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 fip b03 - plr-102510-07 date date legend trust company operating partnership hotel state x state y date date date date a b ------------------------------------------------------- ------------------------------------------------------------------------ -------------------------------- ------------------------------------------------------------------------ ------------- ------------- -------------------------- --------------------- ------------------ ----------------------- ----- --- plr-102510-07 dear ------------------- this responds to a letter dated date submitted on behalf of trust and company requesting an extension of time under sec_301_9100-1 of the procedure and administration regulations to make an election under sec_856 of the internal_revenue_code to treat company as a taxable_reit_subsidiary of trust facts trust is a state x limited_liability_company that elected to be treated for federal tax purposes as real_estate_investment_trust reit beginning with the tax_year that ended on date its primary business is the acquisition ownership and leasing of office and other properties including the hotel trust conducts substantially_all of its operations through operating partnership of which trust is the limited_partner and owner of substantially_all of the equity interests company is a state y corporation that was formed on date company is owned a percent by operating partnership trust owns more than b percent of the value profits and capital interests in operating partnership a state x limited_partnership on date operating partnership purchased the hotel through a disregarded trust and company represent that it had always been the intention of trust and entity trust represents that the hotel is a qualified_lodging_facility within the meaning of sec_856 and sec_856 of the code trust then leased the hotel to company beginning on date as the lessee of the hotel company represents that to operate and manage the hotel it has engaged an eligible_independent_contractor within the meaning of sec_856 company to operate in a manner consistent with trust maintaining reit status and consequently make an election to treat company as a taxable_reit_subsidiary trs of trust moreover trust and company represent that they intended to make a timely election to treat company as a trs of trust on or before date however due to a mix-up in communication between trust and its outside tax advisor trust and company inadvertently failed to make the necessary election on a timely basis upon discovering the error several months later during an internal review of trust’s tax filings trust and company submitted a request for a private_letter_ruling seeking an extension of time under sec_301_9100-1 of the regulations to make an election under sec_856 to treat company as a trs of trust trust and company make the following additional representations the request for relief was filed by trust and company before the failure to make the regulatory election was discovered by the service granting the relief will not result in trust and or company having a lower tax_liability in the aggregate for all years to which the regulatory election applies than plr-102510-07 that taxpayer would have had if the election had been timely made taking into account the time_value_of_money trust and company did not seek to alter a return position for which an accuracy-related_penalty has been or could have been imposed under sec_6662 of the code at the time trust and company requested relief and the new position requires or permits a regulatory election for which relief is requested being fully informed of the required regulatory election and related tax consequences trust and company did not choose to not file the election law and analysis sec_856 of the code provides that a reit and a corporation other than a reit may jointly elect to treat such corporation as a taxable_reit_subsidiary to be eligible for treatment as a taxable_reit_subsidiary sec_856 provides that the reit must directly or indirectly own stock in the corporation and the reit and the corporation must jointly elect such treatment the election is irrevocable once made unless both the reit and the subsidiary consent to its revocation in addition sec_856 specifically provides that the election and any revocation thereof may be made without the consent of the secretary in announcement i r b the service announced the availability of new form_8875 taxable_reit_subsidiary election according to the announcement this form is to be used for tax years beginning after for eligible entities to elect treatment as a taxable_reit_subsidiary the instructions to form_8875 provide that the subsidiary and the reit can make the election at any time during the tax_year however the effective date of the election depends upon when the form_8875 is filed the instructions further provide that the effective date on the form cannot be more than months and days prior to the date of filing the election or months after the date of filing the election if no date is specified on the form the election is effective on the date the form is filed with the service sec_301_9100-1 of the regulations provides that the commissioner has discretion to grant a reasonable extension of time to make a regulatory election defined in sec_301_9100-1 as an election whose due_date is prescribed by regulations or by a revenue_ruling a revenue_procedure a notice or an announcement published in the internal_revenue_bulletin 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 internal_revenue_code except subtitles e g h and i sec_301_9100-3 through c i sets forth rules that the internal_revenue_service generally will use to determine whether under the particular facts and circumstances of each situation the commissioner will grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that subject_to paragraphs b i through iii of sec_301_9100-3 plr-102510-07 when a taxpayer applies for relief under this section before the failure to make the regulatory election is discovered by the service the taxpayer will be deemed to have acted reasonably and in good_faith and sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all years to which the regulatory election applies than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money conclusion based on the information submitted and representations made we conclude that trust and company have satisfied the requirements for granting a reasonable extension of time to elect under sec_856 to treat company as a taxable_reit_subsidiary of trust accordingly trust and company are granted a period of time not to exceed calendar days from the date of this letter to file a form_8875 to treat company as a trs of trust as of date this ruling is limited to the timeliness of the filing of the form_8875 this ruling’s application is limited to the facts representations code sections and regulations cited herein no opinion is expressed with regard to whether trust otherwise qualifies as a reit under subchapter_m of the code no opinion is expressed with regard to whether the tax_liability of either trust or company is not lower in the aggregate for all years to which the election applies than such tax_liability would have been if the election had been timely made taking into account the time_value_of_money upon audit of the federal_income_tax returns involved the director’s office will determine such tax_liability for the years involved if the director’s office determines that such tax_liability is lower that office will determine the federal_income_tax effect this ruling is directed only to the taxpayer who requested it sec_6110 plr-102510-07 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 sincerely alice m bennett chief branch office of associate chief_counsel financial institutions products enclosures copy of this letter copy for sec_6110 purposes cc


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 b04 plr-116847-14 date october legend -------------------------------- -------------------------------------------------------- --------------------- --------------------------------------------------------- ------------------------------------ --------------------------------------------------------------------- grantor spouse grantor trust trust trust -------------------------------------------------------------- date date date date date date date date child taxpayers 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------------------------------------------------------------------------------------------ court ----------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -- ----------------------------------------------------------------------------------- plr-116847-14 -------------------------------------------- ---------------------- ----------------------------------------------------------------------------- county farm agreement of sale ------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- -------------------------------------------------- a v w x y z limited_partnership trustee trustee year -------------------- ---------- ---------- ----------------- ------------ ------------ ------------ ------------------------ -------------------------------- ------- dear ------------------------- this letter responds to your authorized representative’s letter of date requesting rulings on the gift estate and generation-skipping_transfer gst tax consequences of a proposed transaction the facts and representations submitted are summarized as follows on date grantor established an irrevocable_trust trust for the benefit of himself spouse and his lineal_descendants grantor died on date and spouse died on date the corporate trustee of trust is trustee on date grantor established a revocable_trust trust for the benefit of himself on date grantor amended trust so that income was paid in equal shares to his daughter grantor 1’s spouse spouse and his son child for life in addition on date grantor released his right to further amend or revoke trust on date by court order trust as amended was divided into two irrevocable equal trusts one for the benefit of spouse and her descendants trust and one for the benefit of child and his descendants grantor died on date the corporate trustee of trust is trustee trust and trust and the trust beneficiaries of those trusts taxpayers are the parties requesting this ruling currently the beneficiaries of trust and trust are essentially the same trust provides that the trustees are to pay the net_income for the benefit of grantor 1’s issue share and share alike per stirpes trust terminates twenty-one years after the death of the survivor of grantor 1’s three children trust provides that the trustees are to pay the net_income to spouse’s issue per stirpes trust terminates twenty-one plr-116847-14 years after the death of the last surviving lineal descendant of grantor living at the time of grantor 2’s death trust and trust together own farm in county trust owns y acres and trust owns z acres the acreage in farm owned by trust and trust is generally contiguous however the acreage owned by each trust was acquired at different times so that some of the parcels owned by each trust are land-locked and access to these parcels from a public road is only possible via easements over acreage owned by the other trust the trustees of both trusts have decided it is in the best interest of trust and trust to sell the property in a coordinated sale the real_estate owned by each trust is subject_to various zoning and land use restrictions and is not currently serviced by public water and sewer the property is currently zoned for agricultural and residential use and for public land use farm has been on the market for several years since year the purchaser is limited_partnership which is owned by a who is a lineal descendant of both grantor and grantor and is the trustee of a_trust that is a current beneficiary of trust and a contingent beneficiary of trust a is a licensed real_estate broker and is a developer of residential real_estate in the area where farm is located the agreement of sale was negotiated by trustee of trust and trustee of trust with some input from the beneficiaries the trusts and a the purchaser were represented by separate counsel it is represented that the sale price is dollar_figurex which is consistent with two independent appraisals and recent land sales in the area upon completion of all closings trust will receive w percent of the purchase_price and trust will receive v percent of the purchase_price the sellers’ obligations are conditioned on trust and trust receiving approval of the sale from court the beneficiaries of trust and trust performing certain conditions in the event trust terminates prior to the closing of the sale the beneficiaries of trust and trust approving and ratifying the agreement of sale and the taxpayers receiving a favorable private_letter_ruling trust will terminate on date and trust will terminate at a much later date yet to be determined trust and trust were irrevocable prior to date it is represented that no additions have been made to trust or trust after date you have requested the following rulings the execution and or the carrying out of the terms of the agreement of sale and the exercise of any right obligation or remedy hereunder will not constitute an addition to either trust or trust or cause trust or trust to lose its gst tax exempt status under b a of the tax_reform_act_of_1986 or under plr-116847-14 sec_26_2601-1 of the generation-skipping_transfer_tax regulations and distributions from trust and trust will not be subject_to gst tax under sec_2601 of the internal_revenue_code provided that no additions actual or constructive are otherwise made to trust or trust the entering into the agreement of sale and the carrying out of the terms thereof will not cause any beneficiary of either trust or trust to make or be deemed to have made a taxable gift to any other beneficiary or to a the execution and or the carrying out of the terms of the agreement of sale will not cause any beneficiary to be required to include in his or her taxable_estate trust assets owned by trust or trust unless such assets have been distributed to such person prior to his or her death ruling sec_2601 imposes a tax on each generation skipping transfer under a of the tax_reform_act_of_1986 act the gst tax is generally applicable to generation-skipping transfers made after date however under b a of the act and sec_26_2601-1 the gst tax does not apply to a transfer from a_trust if the trust was irrevocable on date and no addition actual or constructive was made to the trust after that date sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax under sec_26_2601-1 or 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 sec_26_2601-1 b or c of this section by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter 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 plr-116847-14 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 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 trustees will seek court approval of the sale of farm trustees will join with all living beneficiaries of trust and trust in the proposed court proceeding the agreement of sale will only be binding on trust and trust if the trusts receive approval from court as part of the proceedings the trustees will petition the court to appoint a guardian and trustee ad litem to represent the interests of minor unborn and unascertained descendants of grantor and grantor in addition the agreement of sale is binding only if trust and trust receive from all beneficiaries of trust and trust ratification and approval of the agreement of sale as part of the court approval process court must determine that the agreement of sale is fair and reasonable which determination includes the determination that the price reflects a fair_market_value and that the other terms of the sale are reasonable in this case trust and trust were irrevocable prior to date therefore trust and trust are currently exempt from gst tax the agreement of sale and sale of farm is binding on trust and trust only if court approves the sale the execution and or the carrying out of the terms of the agreement of sale and the sale of farm are administrative in nature and will not shift a beneficial_interest in trust or 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 entering into the agreement of sale or the sale of farm further execution of the agreement of sale and the sale of farm does not extend the time for vesting of any beneficial_interest in trust or trust beyond the period provided for in the original trusts plr-116847-14 based on the facts submitted and the representations made we conclude that the execution and or the carrying out of the terms of the agreement of sale and the exercise of any right obligation or remedy thereunder will not constitute an addition to either trust or trust or cause trust or trust to lose its gst tax exempt status under b a of the tax_reform_act_of_1986 or under sec_26_2601-1 and distributions from trust and trust will not be subject_to gst tax under sec_2601 provided that no additions actual or constructive are otherwise made to trust or trust ruling sec_2501 imposes a tax for each calendar_year on the transfer of property by gift by an individual sec_2511 provides that the tax imposed by sec_2501 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 sec_2512 provides that where property is transferred for less than adequate_and_full_consideration in money or money’s worth then the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift and shall be included in computing the amount of the gifts made during the calendar_year sec_25_2512-8 of the gift_tax regulations provides that transfers reached by the gift_tax are not confined to those only which being without a valuable consideration accord with the common_law concept of gifts but embrace as well sales exchanges and other dispositions of property for a consideration to the extent that the value of the property transferred by the donor exceeds the value in money_or_money's_worth of the consideration given therefor however a sale exchange or other transfer of property made in the ordinary course of business a transaction which is bona_fide at arm's length and free from any donative_intent will be considered as made for an adequate_consideration in money_or_money's_worth trust and propose to sell acreage in farm it is represented that the trustees have obtained two independent appraisals on the value of farm and that the sales_price is consistent with the appraisals and other sales of land in the area the agreement of sale has been negotiated at arm’s length by the corporate trustees of trust and trust the beneficiaries of both trusts must consent to the sale the trusts and a the purchaser were represented by separate counsel to secure approval of court the trustees will have to demonstrate that the agreement of sale is fair reasonable and plr-116847-14 that the terms are arm’s length the trustees have a fiduciary duty to act in the best interests of all of the beneficiaries based on the facts submitted and the representations made and provided court approves the agreement of sale and finds the agreement of sale is fair reasonable and that the terms are arm’s length we conclude that the entering into the agreement of sale and the carrying out of the terms thereof will not cause any beneficiary of either trust or trust to make or be deemed to have made a taxable gift to any other beneficiary or to a ruling sec_2033 provides that the value of the gross_estate includes the value of all property to the extent of the interest therein of the decedent at the time of his death sec_2035 provides that if the decedent transferred by trust or otherwise an interest in property or relinquished a power with respect to any property during the 3-year period ending on the date of the decedent's death and the value of the property or interest therein would have been included in the gross_estate under sec_2036 sec_2037 sec_2038 or sec_2042 if the transferred interest or relinquished power had been retained by the decedent on the date of death the value of the gross_estate shall include the value of any property or interest therein that would have been so included sec_2036 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_consideration in money_or_money's_worth by trust or otherwise under which the decedent has retained for his life or for any period not ascertainable without reference to the decedent's death or for any period which does not in fact end before the decedent's death - the possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom sec_2037 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise if the possession or enjoyment thereof can through ownership of such interest be obtained only by surviving the decedent and the decedent has retained a reversionary_interest in the property and the value of the reversionary_interest immediately before the death of the decedent exceed sec_5 percent of the value of the property sec_2038 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at plr-116847-14 any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise where the enjoyment thereof was subject at the date of the decedent's death to any change through the exercise of a power in whatever capacity exercisable by the decedent alone or by the decedent in conjunction with any other person without regard to when or from what source the decedent acquired such power to alter amend revoke or terminate or where any such power is relinquished during the 3-year period ending on the date of the decedent's death in order for sec_2035 through to apply a decedent must have made a transfer of property or any interest therein except in the case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth under which the decedent retained an interest in or power over the income or corpus of the transferred property in this case the corporate trustees of trust and trust propose to sell farm to limited_partnership owned by a in exchange for dollar_figurex the acreage in farm is an asset of each trust the beneficiaries are not transferring assets to trust trust or any other trust accordingly the beneficiaries are not transferors for purposes of sec_2036 sec_2037 or sec_2038 based on the facts submitted and the representations made we conclude that the execution and or the carrying out of the terms of the agreement of sale will not cause any beneficiary to be required to include in his or her taxable_estate trust assets owned by trust or trust unless such assets have been distributed to such person prior to his or her death the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as specifically ruled herein we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code the rulings in this letter pertaining to the federal estate and or generation-skipping_transfer_tax apply only to the extent that the relevant sections of the internal_revenue_code are in effect during the period at issue plr-116847-14 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely _____________________________ lorraine e gardner senior counsel branch office of associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes


number release date id office uilc cca_2010040208354437 ---------- from ------------------- sent friday april am to ------------------------ cc ----------- subject re new form_872 paragraph of the current form_872 is just a restatement of the law as it applies to refunds of nonpartnership_items paragraph is included essentially for information purposes for taxpayers who may be unaware that statute extensions also extend the period for filing a refund claim under sec_6511 for nonpartnership_items paragraph first sentence as a matter of law under sec_6227 operates to extend the period for filing aar's under sec_6227 to months from the end of the extension the second and third sentence grant additional extensions for filing suit for partnership items and converted partnership items that would not otherwise occur without an agreement


internal_revenue_service number release date index number ------------------------------------------ ----------------------------------- ----------------------------- ---------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-142254-09 date january legend x country date dear -------------- ----------------------------------- ------- --------------- --------------------- ------------------- this responds to your letter dated date 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 to be classified as a partnership for federal tax purposes the information submitted states that x was formed in country on date x represents that as a foreign eligible_entity x was eligible to elect to be treated as a partnership for federal tax purposes effective date however x inadvertently failed to timely file a form_8832 entity classification election sec_301_7701-3 of the income_tax regulations provides that so long as a business_entity is not classified as a corporation under sec_301_7701-2 or an eligible_entity it may elect its classification for federal tax purposes sec_301_7701-3 further provides that an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under plr-142254-09 sec_301_7701-2 or as 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 that unless the entity elects otherwise a foreign eligible_entity is a partnership if it has two or more members and at least one member does not have limited_liability except as provided in 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 a 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 on the election form the date specified on form_8832 cannot be more than days prior to the date on which the election is filed and cannot be more than months after the date on which 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 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 the term regulatory election as including an election with a deadline prescribed by a regulation 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 an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that request for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government based solely on the facts submitted and representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly x is granted an extension of sixty days from the date of this letter to elect to be classified as a partnership for federal tax purposes effective date the election should be made by filing form_8832 with the appropriate service_center a copy of this letter should be attached to the election 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 plr-142254-09 this ruling is directed only to the taxpayer requesting it sec_6110 of the internal_revenue_code 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 will be sent to x's authorized representative sincerely curt g wilson associate chief_counsel passthroughs special industries enclosure copy of this letter copy for sec_6110 purposes


department of the treasury i n t e r n al r e v e n u e s e r v i c e washington d c date cc tege eoeg et2 dmparkinson genin-138228-04 uil office_of_chief_counsel number info release date --------------------------------- -------------------------------------- --------------------------- ------------------------------- dear --- - --------- this is in response to your request for a letter_ruling concerning the common_paymaster provisions of the internal_revenue_code the code as a preliminary matter apart from the procedure for issuing a formal opinion as described in revproc_2004_1 2004_1_irb_1 the internal_revenue_service is not able to provide binding legal advice to particular taxpayers in the absence of a request for formal guidance we are only able to provide general information accordingly in response to your request we have reviewed the facts provided and set forth below general information which we hope will be helpful to you you indicated that you and your brother own one hundred percent of two separate subchapter_s_corporations from the facts you provided we assume that both you and your brother are concurrently employed by both corporations both corporations use a payroll service provider to comply with their obligations to withhold and pay employment_taxes you inquired as to whether the service would permit the payroll service provider to act as common_paymaster for the two corporations owned by you and you brother the federal_insurance_contributions_act fica imposes a tax on the income of every individual that equals a percentage of wages received by the individual see code sec_3101 fica also imposes an excise_tax on each employer with respect to having individuals in his employ that is equal to a specified percentage of wages paid_by the employer see code sec_3111 the definition of wages in code sec_3121 excludes that portion of remuneration for employment paid_by an employer to an individual that exceeds the contribution_and_benefit_base or wage_base as determined under section of the social_security act the federal_unemployment_tax_act futa like fica also imposes an excise_tax on an employer with respect to having individuals in his employ that is a specified percentage of wages paid_by the employer see code sec_3301 futa also contains a wage_base under the common_paymaster provisions of the code if an individual performs services as an employee for two or more related corporations and one of those corporations disburses all of the compensation to that individual then liability for taxes under the fica and the futa is computed as if the common_paymaster were the only employer paying the compensation it disburses see code sec_3121 and employment_tax regulations regulations sec_31_3121_s_-1 the effect of the common_paymaster provisions is that related corporations pay no more fica or futa taxes than if the corporations were only one employer even though the employee is actually employed by several separate corporations and the employee’s compensation reflects service performed for the several corporations thus a related group of corporations with a common_paymaster is treated as a single corporation and is not required to pay the taxes that would otherwise be due because the worker is an employee of several corporations in order for two or more corporations to use the common_paymaster provisions certain specific requirements must be satisfied the internal_revenue_service does not have the discretion to allow corporations which do not meet these requirements to use the common_paymaster provisions these requirements are that an individual must be concurrently employed by two or more corporations one of those corporations must disburse all of the compensation to that individual and all of the corporations must be related corporations under regulation sec_31_3121_s_-1 corporations are considered related if they satisfy any one of the following four tests during a calendar_quarter i ii iii iv the corporations are members of a controlled_group_of_corporations as defined in code sec_1563 or would be members if sec_1563 and b did not apply and if the phrase more than were substituted for the phrase at least percent wherever it appears in sec_1563 in the case of a corporation that does not issue stock either fifty percent or more of the members of one’s corporation’s board_of directors or other governing body are members of the other corporation’s board_of directors or other governing body or the holders of fifty percent or more of the voting power to select such members are concurrently the holders of fifty percent or more of that power with respect to the other corporation fifty percent or more of one corporation’s officers are concurrently officers of the other corporation thirty percent or more of one corporation’s employees are concurrently employees of the other corporation if the common_paymaster provisions are not applicable each employer for whom services are preformed is required to withhold the employee share of fica and pay the employer share of fica up to the contribution_and_benefit_base as determined under section of the social_security act similarly each employer is required to pay futa up to the futa wage_base department of the treasury - internal_revenue_service form rev code sec_6413 contains special rules applicable to credits and refunds of certain employment_taxes in particular code sec_6413 provides in relevant part that if an employee receives wages from more than one employer during a calendar_year and the wages received by that employee during the year exceed the contribution_and_benefit_base as determined under section of the social_security act the employee shall be entitled to a credit or refund of any amount of tax with respect to such wages imposed by sec_3101 which exceeds the amount of tax attributable to wages equal to the contribution_and_benefit_base code sec_3101 imposes fica_taxes on an employee however code sec_3111 imposes fica_taxes on an employer thus code sec_6413 does not provide any legal authority for a credit or refund of fica_taxes paid_by an employer pursuant to code sec_3111 if you have any questions with regard to this letter please call -------------------- of my staff -------------------- ----- can be reached at -------------------- sincerely lynne camillo branch chief employment_tax branch tax exempt government entities form rev department of the treasury - internal_revenue_service


department of the treasury internal_revenue_service washington d c of f i c e of c h i e f c ou n s e l date number release date cc ita b07 fsa-n-158760-01 uilc 263a internal_revenue_service national_office field_service_advice memorandum for associate chief_counsel income_tax accounting cc ita from subject this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent legend taxpayer year year year year year dollar_figurex dollar_figurey issues whether taxpayer’s method_of_accounting is a permissible method when it includes in inventoriable costs an estimated amount of a liability that does not meet the requirements of sec_1_446-1 and b whether the all-events test and the economic_performance requirement set forth in sec_1_446-1 and b are valid regulations in their application to inventoriable costs conclusion sec_1 taxpayer’s method_of_accounting is not a permissible method the all-events test and the economic_performance requirement set forth in sec_1_446-1 are valid regulations in their application to inventoriable costs facts application_for change in accounting_method - background taxpayer uses an accrual_method of accounting late in year taxpayer filed a form_3115 application_for change in accounting_method with the examining agents under the automatic consent provisions of section dollar_figure of revproc_94_49 1994_2_cb_705 effective for taxable years beginning on or after january year a copy of the form_3115 was filed with the national_office in year the national_office filing included a cover letter that provided a more detailed description of the change in accounting_method for environmental cleanup costs because the description of the proposed change in the copy provided to the examining agents was somewhat brief in the form_3115 taxpayer requested two principal changes the first dealt with taxpayer’s method of capitalizing additional sec_263a costs taxpayer proposed changing its method of cost capitalization from the simplified_production_method of reg sec_1_263a-2 to a facts and circumstances method the second change in accounting_method involved the identification and accrual of certain inventoriable costs - plant and environmental cleanup site costs post- retirement benefit medical costs and supplemental benefit costs taxpayer proposed capitalizing ie including in inventoriable costs these costs when they became subject_to reasonable estimation under its prior method taxpayer treated environmental cleanup costs as deductions from gross_income to arrive at net taxable_income and deducted these costs when economic_performance occurred similarly taxpayer deducted employee_benefits costs based on the provisions of sec_404 and sec_419 which generally allow the deductions to be claimed when payment for those liabilities has been made the taxpayer’s sec_481 adjustment included estimated environmental cleanup costs of dollar_figurex and estimated employee benefit costs of dollar_figurey the proposed change in accounting_method would cause taxpayer’s environmental cleanup and employee benefit costs to be included in inventoriable costs and recovered through cost_of_goods_sold rather than deducted from gross_income taxpayer’s position was that the all-events test and the economic_performance rules apply only to deductions from gross_income and do not apply to cost_of_goods_sold which is offset against total sales to determine gross_income when the form_3115 was filed taxpayer’s year year and year returns were under examination but taxpayer’s inventory cost capitalization was not a pending issue the examination of inventoriable costs was suspended as required by revproc_94_49 1994_2_cb_705 action taken on application_for change in accounting_method the assistant chief_counsel ita denied taxpayer’s application_for change in accounting_method the letter denying the request states in pertinent part the form_3115 you filed request s permission to accrue the above costs plant and site cleanup costs post-retirement medical benefits and other costs not presently included in inventoriable costs when they become subject_to reasonable estimation and to include them in inventoriable costs when they accrue revproc_94_49 does not apply to a change that involves the proper time for accruing costs under sec_461 furthermore you propose to include the above costs in inventoriable costs earlier than the taxable_year during which the costs are incurred under sec_461 contrary to reg sec_1 c ii a and reg sec_1_263a-1 after receiving the denial letter from the national_office for its requested change in accounting_method taxpayer did not file an amended_return for the year tax_year as described below taxpayer also chose to file the year tax_return using a variation of the method proposed in the form_3115 year and year tax returns on examination of taxpayer’s year and year returns form_1120 it was discovered that taxpayer used a variation of the accounting_method that it requested on its form_3115 taxpayer treated environmental cleanup costs that satisfied the all-events test including the economic_performance requirement during the year as current period expenses in this regard taxpayer deducted the entire amount of those environmental cleanup costs instead of including them in inventoriable costs which might have deferred some portion of the costs as part of the ending inventory environmental cleanup costs that did not satisfy the all- events test on the other hand were treated as inventoriable costs and recovered through cost_of_goods_sold likewise taxpayer treated employee benefit payments subject_to sec_404 and sec_419 hereafter referred to as accruable employee_benefits as current period expenses and deducted them from gross_income the accrued employee_benefits that did not comply with the rules of sec_404 and sec_419 hereafter referred to as non-accruable employee_benefits were inventoried and recovered through cost_of_goods_sold explanatory statements regulation disclosure statement form 8725r attached to the year and year returns reference sec_1_446-1 and sec_1_61-3 and disclose that taxpayer has concluded that the referenced regulation sections are invalid in their extension of sec_461 economic_performance principles to items historically and consistently described in case law and statutes not as deductions but as exclusions taxpayer asserts that its treatment of items entering into the computation of cost_of_goods_sold is supported by legislative_history of sec_461 case law and statutes that separately treat exclusions from gross_receipts and expenses and service and department of treasury pronouncements that distinguish between exclusions and expenses law and analysis issue whether taxpayer’s method_of_accounting is a permissible method when it includes in inventoriable costs an estimated amount of a liability that does not meet the requirements of sec_1_446-1 and b 1we assume that the environmental cleanup costs deducted in the taxable_year are not also included in taxpayer’s sec_481 adjustment as a downward adjustment to income 2here again we assume that the employee benefit costs deducted in the taxable_year are not also included in taxpayer’s sec_481 adjustment as a downward adjustment to income taxpayer is required to maintain inventories pursuant to sec_446 and sec_471 furthermore under sec_263a taxpayer is required to include in its inventoriable costs the direct costs of its inventory and the indirect_costs properly allocable to its inventory the sec_263a regulations however provide that a cost may not be included in inventoriable costs until the amount is incurred within the meaning of the regulations specifically reg sec_1_263a-1 provides as follows the amount of any cost required to be capitalized under sec_263a may not be included in inventory or charged to capital accounts or basis any earlier than the taxable_year during which the amount is incurred within the meaning of sec_1_446-1 for a liability to be incurred the regulations require that several criteria must have been met reg sec_1_446-1 provides as follows under such a method an accrual_method of accounting a liability is incurred and generally is taken into account for federal_income_tax purposes in the taxable_year in which all the events have occurred that establish the fact of the liability the amount of the liability can be determined with reasonable accuracy and economic_performance has occurred with respect to the liability thus the income_tax regulations clearly provide that the all-events test including the economic_performance rules of sec_461 apply to inventoriable costs consequently a cost may not be included in inventoriable costs unless and until it has satisfied the all-events test taxpayer argues revproc_94_49 1994_2_cb_705 authorized its change to include environmental cleanup and employee benefit costs in inventoriable costs before the all-events test including the economic_performance requirement was met section dollar_figure of revproc_94_49 automatically grants the consent of the commissioner to any taxpayer within the scope of the revenue_procedure to change its method_of_accounting to a method required or permitted by the final sec_263a regulations the scope of the revenue_procedure is provided in sec_3 the revenue_procedure applies to any taxpayers changing their methods_of_accounting for costs subject_to sec_263a for the first taxable_year beginning on or after date to a method required or permitted by sec_1_263a-1 sec_1_263a-2 and sec_1_263a-3 of the final sec_263a regulations thus the scope of revproc_94_49 as well as the automatic consent provisions of revproc_94_49 are limited to changes to methods required or permitted by sec_263a and the regulations thereunder taxpayer was not within the scope of revproc_94_49 and taxpayer’s proposed accounting_method was not within the automatic consent provision of revproc_99_49 because taxpayer proposed to change to a method that was neither required nor permitted by the final sec_263a regulations in fact taxpayer’s proposed method was expressly prohibited by sec_1_263a-1 thus the service properly determined that taxpayer did not have the commissioner’s consent to change to a method_of_accounting that includes costs in inventoriable costs that have not satisfied the all-events test not only did taxpayer change its method without the commissioner’s consent the method used to compute taxpayer’s income beginning in the year taxable_year is not otherwise permissible taxpayer’s method is not permissible because it is specifically prohibited by sec_1_263a-1 and sec_1_446-1 moreover taxpayer’s method_of_accounting does not clearly reflect income as required by sec_446 and sec_471 because a method_of_accounting that is plainly inconsistent with governing regulations does not clearly reflect income 439_us_522 issue whether the all-events test and the economic_performance requirement set forth in reg sec_1_446-1 and b are valid regulations in their application to inventoriable costs taxpayer has recognized that the method_of_accounting it used to compute taxable_income for the taxable_year year and year is contrary to the income_tax regulations however taxpayer maintains that those regulations are invalid because they exceed congressional intent the regulations at issue represent the service’s construction of sec_263a sec_446 and sec_461 the supreme court set the following standard for reviewing an agency’s construction of a statute in 467_us_837 when a court reviews an agency’s construction of the statute which it administers it is confronted with two questions first always is the question whether congress had directly spoken to the precise question at issue if the intent of congress is clear that is the end of the matter for the court as well as the agency must give effect to the unambiguously expressed intent of congress if however the court determines congress has not directly addressed the precise question at issue the court does not simply impose its own construction on the statute as would be necessary in the absence of administrative regulation rather if the statute is silent or ambiguous with respect to the specific issue the question for the court is whether the agency’s answer is based on a permissible construction of the statute if congress has explicitly left a gap for the agency to fill there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation such legislative regulations are now given controlling weight unless they are arbitrary capricious or manifestly contrary to the statute in such a case a court may not substitute its own construction of a statutory provision for a reasonable interpretation made by the administrator or an agency footnotes omitted the degree of deference given to a regulation depends first on whether the regulation is legislative or interpretive a regulation that promulgated pursuant to a specific statutory authority is a substantive rule legislative in character 81_tc_17 where the commissioner acts under specific authority the court’s primary inquiry is whether the interpretation or method is within the delegation authority 452_us_247 legislative regulations should be given controlling weight unless they are arbitrary capricious or manifestly contrary 3the supreme court recently refined the chevron_doctrine in united_states v mead corp 121_sct_2164 there the issue was the validity of a tariff classification ruling of the united_states customs service we hold that administrative implementation of a particular statutory provision qualifies for chevron_deference when it appears that congress delegated authority to the agency generally to make rules carrying the force of law and that the agency interpretation claiming deference was promulgated in the exercise of that authority delegation of such authority may be shown in a variety of ways as by the agency’s power to engage in adjudication or notice-and-comment rulemaking or by some other indication of a comparable congressional intent 121_sct_2171 emphasis added in concluding that the ruling was not entitled to chevron_deference the court focused on the fact that the ruling was not a product of a notice-and-comment rulemaking or formal adjudication indeed to claim that classifications have legal force is to ignore the reality that different customs offices issue big_number to big_number of them each year sup ct pincite accordingly we conclude that nothing in mead weakens the government’s position under chevron in that the regulations taxpayer is challenging were issued under the service’s notice- and-comment rulemaking authority and thus under mead would be entitled to chevron_deference to the statute 109_f3d_753 fed cir quoting chevron u s pincite when specific statutory authority for a regulation is not conferred the service may promulgate a regulation under the general authority of sec_7805 these are interpretive regulations and are not given as much deference as regulations based on a specific statutory authority general authority regulations are subject_to a series of tests pertaining to the underlying legislative intent courts look to whether there was a substantially contemporaneous construction of the statute by those presumed to have been aware of congressional intent 452_us_247 quoting 440_us_472 other inquiries include whether the service’s interpretation of the regulation has been consistent whether the regulation is in harmony with other statutes and regulations and the degree of scrutiny that congress devoted to the regulation upon subsequent re-enactments id the courts look to prior treasury pronouncements in order to answer these questions the crux of taxpayer’s complaint about reg sec_1_446-1 is that the regulation defines the term liability as including any item allowable as a capitalized cost or as a cost included in cost_of_goods_sold taxpayer argues that because cost_of_goods_sold is an element of the gross_income computation under sec_1_61-3 the accrual of inventoriable costs is effectively governed by sec_451 and the regulations thereunder according to taxpayer regulation sec_4the federal_circuit invalidated a legislative_regulation in 255_f3d_1357 fed cir in so doing however the court did not deviate from the standards enunciated above the regulation at issue was promulgated under sec_1502 and involved affiliated corporations filing consolidated_returns the court invalidated the regulation on the ground that its duplicated_loss factor distorts rather than reflects the tax_liability of consolidated groups and contravenes congress’ otherwise uniform treatment of limiting deductions for the subsidiary’s losses f 3d pincite in essence the court held that denying the deduction at issue would impose a tax on income that would otherwise not be taxed the regulation at issue here does not deny a deduction it merely defers the deduction to a later taxable_year sec_1_451-1 provides that under an accrual_method of accounting_income is includible in gross_income when all the events have occurred which fix the right to receive such income and the amount thereof can be determined with reasonable accuracy implementing a statutory amendment to sec_461 cannot extend to costs that will be included in inventoriable costs and cost_of_goods_sold the regulations are consistent with the congressional intent underlying the economic_performance rules of sec_461 reg sec_1_461-1 is a legislative_regulation promulgated under sec_461 which clearly authorizes the secretary to prescribe regulations that determine when economic_performance occurs this regulation provides that for purposes of implementing sec_461 the term liability is defined in reg sec_1 c ii b because the definition of the term liability is integral to the economic_performance rules the grant of authority under sec_461 extends to the regulations sec_1_446-1 where the term is actually defined even if reg sec_1_446-1 were not legislative the regulation is valid because it meets the standards set for evaluating regulations that are not promulgated pursuant to a specific grant of authority it is consistent with all the other relevant regulations and with sec_461 congress’ intent that the economic_performance requirement pertains to liabilities is clearly expressed in the statute itself the plain language of sec_461 contradicts taxpayer the section is titled certain liabilities not incurred before economic_performance subsection h which states when economic_performance occurs refers to liabilities five times the section does not mention expenses or deductions and does not itself define liabilities 6taxpayer cites 65_tc_422 nonacq 1977_1_cb_2 aff’d 584_f2d_53 5th cir 85_tc_485 69_tc_477 aff’d 630_f2d_670 9th cir for the proposition that cost_of_goods_sold is an exclusion_from_gross_income rather than a deduction none of these cases however support the proposition that the service may not promulgate regulations under sec_263a and sec_446 that determine when costs are includible in inventoriable costs and ultimately cost_of_goods_sold the b c cook courts held that amounts included in and recovered through cost_of_goods_sold were not deductions within the meaning of sec_1312 although the molsen court rejected the service’s argument that costs may not be included in cost_of_goods_sold computation before the all-events test was met the year at issue was prior to the effective date of sec_461 and sec_1_446-1 and sec_1_263a-1 the max sobel courts concluded that sec_162 which permanently disallowed deductions for illegal payments did not apply to gross_income exclusions including sales discounts rebates and cost_of_goods_sold when the regulations under were proposed commentators argued that the proposed_regulations incorrectly applied sec_461 to cost_of_goods_sold the service and treasury addressed the commentators’ arguments in treasury_decision the treasury_decision points out that the old all-events test contained in reg sec_1_461-1 expressly applied to deductible expenses congress deliberately extended the reach of the economic_performance requirement by amending sec_461 to refer to any item that is incurred further the legislative_history contemplates the application of the economic_performance rules to capital items or other items that are not deductible in the year incurred see h_r no part 98th cong 2d sess describing the difficulty of applying a discounting mechanism to capital items see also joint_committee on taxation general explanation of the revenue provisions of the deficit_reduction_act_of_1984 98th cong 2d sess providing an example applying the economic_performance rules to highway construction costs which in were ordinarily treated as deferred costs t d 1992_1_cb_155 the tax_court has on numerous occasions cited reg sec_1_446-1 and b as applicable law for example both kroger company v commissioner tcmemo_1997_2 and dayton hudson corporation v commissioner tcmemo_1997_260 favorably cite sec_1_446-1 and state that the term liability is defined in sec_1_446-1 further support for the validity of the regulations is found in the conference_report on the deficit_reduction_act_of_1984 when describing present law that is the pre- dra ‘84 law the report speaks in terms of expenses and deductions when describing the changes in the law the report speaks in terms of amounts incurred and liabilities h_r no 98th congress 2nd sess c b vol thus it is evident from the legislative_history that congress intended the focus to be on the broader term liabilities rather than the narrower concept of deductions clearly congress had the authority to defer the inclusion of costs in a taxpayer’s inventoriable costs and cost_of_goods_sold until those amounts satisfied the all- events test and the economic_performance rules furthermore the service had the authority to so interpret the code when it promulgated reg sec_1_263a-1 which provides that t he amount of any cost required to be capitalized under sec_263a may not be included in inventory any earlier than the taxable_year during which the amount is incurred within the meaning of sec_1_446-1 the regulations are consistent with the commissioner’s wide discretion under sec_446 and sec_471 to determine whether a particular method_of_accounting clearly reflects income in the early 1980s it was widely reported that because of the time_value_of_money a taxpayer that was found liable for torts could be better off from an income_tax perspective than if it were found not liable see eg mcgown structured settlements deduct now and pay later taxes this was true because the settlement of the claim could call for payments to be made over a long period but the taxpayer could deduct the entire liability in the year that the settlement was reached this fact pattern is exemplified in 102_tc_87 aff’d 71_f3d_209 6th cir in an attempt to prevent this and other distortions arising from liabilities that would not be performed until far into the future congress considered various alternatives including discounting deductions and deferring deductions h_r no part 98th cong 2d sess congress decided to defer deductions until economic_performance occurred and enacted sec_461 sec_461 was effective for taxable years after the date of enactment moreover at about this same time congress enacted the uniform_capitalization_rules under sec_263a these rules were intended to prevent distortions of income from arising because in some cases the costs of producing or reselling property were permitted to be deducted currently rather than properly matched with the future income associated with that property however congress did not make all producers or resellers subject_to sec_263a for example sec_263a does not apply to resellers that meet a dollar_figure million gross_receipts exception accordingly the regulations under sec_446 and sec_263a reg sec_1_446-1 and sec_1_263a-1 reflect the fact that the timing rules that relate to costs of producing or reselling property should be the same regardless of whether a taxpayer incurs deductible or inventoriable costs meanwhile the irs continued to pursue cases like ford motor co based on a clear_reflection_of_income theory the service prevailed in the tax_court and the sixth circuit on the clear_reflection_of_income theory the years at issue in ford motor co preceded the effective date of sec_461 thus the service has previously 7in thor power tool the supreme court recognized that sec_446 and sec_471 provide the commissioner with wide discretion in determining whether a particular method_of_accounting clearly reflects income sec_471 regulations cross-reference sec_263a and the regulations thereunder sec_263a regulations preclude including a cost in inventoriable cost prior to the date that economic_performance is satisfied litigated this issue exclusively on its sec_446 authority both the tax_court and the sixth circuit held that current deduction of a cost that will not satisfy economic_performance until long into the future does not clearly reflect income see ford motor co presumably the wide discretion enjoyed by the irs under both sec_446 and sec_471 provides ample support for the similar conclusion that currently recovering the same or similar costs through inventory and cost_of_goods_sold also does not clearly reflect income if the method doesn’t clearly reflect income the regulations at issue are a valid exercise of the commissioner’s discretion to determine whether a particular method clearly reflects income finally the regulations are consistent with congressional disapproval in sec_461 of reducing taxable_income by recovering costs prior to economic_performance the contrary conclusion would emasculate sec_461 for a significant segment of taxpayers manufacturers and resellers moreover because product_liability claims arising from defectively manufactured or designed products are arguably costs incurred by reason of a production activity a conclusion that inventoriable costs are not subject_to the economic_performance requirement would nullify the holdings in ford motor co case development hazards and other considerations taxpayer’s arguments are without merit we nonetheless are keenly interested whenever the validity of a regulation is challenged please keep the national_office apprized of the progress of this case this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views please call if you have any further questions heather maloy by jeffery g mitchell senior technician reviewer branch cc ita b07


t c memo united_states tax_court michael s yoklic and kay e ross petitioners v commissioner of internal revenue respondent docket no filed date michael s yoklic and kay e ross pro sese doreen marie susi and zachary b friedman for respondent memorandum opinion ashford judge respondent determined a deficiency of dollar_figure in petitioners’ federal_income_tax for the taxable_year after a concession by 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure respondent the issue for decision is whether pursuant to sec_85 and sec_451 petitioners had additional taxable_income of dollar_figure for as a result of petitioner michael s yoklic’s receiving unemployment_compensation in that amount during that year we resolve this issue in favor of respondent background the parties submitted this case to the court for decision without trial under rule the court incorporates by reference the parties’ stipulations of facts and accompanying exhibits petitioners resided in arizona at the time the petition was filed with the court michael s yoklic petitioner filed a claim for unemployment benefits effective date with the arizona department of economic security des des initially found petitioner eligible to receive benefits of dollar_figure per week for each of the weeks ending may to date it is undisputed that petitioner received dollar_figure in unemployment benefits from des during that period thereafter des issued petitioner a determination_letter dated date followed by decision letters dated september and date these letters stated that petitioner was not entitled to the unemployment benefit sec_2respondent concedes that petitioners did not overreport their federal_income_tax withholding for received resulting in an overpayment of unemployment benefits of dollar_figure determined against him the date letter also informed petitioner that the last date to file a request for review was date the only action petitioner took in response to this letter was to repay the benefits he had received as evidenced by a copy of an endorsed check dated date paid to the order of des for dollar_figure des sent the internal_revenue_service and petitioner a form 1099-g certain government payments reporting unemployment_compensation of dollar_figure paid to petitioner in petitioners prepared their federal_income_tax return for reporting income and expenses on a cash_basis however they did not report the unemployment_compensation on the joint_return relying on the des form 1099-g respondent sent a notice_of_deficiency to petitioners on date determining that the reported unemployment_compensation was fully taxable because it is considered a substitute for wages petitioners timely petitioned this court for redetermination of the deficiency 3the date letter states that petitioner was overpaid unemployment benefits of dollar_figure during we believe this stated amount was a typographical error and that the correct amount of overpaid unemployment benefits was dollar_figure as stated in the other two letters discussion gross_income includes all income from whatever source derived unless specifically excluded sec_61 sec_85 and b specifically provides for the inclusion of unemployment_compensation in gross_income defining the term unemployment_compensation as any amount received under a law of the united_states or of a state which is in the nature of unemployment_compensation in addition sec_451 provides that for a cash_basis taxpayer the amount of any item_of_gross_income shall be included in the gross_income for the taxable_year in which received by the taxpayer see sec_1_451-1 income_tax regs providing that under the cash accounting_method gains profits and income are to be included in gross_income in the taxable_year in which they are actually or constructively received by the taxpayer sec_85 and sec_451 are unambiguous and their application to the undisputed facts of this case is clear petitioners stipulated that they were cash_basis taxpayers and that during petitioner received dollar_figure in unemployment_compensation from des in their posttrial brief petitioners contend that the unemployment_compensation should not be included in their gross_income because they repaid it pursuant to des’ letters in the subsequent taxable_year petitioners seem to be arguing that the doctrine_of rescission which is a minor exception to the claim-of-right doctrine applies here the claim-of-right doctrine arises out of the need for certainty in allocating items to the appropriate annual_accounting_period blagaich v commissioner tcmemo_2016_2 at a taxpayer receives income under a claim of right whenever he acquires earnings lawfully or unlawfully without the consensual recognition express or implied of an obligation to repay and without restriction as to their disposition id quoting 366_us_213 under the claim-of-right doctrine laid out by the supreme court in n am oil consol v burnet 286_us_417 i f a taxpayer receives earnings under a claim of right he has received income which he is required to return even though it may still be claimed that he is not entitled to retain the money and even though he may still be adjudged liable to restore its equivalent receipts subject_to a taxpayer’s claim of right are includible for the year of receipt the doctrine_of rescission represents an exception to the claim-of-right doctrine see blagaich v commissioner at pursuant to this exception income received under a claim of right need not be included in gross_income if in the year of receipt the taxpayer recognizes an existing and fixed obligation to repay the amount received and makes provisions for repayment see id at see also 55_tc_1020 aff’d 471_f2d_738 3d cir 38_tc_943 aff’d in part remanded in part 344_f2d_460 5th cir goldberg v commissioner tcmemo_1997_74 slip op pincite aff’d 246_f3d_674 9th cir on the basis of the record before us we find that petitioner’s obligation to repay the unemployment_compensation he received from des in became fixed in that same year however petitioners do not contend nor is there any evidence in the record indicating that they made provisions for repayment also in that same year instead the record clearly shows repayment to des the following taxable_year in date the doctrine_of rescission thus does not save petitioners from respondent’s adjustment including in their gross_income for the unemployment_compensation that in that year petitioner received from des accordingly pursuant to sec_85 and sec_451 we sustain respondent’s determination that for petitioners had dollar_figure of unemployment_compensation that was taxable_income to them we have considered all of the arguments made by the parties and to the extent they are not addressed herein we find them to be moot irrelevant or without merit to reflect the foregoing decision will be entered for respondent


internal_revenue_service number release date index number re department of the treasury washington dc person to contact telephone number refer reply to cc psi 4-plr-116529-99 date date legend decedent spouse child1 child trust year date date date dear this is in response to your letter dated date requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to make a qualified_terminable_interest_property qtip_election under sec_2056 of the internal_revenue_code decedent executed trust a revocable inter_vivos_trust on date decedent died testate on date survived by spouse and children spouse is executor of decedent’s estate and trustee of trust under the terms of decedent’s will the residue of decedent’s estate is to be added to trust the first paragraph under article viii of trust entitled distribution of the trust estate upon the death of settlor provides that upon decedent’s death and after payment of all expenses and taxes the trustee shall distribute the remaining assets in this trust estate to settlor’s spouse spouse the second paragraph under article viii of trust entitled distribution of the trust estate upon the death of settlor’s spouse provides that upon spouse’s death settlor hereby gives devises and bequeaths all of settlor’s estate and all of the property and sums in this trust to settlor’s children child and child share and share alike if either of child or child dies prior to decedent or spouse with children surviving then the deceased child’s share is to pass to the children of the deceased child share and share alike if either of child or child dies prior to decedent or spouse without children surviving then plr-116529-00 the deceased child’s share is to pass to decedent’s surviving child the form_706 of federal estate and generation-skipping_transfer_tax return was filed by the decedent’s estate on date upon audit of form_706 it was determined that spouse received only a life_estate in trust residue with the remainder passing to child and child however a qtip_election under sec_2056 was not made on schedule m of form_706 with respect to these assets taxpayer requests an extension of time under sec_301_9100-1 and sec_301_9100-3 to make a qtip_election under sec_2056 with respect to qualified_terminable_interest_property passing_to_spouse under the terms of trust sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2056 provides that for purposes of the tax imposed by sec_2001 the value of the taxable_estate is to be determined by deducting from the value of the gross_estate an amount equal to the value of any interest in property that passes or has passed_from_the_decedent to the surviving_spouse sec_2056 provides the general_rule that no deduction shall be allowed for an interest passing to the surviving_spouse if on the lapse of time on the occurrence of an event or contingency or on the failure of an event or contingency to occur the interest will terminate or fail sec_2056 provides that in the case of qualified_terminable_interest_property such property shall be treated as passing to the surviving_spouse for purposes of sec_2056 and no part of the property shall be treated as passing to any person other than the surviving_spouse sec_2056 defines qualified_terminable_interest_property as property which passes from the decedent in which the surviving_spouse has a qualifying_income_interest_for_life and to which an election under sec_2056 applies sec_2056 provides that an election under sec_2056 with respect to any property is to be made by the executor on the return of tax imposed by sec_2001 the election once made is irrevocable under sec_2044 any property in which the decedent possessed a qualifying_income_interest_for_life and for which a deduction is allowed under sec_2056 is includible in the decedent's gross_estate under sec_301_9100-1 of the procedure and administration regulations the commissioner of internal revenue may grant a reasonable extension of the 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 if the taxpayer demonstrates to the satisfaction of the commissioner that the taxpayer has acted reasonably and in good_faith and granting the relief will not prejudice the interests of the government plr-116529-00 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_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making 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 to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the standards of sec_301_9100-1 and sec_301_9100-3 have been satisfied consequently an extension of time for making the qtip_election under sec_2056 is granted until days from the date of this ruling the ruling contained in this letter is 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 this ruling it is subject_to verification on examination this ruling is limited to the taxpayer’s request under sec_301_9100-1 and sec_301_9100-3 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 s requesting it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file a copy of this letter is being sent to the taxpayer sincerely yours paul f kugler associate chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes