if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and thank you for your cooperation enclosures publication publication report of examination sincerely marsha ramirez director eo examinations letter catalog number 34809f form 886-a explanation of items schedule or exhibit no year ended 20xx06 20xx06 name of taxpayer org summary this is a final adverse determination as to your exempt status under sec_501 of the internal_revenue_code our adverse determination was made for the following reasons failure to provide records of the organization and failure to meet the reporting requirements under sec_6001 and sec_6033 of the internal_revenue_code exemption from income_tax is a matter of legislative grace and taxpayers have the burden of establishing their entitlement to exemption sec_6033 requires organizations exempt from tax to keep such records and render such statements as are required by such rules and regulations as the secretary may prescribe sec_1_6033-2 h requires organizations exempt from tax to submit such additional information as may be required by the internal_revenue_service for the purpose of inquiring into the organization’s exempt status despite numerous requests to you to provide information to conduct an examination of your form_990 for the year ended 20xx and 20xx no requested information has been provided to us based upon the above we are revoking your organization's exemption from federal_income_tax under sec_501 of the internal_revenue_code effective july 20xx emphasis added department of the treasury - internal_revenue_service form 886-a form 886-a explanation of items schedule no or exhibit name of taxpayer 20xx06 20xx06 org year period ended legend org organization name xx date issue whether org qualifies for exemption under sec_501 of the internal_revenue_code facts exhibit a provides copies of the internal_revenue_service correspondence requesting that org file the form_990 for the tax periods ending june 20xx and june 20xx or to respond to the internal_revenue_service correspondence as to why they are not filing law sec_6001 of the code provides that every person liable for any_tax imposed by the code or for the collection thereof shall keep adequate_records as the secretary_of_the_treasury or_his_delegate may from time to time prescribe sec_6033 of the code provides except as provided in sec_6033 every organization exempt from tax under sec_501 shall file an annual return stating specifically the items of gross_income receipts and disbursements and such other information for the purposes of carrying out the internal revenue laws as the secretary may by forms or regulations prescribe and keep such records render under oath such statements make such other returns and comply with such rules and regulations as the secretary may from time to time prescribe sec_1_6001-1 of the regulations in conjunction with sec_1_6001-1 provides that every organization exempt from tax under sec_501 of the code and subject_to the tax imposed by sec_511 on its unrelated_business_income must keep such permanent books or accounts or records including inventories as are sufficient to establish the amount of gross_income deduction credits or other matters required to be shown by such person in any return of such tax such organization shall also keep such books_and_records as are required to substantiate the information required by sec_6033 sec_1_6001-1 of the regulations states that the books_or_records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law sec_1_6033-1 of the regulations provides that every organization which has established its right to exemption from tax whether or not it is required to file an annual return of information shall submit such additional information as may be required by the district_director for the purpose of enabling him to inquire further into its exempt status department of the treasury - internal_revenue_service form 886-a page of form 886-a name of taxpayer schedule no or exhibit explanation of items year period ended 20xx06 20xxk06 org and to administer the provisions of subchapter_f sec_501 and the following chapter of the code and sec_6033 revrul_59_95 1959_1_cb_627 concerns an exempt_organization that was requested to produce a financial statement and statement of its operations for a certain year however its records were so incomplete that the organization was unable to furnish such statements the service held that the failure or inability to file the required information_return or otherwise to comply with the provisions of sec_6033 and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not - established that it is observing the conditions required for the continuation of exempt status in accordance with the above cited provisions of the code and regulations under sec_6001 and sec_6033 organizations recognized as exempt from federal_income_tax must meet certain reporting requirements these requirements relate to the filing of a complete and accurate annual information and other required federal tax forms and the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated_business_income_tax government's position we propose to revoke the organization’s tax exemption under sec_501 taxpayer's position unknown conclusion it is the internal revenue service's position that org failed to meet the reporting requirements under sec_6001 and sec_6033 to be recognized as exempt from federal_income_tax under c of the internal_revenue_code accordingly the organization's exempt status is revoked effective may 20xx the organization will not continue to qualify for tax exemption under sec_501 as of may 20xx form_1120 returns should be filed for the tax periods after may 20xx department of the treasury - internal_revenue_service form 886-a page of