t c memo united_states tax_court linmar property management_trust norman parsons trustee commissioner of internal revenue respondent petitioner v raymond m marlin petitioner v commissioner of internal revenue respondent docket nos filed date norman parsons pro_se raymond m marlin pro_se chong s hong for respondent memorandum findings_of_fact and opinion haines judge in these consolidated cases respondent determined deficiencies in federal income taxes and additions to tax with respect to raymond m marlin as follows additions to tax sec sec sec year deficiency a a dollar_figure dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number 1respondent determined that mr marlin is liable for sec_6651 additions to tax for through in an amount to be determined respondent determined deficiencies in federal income taxes and additions to tax with respect to linmar property management_trust linmar or linmar trust as follows additions to tax sec sec sec year deficiency a a dollar_figure dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number the primary issue in these cases is whether certain income is attributable to linmar trust or mr marlin as explained more fully below the court holds that linmar trust must be disregarded for federal_income_tax purposes and the income at issue is properly attributable to mr marlin 1unless otherwise indicated all section references are to the internal_revenue_code as amended rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated amounts are rounded to the nearest dollar 2the use of the term trust and of related terms such as trustee and beneficiary is for convenience only and is not intended to be conclusive as the characterization of linmar trust for federal tax purposes the other issues for decision are whether and in what amounts mr marlin received unreported income whether mr marlin is entitled to claimed deductions whether mr marlin is liable for self-employment taxes and whether mr marlin is liable for additions to tax under sec_6651 and and findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the exhibits attached thereto are incorporated herein by this reference when the court filed their petitions linmar trust had a mailing address in california and mr marlin resided at the same california address mr marlin’s businesses during the years at issue mr marlin owned and worked for marlin mechanical inc marlin mechanical and marlin mechanical contractors marlin contractors a sole_proprietorship these businesses provided mechanical construction services on commercial and industrial projects specifically services related to fire sprinklers plumbing refrigeration heating ventilation and air conditioning systems linmar trust formation on date beverly cahill and eules grisby signed the linmar trust declaration of contract and indenture of trust linmar trust contract as creator and exchanger respectively according to trust documents linmar’s capital units ie its certificates of beneficial_interest were originally issued to redondo enterprises on date the capital units were purportedly transferred to nevet’s investments however on its federal_income_tax return linmar’s beneficiary was listed as redondo enterprises linmar trust real_estate on date mr marlin transferred four parcels of real_estate to linmar trust north church street visalia california and avenue visalia california and olive street san francisco california before its transfer to linmar trust the north church street address was mr marlin’s residence when he filed his petition mr marlin still resided at the north church street address marlin mechanical and marlin contractors used the avenue addresses before and after the transfer of the real_estate to linmar trust as part of the transfer of real_estate linmar trust purportedly gave mr marlin a promissory note in the amount of dollar_figure requiring linmar to make monthly payments of dollar_figure linmar trust’s trustees and representatives linmar trust’s initial trustee was winnie mcguire mr marlin’s wife winnie mcguire died on date while she and mr marlin were traveling in hawaii on date winnie mcguire appointed kathleen botta formerly known as kathleen marlin and now known as kathleen remillard as linmar trust’s financial agent ms remillard is mr marlin’s daughter on date winnie mcguire appointed ms remillard as linmar trust’s secretary ms remillard understood that mr marlin and winnie mcguire made final decisions with respect to linmar trust on date winnie mcguire appointed eileen pyzer now known as eileen mcguire as contingent trustee of linmar trust eileen mcguire is winnie mcguire’s daughter on date winnie mcguire appointed eileen mcguire as cotrustee on date eileen mcguire resigned as trustee while serving as trustee eileen mcguire did not know linmar trust’s purpose she did not participate in decisions with respect to linmar trust and she had no involvement with linmar’s real_estate or business operations eileen mcguire understood that 3mr marlin argues that eileen mcguire was a contingent trustee at all times however linmar trust’s minutes show that eileen mcguire became a cotrustee there is no mention of her status as a contingent trustee furthermore in order to complete a property sale mr marlin represented that eileen mcguire had power to represent linmar trust as a trustee mr marlin made final decisions with respect to linmar trust she believed mr marlin was the beneficiary of linmar trust on date eileen mcguire appointed judy costa as a trustee ms costa was either married to mr marlin or had a relationship familiar enough with him that they referred to each other as husband and wife ms costa resides at the same north church street address as mr marlin on date ms costa resigned as trustee on date mr marlin was appointed manager of linmar trust and given authority over the day-to-day operations on date linmar trust and mr marlin entered into a contract providing among other things that in exchange for his trust management services and for occupying the north church street address where he had been living for several years linmar trust would pay mr marlin an occupancy fee and all utilities the contract also provided that linmar trust would lend mr marlin funds for personal expenses the contract was signed by ms costa on behalf of linmar trust and by mr marlin linmar trust transactions and minute book linmar’s minutes resolve that the day-to-day affairs of the trust were delegated to an officer of the trust however the minutes also state that all real_estate matters were to be 4marlin mechanical’s credit card statements show that on more than one occasion airline tickets were purchased for judy marlin including a trip that she and mr marlin took to hawaii in referred to the trustees and that contract negotiations were subject_to trustee approval on date linmar trust sold the olive street property the minutes do not show trustee approval of the sale on date linmar trust sold the avenue properties the minutes do not show trustee approval of the sale from date through date linmar trust entered into and modified contracts with university marelich mechanical lloyd allen pump service and jason correia the minutes do not show approval of any of these contracts linmar trust distributions on date linmar trust wrote a check payable to anglo irish bank with nevet’s investments written on the memo line linmar trust’s income distribution_deduction was dollar_figure linmar trust reported distributable_net_income for and however linmar’s bank records do not show income distributions to nevet’s investments or redondo enterprises the linmar trust contract states any capital unit holder may waive the right to receive any particular distribution or distributions by delivering to the trustees a written waiver prior to the date of the distribution which waiver shall be entered in the minutes there are no such waivers entered in the minutes mr marlin’s acts on behalf of linmar trust mr marlin signed linmar’s tax returns and contracts on date mr marlin completed a form_8821 tax_information_authorization and a form_2848 power_of_attorney and declaration of representative on behalf of linmar trust the signature line on form_8821 states if signed by a corporate officer partner guardian executor receiver administrator trustee or party other than taxpayer i certify that i have the authority to execute this form with respect to the tax matters periods covered the signature line on form_2848 states if signed by a corporate officer partner executor receiver administrator trustee on behalf of the taxpayer i certify that i have the authority to execute this form on behalf of the taxpayer mr marlin then signed his name and as his title wrote trustee on each of the forms account commingling during the years at issue mr marlin did not have a bank account mr marlin did however have a credit card in his name through citibank citibank card no mr marlin made payments on the card by endorsing and delivering to citibank checks payable to him and marlin mechanical through its bank accounts linmar trust also made payments on citibank card no marlin mechanical also held a credit card with citibank citibank card no in addition to business-related purchases for marlin mechanical citibank card no was used to purchase vacations and antiques linmar trust made regular payments on citibank card no mr marlin claims the payments linmar made on the two credit cards are reimbursements for linmar’s expenses however he has not shown nor can the court decipher which expenses are attributable to linmar and whether the amounts paid equal the expenses charged petitioners claim they have records detailing the expenses mr marlin submitted to linmar for reimbursement despite being given the opportunity to present the records petitioners did not present them checks payable to mr marlin and his businesses were deposited into linmar trust’s bank accounts linmar trust’s bank accounts were used to pay for mr marlin’s life_insurance vacation timeshare family members’ educations antiques piano and homeowner’s insurance petitioners claim these amounts were offset by the value of checks deposited into linmar trust bank accounts by mr marlin and his businesses neither petitioner has shown nor can the court decipher how the payments and deposits are connected 5mr marlin claims the payments were made as a repayment of a loan mr marlin provided linmar there is no evidence that mr marlin made a loan to linmar petitioners’ returns and notices of deficiency mr marlin did not file federal_income_tax returns for or on date respondent prepared substitute returns for mr marlin for and on date respondent issued mr marlin a notice_of_deficiency for and mr marlin timely petitioned this court for redetermination of the deficiency linmar trust untimely filed its and returns on date july and date and date respectively the return reported dollar_figure of income and a dollar_figure distribution_deduction the return reported dollar_figure of income and a dollar_figure distribution_deduction the return reported dollar_figure of income and a dollar_figure distribution_deduction the return reported dollar_figure of income and a dollar_figure distribution_deduction on date respondent issued linmar trust a notice_of_deficiency for and linmar trust timely petitioned this court for redetermination of the deficiency 6mr marlin did file a return reporting zero tax due however on date respondent assessed a deficiency of dollar_figure and a penalty under sec_6662 of dollar_figure with respect to mr marlin’s tax_year opinion i burden_of_proof in cases of unreported income the court_of_appeals for the ninth circuit to which an appeal in this case would ordinarily lie requires that the commissioner provide a minimal evidentiary foundation connecting the taxpayer with the unreported income before the presumption of correctness attaches to the commissioner’s determination see 181_f3d_1002 9th cir affg tcmemo_1997_97 596_f2d_358 9th cir revg 67_tc_672 92_tc_661 once the commissioner has met this initial burden the taxpayer must establish by a preponderance_of_the_evidence that the commissioner’s determination is arbitrary or erroneous see hardy v commissioner supra pincite as explained more fully below the court finds that respondent has introduced ample evidence connecting mr marlin with the income-producing activities of linmar trust and with the various items of income not reported by either mr marlin or linmar the record shows that mr marlin had unfettered access to linmar’s financial accounts and property and that he made all decisions with respect to linmar mr marlin managed and resided in rental real_estate properties owned by linmar trust amounts owed to mr marlin and mr marlin’s businesses were deposited in linmar’s accounts and linmar paid their expenses furthermore respondent has presented sufficient evidence linking mr marlin with the various items of unreported income through the bank_deposits and specific items methods accordingly the court holds that respondent’s determination is entitled to the presumption of correctness petitioners have not claimed or established that sec_7491 shifts the burden_of_proof to respondent with respect to any factual issue accordingly petitioners bear the burden_of_proof and production for all issues except as provided by sec_7491 see rule a 290_us_111 ii disregard of linmar trust as a separate_entity respondent argues that linmar trust should be disregarded as a separate_entity for federal tax purposes because it lacks economic_substance and is a sham the court agrees taxpayers have the right to conduct their transactions in such a manner and form as to minimize or altogether avoid the incidence of taxation by whatever means the law permits 293_us_465 this right however does not bestow upon taxpayers a right to structure a paper entity to avoid taxation when that entity is without economic_substance 79_tc_714 affd 731_f2d_1417 9th cir the commissioner is not required to apply the tax laws in accordance with the form a taxpayer employs where that form is a sham or inconsistent with economic reality 308_us_473 application of these principles requires the court to look beneath the surface of the entity and transactions at issue to examine their reality 79_tc_888 if the creation of a_trust lacks economic_effect and alters no cognizable economic relationship the court may ignore the trust as a sham see eg zmuda v commissioner supra pincite 73_tc_1235 this rule applies regardless of whether the entity has a separate existence recognized under state law and whether in form it is a_trust a common_law business_trust or some other form of jural entity zmuda v commissioner supra pincite whether a_trust lacks economic_substance for tax purposes is a factual question to be decided on the basis of the facts before the court paulson v commissioner tcmemo_1991_508 citing 338_us_451 affd per curiam 992_f2d_789 8th cir to determine whether a_trust lacks economic_substance for tax purposes the court considers these factors whether the taxpayer’s relationship to the transferred property differed materially before and after the trust’s creation whether the trust had an independent_trustee whether an economic_interest passed to other trust beneficiaries and whether the taxpayer respected the restrictions placed on the trust’s operation as set forth in the trust documents see muhich v commissioner tcmemo_1999_192 affd 238_f3d_860 7th cir as discussed below each of these factors supports a conclusion that linmar trust had no economic_substance a mr marlin’s relationship to the transferred property before and after linmar’s creation with respect to the first factor the court looks to the economic reality of a purported arrangement to determine who is the settlor of a_trust whether or not named as settlor in the related documents zmuda v commissioner supra pincite mr grisby and ms cahill signed the linmar trust contract as exchanger and creator respectively neither mr grisby nor ms cahill was called as a witness the court infers that their testimony would not have been favorable to mr marlin see 6_tc_1158 affd 162_f2d_513 10th cir petitioners have presented no evidence that either mr grisby or ms cahill had any participation in linmar’s existence after its formation from the record it appears that mr grisby and ms cahill acted as straw men to form linmar trust mr marlin contributed four parcels of real_estate to linmar petitioners colored the transaction as a sale by having 7black’s law dictionary 6th ed defines straw_man as a ‘front’ a third party who is put up in name only to take part in a transaction person who purchases property for another to conceal identity of real purchaser or to accomplish some purpose otherwise not allowed linmar trust provide mr marlin a promissory note the only evidence petitioners presented that payments were made on the note is a canceled check dated date and made out to global business serv trust acct in the amount of dollar_figure which is the amount of the monthly installments required by the promissory note meadow brook was written on the memo line this purported payment on the note was made more than years after the transfer petitioners also suggest that the note was paid off in the amount of dollar_figure as part of linmar’s sale of the olive street property in the payment was allegedly made to meadow brook investments as evidence of this payment petitioners direct the court to a disbursement summary from the sale of the olive street property showing payment to meadow brook investments and a letter from meadow brook investments showing a payoff amount of dollar_figure however petitioners have not presented any evidence of when or for what consideration mr marlin transferred the note to meadow brook investments in short there is no evidence that linmar made any payment to mr marlin on the note or that meadow brook paid mr marlin any amount in exchange for the note that a taxpayer would transfer four valuable parcels of real_estate to a_trust for no value while retaining no control_over the real_estate is not plausible accordingly the court finds that the transfer of the four parcels of real_estate was not a sale see gouveia v commissioner tcmemo_2004_256 after the transfer of the real_estate to linmar the use of the properties did not change mr marlin resided at the north church street address before and after linmar’s formation mr marlin owned marlin mechanical and marlin contractors and each used the avenue addresses before and after linmar’s formation the financial accounts of mr marlin mr marlin’s businesses and linmar trust were commingled as manager of linmar trust mr marlin had authority to conduct linmar’s day- to-day operations rents were deposited into linmar’s accounts on which mr marlin was a signatory the record shows that mr marlin had unfettered access to linmar’s funds furthermore the record indicates that mr marlin and not the purported trustees made all decisions relating to the transferred properties the court concludes that after their transfer to linmar mr marlin’s relationship to the transferred properties did not change in any material way accordingly this factor points to a sham 8although certainly not dispositive the court recognizes that the name linmar is the reverse of the syllables of marlin petitioners offered no explanation as to why the trust’s name so closely resembles mr marlin’s name b the independence of linmar’s trustees the failure of a nominal trustee to have any meaningful role in the operation of the trust has been repeatedly cited by this court as evidence that the entity lacks economic_substance see eg zmuda v commissioner t c pincite para techs trust v commissioner tcmemo_1994_366 affd without published opinion sub nom anderson v commissioner 106_f3d_406 9th cir during the years at issue linmar’s trustees were winnie mcguire who was mr marlin’s wife eileen mcguire who is winnie mcguire’s daughter and ms costa who is either mr marlin’s wife or familiar enough with mr marlin that they refer to each other as husband and wife ms remillard who was linmar’s secretary and financial agent and eileen mcguire both testified that mr marlin made all decisions with respect to linmar trust neither petitioner presented evidence that winnie mcguire or eileen mcguire acted independently eileen mcguire testified that she did not know linmar’s purpose she did not take part in decisionmaking with respect to linmar and she did not have any involvement with linmar’s real_estate or business operations when asked about the extent of her participation in the trust she stated i just signed papers occasionally didn’t really understand what they were or question it eileen mcguire also testified that she believed mr marlin was the beneficiary of the trust neither petitioner presented any evidence that ms costa acted independently ms costa did not testify at trial the court infers that her testimony would not have been favorable to mr marlin see wichita terminal elevator co v commissioner t c pincite the court concludes that during the years at issue linmar did not have an independent_trustee and that decisions with respect to linmar were made by mr marlin accordingly this factor points to a sham c economic interests passed to beneficiaries in determining to whom economic interests passed this court has considered whether a taxpayer identified the ultimate beneficiary or holder of certificates of beneficial_interest see gouveia v commissioner supra petitioners claim that during the years at issue linmar’s beneficiary was either redondo enterprises or nevet’s investments none of linmar’s representatives know anything about redondo enterprises or nevet’s investments other than their names and addresses that neither mr marlin who is intimately involved with the trust nor mr parsons linmar’s current trustee would know anything about the trust’s beneficiary other than its name and address is not plausible furthermore linmar’s trustee during the years at issue believed that mr marlin was the beneficiary petitioners claim that in date linmar wrote a check for dollar_figure to nevet’s investments however the check is paid to the order of anglo irish bank nevet’s investments is only written on the memo line there is no evidence that nevet’s investments received any benefit from the check in fact other than their own uncorroborated testimony neither mr marlin nor mr parsons presented any evidence that the purported beneficiaries even exist furthermore under the terms of the linmar contract it is unclear whether linmar has a beneficiary at all the contract states that the trustees shall continue to conserve and protect the assets and initiate continue extend or discontinue any venture or investment at their sole discretion for the benefit of the trust a_trust exists for the benefit of its beneficiaries not for its own benefit petitioners also state that the trust’s purpose is to protect the trust assets from suitors spend thrift relatives and probate these are the purposes of individuals not business organizations such as linmar’s purported beneficiaries the court also notes that the transfer of property to linmar did not create any rights in anyone else with respect to the transferred property the linmar trust contract states that ownership of capital units does not entitle such owner to any title legal or equitable nor to any management powers or rights to or in any assets or income of the trust the contract also states that a capital unit holder’s death or termination does not create any rights in linmar or its assets all rights of a capital unit holder terminate upon the death of that holder such rights automatically reverting to the trustees hereof the death insolvency or bankruptcy of any capital unit holder shall not operate to dissolve terminate or in any other manner affect this trust nor any of its operations or affairs nor may the heirs legal representatives or transferees of said holder demand a division of property of the trust nor any special accounting nor any rights whatsoever the agreement gives the beneficiaries a right to annual income and upon termination trust assets however these rights are illusory because the trustees are given broad discretion to determine what constitutes corpus income and net distributable income to the capital unit holders in fact despite the fact that linmar reported distributable_net_income in and the record is devoid of any evidence that distributions were made to the beneficiaries or that the beneficiaries waived their rights to distributions the trustees also have authority to amend the contract terminate the trust or extend the trust’s term the agreement clarifies that the trustee’s discretion is absolute the trustees have exclusive power to construe the meaning and intent of this contract such construction is conclusive legally binding and will govern such unbridled power gives taxpayer- trustees the same control_over property as they enjoyed before the formation of the trust see markosian v commissioner t c pincite castro v commissioner tcmemo_2001_115 as stated previously linmar had no independent_trustee and for all intents and purposes mr marlin functioned as linmar’s trustee making all decisions petitioners have not proven that anyone other than mr marlin and his immediate_family received an economic benefit from linmar trust accordingly this factor points to a sham d restrictions imposed by linmar trust or by the law of trusts the record shows that neither the linmar contract nor trust law restricted mr marlin’s use of the transferred property to the extent that the linmar contract required certain procedures or actions there is no evidence that the contract was followed for example there is no evidence that the trustees approved all real_estate transactions and contracts as required by the linmar contract all evidence indicates that mr marlin made those decisions without trustee approval mr marlin’s unrestricted use of trust property indicates that he was not restrained in any meaningful manner including fiduciary restraints accordingly this factor points to a sham e conclusion petitioners have provided no evidence that linmar had a valid business_purpose or was anything more than a vehicle for mr marlin to conduct his business and personal affairs to evade federal income taxes in substance mr marlin remained the owner of the properties purportedly transferred to linmar and is taxable on the income derived therefrom after considering the four factors above the court concludes that linmar trust lacked economic_substance and must be disregarded for federal_income_tax purposes iii the amount of income attributable to mr marlin when a taxpayer fails to maintain or produce adequate books_and_records the commissioner is authorized under sec_446 to compute the taxpayer’s taxable_income by any method that clearly reflects income 348_us_121 43_tc_824 the commissioner has great latitude in selecting a method for reconstructing a taxpayer’s income and the method need only be reasonable in light of all the surrounding circumstances this court has long accepted the bank_deposits method of income reconstruction 70_tc_1057 9in light of our holding the court need not address respondent’s alternative arguments that linmar’s income should be allocated to mr marlin under the assignment_of_income_doctrine or the grantor_trust_rules see gouveia v commissioner tcmemo_2004_256 n castro v commissioner tcmemo_2001_115 n while not conclusive bank_deposits are prima facie evidence of income 87_tc_74 mr marlin bears the burden of proving respondent’s determinations are erroneous and with respect to the bank_deposits analysis must show the deposits came from a nontaxable source see rule a 290_us_111 54_tc_1121 neither petitioner introduced evidence that contemporaneous books_and_records were maintained respondent used a combination of the specific items and bank_deposits methods to determine mr marlin’s unreported income respondent determined mr marlin’s unreported gross_receipts that should have been reported on schedule c profit or loss from business rental income that should have been reported on schedule e supplemental income and loss and interest_income by comparing the results of the specific items and bank_deposits analyses with linmar trust’s tax returns mr marlin provided no evidence that respondent’s calculations were incorrect or that any of the deposits were nontaxabledollar_figure respondent properly took into account income reported on linmar’s returns and mr marlin’s specific items of income to prevent the double counting of that income respondent also determined that mr marlin received dollar_figure of capital_gain from the sale of the olive street property the 10before trial respondent conceded dollar_figure of gross_receipts for because it was a nontaxable transfer gain from the sale of property is equal to the excess of the amount_realized therefrom over the adjusted_basis of the property sec_1001 mr marlin admits the amount_realized on the sale was dollar_figure a taxpayer must establish his cost or adjusted_basis for the purpose of determining gain_or_loss that he must recognize on a sale of property 271_f2d_44 9th cir affg tcmemo_1957_193 taxpayers who fail to prove a basis in a sold asset are considered to have a zero basis in that assetdollar_figure garrett v commissioner tcmemo_1997_231 mr marlin presented no evidence of his basis in the olive street property and is therefore considered to have a zero basis accordingly he received dollar_figure of capital_gain on the sale of the olive street property iv self-employment_tax respondent determined that mr marlin is liable for self- employment_tax under sec_1401 for each of the years at issue sec_1401 imposes a tax on the self-employment_income of 11in certain circumstances the court may use the cohan_rule to estimate a taxpayer’s basis in an asset at the time of transfer 39_f2d_540 2d cir for the court to estimate basis the taxpayer must provide some reasonable evidentiary basis for the estimation 94_tc_337 85_tc_731 mr marlin has not provided any basis that would permit a reasonable estimate of his basis in the olive street property individuals self-employment_income means the net_earnings_from_self-employment derived by an individual sec_1402 mr marlin presented no evidence that would indicate the schedule c gross_receipts he received are not self-employment_income therefore he is liable for self-employment_tax on that income for the years at issuedollar_figure v deductions linmar trust claimed deductions on its schedules c and schedules e during the years at issue respondent did not allow mr marlin any deductions other than the standard_deduction and the deduction for self-employment_tax deductions are a matter of legislative grace and a taxpayer bears the burden of proving that he has complied with the specific requirements for any deduction he claims 503_us_79 292_us_435 see also rule a mr marlin has presented no evidence that would indicate he is entitled to any deductions beyond those determined by respondent nor has he provided the court any reasonable factual basis upon which the court may estimate his allowable deductions under 39_f2d_540 2d cir therefore he is not entitled to any deductions beyond those determined by respondent 12for each of the years at issue respondent allowed mr marlin a deduction for one-half of the self-employment_tax under sec_164 vi additions to tax a burden_of_proof the commissioner bears the initial burden of production with respect to a taxpayer’s liability for additions to tax under sec_6651 and and a sec_7491 rule a 116_tc_438 to meet this burden the commissioner must come forward with sufficient evidence indicating it is appropriate to impose the additions to tax higbee v commissioner supra pincite the taxpayer bears the burden_of_proof as to any exception to the additions to tax see sec_7491 rule a higbee v commissioner supra pincite b sec_6651 addition_to_tax sec_6651 imposes an addition_to_tax for failure_to_file a return on the date prescribed determined with regard to any extension of time for filing unless the taxpayer can establish that such failure is due to reasonable_cause and not due to willful neglect mr marlin claims he failed to file tax returns for the years at issue because he reasonably relied on the advice of a tax professional who stated that he did not have sufficient income to require filing a return mr marlin presented no evidence of his adviser’s expertise nor did he present any evidence that the adviser was provided all necessary and accurate information if a competent adviser had been presented all of mr marlin’s tax information that adviser could not have reasonably advised mr marlin not to file a return therefore the court holds that mr marlin did not have reasonable_cause for his failure_to_file the returns at issue c sec_6651 addition_to_tax sec_6651 imposes an addition_to_tax of percent per month up to a maximum of percent for failure to make timely payment of the tax shown on a return unless the taxpayer shows that the failure is due to reasonable_cause and not due to willful neglect the addition_to_tax applies only when an amount of tax is shown on a return 120_tc_163 under sec_6651 a return prepared by the secretary pursuant to sec_6020 is treated as a return filed by the taxpayer for the purpose of determining the amount of an addition_to_tax under sec_6651 for these purposes a sec_6020 return in the context of sec_6651 and g must be subscribed it must contain sufficient information from which to compute the taxpayer’s tax_liability and the return form and any attachments must purport to be a ‘return’ spurlock v commissioner tcmemo_2003_ see also cabirac v commissioner supra pincite respondent prepared substitute returns that satisfied the requirements of sec_6651 and g and b mr marlin has not paid the tax due and has not established that his failure to timely pay was due to reasonable_cause d sec_6654 addition_to_tax sec_6654 imposes an addition_to_tax on an underpayment of estimated_tax unless one of the statutory exceptions applies see sec_6654 the addition_to_tax is calculated with reference to four required_installment payments of the taxpayer’s estimated_tax liability sec_6654 127_tc_200 affd 521_f3d_1289 10th cir each required_installment of estimated_tax is equal to percent of the required_annual_payment sec_6654 the required_annual_payment is generally equal to the lesser_of percent of the tax shown on the individual’s return for that year or if no return is filed percent of his or her tax for such year or if the individual filed a return for the immediately preceding_taxable_year percent of the tax shown on that return sec_6654 wheeler v commissioner supra pincite a taxpayer has an obligation to pay estimated_taxes for a particular year only if he has a required_annual_payment for that year wheeler v commissioner supra pincite the required_annual_payment is determined with respect to the tax_liability shown on the taxpayer’s return for the preceding year even when the return for the previous year fraudulently understates income or was filed late 121_tc_308 mr marlin did not file returns for or nor did he pay estimated_tax in any of those years however mr marlin’s form_4340 certificate of assessments payments and other specified matters indicates that he filed a return for which reported zero tax due respondent later determined that mr marlin owed dollar_figure in income_tax for nevertheless mr marlin filed a return for and the required_annual_payment for is limited to percent of the tax shown on the return ie zero accordingly mr marlin is not liable for an addition_to_tax under sec_6654 for see wheeler v commissioner supra pincite mendes v commissioner supra pincite mr marlin did not file returns for the other years at issue or for the immediately preceding years and he did not pay estimated_tax in those years therefore mr marlin is liable for additions tax under sec_6654 for and calculated with respect to the required annual payments ie percent of the tax due for the respective years in reaching the holdings herein the court has considered all arguments made and to the extent not mentioned above concludes they are moot irrelevant or without merit to reflect the foregoing decision will be entered for petitioner in docket no decision will be entered under rule in docket no


office_of_chief_counsel internal_revenue_service memorandum number release date cc fip b03 adubert pref-113527-16 uilc date date to associate area_counsel south florida large business international division from helen hubbard associate chief_counsel financial institutions and products subject -------------------------------- pref-113527-16 unamortized debt issuance costs this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent legend taxpayer year year year amount amount amount amount interest rate -------------------------------- ------- ------- ------- ------------------- --------- ----------------- ------------------ ---------------- pref-113527-16 issue what is the proper treatment of unamortized debt issuance costs for convertible debentures upon the conversion of the debentures into warrants exercisable into the issuer’s common_stock conclusion under revrul_72_348 1972_2_cb_97 and the cases cited therein upon the conversion of the debentures into stock the unamortized debt issuance costs assume the character of a capital_expenditure in connection with the issuance of the stock in this case the debentures were converted into warrants the exercise price of the warrants is a nominal sum and the warrants are treated as stock accordingly the issuer is not entitled to deduct its remaining unamortized debt issuance costs in the taxable_year of the conversion facts in year taxpayer issued amount interest rate convertible debentures due in year debentures at issuance taxpayer incurred debt issuance costs which it capitalized and amortized on a yearly basis over the term of the debentures in year per the terms of the debentures the holder holder exercised its right to convert the debentures into taxpayer’s warrants exercisable into taxpayer’s common_stock warrants the exercise price of the warrants is a nominal sum amount per share taxpayer paid holder a cash incentive fee of amount at the time of the conversion the unamortized balance of debt issuance costs was approximately amount costs all of which taxpayer seeks to deduct in the taxable_year of the conversion law and analysis sec_162 allows a deduction for all ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business however certain expenses are required to be capitalized under sec_263 under sec_1_263_a_-5 of the income_tax regulations debt issuance costs generally are required to be capitalized capitalized debt issuance costs are amortized over the term of a loan see 57_tc_781 sec_1_446-5 discussed infra sec_162 revrul_72_348 1972_2_cb_97 addresses inter alia the tax treatment of unamortized bond expense when an issuer’s bonds are converted into capital stock of the issuer under the facts of the ruling the taxpayer incurred costs for commissions and miscellaneous expenses upon the issuance of convertible debt the ruling provides the bond expense was incurred in connection with the issuance of the bonds upon the conversion of each bond into stock there was clearly no loss suffered by the taxpayer as a result of the transaction it was purely a capital_transaction its obligation to convert the bonds into stock was pref-113527-16 incurred when the bonds with respect to which the expense in question was incurred were issued for amortization purposes the issuance of the bonds is not a separate and distinct transaction from the conversion of the bond to stock and from the time of conversion any expense incurred in connection with the issuance of the original obligations should be treated as expense in connection with the issuance of stock of a corporation in support of these conclusions the ruling cites 34_bta_1191 t he conversion of bonds into capital stock of the obligor is purely a capital_transaction that is a readjustment of the obligor's capital structure which does not result in either a deductible loss or a taxable gain 13_bta_988 the issuer exchanged its stock for its bonded liability this was a purely capital_transaction which did not result in deductible loss or taxable gain aff’d in part rev’d in part 47_f2d_990 cert_denied 284_us_618 404_f2d_960 holding upon the exchange of the company’s bonds for the company’s stock in a bankruptcy reorganization unamortized debt issuance costs attributable to the issuance of the bonds were no longer deductible revrul_72_348 further provides that expenses paid in connection with the issuance of stock in a corporation are not deductible as ordinary or necessary expenses of carrying on a business rather such expenses are regarded as capital expenditures revrul_72_348 citing emerson electric manufacturing co v comm’r 3_bta_932 and 8_bta_631 aff’d 33_f2d_75 1st cir based on the authorities above revrul_72_348 concludes u pon the conversion of the bonds into stock the unamortized bond expense at that date assumes the character of a capital_expenditure under sec_263 of the code in connection with the issuance of the stock into which the bonds were converted and is not deductible by the taxpayer the warrants afforded holder the right to purchase taxpayer’s common_stock for amount per share a nominal sum the nominal purchase_price guaranteed that holder would exercise the right to acquire the stock under all reasonable scenarios accordingly revrul_72_348 applies to the conversion because the warrants are treated as stock see revrul_82_150 1982_2_cb_110 taxpayer argues that it is entitled to deduct the remaining unamortized costs in the taxable_year in which the conversion took place on the grounds that revrul_72_348 is obsolete following congress’ enactment of sec_108 taxpayer asserts that under current law the retirement of debt for stock is treated the same way as a retirement for cash pref-113527-16 sec_61 provides that gross_income includes income from the discharge_of_indebtedness cod income sec_108 provides additional rules for determining the amount of cod income an issuer must recognize sec_108 requires certain debtors to reduce certain tax_attributes in an amount equal to the excluded amount of cod income before courts had formulated an exception to the inclusion of cod income or reduction in the debtor’s tax_attributes if the debtor exchanged its stock for its indebtedness stock-for-debt exception beginning with the bankruptcy_tax_act_of_1980 however the stock-for-debt exception was progressively limited by statute until its repeal by the revenue reconciliation act of the tax_reform_act_of_1984 which added sec_108 formerly sec_108 provided a general_rule that when stock was issued for debt the debtor would be treated as having satisfied the debt with an amount of money equal to the fair_market_value of the stock in other words as a general_rule there would be no stock-for-debt exception however an exception formerly sec_108 was also added providing for a stock-for-debt exception when the debtor was insolvent the revenue reconciliation act of repealed the stock- for-debt exception effective generally with respect to stock transferred after in satisfaction of any indebtedness sec_108 as evidenced by sec_108 and e sets parameters around the exception set forth in sec_108 that gross_income does not include cod income in certain circumstances taxpayer is generally correct that the repeal of the stock-for- debt exception results in sec_108 treating a debt repurchase including a conversion as a cash retirement equal to the fair_market_value of the stock what taxpayer fails to acknowledge is that sec_108 applies only in specified circumstances the introductory language to sec_108 makes clear that the scope of the provision is limited to determining income of a debtor_corporation from discharge_of_indebtedness had congress intended with the repeal of the stock-for-debt exception to overturn revrul_72_348 or to cause stock-for-debt exchanges to be treated as cash retirements for all purposes of the code congress would have said so explicitly in the statute see 481_us_69 taxpayer asserts that under current law the retirement of debt for stock is treated the same way as a retirement for cash in taxpayer’s view the tax treatment of unamortized debt issuance costs should be the same whether the debt is retired with see eg 156_f2d_122 1st cir acq 1947_1_cb_3 140_f2d_382 1st cir 1_tc_872 sec_108 provides for purposes of determining income of a debtor from discharge_of_indebtedness if a debtor_corporation transfers stock to a creditor in satisfaction of its recourse or nonrecourse indebtedness such corporation shall be treated as having satisfied the indebtedness with the amount of money equal to the fair_market_value of the stock emphasis added pref-113527-16 cash or with equity of the issuer accordingly taxpayer asserts that it should be entitled to a current deduction for the remaining costs as support for this position taxpayer points to the amendment to sec_1_61-12 which amended the term repurchase to include the conversion of a debt_instrument into stock of the issuer sec_1_61-12 provides in pertinent part that i in general an issuer does not realize gain_or_loss upon the repurchase of a debt_instrument for purposes of paragraph c the term repurchase includes the retirement of a debt_instrument the conversion of a debt_instrument into stock of the issuer and the exchange including an exchange under sec_1001 of a newly issued debt_instrument for an existing debt_instrument ii repurchase at a discount an issuer realizes income from the discharge_of_indebtedness upon the repurchase of a debt_instrument for an amount less than its adjusted_issue_price within the meaning of sec_1_1275-1 the amount of discharge_of_indebtedness income is equal to the excess of the adjusted_issue_price over the repurchase price see sec_108 and the regulations thereunder for additional rules relating to income_from_discharge_of_indebtedness iii repurchase at a premium an issuer may be entitled to a repurchase premium deduction upon the repurchase of a debt_instrument for an amount greater than its adjusted_issue_price within the meaning of sec_1_1275-1 see sec_1_163-7 for the treatment of repurchase premium taxpayer is generally correct that an issuer is entitled to a current deduction for unamortized debt issuance costs upon the retirement of its debt for cash see 75_f2d_644 d c cir 76_f2d_1011 2d cir per curiam 75_f2d_723 8th cir however sec_1_61-12 does not equate a stock-for-debt exchange to a cash retirement of debt for all purposes of the code we have found no reason to believe that revrul_72_348 has been obsoleted by revisions to sec_108 or by the amendments to sec_1_61-12 lastly taxpayer makes an argument based on sec_1_446-5 which was issued in sec_1_446-5 provides rules for allocating debt issuance costs over the term of the debt in many cases sec_1_446-5 will require the issuer to allocate debt issuance costs as if the costs were oid subject_to sec_1_163-7 taxpayer infers from this use of the rules in sec_1_163-7 that any unamortized debt issuance costs at the time of a conversion pref-113527-16 should be treated as if they were repurchase premium subject_to sec_1_163-7 however sec_1_446-5 applies only to debt issuance costs that are otherwise deductible sec_1_446-5 both stock issuance costs and debt issuance costs are capital expenditures see sec_1_263_a_-5 and however debt issuance costs are amortizable whereas stock issuance costs are not see 57_tc_781 651_f2d_828 2d cir 74_f2d_163 10th cir 88_tc_1157 32_bta_39 acq in part 1935_1_cb_15 non-acq in part 1935_1_cb_35 withdrawing non-acq c b 28_bta_480 8_bta_631 acq 1928_2_cb_3 aff'd 33_f2d_75 1st cir 3_bta_932 taxpayer’s argument would create a tax incentive to issue convertible debt and have a holder immediately convert into its stock rather than to issue the stock outright which would be inconsistent with sec_1_263_a_-5 having found that revrul_72_348 is still valid we conclude that the principles therein are determinative to the facts here the issuance of taxpayer’s debentures was not a separate and distinct transaction from the conversion of the debentures into warrants in accordance with the terms of the debentures and from the time of conversion the remaining costs assume the character of an expense in connection with the issuance of the warrants accordingly taxpayer is not entitled to deduct its remaining costs in the taxable_year in which the holder exercised its right under the conversion feature this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call if you have any further questions by _____________________________ charles w culmer senior technician reviewer branch office of the associate chief_counsel financial institutions products


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 tege eb qp2 plr-138800-09 date date legend state s ------------------------ state_agency ------------------------------------------------------------------------------ ---------------------------------------------------------------------------------------------- plan -------- ----------------------------------------------------------------------------------------------------------- --------------------------------------------- dear ----------------- this responds to your authorized representative’s original letter and subsequent correspondence on behalf of state s and its state_agency requesting a ruling that state’s s restated deferred_compensation plan the plan is an eligible_deferred_compensation_plan under sec_457 of the internal_revenue_code_of_1986 the code as amended under the economic_growth_and_tax_relief_reconciliation_act_of_2001 egtrra and in subsequent legislation the restated plan has been adopted by state s which is represented to be an eligible governmental employer described in sec_457 of the code the state_agency administers the plan on behalf of state s under the plan a participant who must be an eligible_employee of state s or one of its related agencies and instrumentalities may elect to defer compensation within the plan’s limits that would have been received for services rendered to state s in any taxable_year until death severance_from_employment attainment of age 70½ or until the occurrence of an unforeseeable_emergency the plan also contains a provision allowing for an plr-138800-09 elective in-service distribution of dollar_figure or less to be paid to a participant from his or her account in certain limited circumstances set forth thereunder and in sec_457 the plan permits the state_agency to allow the plan’s participants to take loans from their sec_457 plan accounts subject_to certain restrictions loans made under the plan are subject_to rules in the plan and under sec_1_457-6 of the income_tax regulations including provisions restricting the maximum amount and term of a plan_loan a participant’s election under the plan to defer compensation not yet paid including post-severance compensation paid within a limited period after severance_from_employment must be filed prior to the beginning of the month in which the compensation to be deferred is paid or made available the plan provides for a maximum amount that may be deferred by a participant in any taxable_year and also provides for a catch-up computation for amounts deferred for one or more of the participant's last three taxable years ending before he attains normal_retirement_age under the plan the amounts that may be deferred by a participant in the plan under the annual maximum limitation and the catch-up provisions are within the limitations of sec_457 including the sec_457 coordinated deferral provision the plan also provides for the age plus catch-up_contributions described in sec_414 and sec_457 however the plan provides that a participant can only utilize one of the two catch-up contribution provisions during a single year with certain limitations a participant beneficiary or alternate_payee may elect the manner in which his her deferred amounts will be distributed the plan provides that the manner and time of benefit payout must meet the distribution_requirements of sec_401 and sec_457 of the code the plan provides that amounts of compensation deferred thereunder are to be transferred to and held in a_trust described in sec_457 for the exclusive benefit of the participants and their beneficiaries all amounts deferred under the plan must be transferred to the trust within a short_period after such compensation would otherwise have been paid in compliance with sec_1_457-8 of the regulations the rights of any participant or beneficiary to payments pursuant to the plan are generally nonassignable and not subject_to transfer or alienation under the plan a participant may elect to have any portion of an allowable distribution which constitutes an eligible_rollover_distribution described plr-138800-09 in sec_402 of the code paid directly to another eligible_retirement_plan described in sec_402 such as an individual_retirement_account ira in a direct_rollover the plan also provides that a participant prior to severance_from_employment or a beneficiary or alternate_payee may elect pursuant to sec_457 and in accordance with the state agency’s rules to transfer a portion or all of the amount in his her sec_457 plan account to a defined benefit governmental_plan described in sec_414 of the code that accepts such transfers to purchase permissive_service_credit described in sec_415 of the code or make a repayment to which sec_415 does not apply under sec_415 pursuant to the terms of such transferee_plan sec_457 of the code provides rules for the deferral of compensation by an individual participating in an eligible_deferred_compensation_plan as defined in sec_457 sec_457 of the code provides that in the case of a participant in an eligible governmental deferred_compensation plan any amount of compensation deferred under the plan and any income attributable to the amounts so deferred shall be includible in gross_income only for the taxable_year in which such compensation or other income is paid to the participant or beneficiary sec_457 prescribes that an eligible_deferred_compensation_plan must meet the distribution_requirements of sec_457 sec_457 provides that for a sec_457 plan to be an eligible_plan the plan must have distribution_requirements providing that under the plan amounts will not be made available to participants or beneficiaries earlier than i the calendar_year in which the participant attains age 70½ ii when the participant has a severance_from_employment with the employer or iii when the participant is faced with an unforeseeable_emergency as determined under treasury regulations sec_457 defines an eligible_employer to be a state political_subdivision of a state any agency_or_instrumentality of a state or political_subdivision of a state sec_457 provides that with respect to an eligible_retirement_plan established and maintained by a governmental employer if any portion of the balance_to_the_credit of an employee in the plan is paid to him her in an plr-138800-09 eligible rollover the employee transfers any portion of the property received in such distribution to an eligible_retirement_plan and in the case of a distribution of non-monetary property the amount so transferred consists of the property distribution then such distribution to the extent so transferred shall not be includible in gross_income for the taxable_year in which paid sec_457 provides that no amount shall be includible in gross_income due to a direct trustee-to-trustee transfer to a defined benefit governmental_plan described in sec_414 if such transfer is a to purchase permissive_service_credit described in sec_415 in the governmental_plan or b to make a repayment to which sec_415 does not apply under sec_415 sec_1_457-10 of the income_tax regulations clarifies that such a transfer may be made before severance_from_employment sec_457 provides that a plan maintained by an eligible governmental employer shall not be treated as an eligible_deferred_compensation_plan unless all assets and rights purchased with such deferred_compensation amounts and all income attributable to such amounts property or rights of the plan are held in trust for the exclusive benefit of participants and their beneficiaries based upon the provisions of the plan summarized above and the documents and representations provided we conclude as follows the restated plan of state s constitutes an eligible_deferred_compensation_plan as defined in sec_457 of the internal_revenue_code_of_1986 as amended under egtrra and subsequent legislation amounts of compensation deferred in accordance with the plan including any income attributable to the deferred_compensation will be includible under sec_457 of the code in the recipient’s gross_income only for the taxable_year or years in which amounts are paid to a participant or beneficiary in accordance with the terms of the plan the trust under the plan established by state s satisfies the requirement of sec_457 of the code and the trust shall be treated as an organization_exempt_from_taxation under sec_501 of the code no opinion is expressed concerning the timing of the inclusion in income of amounts deferred under any deferred_compensation plan other than the above- plr-138800-09 described plan if the plan is significantly modified this ruling will not necessarily remain applicable this ruling is directed only to the plan and not to any other sec_457 plan and it applies only if state s adopts the revised plan submitted on date amending the restated plan originally submitted on date sec_6110 of the internal_revenue_code provides that this ruling may not be used or cited as precedent sincerely cheryl press senior counsel qualified_plans branch employee_benefits tax exempt government entities enclosure


internal_revenue_service p o box cincinnati oh release number release date date date legend b foundation c llc d grant program e religion f dollar amount g dollar amount h dollar amount j dollar amount k dollar amount m dollar amount dear department of the treasury employer_identification_number contact person - id number contact telephone number vil you asked for advance approval of your educational grant procedures under internal_revenue_code sec_4945 this approval is required because you are a private_foundation that is exempt from federal_income_tax our determination we approved your procedures for awarding educational grants based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding educational grants meet the requirements of code sec_4945 as a result expenditures you make under these procedures won't be taxable descriptio of your request b a foundation and the sole member of c operates an educational grant program called d the purpose of d is to deepen and enrich the e educational learning opportunities of students and where relevant or desired their families by offering grants to organizations for use in such programs while b will primarily fund d b may request that other donors enter into their original grant agreement with the recipient in providing additional funding you plan on operating in connection with b to become an additional donor party to the grant agreement in doing so you will provide grants to the original recipient and funds would be administered and monitored under the procedures established by b described below the duration and amounts of the grants awarded to educational organizations will vary but most are expected to be in the form of three year grants in amounts ranging between f and g dollars per annum you will fund each grantee’s program in the first year thereafter grantee organizations are expected to obtain increasing amounts of donor commitments to cover the costs of their programs you expect to mail informational materials to individual educators who are working at organizations that provide e educational programming to students in grades kindergarten through twelfth grade and college the educators who have received or will receive the solicitation materials and application package have been or will be pre-selected by nominators engaged by you to identify and recruit potential applicant organizations with outstanding educators at their organizations since you do not have educational staff with e educational experience you developed relationships with individual consultants who have experience with formal and informal programming to help identify an appropriate applicant pool and to ensure high quality among the applicant pool you have engaged individuals to serve as nominators in connection with d you requested that the nominators identify a group of outstanding innovative educators working with educational organizations who you could invite to apply for funding nominators were asked to identify individuals with a reputation for implementing high quality programming and a proven track record for achieving educational results additionally you requested that nominators identify educators who the nominators believe can propose new programs that could be implemented by the educational organizations where such educators are employed that would deepen and enrich the knowledge and identity of the students of such organizations and educators and if relevant the families of these students while the objective is to have innovative educators design d programs you will also consider the nature of the organization where the educator is employed as the organization will be responsible for supporting sustaining and implementing the educational programming if the organization is awarded a d grant the class of eligible grantees is limited to educational organizations at which educators identified by the nominators are employed although the invitations are intended to be non-transferable and personal to the identified educators you are committed to building educational programming at the grantee organization under the supervision of either the nominated educator or another qualified educator at the organization that is selected by the grantee organization in making their initial nominations the nominators will take into account the experience of the organization in implementing high quality educational programming letter catalog number 58222y you will review the submitted applications based upon a number of criteria including experience and track record of the applicant organization in executing effective e educational programming the clarity of the plan and budget readiness of the organization to implement the proposed project and goals of the proposal and the probability of the organization achieving the stated goals of the proposal you expect to commit funds to d in its first year sufficient to enable between ten to twenty grantee organizations to begin developing programs with the nominated educators thereafter the extent to which you will commit to funding programs and new grantees will be determined after an assessment regarding the success of the first grantees’ programs and available_resources each grantee may request a different amount for each of the three years as it builds its program in the first year grantees may request between f and g dollars in the second year grantees may request between f and h dollars in the third year grantees may request between f and j dollars in years two and three the grantee organization is expected to also raise program funds from other sources during the third year of the grant you will evaluate the impact of the program and effectiveness of grantee organizations for achieving proposal objectives based upon implementation feedback such as increases in the program participants or quantity of time participants spend engaged in programming supported by d or increased depth or measure of learning as determined by valid educational measures you will invite a number of grantees to apply for an additional two years of grant funding if awarded an extension grant each grantee organization would be eligible to receive a maximum of k dollars in year four and m dollars in year five as with the standard three year grants such extension grant will be made with the expectation that the grantees secure increasing amounts of donor commitments to offset program_costs you will fund each grant in installments with an initial payment up front to fund the first eight months of programming in year one thereafter each grantee organization would submit a report to you every six months upon receipt of a report which evidences the satisfactory continued implementation of the program supervised by an adequately qualified educator whether the initial nominated educator or a replacement selected by the educational_organization you will fund the subsequent payments in years one two and three and if extended years four and five if the nominated educator leaves the educational_organization after you enter into the grant agreement the educational_organization would be responsible for selecting an adequately qualified educator to continue implementing the program grantees will submit written reports to you every six months reports will include a narrative description of the implementation of the educational programming and will be accompanied by a financial report on the use of granted funds compared against the budget a program coordinator or other c representative will regularly communicate with each recipient organization to receive feedback on the funded program and how the grant monies are being spent in connection to such programming letter catalog number 58222y each grant recipient must keep and maintain such financial records and in sucha manner so as to adequately reflect and account for_the_use_of the organization grant funds and to furnish originals or authentic copies to the program coordinator upon request c in its sole discretion may take any and all such reasonable and appropriate steps including possibly legal action to compel compliance of use of funds for their intended purpose including requiring the return of all or any portion of funds remitted and the withholding of funds not previously remitted the awarding of d is a multi-faceted process which begins with the initial identification of educational organizations at which nominated educators are then employed nominated educators are then sent informational materials and grant applications which they are encouraged to complete with the appropriate stakeholders at their respective educational organizations applications must be submitted by educational organizations completed applications submitted by those educational organizations are then received by you and evaluated by your selection committee each completed application will be reviewed by one or more members of your staff and a nominator other than the nominator who originally nominated the educator who was the architect for the related proposal each member will rate the application in connection with following parameters e e e e e the internal logic educational strength and process of implementing the educational proposal described in the application the evidence and probability that the proposed educational programming will significantly deepen and enrich the educational growth of the program participants the track record of the organization in implementing educational programming and in successfully implementing new educational programming the readiness of the organization and commitment of the organization to expand and offer the new programming the level of involvement and supervision which the selected educator will assume in guiding the project the selection committee will also be responsible for identifying any relationships between potential grant applicants and disqualified persons and ensure that organizations with any such relationship s are not awarded grants your selection committee consists of one or more members of your staff and a nominator other than the nominator who originally nominated the educator who was the architect for the related proposal if any member of the senior staff or management of a potential grant recipient is either related to whether by blood or through marriage or has any direct or indirect affiliation with the d program coordinator or any director officer_or_employee of you or c they will be ineligible to participate in the program letter catalog number 58222y no director officer_or_employee of you or c or any other person who is involved in the process of selecting applicants for the program will be in a position to derive a private benefit directly or indirectly if certain potential grantees are selected over others basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that meets all of the following requirements of code sec_4945 is not a taxable_expenditure the foundation awards the grant on an objective and nondiscriminatory basis the irs approves in advance the procedure for awarding the grant the grant is - - - ascholarship or fellowship subject_to sec_117 and is to be used for study at an educational_organization described in sec_170 a ii or a prize or award subject_to the provisions of sec_74 if the recipient of the prize or award is selected from the general_public or to achieve a specific objective produce a report or similar product or improve or enhance a literary artistic musical scientific teaching or other similar skill or talent of the recipient to receive approval of its educational grant procedures sec_53_4945-4 requires that a private_foundation show the grant procedure includes an objective and nondiscriminatory selection process the grant procedure results in the recipients performing the activities the grants were intended to finance the foundation plans to obtain reports to determine whether the recipients have performed the activities that the grants were intended to finance other conditions that apply to this determination this determination covers only the grant program described above this approval will apply to succeeding grant programs only if their standards and procedures don't differ significantly from those described in your original request this determination applies only to you it may not be cited as precedent you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you must report any significant changes in your program to the cincinnati office of exempt_organizations at letter catalog number 58222y internal_revenue_service exempt_organizations determinations p o box cincinnati oh e e e you cannot make grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives all funds distributed to individuals must be made on a charitable basis and must further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 b you should keep adequate_records and case histories so that you can substantiate your grant distributions with the irs if necessary we've sent a copy of this letter to your representative as indicated in your power_of_attorney please keep a copy of this letter in your records if you have any questions please contact the person listed at the top of this letter sincerely director exempt_organizations letter catalog number 58222y


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 fip b04 plr-121717-05 date date ---------- ----------------------------------------------------------- legend taxpayer ---------------------------------------------------------- subsidiary a ----------------------------------------------------------------------------------------------------------- country x state state number z bbs ccs dds dear ------------- ---------------------------------- -------------------------------- ------------------------------- -------------------- ------ --- -------------------------------------------------------------------------------- this letter is in response to the ruling_request filed on behalf of taxpayer dated date the taxpayer has requested a ruling with respect to certain assets held by the taxpayer in a variable_annuity separate_account facts plr-121717-05 taxpayer is a stock_life_insurance_company as defined in sec_816 and is subject_to taxation under part i of subchapter_l of the code taxpayer is organized and operated under the laws of state and maintains its executive offices in state taxpayer also has a branch office in country x taxpayer files a consolidated_income_tax_return with its wholly owned subsidiary subsidiary a on a calendar_year basis and each company reports its income on an accrual_method taxpayer is licensed to conduct a life_insurance business and issues variable life and or variable_annuity contracts in number z states and the district of columbia and in country x taxpayer represents that it has recently begun to issue group variable_annuity contracts through its branch office in country x the contracts the assets supporting the contracts are held in a separate_account the separate_account established under the laws of state taxpayer further represents that the income deductions assets and liabilities associated with the separate_account will be maintained separately from taxpayer’s other accounts taxpayer reports that the contracts are issued to pension_plan trustees and sponsors to fund the obligations of various types of defined contribution pension plans the plans the plans are established under the laws of country x by country x employers the plans are the contract holders under the plans amounts are contributed by or on behalf of employee plan members members and then used to fund the contracts taxpayer states that it will establish an account for each member to separately account for that member’s contract amounts taxpayer represents that the contract amounts are invested in one or more of the investment options available under the contracts the underlying investment_assets as directed by the members per taxpayer the number of investment options varies by plan but there is no limit on the maximum number of investment options that can be made available each plan permits members to reallocate their contract amounts on a specified frequency as explained in taxpayer’s submission the investment options under a contract include bbs which are the equivalent of the subaccounts or subdivisions of a separate_account used in connection with u s variable_contracts each bb invests in one or more of three different types of assets units of country x investment funds known as ccs described by taxpayer as similar to a type of u s private_placement investment fund units of country x investment funds known as dds per taxpayer these are essentially the same as u s mutual funds and shares of stock of the country x employer that established the plan taxpayer represents that all of the assets that fund the plans are and will be available for purchase directly by the public without the purchase of a contract although some of these assets ie units in ccs are available to only large sophisticated investors plr-121717-05 as represented by taxpayer under the contracts a member is vested in and is entitled to receive the value of his or her account as permitted under the laws of country x the value of the account at any time is based upon the value of the cc or dd units or employer stock allocable to such account the contract does not contain any permanent annuity purchase rate guarantees or any other type of insurance guarantee however at retirement a member may elect to have his or her account applied to provide immediate_annuity payments by taxpayer in that event taxpayer will withdraw from the member’s account the amount necessary to provide the annuity payments which will be determined based on the current annuity purchase rates then in effect by taxpayer taxpayer expects however that members will rarely if ever elect this option should a member elect to purchase an annuity the member will pay a fee to taxpayer taxpayer represents that the contracts do not impose any surrender charges however periodic asset-based fees and charges are imposed by taxpayer on each account under a contract contract charges taxpayer further represents that the contracts do not comply with sec_72 do not qualify as variable_contracts for purposes of sec_817 are not pension_plan_contracts within the meaning of sec_818 and do not comply with the diversification requirements of sec_817 and the regulations thereunder law and analysis sec_61 provides that the term gross_income means all income from whatever source derived including gains derived from dealings in property interest and dividends since the service has issued a number of revenue rulings addressing when an investor in a contract has sufficient control_over the underlying investments to be treated as the owner of those investments revrul_77_85 1977_1_cb_12 concludes that if a purchaser of an investment annuity_contract selects and controls the investment_assets in the separate_account of the issuing life_insurance_company then the purchaser is treated as the owner of those assets for federal_income_tax purposes revrul_77_85 also states that b ecause the insurance_company receives nothing until a portion of the custodial_account is liquidated and remitted to it by the custodian as either charges or premiums due under the contract the insurance_company should only include the premiums and charges paid each year in its premium income for that year under sec_809 of the code predecessor of current sec_803 similarly revrul_80_274 1980_2_cb_27 holds that where a savings and loan depositor transfers a certificate of deposit c d to a life insurer in exchange for an annuity_contract and the life insurer is expected to continue to hold the c d for the plr-121717-05 benefit of the depositor the depositor not the insurance_company is considered the owner of the c d for tax purposes revrul_81_225 1981_2_cb_12 clarified and amplified by revrul_2003_92 2003_2_cb_350 analyzes five situations involving purported variable_annuity contracts in four of the situations the ruling concludes that the contracts are not annuity_contracts and that prior to the annuity_starting_date the contract holders are the owners of the assets held by the insurance_company with regard to the contracts in these situations the insurance_company holds shares of mutual funds that are directly or indirectly available to the public in the fifth situation the contract holder can invest only in a non-publicly-available mutual_fund managed by the insurance_company or one of its affiliates the shares in that mutual_fund are available only through the purchase of an annuity_contract in that situation the ruling concludes that the insurance_company is treated as the owner of the mutual_fund shares held by the company for the contracts in revrul_82_54 1982_1_cb_11 the purchasers of certain annuity_contracts have the right to direct the issuing insurance_company to invest in the shares of any or all of three mutual funds that are not available to the public one mutual_fund invests primarily in common stocks another in bonds and a third in money market investments policyholders are free to allocate their premium payments among the three funds and have an unlimited right to reallocate contract values among the funds prior to the maturity_date of the annuity_contract the ruling concludes that the policyholders' ability to choose among general investment strategies for example between stocks bonds or money market instruments either at the time of the initial purchase or subsequent thereto does not constitute sufficient control so as to cause the policyholders to be treated as the owners of the mutual_fund shares in 749_f2d_513 8th cir cert_denied 473_us_905 the court upheld the investor_control theory of revrul_81_225 the taxpayers in christoffersen purchased a variable_annuity contract that reflected the investment return and market_value of assets held in a separate_account that was segregated from the general assets of the issuing insurance_company the taxpayers had the right to direct that their premium payments be invested in any one or all of six publicly traded mutual funds the taxpayers could reallocate their investment among the funds at any time and had the right to make withdrawals to surrender the contract and to apply the accumulated value under the contract to provide annuity payments the court held that the taxpayers and not the issuing insurance_company owned the mutual funds for federal_income_tax purposes in revrul_2003_91 2003_2_cb_347 holders of variable_annuity contracts were not considered the owners of the assets in which the funds invested even though the policyholders had the ability to allocate the premium paid among various subaccounts change such allocations at any time and transfer funds from one subaccount to another the investment in the subaccounts was available solely through plr-121717-05 purchase of variable_annuity contracts and was not otherwise publicly available moreover the policyholders were not able to communicate directly or indirectly with the investment advisors regarding the investment strategies of the subaccounts revrul_2003_91 concludes that the policyholders did not have direct or indirect control_over any of the assets in the subaccounts and therefore would not be treated as the owners of such assets in revrul_2003_92 2003_2_cb_350 a holder of a variable_annuity or life_insurance_contract is the owner of interests in a nonregistered partnership where interests in the nonregistered partnership are not available exclusively through the purchase of a life_insurance or annuity_contract the ruling concludes that pursuant to sec_61 the owner of interests held in a sub-account must include in its gross_income any interest dividends or other income derived from the interests held in the sub- account in the year in which the interest dividends or other income is earned sec_817 was enacted as part of the deficit_reduction_act_of_1984 pub_l_no in the legislative_history of that act congress expressed its intent to deny life_insurance treatment to any variable_contract containing segregated accounts backed by publicly available funds h_r conf_rep no pincite holding taxpayer will not be considered the owner of the underlying investment_assets for federal_income_tax purposes this ruling makes no conclusion regarding the federal_income_tax liability of the plans 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 rulings it is subject_to verification on examination 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 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative plr-121717-05 a copy of this letter must be attached to any income_tax return to which it is relevant sincerely s donald j drees jr senior technical reviewer branch office of associate chief_counsel financial institutions products ------------------------- -------------------------


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 b03 plr-119964-08 date date company ------------------------------------------------------------- ------------------------------------- ---------------------------------------------- a b --------------------------- ----------------- dear ------------ we received a letter dated date and subsequent correspondence submitted on behalf of company requesting a ruling under sec_1362 of the internal_revenue_code this letter responds to that request facts company was incorporated on a under state law company’s shareholders intended for company to be an s_corporation effective b however company’s form_2553 election by a small_business_corporation was not timely filed thus company requests a ruling that it will be recognized as an s_corporation effective b law and analysis sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation plr-119964-08 sec_1362 provides that an election under sec_1362 may be made by a small_business_corporation for any taxable_year - a at any time during the preceding_taxable_year or b at any time during the taxable_year and on or before the 15th day of the third month of the taxable_year sec_1362 provides that if a an election under sec_1362 is made for any taxable_year determined without regard to sec_1362 after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make the election the secretary may treat such an election as timely made for the taxable_year and sec_1362 shall not apply conclusion based on the facts submitted and representations made we conclude that company has established reasonable_cause for failing to make an s_corporation_election thus we conclude that company is eligible for relief under sec_1362 accordingly if company makes an election to be an s_corporation by filing with the appropriate service_center a completed form_2553 effective b within days following the date of this letter the election shall be treated as timely made a copy of this letter should be attached to the form_2553 filed with the service_center a copy is enclosed for that purpose except as expressly provided herein 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 concerning whether company is otherwise eligible to be an s_corporation for federal tax purposes this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely s leslie h finlow senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures a copy of this letter a copy for sec_6110 purposes


internal_revenue_service department of the treasury number release date index number in re washington dc person to contact telephone number refer reply to cc ita 3-plr-113302-03 date date ty legend taxpayer condition a condition b condition c condition d problem e problem f problem g problem h problem i treatment j dear this letter_ruling is in response to taxpayer’s letter dated date and submitted pursuant to revproc_2003_1 2003_1_irb_1 requesting a ruling under sec_213 of the internal_revenue_code facts taxpayer was born with condition a condition b and other condition c all congenital abnormalities these defects significantly inhibit the proper function of the body including problem e problem f problem g problem h and problem i and have now been ameliorated with numerous surgeries as a direct result of these surgeries taxpayer has condition d a facial deformity condition d can be improved with treatment j which will need to be repeated over the course of many years plr-113302-03 taxpayer seeks a ruling that the cost of treatment j is a deductible medical expense pursuant to sec_213 law and analysis sec_213 allows a deduction for medical_care expenses for which the taxpayer is not compensated by insurance or otherwise to the extent the expenses exceed percent of adjusted_gross_income sec_213 defines medical_care to include amounts paid for the diagnosis cure mitigation treatment or prevention of disease or for the purpose of affecting any structure or function of the body however sec_213 provides that medical_care does not include cosmetic_surgery unless the surgery is necessary to ameliorate a deformity arising from or directly related to a congenital abnormality a personal injury resulting from an accident or trauma or a disfiguring disease sec_213 defines cosmetic_surgery as any procedure that has as its objective the improvement of the patient’s appearance without also meaningfully promoting the proper function of the body or preventing or treating illness or disease sec_1_213-1 of the income_tax regulations states that medical_care includes operations or treatments including surgery that affect a portion of the body and that are deemed to be for the purpose of affecting any structure or function of the body here treatment j is cosmetic_surgery pursuant to sec_213 because it will improve taxpayer’s appearance without also meaningfully promoting the proper function of the body or preventing or treating illness or disease however according to taxpayer’s submission taxpayer’s condition d is a deformity that arose from or is directly related to the congenital abnormalities condition a condition b and condition c suffered by taxpayer thus treatment j is included within the definition of medical_care under sec_213 and sec_213 to the extent not_compensated_for_by_insurance_or_otherwise the expenses of treatment j that exceed of taxpayer’s adjusted_gross_income will be deductible pursuant to sec_213 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 sincerely yours christopher f kane chief branch associate chief_counsel income_tax accounting


third party communication date of communication month dd yyyy cca-01280221-15 id uilc number release date from ------------------------- sent date pm to -------------------------------- cc ----------------- bcc subject analysis of primary issue hello please see the attached document for what i think should be the analysis of the primary issue of course the facts of ------- need to be appropriately incorporated into this somewhat generic analysis as i mentioned i went through the sec_199 reg file i found nothing in the file that provides any additional insight into each element under the third party comparable exception one thing has become even clearer for me however is that these exceptions were not intended to apply to ------- and such similar taxpayers not be entitled to sec_199 benefits it was clearly intended that under the final regs ------- and such - would after the reg file review and completing this analysis i am questioning the need for the secondary position beyond explaining that even if ------- has any gross_receipts from providing access to computer_software online it does not meet each element of the exception and explaining why and distinguishing the cca i think we may want to re-visit the merits of taking a secondary position at all i will circulate my take on the analysis for the secondary position in ------- separately once we have the facts and this analysis is incorporated we need to run the document by the no in the meantime i will share a generic version of this analysis with the no and the division counsel there is absolutely nothing in my analysis of the primary position that should be subject_to a dispute between ----- and our office and really should not be disputed by taxpayers i stuck to the language of the regs and to the explanations in the preamble but we will find out for sure soon ------------- attachment ------- primary argument docx