t c memo united_states tax_court curtis investment_company llc henry j bird a partner other than the tax_matters_partner petitioner v commissioner of internal revenue respondent guy r baxter and lonnie c baxter petitioners v commissioner of internal revenue respondent docket nos filed date david d aughtry and hale e sheppard for petitioners jason p oppenheim john w sheffield iii and lawrence sledz for respondent memorandum findings_of_fact and opinion marvel chief_judge these cases have been consolidated for trial briefing and opinion the issues for decision are whether petitioners are entitled to deduct the losses and fees associated with custom adjustable rate debt structure cards transactions for taxable_year year at issue and liable for accuracy-related_penalties under sec_6662 respondent issued a notice of final_partnership_administrative_adjustment fpaa pursuant to sec_6223 to r alan bird jr the tax_matters_partner tmp of curtis investment co llc curtis investment a limited_liability_company llc organized under the laws of the state of georgia in the fpaa respondent disallowed curtis investment’s claimed loss deduction for that resulted from a cards transaction and the claimed deductions from entering into the transaction respondent also determined accuracy-related_penalties under 1we use the term petitioners to refer collectively to curtis investment and mr and mrs baxter 2all section references are to the internal_revenue_code code in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated sec_6662 for a gross_valuation_misstatement because r alan bird jr did not petition this court within days henry j bird a notice_partner filed a petition pursuant to sec_6226 respondent issued a notice_of_deficiency to mr and mrs baxter on date that determined a deficiency and accuracy-related_penalty under sec_6662 for a gross_valuation_misstatement in mr and mrs baxter’s federal_income_tax for in the notice_of_deficiency respondent disallowed a claimed loss deduction for as a result of a cards transaction similar to curtis investment’s cards transaction findings_of_fact some of the facts have been stipulated and are so found the stipulations of fact and facts drawn from stipulated exhibits are incorporated herein by this reference mr and mrs baxter resided in south carolina at the time of filing their 3alternatively respondent determined that petitioners are liable for accuracy-related_penalties under sec_6662 for negligence or a substantial_understatement_of_income_tax 4respondent also issued a notice_of_deficiency to mr and mrs baxter for that determined a deficiency in federal_income_tax and an accuracy-related_penalty under sec_6662 respondent’s position with respect to is an alternative to respondent’s determination for because we hold that mr and mrs baxter’s cards transaction lacked economic_substance respondent concedes the deficiency and accuracy-related_penalty petition curtis investment’s principal_place_of_business when its petition was filed was georgia i petitioners in henry russell curtis founded curtis printing co which became a very successful printing company in curtis printing co ’s name was changed to curti sec_1000 and in curti sec_1000 decided to offer its stock to the public in order to offer the stock of curti sec_1000 to the public curti sec_1000 incorporated american business products inc abp abp became the corporate parent of curti sec_1000 and the abp stock was traded to the public before the public offering curti sec_1000 was primarily owned by the curtis family in the family formed curtis investment which operated as a holding_company for curti sec_1000 stock after the public offering curtis investment owned approximately of the abp stock in addition to holding abp stock curtis investment began diversifying its portfolio as part of its diversified portfolio curtis investment would borrow funds at a low interest rate to make an investment if it determined that the investment would yield a return greater than the interest cost 5members of the curtis family including mrs baxter also individually owned abp stock in mrs baxter became the managing member of curtis investment in her son henry j bird mr bird started to work at curtis investment after previously working at curti sec_1000 for over years on date mr bird became the managing member of curtis investment mr bird holds a bachelor’s degree in business administration from west georgia college he was also the president of a mortgage company birdhouse mortgages and as a result he is familiar with loan origination fees and the lending industry when mr bird became the managing member of curtis investment the company included family members to centralize management in mr bird formed an investment committee to assist curtis investment with determining what type of assets the company should hold the investment committee determined that curtis investment should diversify its holdings and therefore as part of that diversification curtis investment would sell some of its abp stock over a 10-year period 6mrs baxter started working for curtis investment in mrs baxter is the great-granddaughter of henry russell curtis the founder of curtis printing co the record states that mrs baxter and later her son mr bird were the managing partners of curtis investment because curtis investment was organized as an llc we will refer to them as managing members 7mr bird is often referred to as jay bird throughout the record in either late or early however abp received a tender offer for the purchase of the company abp’s board accepted the tender offer and as a result of the tender offer curtis investment sold big_number shares of abp stock and big_number shares of abp stock on february and respectively these sales generated a dollar_figure long-term_capital_gain mrs baxter sold big_number shares of abp stock on date and that sale generated a dollar_figure long-term_capital_gain and a dollar_figure short-term_capital_gain petitioners were therefore no longer able to sell their abp stock over a 10-year period petitioners knew that the sales of abp stock would generate substantial tax_liabilities and they began considering ways to shelter the capital_gains triggered by the sales petitioners considered several different tax_shelter transactions but ultimately rejected those proposals then in the fall of they began considering cards transactions to minimize their tax_liabilities ii petitioners’ entry into the cards transactions cards transactions are not new to this court see generally hunter v commissioner tcmemo_2014_132 crispin v commissioner tcmemo_2012_70 aff’d 708_f3d_507 3d cir kerman v commissioner tcmemo_2011_54 aff’d 713_f3d_849 6th cir country pine fin llc v commissioner tcmemo_2009_251 the cards transaction including the cards transactions at issue here was developed and marketed by chenery associates inc chenery roy hahn is chenery’s founder and worked with petitioners on their cards transactions the purpose of a cards transaction is to create an artificial substantial capital_loss that offsets an unrelated capital_gain in the fall of barbara coats an accountant at windham brannon p c windham brannon and an adviser of petitioners learned about the alleged benefits of cards transactions while teaching a class ms coats was introduced to mr hahn who recommended cards transactions to shelter petitioners’ capital_gains that resulted from the abp stock sale and as a way to obtain long- term funds for investment ms coats believed the proposal could work for petitioners because of their history with leveraging debt and their desire to shield the gains from the sale of abp stock ms coats and another accountant of windham brannon matt levin presented the cards transactions proposal to mr bird mr bird asked petitioners’ advisers to research the proposal petitioners’ advisers included ms coats and mr levin of windham brannon and thomas h rogers iii and ann a watkins lawyers at rogers watkins mr rogers was to review the contracts 8petitioners had previously retained stalled hie as their lawyer however mr hie was no longer their legal counsel by the year at issue petitioners also continued and the tax consequences of the cards transactions windham brannon also reviewed tax consequences of the cards transactions during their review of the contracts and tax consequences of the cards transactions petitioners’ advisers received a model legal opinion for a cards transaction drafted by the law firm of brown wood the model opinion letter included several blanks and explanatory brackets where currency amounts dates and names were to be entered although the model opinion letter did not address petitioners’ specific cards transactions the model opinion letter did generally describe a cards transaction the model opinion letter concluded that a cards transaction would more_likely_than_not have economic substancedollar_figure in continued relied on investment advice from eric zimmerman 9for example petitioners borrowed from hvb structured finance inc a subsidiary of bayerische hypo-und vereinsbank ag collectively referred to as hvb and not deutsche bank the letter also assumed that petitioners were borrowing the present_value of the amount assumed due in years petitioners received only a portion of the amount due in years 10in respondent issued notice_2000_44 2000_2_cb_255 warning taxpayers of cards transactions and son-of-boss transactions the model opinion letter from brown wood discusses the notice mr bird testified that he reviewed the model opinion letter with mr rogers extensively we therefore conclude that mr bird was aware of respondent’s position reviewing the model opinion letter petitioners spoke with r j ruble an attorney at brown wooddollar_figure ms coats mr levin and mr rogers reviewed the model opinion letter and relied solely on the model opinion letter and materials cited therein to form their opinion of the cards transactions none of petitioners’ advisers provided their own opinion_letters mr bird knew that petitioners’ advisers relied solely on the model opinion letter and the materials cited within the model opinion letter after reviewing the model opinion letter petitioners’ advisers concurred with the model opinion letter regarding the tax consequences and did not raise any additional issuesdollar_figure chenery provided petitioners with their respective opinion_letters from brown wood that discussed their particular cards transactions after petitioners had already entered into their cards transactions as part of 11mr hahn listed mr ruble as a reference for petitioners to contact regarding mr hahn’s qualifications 12ms coats testified that she believed that while the capital_loss would offset the capital_gain from the abp stock she believed that petitioners would ultimately pay tax on the gain over time in other words the tax would be deferred petitioners also testified to this effect however we do not find their testimony credible the record is devoid of any documentary_evidence to suggest that petitioners would pay the tax over time and the model opinion from brown wood does not include this conclusion petitioners’ cards transactions chenery had promised the opinion_letters chenery told petitioners that the opinion letter would eliminate the risk of tax penalties petitioners did not pay brown wood directly for the opinion_letters chenery paid brown wood from fees petitioners paid to chenery in addition to arranging for a review of the model opinion letter petitioners hired a private investigator to investigate chenery and mr hahn petitioners’ advisers did research on hvb the bank providing the loans for the cards transactions and on brown wood and that research did not generate any concerns as described infra pp petitioners as part of the cards transactions would receive some proceeds that they planned to invest mr bird assumed the primary responsibility for researching the investment potential of the cards transactions and deciding whether petitioners could profit from them mr bird’s research led him to conclude that petitioners needed to earn to make the cards transactions profitable mr bird calculated that the expected rate of return on investments made with proceeds from the cards transactions was and that after factoring in costs of petitioners could expect a net return of petitioners’ advisers reviewed mr bird’s calculations and confirmed that the cards transactions could be profitable on date curtis investment’s investment committee discussed the cards transactions during the meeting mr bird made a powerpoint presentation regarding the cards transactions the presentation included mr bird’s analysis of the investment potential which he referred to as a capital leverage plandollar_figure although the powerpoint presentation did not include any information regarding the tax benefits of the proposal tax benefits were discusseddollar_figure petitioners ultimately decided to participate in the cards transactions petitioners did not consider any financing options other than the cards transactions in the last quarter of 13the presentation included several errors about the actual cards transactions at issue for example the calculations include only years of accruing interest for a 30-year loan 14mr bird testified that he did not know whether he would have approved the cards transactions absent the tax benefits mrs baxter testified that she would not have engaged in a cards transaction if the tax could have been completely avoided another member of the investment committee hal curtis testified that the tax benefits were irrelevant to him in his decision that curtis investment should engage in the cards transaction for the reasons discussed infra pp we do not find petitioners’ testimony credible iii the cards transactions a cards transaction typically has three stages loan origination loan assumption and loan operation the cards transactions at issue in these cases also had three stages which are described below a origination on date elizabeth a d sylvester and michael sherry residents of the united kingdom organized brondesbury financial trading llc brondesbury as a delaware llc for the sole purpose of facilitating the cards transaction with respect to curtis investment also on date ms sylvester and mr sherry organized caledonian financial trading llc caledonian as a delaware llc for the sole purpose of facilitating a cards transaction with respect to mr and mrs baxter ms sylvester and mr sherry capitalized the entities solely through the use of promissory notes on date brondesbury and caledonian each entered into a credit agreement with hvb a german-based bank whereby hvb agreed to lend 15ms sylvester and mr sherry are not strangers to this court each has participated in other cards transactions that have come before us for example in country pine fin llc v commissioner tcmemo_2009_251 where they established another delaware llc that acted as the borrower in that matter petitioners did not hire a private investigator to investigate ms sylvester and mr sherry but did review ms sylvester’s résumé brondesbury million and caledonian million both credit agreements were for a 30-year period other than the names of the borrowers and the amounts borrowed the two credit agreements were substantially identical although the credit agreements included a 30-year period hvb had the unilateral right to call the loan at the end of every year interest on the loans accrued annually with the exception of the first and second interest periods which occurred in the first year of the loandollar_figure hvb could adjust the interest rate annually the agreement governing the loans required different collateralization according to the quality of the collateral if the collateral consisted of cash or an acceptable cash_equivalent the borrowers were required to deposit collateral equal to of their obligations to hvb if the collateral consisted of other assets the borrowers were required to deposit collateral equal to of the obligations hvb deposited of each loan’s proceeds into a time deposit account established at hvb for each borrower the time deposits were set to mature in one yeardollar_figure hvb disbursed the remaining of each loan’s proceeds by issuing 16the interest rate was equal to the 12-month euro libor plus a spread of euro libor on date wa sec_4 17mr bird testified that he believed that the time deposits would be reset continued a one-year promissory note to each borrower both the time deposits and the loan proceeds paid interest at a rate equal to 12-month libor there was a difference of between the interest owed on the loan and the interest rate paid on the time deposits and promissory notes brondesbury and caledonian pledged their respective time deposits and promissory notes as collateral for the loansdollar_figure as a result of the time deposits and promissory note collateralization the amounts of the loans were fully collateralized the entities could not withdraw cash from hvb without substituting collateral and any substitution of collateral required hvb’s approval hvb also had the right to withdraw interest due to hvb from the time deposit account when an interest payment was due b loan assumption on december and curtis investment executed a series of agreements with brondesbury and mrs baxter executed similar documents with caledonian both purchased their respective counterparties’ hvb promissory continued each year we do not find his testimony credible with respect to the time deposits because there is no documentary_evidence that suggests a reset each year 18proceeds from the redemption of the promissory notes were also pledged as collateral notes that represented of the counterparties’ loan proceeds in exchange for the promissory notes they agreed to assume of their respective entities’ hvb loans on a joint_and_several basis the amounts of the hvb loans and the amounts of the liabilities assumed by petitioners were calculated to shield most of the abp stock gain from taxation the full balance of each entity’s loan was due on december however petitioners were also aware that hvb could call the loan on or after date petitioners’ attorney tom rogers had advised mr bird regarding the calling of the loans mrs baxter was also aware that hvb could call the loans both brondesbury and caledonian agreed to make annual interest payments to hvb but petitioners were required to replace any collateral used to make those interest payments both brondesbury and caledonian agreed not to request the release or withdrawal of any of the collateral and as long as the collateral remained ie the time deposits it would be used to pay off the principal of the loan consequently petitioners did not gain access to the full amounts of the loans on date petitioners redeemed their respective promissory notes hvb deposited million into curtis investment’s hvb account and big_number into mrs baxter’s hvb account on the same day petitioners requested that hvb exchange the euro for u s dollars at a dollar-to-euro exchange rate of petitioners also entered into one-year forward contracts19 with hvb the forward contracts required petitioners to sell u s dollars for euro on date using a dollar-to-euro exchange rate as a result of petitioners’ inflated bases from assuming liability for the full amounts of the loans the dollar-to-euro exchange resulted in a dollar_figure purported loss for curtis investment and dollar_figure purported loss for mr and mrs baxter c operational phase petitioners were subject_to the same limitations as brondesbury and caledonian in terms of withdrawing the proceeds from the hvb loans petitioners could not withdraw the cash without hvb’s approval petitioners purportedly found this unacceptable therefore before entering into the cards transactions petitioners had negotiated a solution with canadian imperial bank of commerce cibc to facilitate the withdrawal of cash from hvb petitioners had a prior relationship with cibc and held several investment accounts with the bank 19a forward_contract is a contract that allows two parties to buy or sell an asset at a specified time for a specified amount in these cases the forward_contract allowed petitioners to convert u s dollars back into euro see kipnis v commissioner tcmemo_2012_306 at n to facilitate the withdrawal of cash cibc issued petitioners one letter_of_credit with a value of dollar_figure million hvb would allow the use of the letter_of_credit as substitute collateral cibc charged petitioners dollar_figure for the letter_of_credit the letter_of_credit had a stated termination_date of date if petitioners needed the letter_of_credit for subsequent years they would have to pay cibc dollar_figure each year the assets in petitioners’ cibc investment accounts were used to collateralize the letter_of_credit to ensure that the letter_of_credit was fully collateralized curtis investment was required to maintain at least dollar_figure million in its investment accounts at cibc both curtis investment and mrs baxter used the letter_of_credit as replacement collateral on date hvb deemed the letter_of_credit acceptable as substitute collateral and wired dollar_figure to one of curtis investment’s cibc accounts the funds consisted of dollar_figure for curtis investment and dollar_figure for mrs baxter petitioners pledged to hvb a first priority lien and security_interest in favor of hvb for the letter_of_credit as a result of the letter_of_credit petitioners’ cards loans were fully collateralized on date cibc credited the dollar_figure to a curtis investment account petitioners maintained the proceeds deposited with cibc in cash and did not make investments consistent with mr bird’s purported capital leverage plan until date d fees to set up and facilitate its cards transaction curtis investment paid dollar_figure to chenery mrs baxter paid chenery dollar_figure to set up and facilitate her cards transaction therefore including the dollar_figure that petitioners paid cibc for the letter_of_credit petitioners paid dollar_figure in fees the upfront fees totaled approximately of the cash petitioners received from hvb mr bird was familiar with loans and the lending industry he was president of a mortgage company called birdhouse mortgages according to mr bird an origination fee is computed on the amount borrowed and not on the amount owed at the end of the loan birdhouse mortgages did not offer any products with a or more loan origination fee iv unwinding the cards transactions on date petitioners received notice from hvb that hvb intended to call the loansdollar_figure the time deposits in accounts with hvb for the 20petitioners testified that hvb told them as a result of the events on date the bank was repositioning its investment focus and had continued respective entities were used to repay most of the outstanding loans as a result curtis investment had to repay hvb dollar_figure and mrs baxter had to repay dollar_figure on or around date petitioners wired hvb funds to satisfy the remaining balance of the hvb loans petitioners sought replacement financing from cibc bank of north georgia deutsche bank and national bank of south carolina for the full amounts of the two loans however petitioners ultimately did not obtain replacement financing for the entire loan amounts petitioners did negotiate a loan of dollar_figure million from cibc and used a portion of the proceeds to satisfy their obligations to hvb v petitioners’ income_tax returns and notices of deficiency curtis investment timely filed its form_1065 u s return of partnership income for the year at issue reporting a dollar_figure long-term_capital_gain from the abp stock sale curtis investment also reported a dollar_figure loss as a result of the cards transaction the loss from the cards transaction allegedly occurred when curtis investment redeemed the promissory note curtis continued decided to call the loan we do not find petitioners’ testimony credible because other facts in the record suggest that the cards transaction would not last the entire 30-year term see infra p investment redeemed dollar_figure from the promissory note but claimed a basis of dollar_figure as a result of its joint_and_several_liability for the entire hvb loan of brondesbury curtis investment also claimed a deduction of dollar_figure for loan origination feesdollar_figure respondent issued an fpaa to the tmp for curtis investment on date in the fpaa respondent determined that curtis investment was not entitled to deductions for capital losses or transaction costs as a result of the cards transaction and that curtis investment was liable for accuracy-related_penalties because the tmp did not petition this court mr bird a notice_partner and managing member for the year at issue filed a petition pursuant to sec_6226 mr and mrs baxter timely filed their form_1040 u s individual tax_return for taxable_year on their form_1040 mr and mrs baxter reported a long-term_capital_gain of dollar_figure and a short-term_capital_gain of dollar_figure from the sale of abp stock that mrs baxter owned individually mr and mrs baxter also reported a dollar_figure capital_loss as a result of the cards transaction the loss from the cards transaction allegedly occurred when mrs 21the loan origination fees totaled dollar_figure but curtis investment amortized the fees and claimed a deduction of dollar_figure baxter redeemed her hvb promissory note mrs baxter redeemed her promissory note with a value of dollar_figure but claimed a basis of dollar_figure as a result of her joint_and_several_liability for the entire hvb loan of caledonian respondent issued notices of deficiency to mr and mrs baxter on date for taxable years and in the notice_of_deficiency for the taxable_year respondent determined inter alia that mr and mrs baxter were not entitled to the capital_loss deduction as a result of the cards transaction because the transaction lacked economic_substance additionally respondent determined that mr and mrs baxter were liable for accuracy-related penaltiesdollar_figure mr and mrs baxter timely petitioned this court vi the expert reports respondent introduced an expert report by a lawrence kolbe dr kolbe holds a ph d in economics from the massachusetts institute of technology and has previously testified in or been deposed in tax_court cases involving cards transactions see eg hunter v commissioner tcmemo_2014_132 kipnis v commissioner tcmemo_2012_306 crispin v commissioner tcmemo_2012_70 gustashaw v commissioner tcmemo_2011_195 aff’d f 3d 22respondent concedes the deficiency and penalty if the court holds for respondent with respect to 11th cir kerman v commissioner tcmemo_2011_54 country pine fin llc v commissioner tcmemo_2009_251 dr kolbe’s report focused on the cards transactions as financing decisions and therefore analyzed the loans and not what was done with the proceeds dr kolbe concluded that the cards transactions were not economically rational because the expected rate of return on the amount invested did not exceed or even equal the cost of capital ie the expected rate of return in capital markets on alternative investments of equivalent risk on the basis of his analysis dr kolbe concluded that the net present_value of the loans was negative dollar_figure million a typical loan has a net present_value of zero in other words the loans would reduce petitioners’ wealth by dollar_figure million regardless of the returns from the investments dr kolbe also considered the fees and interest rate of the cards transactions on the basis of his analysis dr kolbe concluded that the fees were dollar_figure more than for a loan that would yield similar proceeds and that the interest rate on the loans wa sec_2 higher than market interest rates without fees dr kolbe also noted that the longer the loans were maintained the worse off petitioners were because of the excessive annual costs of the loans after the first year dr kolbe therefore concluded that the loans were an unprofitable financing decision and the use of the loan to purchase any investment would create an unnecessary and material drag on the investment’s profitability petitioners introduced the expert report of james a walker a banker with years of experience mr walker holds an m b a degree from georgia state university mr walker’s report discusses commercial lending practices he concludes that the credit agreement was a 30-year loan term his report does not address the profit potential or the business_purpose of the cards transactions petitioners also introduced the expert report of conrad s ciccotello dr ciccotello has a ph d in finance from pennsylvania state university and is a professor at georgia state university dr ciccotello’s report focuses on the investment potential of the cards transactions and concludes that petitioners could profit from the cards transactions if their investment returns are greater than i burden_of_proof opinion tax deductions are a matter of legislative grace and the taxpayer has the burden of proving that he is entitled to the deductions claimed rule a 503_us_79 292_us_435 however if a taxpayer produces credible evidence23 with respect to any factual issue relevant to ascertaining the taxpayer’s liability for any_tax imposed by subtitle a or b of the code and satisfies the requirements of sec_7491 the burden_of_proof on any such issue shifts to the commissioner sec_7491 sec_7491 requires a taxpayer to demonstrate that he or she complied with the requirements under the code to substantiate any item maintained all records required under the code and cooperated with reasonable requests by the secretary24 for witnesses information documents meetings and interviews see 116_tc_438 although petitioners contend that the burden_of_proof should shift to respondent petitioners have failed to produce credible_evidence to support a shift in the burden_of_proof therefore the burden_of_proof remains with petitioners even if petitioners had produced credible_evidence which they did not to support a shift in the burden_of_proof the parties filed a joint statement of issues and did credible_evidence is the quality of evidence which after critical analysis the court would find sufficient upon which to base a decision on the issue if no contrary evidence were submitted without regard to the judicial presumption of irs correctness 116_tc_438 quoting h_r conf rept no pincite 1998_3_cb_747 24the term secretary means the secretary_of_the_treasury or_his_delegate sec_7701 not list the burden_of_proof as an issue accordingly the burden_of_proof is not at issue ii merits of cards under the economic_substance_doctrine taxpayers have the right to structure their transactions in a manner which decreases the amount of what otherwise would be their taxes 293_us_465 however even if a transaction is in formal compliance with the code the economic_substance of the transaction determines what is and what is not income to a taxpayer generally courts use a two-prong test to decide whether a transaction has economic_substance we are mindful however that there is a split among the courts of appeals as to the proper application of the economic_substance_doctrine absent a stipulation to the contrary appeals in these cases lie with the court_of_appeals for the eleventh circuit with respect to curtis investment and the court_of_appeals for the fourth circuit with respect to mr and mrs baxter accordingly we follow the laws of those circuits see 54_tc_742 aff’d 445_f2d_985 10th cir in determining whether a transaction has economic_substance the court_of_appeals for the eleventh circuit has stated that a transaction ceases to merit tax respect when it has no economic effects other than the creation of tax benefits the objective test and even if the transaction has economic effects it must be disregarded if it has no business_purpose and its motive is tax_avoidance the subjective test 254_f3d_1014 11th cir rev’g tcmemo_1999_268 kipnis v commissioner at the court_of_appeals for the fourth circuit has stated to treat a transaction as a sham the court must find that the taxpayer was motivated by no business_purpose other than obtaining tax benefits in entering the transaction and that the transaction has no economic_substance because no reasonable possibility of a profit exists 436_f3d_431 4th cir 912_f2d_736 4th cir 752_f2d_89 4th cir aff’g in part rev’g in part 81_tc_184 thus the first prong of the test in the fourth circuit is subjective while the second is objective therefore for a finding that mr and mrs baxter’s cards transaction lacked economic_substance the transaction must satisfy both prongs of the test while curtis investment’s cards transaction must satisfy only one prong of the test this court has examined other cards transactions promoted by chenery we have held that the cards transaction lacked economic_substance on each occasion see kipnis v commissioner tcmemo_2012_306 crispin v commissioner tcmemo_2012_70 kerman v commissioner tcmemo_2011_54 country pine fin llc v commissioner tcmemo_2009_251 the other cards transactions are essentially the same as the cards transactions in these cases with only immaterial differences accordingly we will look to the economic_substance test as we have in past cards transaction cases a the objective test the objective test involves a broad examination of whether from an objective standpoint the transaction would likely produce economic benefits other than the generation of a tax deduction 862_f2d_1486 11th cir aff’g 87_tc_1087 a reasonable opportunity for profit will ordinarily be found only if there was a legitimate expectation that the nontax benefits would be at least commensurate with the associated transaction costs rovakat llc v commissioner tcmemo_2011_225 slip op pincite aff’d 529_fedappx_124 3d cir in regard to whether their cards transactions lacked economic_substance petitioners contend that the court must consider its capital leverage plan in other words petitioners contend that they entered into the cards transactions to obtain proceeds for investment and that the court should consider their investment purpose in determining whether the cards transactions objectively had economic_substance other taxpayers have made similar arguments in cards transaction cases and we have consistently rejected those arguments see kipnis v commissioner at country pine fin llc v commissioner tcmemo_2009_251 slip op pincite although petitioners urge this court to consider the profit potential from the investments purchased with proceeds from the cards transactions we decline the invitation as we have previously and focus on the transaction that gave rise to the tax loss see country pine fin llc v commissioner slip op at dollar_figure because petitioners’ capital leverage plan is not the transaction that gave rise to the tax loss we do not consider whether it had economic_substance we review the cards transactions separately from the transfers of proceeds that petitioners used for their capital leverage plan 25petitioners contend that this court and other courts have erred by analyzing the financing and investment decisions separately petitioners contend that this court and other courts have limited the scope of review at the urging of dr kolbe we do not find merit in these arguments this court and other courts have not determined the scope of review to include only the transaction that gave rise to the tax loss solely because of dr kolbe’s opinion see am elec power co v united_states 326_f3d_737 6th cir courts should not evaluate the transaction’s profitability after the challenged deduction has been allowed to do so would swallow the sham analysis entirely in reviewing the cards transactions without reference to the transfer of the proceeds to petitioners we find dr kolbe’s report and related testimony persuasive that the cards transactions lacked economic substancedollar_figure dr kolbe’s report shows that the cards transactions lacked profit potential the report states that the cards transactions reduced petitioners’ wealth by dollar_figure million and would have reduced it even more had the cards transactions lasted longer than one year these losses would exist no matter what investments petitioners made with the proceeds because the same investments could have been financed by a more conventional type of loan and the artificial unrelated losses would remain even if we accepted petitioners’ position that we should consider the transfer of proceeds to them as part of the cards transactions see id petitioners’ expert reports were not helpful to the court’s analysis dr ciccotello’s expert report focuses on whether the decisions to enter the cards transactions were rational when considering projected returns from investments petitioners would make with proceeds from the cards transactions because the 26petitioners contend on brief that the court should not admit dr kolbe’s testimony or reports because dr kolbe has received substantial compensation from the commissioner as an expert in previous cases pursuant to sec_7453 we apply the federal rules of evidence and fed r evid provides requirements for expert witnesses dr kolbe has the required education and skills petitioners raised similar arguments at trial and we overruled their objection we find that petitioners’ claims are without merit investment of the proceeds is not part of the transaction that gave rise to the tax loss see country pine fin llc v commissioner slip op pincite we do not find the report helpful or persuasive in evaluating the economic_substance of the cards transactions at issue additionally petitioners offered expert testimony from mr walker mr walker’s expert report addresses commercial lending practices and not the question of whether the transactions would objectively yield a profit we also do not find mr walker’s report helpful because he does not address the economic_substance of the cards transactions at issue petitioners paid combined fees of dollar_figure to chenery to participate in the cards transactions after paying those fees petitioners could not obtain investable proceeds unless they obtained collateral that was satisfactory to hvbdollar_figure as respondent’s expert notes and we find persuasive the financing costs were substantially above market rates for comparable financing options as a result of the substantial financing costs respondent’s expert concluded that the costs would create a very material and entirely unnecessary drag on the profitability of an investment 27petitioners had to pay cibc dollar_figure for a letter_of_credit so they could withdraw investable proceeds in total petitioners paid dollar_figure to obtain investable proceeds of dollar_figure in sum we find that the cards transactions did not objectively provide petitioners with a reasonable possibility of profit petitioners engaged in the cards transactions to create tax losses petitioners could have found less expensive financing options but did not even investigate other options before entering into the cards transactions petitioners knew that the cards transactions would generate a tax loss and this was their motive there was no genuine profit_motive for these cards transactions and any testimony to the contrary is simply not credible accordingly petitioners fail to satisfy the objective test of the economic_substance_doctrine b the subjective test initially we note that because the cards transaction that curtis investment entered into fails the objective test the subjective motive is irrelevant see kirchman v commissioner f 2d pincite however for the court to determine that the cards transaction entered into by mr and mrs baxter lacks economic_substance it must also fail the subjective test see black decker corp f 3d pincite the subjective test reviews the intent or business_purpose of the taxpayer having a business_purpose does not mean the reason for a transaction is free of tax considerations but the purpose must be one that figures in a bona_fide profit-seeking business united parcel serv of am inc v commissioner f 3d pincite thus a transaction that would not have occurred in any form but for tax_avoidance reasons does not have a business_purpose id pincite see also rice’s toyota world inc v commissioner f 2d pincite petitioners contend that their business_purpose was to obtain proceeds for investment assuming petitioners actually intended to leverage funds for investment purposes we believe petitioners would have attempted to reduce their costs of borrowing and maximize the amount of funds available for investment instead petitioners paid financing costs of approximately of the proceeds of the loan and organized their cards transactions such that the transactions would result in losses close to the amount of taxable gains from the sale of abp stock petitioners did not attempt to obtain any other loan in the last three months of nor did they attempt to maximize the amount that they could borrow for investment petitioners decided to use hvb a bank with which they had no prior relationship rather than banks with which they had existing relationships because borrowing money from those banks would not have provided petitioners with the tax losses that cards transactions promised accordingly we do not find petitioners’ purported investment motive credible petitioners also contend that the proceeds were intended for long-term investments because the loans were intended to last for years however petitioners knew or should have known that the cards transactions would not last for years the collateral securing of the outstanding loans was in one- year time deposits petitioners purchased one-year forward contracts and the letter_of_credit from cibic would terminate after one year without a renewal further petitioners knew that hvb could call the loans on a yearly basis although mr walker concluded that the ability to call a loan on a yearly basis is standard practice facts in the record such as the one-year time deposits and the one-year letter_of_credit support an inference that these particular loans would not remain in place for yearsdollar_figure we find that petitioners knew or should have known that the loans would not remain in place for yearsdollar_figure 28we also conclude as a result of these facts that petitioners’ testimony is not credible with respect to date as the cause for hvb’s calling the loans 29petitioners did seek replacement financing and ultimately found financing to satisfy their hvb obligations in the fall of when petitioners were notified that hvb would terminate the loans petitioners’ investments had decreased and selling the investments would result in a loss therefore petitioners’ primary purpose in finding replacement financing was to avoid recognizing the losses as mr bird testified well if everything had been rosy we’d been--you know it’d be one thing but things were terrible because now we have to pull money out of the stock market when it’s down so it’s going to cost us even more petitioners knew that they had substantial tax_liabilities resulting from their sales of their abp stock and immediately began considering ways to shelter the gains petitioners considered other tax_shelters before choosing the cards transactions and structured their cards transactions such that the losses would offset most of the gains and not to maximize investable proceeds petitioners rushed to close the cards transactions before the end of because the transactions would shield the gains on their abp stock but they waited nearly six weeks before investing the funds although petitioners and their advisers testified that the cards transactions’ purported business_purpose was for investment and would simply defer the tax that would ultimately be paid we do not find their testimony credible we find that absent the substantial tax benefits no rational taxpayer including petitioners would have entered into the cards transactions accordingly we conclude that petitioners did not have a business_purpose for entering into the cards transactions c loan origination fees respondent also disallowed deductions for loan origination fees with respect to curtis investment’s cards transaction fees incurred in connection with a transaction that lacks economic_substance are generally not deductible see 113_tc_254 aff’d f 3d 11th cir see also 132_tc_161 aff’d 408_fedappx_908 6th cir however courts have upheld deductions based on genuine debts where the debts were elements of a transaction lacking economic_substance see rice’s toyota world inc v commissioner f 2d pincite the parties did not list the cards transaction fees as an issue in their joint statement of issues filed with the court and therefore the transaction fees are not at issue see our country home enters inc v commissioner 145_tc_1 ndollar_figure treating an issue not raised in a memorandum of issues to be decided in the case as waived or otherwise abandoned even if the fees were at issue the record confirms on the basis of the cards transactions’ structure that curtis investment was not genuinely indebted consequently we sustain respondent’s disallowance of the deductions iii accuracy-related_penalty respondent determined that petitioners are liable for accuracy-related_penalties a taxpayer may be liable for a accuracy-related_penalty on the portion of an underpayment of income_tax attributable to negligence or disregard of rules or regulations a substantial_understatement_of_income_tax or a substantial_valuation_misstatement sec_6662 and b - the penalty increases to to the extent that the underpayment is attributable to a gross_valuation_misstatement sec_6662 an accuracy-related_penalty under sec_6662 does not apply to any portion of an underpayment_of_tax for which a taxpayer had reasonable_cause and acted in good_faith sec_6664 respondent determined the accuracy-related_penalty applies to any portion of the underpayment related to the disallowed loss deductions as a result of the cards transactionsdollar_figure petitioners argue that no accuracy-related_penalty applies because they had reasonable_cause and acted in good_faith we now address whether petitioners are liable for the accuracy-related_penalty a gross_valuation_misstatement respondent determined a accuracy-related_penalty for a gross_valuation_misstatement with respect to the losses reported from the cards transactions the gross_valuation_misstatement penalty is a penalty that 30the record is unclear as to whether respondent determined an accuracy- related penalty with respect to curtis investment’s disallowed transaction costs respondent determined that curtis investment was liable for an accuracy-related_penalty for a gross_valuation_misstatement as a result of its promissory note’s inflated basis see sec_6662 as an alternative to an accuracy-related_penalty for a gross_valuation_misstatement respondent determined that curtis investment was liable for an accuracy-related_penalty for negligence or a substantial_understatement_of_income_tax see sec_6662 and accordingly because we hold that curtis investment is liable for an accuracy-related_penalty for a gross_valuation_misstatement we do not address respondent’s alternative position applies to any portion of an underpayment_of_tax required to be shown on a return that is due to the taxpayer’s overstating the value of or his adjusted_basis in property by or more of its true value or adjusted_basis as the case may be sec_6662 when a property’s true basis is zero the gross_valuation_misstatement penalty is automatically triggered if the taxpayer claimed on his tax_return that the property had any basis at all sec_1_6662-5 income_tax regs the commissioner bears the burden of production with respect to the taxpayer’s liability for a sec_6662 penalty and must produce sufficient evidence indicating that it is appropriate to impose the penalty see sec_7491 higbee v commissioner t c pincite once the commissioner meets his burden of production the taxpayer must come forward with persuasive evidence that the commissioner’s determination is incorrect or that the taxpayer had reasonable_cause or substantial_authority for the position see higbee v commissioner t c pincite our holding that the cards transactions lack economic_substance results in the total disallowance of the loss deductions without regard to the value or bases of the property used in the cards transactions see leema enters inc v commissioner tcmemo_1999_18 aff’d sub nom 243_f3d_1212 10th cir the gross valuation penalty applies when an underpayment stems from deductions or credits that are disallowed because of lack of economic_substance see united_states v woods u s ___ 134_sct_557 gustashaw v commissioner tcmemo_2011_195 consequently respondent has satisfied his burden of production and the gross_valuation_misstatement applies to petitioners’ underpayments absent a showing of reasonable_cause b reasonable_cause and good_faith the accuracy-related_penalty does not apply with respect to any portion of the underpayment for which the taxpayer shows that there was reasonable_cause and that he or she acted in good_faith sec_6664 the decision as to whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all of the pertinent facts and circumstances including the experience knowledge and education of the taxpayer see sec_1 b income_tax regs circumstances that may indicate reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances including the experience knowledge and education of the taxpayer id partner-level defenses including reasonable_cause and good_faith may not be asserted in a partnership-level tefra proceeding such as the one we have here see 131_tc_275 but when the reasonable_cause defense rests on the partnership’s actions such as in the cases here we may entertain the defense at the partnership level taking into account the state of mind of the general_partner 137_tc_70 aff’d 728_f3d_676 7th cir petitioners contend that they had reasonable_cause and acted in good_faith because the cards transactions present a novel issue and that they reasonably relied on the advice of tax professionals we address both below novel issue this court has previously found that a taxpayer acted with reasonable_cause and good_faith when a deficiency is the result of an issue of first impression and the taxpayer’s position is reasonably debatable see 123_tc_144 likewise this court has found reasonable_cause and good_faith when a taxpayer takes a position on an initial interpretation of a statute and the statutory text is unclear see 114_tc_259 however regardless of whether the legal issue is novel the court considers all of the facts and circumstances in determining whether a taxpayer acted with reasonable_cause and in good_faith see sec_1 b income_tax regs petitioners contend that the issues raised by the cards transactions in these cases are novel issues although at the time petitioners filed their returns no cards transactions cases had been litigated the requirement that a transaction have economic_substance has been a longstanding principle of tax law see eg gregory v helvering u s pincite winn-dixie stores inc v commissioner t c pincite in fact brown wood offered an opinion with respect to economic_substance of the cards transactions that was allegedly based on representations of the parties respondent had also already taken a position in notice_2000_44 2000_2_cb_255 unfavorable to cards transactions and brown wood discussed respondent’s position in its model opinion letter even if petitioners’ cards transactions presented novel issues which they do not petitioners’ position is not reasonably debatable and petitioners did not prove that they acted with reasonable_cause and in good_faith reliance on tax advisers petitioners also assert that they acted with reasonable_cause and in good_faith because they reasonably relied on the advice of their tax advisers reliance on the advice of a tax professional may but does not necessarily establish reasonable_cause and good_faith for the purpose of avoiding a sec_6662 penalty 469_us_241 a taxpayer’s reliance on a competent tax professional may establish reasonable_cause and good_faith when the taxpayer provides necessary and accurate information to the adviser and the taxpayer reasonably relies in good_faith on the adviser’s judgment see 115_tc_43 aff’d 299_f3d_221 3d cir in cases where the tax adviser has an inherent conflict of interest of which the taxpayer knew or should have known a taxpayer’s reliance on the adviser’s opinion is unreasonable see 135_tc_199 neonatology assocs p a v commissioner t c pincite the parties dispute whether petitioners’ tax advisers were competent professionals that had sufficient expertise to justify reliance and whether petitioners relied in good_faith on the advisers’ judgment see neonatology assocs p a v commissioner t c pincite brown wood provided petitioners a model tax opinion before petitioners entered into the cards transactions and finalized opinion_letters after petitioners had already engaged in the cards transactions the tax opinions were promised as part of petitioners’ entering into the cards transactions and a portion of the fees that petitioners paid chenery were used to pay brown wood the tax opinion was marketed as a means of eliminating penalty risk because chenery promised to provide the tax opinion from brown wood as part of petitioners’ entering into the cards transactions petitioners and their advisers knew or should have known that brown wood had an inherent conflict of interest a taxpayer’s reliance on an adviser with an inherent conflict is not justified or reasonable see 144_tc_161 petitioners contend that even if brown woods had a conflict of interest they relied on their longtime tax advisers to evaluate the cards transactions although a taxpayer generally does not reasonably rely on the advice of a tax adviser when the adviser relies on information from a third party that is a promoter of a tax_shelter under some facts and circumstances reliance may be reasonable see id sec_1_6664-4 income_tax regs petitioners cite cnt as a case analogous to their case in cnt the taxpayers mr and mrs carroll owned a chain of successful funeral homes mr carroll was an aging world war ii veteran held a degree in mortuary science and had no sophisticated tax or financial knowledge in fact the taxpayers had never invested in mutual funds or securities had no diversified investments and held their savings principally in cash in an attempt to maintain a steady stream of income during retirement the taxpayers in cnt decided to sell the funeral homes but maintain the real_property however after discussing the proposed sale the taxpayers’ longtime advisers determined that transferring the real_property from the funeral home business would create substantial gains as a result of the taxpayers’ low basis after various presentations meetings and phone calls mr carroll’s advisers recommended a son-of-boss transaction see cnt inv’rs llc v commissioner t c pincite n as in petitioners’ case the promoters of the son-of-boss transaction in cnt provided a tax opinion that the taxpayers’ advisers reviewed id pincite in deciding whether mr carroll’s tax advisers had sufficient expertise to justify reliance we noted that the issue is a close one id pincite however we ultimately held that the taxpayers in cnt had reasonable_cause and acted in good_faith id pincite the taxpayers were not sophisticated with respect to tax or financial matters mr caroll’s tax advisers had also reviewed materials independent of the tax opinion that was promised as part of the son-of-boss transaction petitioners’ case is distinguishable from cnt the taxpayers’ advisers in cnt took steps to complete an independent analysis although petitioners took steps to independently investigate chenery and hvb their advisers relied solely on the legal analysis within the brown wood model opinion letter in concluding that petitioners should enter into the cards transactions the advisers checked some of the materials cited in the model opinion letter but did not conduct any legal research of their own and on the basis of this scant review petitioners’ advisers recommended the cards transactions mr bird knew his advisers relied solely on the model opinion letter from brown wood in formulating their opiniondollar_figure petitioners and their advisers should have known to conduct an independent legal analysis in the light of the inherent conflict of interest created by the relationship between brown wood and chenerydollar_figure although the taxpayers’ advisers in cnt reviewed only a few sources other than the opinion letter provided by the promoter the expertise and sophistication 31the model opinion letter discusses notice_2000_44 supra warning taxpayers about tax_shelters similar to son-of-boss and cards mr bird testified that he went over this model opinion letter with mr rogers paragraph by paragraph consequently if mr bird’s testimony is truthful he and his advisers discussed the notice while the notice is not dispositive of the issue we find it surprising that mr bird did not ask his advisers to conduct a more extensive review considering respondent’s position additionally the court in cnt was unable to conclude whether the taxpayers were aware of this notice see 144_tc_161 32mr hahn listed mr ruble a lawyer at brown wood as a reference on documents he provided to petitioners mr ruble is the attorney who was petitioners’ contact at brown wood of the taxpayers in cnt were materially different from petitioners’ both mr bird and mrs baxter had sophisticated financial knowledge mrs baxter was an assistant manager or manager of curtis investment for nearly years mr bird had served as manager of curtis investment for approximately three years at the end of mr bird also had a business degree and was president of birdhouse mortgages both had experience working with financing transactions and financial institutions although petitioners were sophisticated with respect to financial matters they did not question the costs of the cards transactions petitioners did not seek or even investigate other financing options yet they contend that the principal purpose of engaging in the cards transactions was to obtain funds to invest if in fact petitioners intended to obtain funds to leverage a businessperson with petitioners’ experience would have investigated alternative financing arrangements that might have proved less expensive than the cards transactions the court also notes that petitioners introduced into evidence several documents to prove an investment motive but the record is devoid of any discussions regarding the tax benefits of the cards transactions however from the record as a whole the court is convinced that the tax benefits of the cards transactions were discussed petitioners who were sophisticated in business should have known that these benefits were too good to be true we conclude that petitioners’ reliance was not reasonable or in good_faith in conclusion we find on the basis of all the facts and circumstances that petitioners failed to establish the reasonable_cause and good-faith defense to the accuracy-related_penalty accordingly we sustain respondent’s determination that petitioners are liable for the accuracy-related_penalty we have considered the parties’ remaining arguments and to the extent not discussed above conclude those arguments are irrelevant moot or without meritdollar_figure to reflect the foregoing appropriate decisions will be entered 33the parties also asked the court to decide whether mrs baxter pursued the cards transaction with an intent to make a profit whether petitioners’ liabilities in excess of the cash received from hvb constituted genuine indebtedness and to what extent mrs baxter was at risk for the cards transaction at the close of the taxable_year however because we find that the cards transactions lacked economic_substance and the loss deductions are disallowed we do not need to resolve these issues


internal_revenue_service number release date index number ------------------------ --------------------------------- ------------------------------------------ ---------------------------------------- ----------------------------- ---------------------------- ----------------------------------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact --------------- id no ------------- telephone number --------------------- refer reply to cc tege eo2 plr-137765-08 date december legend trust -------------------------------------------------------------------------- ---------------------------------------------------------------------- ----------------------------------------- state state statute ------------ ---------------------------------------------------- plans -------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- ------------------------------------------------------------ state retirement_system ---------------------------------------- dear ------------------- this is in reply to your letter dated date requesting rulings that the income of trust is excluded from gross_income under sec_115 of the internal_revenue_code and that trust is not required to file a federal_income_tax return facts plr-137765-08 trust was created pursuant to state statute to help certain public employers fund hospital and medical benefits for their retired employees spouses and dependents under plans plans provide benefits through a self-insurance arrangement the participating employers and the participating retirees each contribute to the cost of the health coverage benefits provided pursuant to plans include medical and prescription drug benefits only an employer that is a state a political_subdivision of a state or an entity the income of which is excluded from gross_income under sec_115 of the code can become a participating employer in plans trust is governed by the same board_of nine trustees that governs the state retirement_system five trustees are selected by and from participating employees and retired employees three are selected by the governor and one is a state official trust’s income is derived from employer contributions and investment_income trust’s income is used solely for retiree benefits and trust expenses plans do not permit any benefits to be paid_by pre-tax salary reduction no cash-out of amounts paid for plan benefits and no conversion of sick or vacation days to post-retirement medical benefits is permitted domestic partners may be beneficiaries under plans trust represents that in administering plans it will make reasonable efforts to identify individuals who do not qualify as a spouse or as dependents under sec_152 of the internal_revenue_code of participating retired employees in plans and will in accordance with applicable tax law include in the income of retirees the value of the participating employers portion of coverage for such individuals the trustees may amend_or_terminate trust upon termination the trustees will distribute the remaining assets of trust solely for the purpose of assisting in the payment of health benefits for retirees and related administrative expenses in no event will the assets of trust will be distributed to an entity that is not a state a political_subdivision of a state or an entity the income of which is excluded from gross_income under sec_115 of the internal_revenue_code law and analysis sec_115 sec_115 of the code provides that gross_income does not include income derived from any public_utility or the exercise of any essential government function and accruing to a state or any political_subdivision thereof in revrul_77_261 1977_2_cb_45 income from an investment fund established under a written declaration of trust by a state for the temporary investment of cash balances of the state and its participating political subdivisions was excludable from gross_income for federal_income_tax purposes under sec_115 the ruling indicated that the statutory exclusion was intended to plr-137765-08 extend not to the income of a state or municipality resulting from its own participation in activities but rather to the income of a corporation or other entity engaged in the operation of a public_utility or the performance of some governmental function that accrued to either a state or municipality the ruling points out that it may be assumed that congress did not desire in any way to restrict a state’s participation in enterprises that might be useful in carrying out projects that are desirable from the standpoint of a state government and which are within the ambit of a sovereign to properly conduct in addition pursuant to sec_6012 and the underlying regulations the investment fund being classified as a corporation that is subject_to taxation under subtitle a of the code was required to file a federal_income_tax return each year in revrul_90_74 1990_2_cb_34 the service determined that the income of an organization formed funded and operated by political subdivisions to pool various risks casualty public liability workers’ compensation and employees’ health is excludable from gross_income under sec_115 of the code in revrul_90_74 private interests neither materially participate in the organization nor benefit more than incidentally from the organization trust provides health benefits to retired employees of its participating employers all participating employers are required to be a state a political subdivisions of a state or an entity the income of which is excluded from gross_income under sec_115 of the code providing health benefits to current and retired government employees constitutes the performance of an essential government function based upon revrul_90_74 and revrul_77_261 trust performs an essential_governmental_function within the meaning of sec_115 of the code the income of trust accrues to its participating employers all of whom are political subdivisions or entities the income of which is excluded from gross_income under sec_115 of the code upon the dissolution of trust the use of its remaining funds to provide health benefits for retirees satisfies an obligation the participating employers have assumed with respect to providing health benefits to their employees the benefit to the participating employees is incidental to the public benefit see revrul_90_74 based on the information and representations submitted by trust we hold that as of the date the amendments are adopted the income of trust is derived from the exercise of an essential_governmental_function and will accrue to a state or a political_subdivision thereof for purposes of sec_115 accordingly trust’s income is excludable from gross_income under sec_115 of the code sec_6012 sec_6012 and sec_1_6012-2 of the regulations provide in part that every corporation as defined in sec_7701 subject_to taxation under subtitle a is required to file an income_tax return regardless of whether it has taxable_income or regardless of the amount of its gross_income plr-137765-08 sec_6012 provides that every trust having for the taxable_year any taxable_income or having gross_income of dollar_figure or over regardless of the amount of taxable_income must file an annual income_tax return sec_7701 and sec_301_7701-4 of the regulations define trust for purposes of sec_6012 if trust is classified as a_trust for federal_income_tax purposes no annual income_tax return is required to be filed by trust pursuant to sec_6012 since any income realized by trust is excluded from gross_income under sec_115 however if trust is a corporation as defined in sec_7701 it will be required to file an income_tax return pursuant to sec_6012 no opinion is expressed on the classification of trust as a_trust or corporation for federal tax purposes no opinion is expressed concerning the federal tax consequences of the trust under any other provision of the code other than those specifically cited above in particular no representation is made that contributions to the plans or payments to employees former employees retirees spouses or beneficiaries will be tax-free this ruling concerns only the federal tax treatment of the trust’s income it may not be cited or relied upon by the state retirement_system whatsoever as precedent concerning any matter relating to the plans in particular this ruling has no effect on whether contributions to the plans or payments from the plans including reimbursement of medical_expenses are excludable from the gross_income of employees former employees or retirees under the internal_revenue_code the federal_income_tax consequences to employees former employees and retirees depend on the terms and operation of the plans this ruling is directed only to the taxpayer who requested it sec_6110 provides that this ruling may not be used or cited as precedent in accordance with a power_of_attorney on file we are sending a copy of this letter to your representative sincerely ________________________ sylvia f hunt assistant chief exempt_organizations branch division counsel associate chief_counsel tax exempt and government entities enclosures copy of this letter copy for sec_6110 purposes


number release date id office uilc cca_2009091813355136 -------------- from -------------------- sent friday date pm to ------------------ cc ---------------------------------------- subject ----------------------- by memorandum dated date advice was requested regarding the application of sec_6501 the issue is whether a form_872 consent to extend the time to assess tax signed by the taxpayer only but received by the i r s before the expiration of the period of limitations on assessment is valid both sec_6501 and the corresponding regulation are clear - two timely signatures are required regulation however regulation sec_301_6501_c_-1 is consistent with sec_6501 and should be given deference especially by the administrative body that promulgated it the fact that there is no recent case law on point is no reason for the i r s to take a contrary position indeed a court may rule on the validity of an interpretive the case of 415_f2d_695 9th cir addressing the validity of a waiver of the six-year statute_of_limitations for collection after assessment provides guidance the rohde court found that the regulation at issue reflected a considered administrative interpretation of the statute and therefore was entitled to respect as it did not attempt to add a requirement that did not exist id pincite the regulation at issue in rohde was found to be a reasonable and valid exercise of rule- making power id pincite note that although the rohde court did not address the validity of a form_872 signed by the taxpayer only the i r s 's revised action on decision wl included in its conclusion a specific reference to form_872 the reasoning of the rohde court applies to the issue presented herein c a requires that both the secretary and the taxpayer have consented in writing the corresponding regulation restates that the assessment_period may be extended by agreement in writing by the taxpayer and the district_director or an assistant regional_commissioner and that such agreement shall become effective when the agreement has been executed by both parties therefore the effective date of the waiver cannot be upon the signature of the taxpayer only and the revenue_agent should be advised accordingly i r c


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 b1 plr-138839-07 date date -------------------------------------------------- legend x -------------------------------------------------- state date dear ------------ ------ -------------------------- this letter responds to your letter dated date submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code facts the information submitted states that x was incorporated on date under the laws of state the shareholder of x intended that x be treated as an s_corporation effective date but the election to be treated as an s_corporation as of date was not timely filed law and analysis corporation sec_1362 provides that a small_business_corporation may elect to be an s sec_1362 provides the rule on when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation’s taxable_year then the corporation will be treated as plr-138839-07 an s_corporation for the year in which the election is made under sec_1362 however if an s election is made after the first two and one-half months of a corporation’s taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed sec_1362 provides that if no sec_1362 election is made for any x did not timely file an election to be treated as an s_corporation under sec_1362 taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply as of date x has however established reasonable_cause for not making a timely s election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and the representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an s_corporation effective date within days from the date of this letter x should submit a properly completed form_2553 effective date with a copy of this letter attached to the relevant service_center the federal_income_tax consequences of the transaction described above under any other provision of the code specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes the code provides that it may not be used or cited as precedent letter will be sent to your authorized representative in accordance with the power_of_attorney on file with this office a copy of this this ruling is directed only to the taxpayer s requesting it sec_6110 of except as specifically set forth above no opinion is expressed or implied as to sincerely dianna k miosi chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service cor-126405-00 date uilc number info release date the honorable jo ann emerson u s house of representatives washington d c attention eric david dear ms emerson this letter is in response to constituent ates kced whether the internal revenue your inquiry dated date on behalf of a service is going to raise the business standard mileage rate which is currently cents per mile we are pleased to tell you that the business standard mileage rate will rise to cents per mile on date hope this information is helpful please call john t sapienza jr identification_number at if you have any questions sincerely heather c maloy associate chief_counsel income_tax accounting


department of the treasury int ernal revenue service washington d c date o f f i c e o f c h i e f c o u n s e l number release date cc psi b01 tl-n-778-01 uilc internal_revenue_service national_office field_service_advice memorandum for june y bass associate area_counsel lmsb from subject david r haglund senior technician reviewer cc psi b01 this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be used or cited as precedent disclosure statement field_service_advice is chief_counsel_advice and is open to public inspection pursuant to the provisions of sec_6110 the provisions of sec_6110 require the service to remove taxpayer identifying information and provide the taxpayer with notice of intention to disclose before it is made available for public inspection sec_6110 and i sec_6110 also authorizes the service to delete information from field_service_advice that is protected from disclosure under u s c sec_552 b and c before the document is provided to the taxpayer with notice of intention to disclose only the national_office function issuing the field_service_advice is authorized to make such deletions and to make the redacted document available for public inspection accordingly the examination appeals or counsel recipient of this document may not provide a copy of this unredacted document to the taxpayer or their representative the recipient of this document may share this unredacted document only with those persons whose official tax_administration duties with respect to the case and the issues discussed in the document require inspection or disclosure of the field_service_advice legend a b tl-n-778-01 c d e f g h i j k l m n o a b c d e f g h i j tl-n-778-01 k l m n o p q d1 d2 d3 d4 d5 d6 d7 d8 d9 d10 issues whether the sale of a f percent interest in b a tefra partnership by k an llc owned by f and l to h an s_corporation wholly owned by f on d1 terminated the partnership if a partnership return on form_1065 erroneously covers a full year in spite of the partnership’s constructive termination is that filing a return for statute_of_limitations purposes conclusions tl-n-778-01 yes pursuant to sec_708 the partnership was terminated on d1 when k sold its f percent interest in the partnership to h yes under a case-by-case test used by the courts to evaluate flawed returns the filing would start the running of the statute_of_limitations on assessment although two short-year returns should have been filed in light of the partnership_termination the full-year filing will start the running of the statute for both short years facts a hosts a show a has hosted show for approximately twenty years b is one of four entities that held an ownership_interest in certain assets germane to a and show the other entities owning interests are c d and e collectively referred to herein as taxpayer entities the taxpayer entities sold most of the assets underlying the show f is the sole shareholder of c f also owns all of the shares of e and g f directly or indirectly owns all of d e a f b and g c f is the sole shareholder of h a non-tefra s_corporation b is owned d percent by i e percent by j and f percent by k k is a non-tefra partnership owned g percent by f and h percent by f’s wife l on d1 k sold its f percent interest in b to h for a promissory note in the amount of dollar_figurei it appears that the promissory note payable to k was paid when the related entities sold the show assets in d2 the price of the f percent interest in b was determined by the appraised value of the show related assets that b owned in d3 from the sale of its interest in b k reported dollar_figurei as the amount_realized less cost or other basis for a total gain of dollar_figurej b continued its business activities and filed a form_1065 partnership return purporting to cover the entire year d4 the return was filed under b’s employer_identification_number and was signed by a partner authorized to sign on behalf of both the terminated and continuing partnerships short_year returns covering the periods d5 and d6 were not filed the filed partnership return for b shows the ownership of the following partners on the forms k-1 i an individual owned d percent before the termination on d1 and d percent at the end of the partnership’s taxable_year d7 of the partnership profits and capital tl-n-778-01 j an individual owned e percent before the termination on d1 and e percent at the end of the partnership’s taxable_year d7 of the partnership profits and capital k a partnership owned f percent before the termination on d1 and k percent at the end of the year of the partnership’s taxable_year of the partnership profits and capital and h an s_corporation owned k percent before the termination on d1 and f percent at the end of the partnership’s taxable_year d7 of the partnership profits and capital on d8 the taxpayer entities entered into a contract to sell most of the show related assets to unrelated third parties m and its parent_corporation n the buyers to determine the value of the assets of the show the buyers hired an independent_appraiser in the industry o to appraise the assets as of d9 the appraisal according to the appraisal the total value of the show was dollar_figurel however the sales contract shows a purchase_price of dollar_figurem of the sales_price b received approximately dollar_figuren for selling the following show assets during d3 on the tax_return sold for dollar_figureo b on the tax_return sold for dollar_figurep and other fixed assets sold for dollar_figureq law and analysis issue partnership_termination under sec_708 of the internal_revenue_code a partnership shall be considered as continuing if it is not terminated a termination occurs only where no part of any business financial operation or venture of the partnership continues to be carried on by any of its partners in a partnership or where there is a sale_or_exchange of percent or more of the total interest in partnership capital and profits within a 12-month_period sec_708 for purposes of the percent sale_or_exchange of the partnership_interest a sale_or_exchange to another member of the partnership and the exchange of one partnership_interest for another interest in another partnership are included sec_1_708-1 the partnership taxable_year closes with respect to the partners if there has been a termination of the partnership sec_1_708-1 the date of the termination is the date of the sale_or_exchange of the percent partnership_interest id under sec_1_708-1 upon termination tl-n-778-01 of a partnership by a sale_or_exchange of an interest the following is deemed to occur the partnership contributes all of its assets and liabilities to a new partnership in exchange for an interest in the new partnership and immediately thereafter the terminated partnership distributes interests in the new partnership to the purchasing partner and the other remaining partners in proportion to their respective interests in the terminated partnership in liquidation of the terminated partnership either for the continuation of the business by the new partnership or for its dissolution and winding up while the attribution rule_of sec_707 applies to whether or not a partner may recognize a loss on the sale of a partnership_interest these rules have no application to terminations under sec_708 the court in evans v commissioner held that a termination of a partnership occurred under sec_708 where a percent partner assigned his entire partnership_interest to his wholly owned corporation 54_tc_40 pincite here k sold its f percent interest in b to h on d1 consequently there was a termination of the b partnership on d1 under sec_708 a new partnership was deemed formed with the remaining partners and h on d10 issue return for statute_of_limitations purposes sec_443 of the internal_revenue_code requires a short-year return to be filed if the taxpayer exists for only part of what otherwise would be its taxable_year sec_706 provides rules for determining the taxable_year of a partnership the accompanying regulations provide that upon a partnership_termination the partnership taxable_year closes for all partners as of the date of the termination sec_1_706-1 sec_708 provides that a partnership terminates for tax purposes upon the sale_or_exchange of at least of the total interest in partnership capital and profits within a 12-month_period sec_6031 provides that every partnership must make a return for each taxable_year stating specifically its gross_income allowable deductions and other required items sec_6063 provides that a partnership tax_return must be signed by one of the partners sec_6063 further states that a partner’s signature on the return is prima facie evidence that he or she is authorized to sign the return on behalf of the partnership tl-n-778-01 sec_6109 requires identifying numbers to be included on tax returns and other documents the accompanying regulations state that when a partnership constructively terminates under sec_708 the new partnership created by the termination retains the employer_identification_number of the terminated partnership sec_301_6109-1 see also i r s notice_2001_5 i r b section a states that tax attributable to partnership items arising in a given year may be assessed until three years after the later of i the filing of the partnership return for that year or ii the due_date of the return for the year determined without regard to extensions section c states that tax attributable to partnership items arising in a given year may be assessed at any time where the partnership fails to file a return for that year sec_6501 provides generally that any_tax imposed under the code shall be assessed within three years after the return is filed sec_6501 provides that tax for a given year may be assessed at any time if no return is filed for the year in the present case a partner in b sold its f interest on d1 thereby triggering a termination of the partnership under sec_708 b should have filed a short-year return for the period ending d1 because the termination caused its taxable_year to close on that date see code sec_443 sec_1_706-1 similarly the new partnership generated by the termination should have filed a return for its taxable_year beginning d10 see code sec_443 i r s notice_2001_5 2001_3_irb_327 as noted above b did not comply with this requirement to file short-year returns instead one return was filed purporting to cover the period d4 area_counsel has asked whether this single filing constitutes a return for b’s short taxable_year d5 or for the newly formed partnership’s short taxable_year d6 for the reasons stated below the return would start the running of the statute_of_limitations for assessment with respect to both of these short periods the tax_court has stated in the context of sec_6501 that a document must satisfy four elements to be considered a return for statute_of_limitations purposes beard v commissioner t c big_number aff’d per curiam 793_f2d_139 6th cir first the document must contain sufficient data to calculate tax_liability second the document must purport to be a return third there must be an honest and reasonable attempt to satisfy the requirements of the tax law and fourth the taxpayer must execute the return under penalties of perjury id pincite tl-n-778-01 in the present case area_counsel indicates that the full-year return provides the service with enough information to calculate tax_liability for the two short years the return therefore satisfies the first element of beard with respect to the second element the full-year return was filed on the proper form for a partnership return included the required form k-1s and bore no alterations to the form’s official text accordingly there seems to be no basis for denying that the document purports to be a return with regard to the third element area_counsel believes the partners in a b apparently made an honest and reasonable attempt to comply with applicable law area_counsel believes the partners may simply have been unaware that the sale of a f interest terminated b the taxpayers therefore could seemingly make a strong case that they have complied with the third beard factor finally with regard to the fourth element an individual who was a partner in both b and the newly formed partnership signed the full-year return under penalties of perjury in other words an individual who could have properly signed each of the short-year returns under sec_6063 signed the full-year return for purposes of the fourth beard element therefore it seems clear that an appropriate taxpayer signed the full-year return the decision in beard does not specifically address section which as noted above sets forth the statute_of_limitations rules applicable to partnership returns section c provides that failure_to_file a partnership return leaves the statute_of_limitations for assessment open indefinitely thus if a return is so flawed that the partnership is treated as filing no return the service may assess at any time research indicates only one case under section c addressing the question of whether a flawed partnership return starts the running of the statute_of_limitations in a recent tax_court case the service argued that a partnership failed to file a return for purposes of section c because no partner signed the return agri-cal venture associates v commissioner 80_tcm_295 in light of this failure the service argued the statute_of_limitations on assessment must be held open indefinitely the tax_court agreed stating that only a return as required by the internal_revenue_code a valid_return will fix the time for the running of the period to assess tax ie the statute_of_limitations id pincite the agri-cal decision could be read broadly to mean that any partnership return not filed in accordance with the code will leave the statute_of_limitations open under section c under this reading the statute would remain open in the present case since filing a full-year return instead of two short-year returns was clearly erroneous under the code provisions cited above in effect this reading would supercede the beard test in the context of partnership returns since that test holds that even a significantly flawed return can begin the running of the statute tl-n-778-01 the tax_court did not state in agri-cal however that it is departing from the general test set forth in beard moreover the result in agri-cal no valid_return filed is consistent with beard since the return in agri-cal would have failed to satisfy the fourth element of the beard test signature by the taxpayer under penalty of perjury accordingly agri-cal should not be read as superceding the beard test and that test should apply here to weigh the strength of the service’s case on the statute_of_limitations issue you should note moreover that the facts of the present case are distinguishable from those in agri-cal the partnership in agri-cal failed to obtain a partner’s signature on the return in the present case the return was signed by an individual who was a partner in both b and the newly formed partnership thus reflecting compliance with the rule_of sec_6063 that partnership returns must be signed by a partner a supreme court decision addressing use of an incorrect tax form also supports the conclusion that the full-year return filed in the present case started the running of the statute see 309_us_304 in germantown trust a taxpayer taxable as a corporation incorrectly viewed itself as a_trust and thus filed its return on form_1041 the court held that despite this error the form_1041 should be considered a return for statute_of_limitations purposes id pincite the court noted that the return contained all of the data from which a tax could be computed and assessed although it did not purport to state any amount due as tax id pincite the return therefore was held sufficient to start the period of limitations id the return in the present case was also presented on the wrong form in a sense since two separate short-year returns should have been used instead of a full-year return as in germantown trust however the return contained adequate data from which the service could calculate the tax_liability the supreme court has further held as follows with regard to whether a return starts the running of the statute_of_limitations on assessment p erfect accuracy or completeness is not necessary to rescue a return from nullity if it purports to be a return is sworn to as such and evinces an honest and genuine endeavor to satisfy the law this is so though at the time of filing the omissions or inaccuracies are such as to make amendment necessary 293_us_172 citation omitted although the return in the present case was flawed taxpayer could strongly argue that the return satisfied the standards of zellerbach as noted above the full-year filing purported to be a return was sworn under penalties of perjury and seemingly reflected a good_faith effort to satisfy the law case development hazards and other considerations tl-n-778-01 this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse affect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views david r haglund senior technician reviewer branch office of the associate chief_counsel passthroughs special industries