tcmemo_2013_275 united_states tax_court michael d brown and mary m brown petitioners v commissioner of internal revenue respondent docket nos filed date michael charles cohen jonathan i reich judianne j jaffe russell m ozawa and david l rice for petitioners louis b jack jeri l acromite kevin w coy and sherri spradley wilder for respondent memorandum findings_of_fact and opinion holmes judge on date an insurance salesman named michael brown took ownership of a dollar_figure million plane in portland oregon he flew from there to seattle to chicago--he says for business meetings--and then back to portland brown says these flights put the plane in service in and entitle him to a giant bonus-depreciation allowance but a few days later he had the plane flown to a plant in illinois where it underwent additional modifications that were completed about a month later the commissioner says these additional modifications mean that brown didn’t place the plane in service until we have to figure out what exactly it means to put a plane in service findings_of_fact i brown’s insurance_business fitzgerald asserted that the very rich are different from you and me f scott fitzgerald the rich boy in all the sad young men hemingway replied that t he very rich are different from you and me t hey have more money ernest hemingway the snows of kilimanjaro in the fifth column and the first forty-nine storie sec_58 sec_78 the facts of mary brown is a party only because she and her husband filed a joint_return all references to brown are to michael brown this case show that both statements are true the very rich have much more money and they can use it to do things with insurance that most people can’t brown has built his career on figuring out how to help the very rich do these things he finds what fitzgerald called the compensations and refuges of life fitzgerald supra pincite--or at least of life insurance--for them to use in their estate_planning and he’s been very successful--he doesn’t bother selling policies worth less than dollar_figure million and has sold a handful in the range of dollar_figure million on those larger ones the premiums average between dollar_figure and dollar_figure million per year since brown’s commission on a policy often equals the first year’s premium he’s earned over dollar_figure million on a single policy several times--and once even earned dollar_figure million on a single deal as one might imagine individuals with the means to buy these policies are not common and brown has to constantly prospect for new clients most of these he gets through referrals and most of his referrals come from a network of cpas and other insurance agents he has nurtured for years when an agent or accountant in his network identified a forbes member pursuing an insurance program that contact would often call brown--an insurance genius often ahead of the irs in his understanding of the code’s intricacies or at least its apparent intricacies --to explain and sell the insurance if brown closed the deal he would share the commission with the one who brought him the lead ii need for an aircraft the very rich are also very demanding early in his career brown realized that relying on commercial flights to meet prospective clients at a moment’s whim would limit his success so he began to charter jets the ability to get to prospective clients quickly on their own schedules gave him a huge advantage over his competitors but eventually even chartering led to missed business opportunities brown credibly testified that jet owners often reneged on their oral commitment to supply a plane and as brown said i f they decide to use it themselves you’re just out of luck he recounted one such missed opportunity he had set up a meeting with the koch brothers in kansas and arranged for a charter from orange county to wichita but when he arrived at the airport the plane didn’t show up and the charter company told him that the owner had decided in a new york times article credited him and a nationally known estate-planning attorney with inventing a split-dollar life-insurance arrangement that enabled brown’s clients to avoid dollar_figure in estate_taxes for every dollar_figure of insurance they bought within a mere three weeks after the article’s publication the irs issued notice_2002_59 2002_2_cb_481 which disallowed the arrangement’s use the koch brothers are part of the family that control koch industries an exceptionally large privately owned company to use it for himself brown couldn’t fly commercially to wichita to make the meeting and the kochs didn’t reschedule he later learned they ended up buying a policy from another agent that resulted in an dollar_figure million commission that missed opportunity in persuaded brown to buy a plane for himself that plane was a hawker jet managed by a company called privatair-- and it helped brown a good deal in meeting the needs of his upscale clientele he could even occasionally travel to four different states on the same day to meet with prospective clients owning a plane also enabled him to establish a certain rapport with the extreme high end of the insurance buyers most of whom also owned their own jets the hawker however wasn’t perfect it was only about a four - hour airplane which meant that brown couldn’t fly nonstop from los angeles to new york--the two cities that he said had the most billionaires--unless he had a jet stream behind him without one he had to stop in kansas to refuel which stretched a five-hour journey into a seven-hour one iii the search for an upgrade this inefficiency wore on brown and he decided to upgrade his ride recognizing the low interest rates prevalent in compared to the interest he was paying on the money he borrowed to buy the hawker he began to shop for a longer-range aircraft his search intensified in date when congress increased bonus_depreciation from to for certain kinds of property acquired and placed_in_service between date and date see jobs and growth tax relief reconciliation act of jgtrra pub_l_no sec stat pincite upon learning of that big benefit --and in combination with his exceptionally good year --brown started his hunt for a better plane but he insisted that whatever was offered to him be available for delivery in after unsuccessfully trying to buy an airplane on his own brown called woody mcclendon mcclendon was working for a company named private jet services inc but brown had known him since his days at privatair the plane-management company that brown had used for years mcclendon directed brown to a bombardier challenger and mcclendon told him that the challenger would be available for delivery by the end of 2003--an absolute must for brown whose income and thus whose ability to use very large depreciation allowances could vary greatly from year to year brown quickly took off after this lead he promised a dollar_figure commission to private jet services and mcclendon flew to cahokia illinois to inspect the jet--then owned by a company called jetcraft--to ensure a december delivery the jet was in cahokia at the midcoast aviation facility a plant where owners could have their jets configured and equipped to their specifications jetcraft had a contract with midcoast to configure jets that jetcraft had bought on speculation after confirming that the challenger would be ready for a date delivery mcclendon put brown in touch with jetcraft and they began to bolt together a deal in early date brown himself traveled to cahokia to check midcoast’s progress and took a test flight on a similar challenger jet that midcoast had already finished work on brown liked what he saw and so on date he signed a contract to buy the challenger for dollar_figure million he made sure that the contract required delivery in oregon by date and if jetcraft failed to do so the contract let brown terminate the deal and receive a full refund of his entire deposit brown made no secret to jetcraft and midcoast that he needed to close by that date for tax reasons iv postcontract modifications the dollar_figure million brown promised to pay was not the entire purchase_price while brown was in cahokia midcoast showed him some other planes and one in particular caught his eye it had a conference table in just about the same spot brown wanted the plane delivered to him in oregon because that state unlike california has no sales_tax where brown’s plane had two barcaloungers brown was inspired--he didn’t want just comfort from the jet he wanted to use it for business the conference table was now a necessity mcclendon tried to dissuade brown he advised him that adding a conference table was not a good idea and not just because of its cost and weight as mcclendon put it it was a big job requiring a major rework of the airplane including rebuilding the floor and installing a separate subhydraulic system but because mcclendon said that brown told him that he needed it for his mission brown insisted that his plane have a conference table brown also wanted another change to the interior he frequently used powerpoint to make presentations to potential clients or fellow insurance agents adding a conference table would also increase the plane’s seating capacity and more seats meant that federal regulations would require the installation of a digital flight-data recorder the commissioner focuses on the fact that the flight-data recorder installation was necessary only because brown wanted to use the aircraft in a charter business in addition to his insurance_business and because this modification was not made until the commissioner argues that brown could not have placed the challenger in service in brown argues that--even though he did sign a charter agreement for the challenger beginning date--he hadn’t decided in whether to charter it brown also credibly testified that chartering is used only to defray some of the cost but it’s not a business that will make enough money to pay for the airplane we make no finding as to whether brown intended to have a charter business in and therefore we need not--and will not--decide whether the lack of a digital flight recorder in prevented brown from placing the challenger in service that year this was important to the effectiveness of his sales pitch so he wanted midcoast to replace the standard 17-inch display screens with 20-inch screens these seemingly minor touches about adding the conference table and upgrading display screens were important to brown’s business and we find his testimony credible when he stated that he needed those two things done for his business midcoast hesitated to comply with these demands before delivering the plane according to brown these modifications were too specific and midcoast didn’t like to make super specific adjustments until you’ve already bought the airplane we find however that there was a reason brown didn’t want the changes made until after he took ownership of the plane midcoast estimated that these modifications--along with a few other requested customizations--would take at least six weeks and that would prevent brown from taking delivery in so brown and midcoast agreed on an alternative on date-- one week after brown signed the contract to buy the plane--midcoast sent him a revised form called an aircraft work authorization to reconfigure the challenger to include among other things the conference table and the larger display screens the proposal quoted a price for those modifications--along with a few others--of more than dollar_figure the following day brown agreed to midcoast’s proposal and paid an immediate nonrefundable deposit when midcoast received it five days later on date the delay allegedly due to a fax- machine error mcclendon confirmed with a midcoast representative that--after brown took delivery of the airplane before the end of the year--the plane would return to midcoast on january or to start the work v delivery brown and his family planned a vacation at the end of the year but he didn’t get much rest during those last few days of although the parties had first planned to transfer the challenger on date delays started to creep in and they rescheduled delivery for december in portland brown had his personal pilot rick duggan fly him in his old plane from cabo san lucas specifically midcoast estimated the installation of the conference table would cost dollar_figure and the display screen upgrade dollar_figure the other high- dollar item in that proposal was the installation of a laser inertial-reference system estimated to cost dollar_figure the proposal didn’t even include the installation of a digital flight recorder which ended up costing yet another dollar_figure the paperwork shows that brown signed this authorization on behalf of zulu equipment llc brown formed this company for the sole purpose of buying and owning the challenger because zulu is a single-member llc that didn’t elect to be treated as a corporation we disregard it as an entity separate from brown for tax purposes see sec_301_7701-2 proced admin regs jet owners apparently park ownership of their planes in llcs to limit their liability if something goes terribly wrong mexico--where brown had been at his vacation home with his family--to chino california the old plane’s home base then brown learned that there were problems with the loan he’d arranged to finance the deal this meant more delay on the morning of december brown and duggan finally flew to portland so brown could take delivery of the challenger brown inspected the plane and pronounced it perfect for some buyers he explained that i t was complete in every way except for two business requirements that he needed we find this testimony credible brown reiterated that since he wanted to use the plane for business he needed those two things done but because of the deal he had cut to have that work done in date brown signed the closing documents and accepted delivery of the challenger brown understood that taking delivery wasn’t enough to capture the bonus_depreciation he was hunting so his eventful day had only just begun in what the commissioner calls tax flights brown proceeded to take several trips in the challenger after fueling the plane around noon a pilot certified to fly the see infra note for discussion regarding the time discrepancy between the portland fuel receipt brown provided at trial and the flight logs challenger flew brown and duggan --along with brown’s aviation attorney mark schneider --from portland to seattle landing just before p m brown testified that he flew there to have a business lunch with michael mastro a real-estate developer to whom he had sold a large insurance_policy earlier in the year and a couple that mastro wanted to introduce to him as potential clients brown said that he met them at a restaurant named carmine’s for maybe an hour- and-a-half or two he added that it turned out like most of the meetings they don’t buy in addition to his testimony brown introduced a letter dated date that mastro wrote and signed that letter read dear mike i just wanted to thank you for taking the time to fly up here to seattle and meet with me yesterday as you know it was critical that we since duggan hadn’t received training specific to the challenger--and thus was not type rated for that aircraft--he was not yet able to fly it himself at trial brown denied that schneider was on board brown had however previously told the commissioner in response to an informal_discovery request that schneider was on that flight to review and discuss the purchase documents signed in portland and related legal matters associated with managing and operating the aircraft brown didn’t call schneider to testify and didn’t satisfactorily explain his earlier statement which we now find more believable brown testified he couldn’t remember the couple’s name and neither mastro nor the unnamed couple testified at trial mastro’s absence was easy to explain since according to the parties he was a fugitive from money-laundering and fraud charges at the time of trial meet before yearend to review the insurance policies that you sold me earlier this year and discuss future opportunities because of your extraordinary knowledge of insurance and related matters i was happy to introduce you to a business_associate of mine and his wife i enjoyed watching their eyes light up as you discussed how you could help them take advantage of various estate_planning alternatives i trust you will be able to turn this introduction into a win-win situation for both parties again thanks for all you have done for me and my family in the past and i look forward to working with you in the future best regards s michael mastro michael mastro not only do our eyes not light up but we sense something doesn’t smell quite right with the whole seattle visit first brown’s testimony didn’t jibe with the flight logs he submitted at audit although brown said his lunch meeting lasted between minutes and two hours the flight logs show that the challenger was on the ground in seattle for only minutes with respect to the timeframe we find the flights logs submitted at audit more credible than brown’s testimony brown introduced new records--a summary flight log and three gasoline receipts--at trial that he hadn’t previously given to the commissioner these records however not only contradict the original flight log that he had previously turned over to the commissioner but also aren’t consistent with each other for example the new summary flight log like the one he provided at audit shows the challenger taking off pincite a m local time in portland but one of the new-- continued we also give zero credence to the letter brown acknowledged that the letter was neither contemporaneous nor even prepared by mastro he admitted his cfo cpa gary fitzgerald drafted the letter sometime much later and had mastro sign it although at one point brown said he thought he had told fitzgerald to write the letter several months after year end we find more credible his later testimony that one of fitzgerald’s jobs is to write letters on behalf of brown’s business associates to get the substantiation for deductions when the irs requests them emphasis added we therefore find that fitzgerald didn’t write this letter until at least when the irs began auditing brown’s return for the tax_year we do not take it seriously as proof of anything but a reason to question brown’s credibility and that leaves us with only brown’s uncorroborated testimony about his lunch in seattle brown didn’t produce a lunch bill and neither mastro nor the continued signed--fuel receipts introduced at trial shows the challenger being fueled in portland almost a half hour later the new--unsigned--seattle fuel receipt also indicates that brown spent almost four hours in seattle--about double the time that brown himself said he was there if brown had been in seattle for that long the challenger couldn’t have landed at its next destination chicago before p m local time--which is over an hour later than the chicago fuel-service receipt provided at trial indicates we therefore don’t give any weight to the unsigned seattle fuel receipt or to the new summary flight log to the extent that it conflicts with what brown originally provided unknown couple testified on his behalf we also find noteworthy that schneider--who was on board the challenger from portland to seattle but not on any of the other flights discussed below --worked at a law firm just outside of seattle we therefore find it more_likely_than_not that there was no business lunch in seattle brown however was not finished sometime between and p m local time duggan and brown flew the challenger to chicago landing about three-and- a-half hours later at midway airport brown flew there for the sole purpose of meeting a fellow insurance agent named marc pasquale there is no doubt that brown was pasquale’s mentor in the late ‘90s pasquale--then only in his midtwenties--was a disillusioned cpa working for a giant accounting firm in his father also a cpa suggested to him that he meet brown pasquale grudgingly complied but brown quickly won him over-- and at a breakfast meeting in new york brown convinced him to leave public accounting and begin selling insurance from day one brown helped establish pasquale’s insurance career although pasquale acknowledged that it was kind of an odd arrangement because brown was in southern california while he was in chicago pasquale followed brown around the country to apprentice with him for nearly two years the two often shared insurance commissions and pasquale credibly testified that he made over a million dollars on the policies that he worked on with brown between and during that time they spoke several times a week so after brown got off the plane in chicago he met with pasquale at an airport pizza restaurant although brown at times suggested otherwise we find-- as pasquale testified--that brown himself set this meeting up the whole visit lasted about an hour--brown gave pasquale a tour of the plane for about minutes and then had a quick dinner for the other or so minutes what exactly did they discuss brown introduced another letter very similar to the one supposedly from mastro this letter was signed by pasquale dated date and looks like it’s on pasquale’s company letterhead it reads dear mike thanks for coming through for me when i told you how vital it was for us to meet before the books are closed on as we discussed yesterday in chicago due to my efforts we were able to share insurance commissions on well over a million dollars of policies in the list we reviewed of prospective clients in the greater chicago area should generate even greater commissions in our relationship has always been mutually rewarding in the past and based on yesterday’s meeting looks like it will continue so well into the future thanks again sincerely oak venture advisors llc s marc a pasquale marc a pasquale this is just not believable brown admitted that fitzgerald had written the letter at his direction--like the mastro letter--and sent it to pasquale to sign pasquale confirmed he signed a letter that had been written for him pasquale couldn’t recall exactly when he received it saying he thought it was at some point in but also that it was possible that it was given to him as late as in light of that testimony and brown’s testimony that one of fitzgerald’s jobs was to get documentation for these events only when the irs requests it we find--as we did with the mastro letter--that fitzgerald didn’t send this letter to pasquale until after the irs began auditing brown’s return in now to the letter’s contents as even pasquale admitted this letter was a little bit over the top pasquale said he couldn’t stand by the letter’s statement that he needed to meet with brown before year end but we do believe pasquale’s testimony that any time spent with brown face to face was valuable to him so although pasquale admitted that he neither wrote nor reviewed the letter we find that it was important for him in some general way to talk to brown in person about business what did they discuss brown said that they talked about two mutual clients with whom they were having some difficulty pasquale couldn’t remember any of those details and we don’t credit brown’s testimony that said pasquale credibly testified that of the hundreds of conversations he had with brown over the years t here was not one that didn’t involve business in some way their whole business is selling policies pasquale explained and all they did was talk about who they’re going to see who’s their prospects what’s worth following up with what’s not worth following up with and how to coordinate schedules we believe pasquale when he said that there’s no doubt they talked business that night the challenger remained grounded at midway for about an hour and a half before brown and duggan boarded it at about p m chicago time to return to portland they returned there a little before midnight local time and all said brown logged nearly big_number miles during his flights that day the following morning--new year’s eve--brown and duggan got back into brown’s old plane and returned to cabo san lucas where brown rejoined his family on vacation the challenger however stayed in portland it needed to return to midcoast so--in mcclendon’s words-- it could be finish ed up on date mcclendon flew it from portland to arizona where he lived the next day he took it to cabo san lucas to retrieve brown and his family dropping them off in california a different pilot then flew the plane back to midcoast in cahokia to complete the modifications work began on january and lasted about three weeks after a few additional days of working through an issue related to obtaining replacement insurance the completed challenger was finally ready to return to brown on january vi the audit the browns claimed almost dollar_figure million of bonus_depreciation on the challenger as an expense for his insurance_business on brown’s schedule c profit or loss from business that deduction however was far from the only item on the browns’ returns over a number of years that started the commissioner’s radar beeping loudly between and the commissioner issued six notices of deficiency to the browns--one for each year between and 2006--determining that they had underpaid their tax by over although midcoast initially estimated in late december that the modification would take six weeks that estimate was reduced to four weeks after brown subsequently decided not to have some woodwork done dollar_figure million not including penalties under sec_6662 and sec_6663 of approximately dollar_figure million the browns timely filed a petition for each of these years and we consolidated the cases about two weeks before a scheduled two-week trial in los angeles the browns were california residents when they filed their petitions the parties still hadn’t resolved many of the issues according to the commissioner’s 76-page pretrial memo brown had failed to substantiate a litany of his expenses on schedule c claimed fraudulent consulting-fee deductions used nominees to conceal ownership and control of entities from the irs and created many false documents in an attempt to support illegitimate deductions in the week leading up to trial however the parties settled every issue except brown’s entitlement to bonus_depreciation we thus tried the case on the single issue of whether brown was entitled to deduct over dollar_figure million in bonus_depreciation on the challenger for the parties later filed a stipulation of settled issues that adjusted the browns’ income upwards of over dollar_figure million approximately dollar_figure million of which was subject_to an addition_to_tax for fraud under sec_6663 resulting in taxes and penalties of over dollar_figure million all section references are to the internal_revenue_code in effect at all relevant times unless otherwise indicated all rule references are to the tax_court rules_of_practice and procedure opinion the dispute here is over timing the commissioner concedes that brown could properly claim bonus_depreciation on the challenger for the commissioner however asserts there are two independent barriers that prevent brown from claiming the deduction for first he contends that the challenger was not placed_in_service in but even if it was the commissioner argues that brown still loses because he didn’t substantiate qualified_business_use for that year we begin with a few passes over the lush and tangled landscape of bonus_depreciation i bonus_depreciation we start with depreciation since tax policy desires generally to match income with the expenses of producing that income see 503_us_79 the code allows a deduction for the exhaustion and wear_and_tear of property used in a trade_or_business sec_167 this allows taxes to more closely reflect economic profit to determine the annual wear-and-tear the code generally requires taxpayers to use the modified accelerated_cost_recovery_system macrs set up in sec_168 enacted as part of the economic_recovery_tax_act_of_1981 pub_l_no sec a stat at 203--and substantially amended by the tax reform act of pub_l_no secs stat pincite which ushered in the macrs regime -- sec_168 has been tinkered with by congress so often over the years that it has become even by the standards of the code unusually complex the many layers of amendments to the section have been of many different shapes and sizes but they still often show some semblance of connection to the section’s original purpose--economic stimulation and this was true immediately after date concerned about the effects the terrorist attacks might have on the economy congress enacted sec_168 that subsection granted a special allowance for certain property acquired after date and before date see job creation and worker assistance act of pub_l_no sec_101 sec_116 stat pincite in the case of qualified_property the depreciation deduction under sec_167 for the taxable_year in which the property is placed_in_service shall include an allowance equal to percent of the adjusted_basis of the qualified_property in addition to depreciation otherwise allowable under macrs sec_168 emphasis added this special allowance became known colloquially as bonus_depreciation less than two years later congress upped the bonus see jgtrra sec under new paragraph of subsection k congress increased bonus depreciation for qualified_property acquired and placed_in_service after date and before date from to sec_168 for brown to properly claim bonus_depreciation for the challenger must thus have been both qualified_property and qualified_property that was acquired and placed_in_service that year ii qualified_property what is qualified_property as relevant here the code defines qualified_property as property with a recovery_period of years or less sec_168 noncommercial airplanes have a recovery_period of five years see revproc_87_56 1987_2_cb_674 so the challenger flies past that test with no problem there are however exceptions that can bring otherwise qualified_property to ground see sec_168 one of those is if the property is subject_to the alternative_depreciation_system under sec_168 sec_168 and to determine whether sec_168 applies to property we must first apply sec_280f b --a section that relates to listed_property with limited business use see sec_168 sec_168 requires the use of an alternative and less favorable depreciation system for five specified categories of property sec_280f sends us down another runway under sec_280f a taxpayer must use the alternative_depreciation_system under sec_168 if listed_property is not predominantly_used in a qualified_business_use for a certain taxable_year listed_property includes property that’s used as a means of transportation such as the challenger see sec_280f the term predominantly_used in a qualified_business_use means that the listed property’s business_use_percentage must exceed sec_280f and business_use_percentage means the percentage of use which is a qualified_business_use sec_280f and generally qualified_business_use is any use in a trade_or_business of the taxpayer sec_280f emphasis added thus if brown proved that he used the challenger in any way in his business in more than of the time he flew it ie if the majority of his flight miles on december were used any way in his business then the alternative_depreciation_system under sec_168 wouldn’t apply and the an exception is that qualified_business_use doesn’t include leasing property to a 5-percent_owner or related_person sec_280f although zulu equipment leased the challenger to brown in it’s disregarded as a separate_entity for tax purposes because it’s an llc wholly owned by brown see supra note thus the lease is also disregarded for tax purposes see sec_301_7701-2 proced admin regs i f the entity is disregarded its activities are treated in the same manner as a sole_proprietorship branch or division of its owner challenger would be considered qualified_property for bonus-depreciation purposesdollar_figure iii placed_in_service that’s a hard question to answer and we think it makes sense to keep it on standby--and move to the question of whether brown placed his new plane in service within the meaning of the regulations remember that sec_168 says that for qualified_property the depreciation deduction provided by sec_167 for the taxable_year in which such property is placed_in_service shall be eligible for bonus_depreciation sec_168 emphasis added the regulation says that p roperty is first placed_in_service when first placed in a condition or state of readiness and availability for a specifically assigned function sec_1_167_a_-11 income_tax regs emphasis added so the question comes down to whether in we note again the standard is any use in a trade_or_business sec_280f which isn’t the same as the ordinary and necessary standard generally required of business deductions under sec_162 we have also held that n owhere in the language of sec_168 is there a suggestion that availability of the depreciation deduction is dependent on the satisfaction of the requirements of sec_162 there simply is no requirement that the use of the depreciable_property be ‘ordinary’ or ‘necessary ’ the only requirement is that it be used in the taxpayer’s trade_or_business 97_tc_670 the challenger was in a condition or state of readiness and availability for the specifically assigned function for which brown purchased it the commissioner argues that the challenger’s specifically assigned function was to serve as an aircraft configured in the manner brown deemed necessary for his insurance_business and that configuration included a conference table and enhanced display screens the commissioner says that since those two modifications weren’t made until date the challenger wasn’t ready for its specifically assigned function until then brown disagrees and with neither code nor regulation to guide us we must navigate using only caselaw the earliest case the commissioner relies on is 66_tc_718 the taxpayer in noell built an airport runway between late and late which required him to grade the land supply a rock base lay down asphalt pavement and plant sod id pincite after he laid down the rock base in 1967--but before he completed the project--pilots did occasionally use the runway to land and take off the roughness of the incomplete surface however made it unsatisfactory for permanent use and available only in good weather id the taxpayer wanted an investment_credit for the runway against his tax bill the commissioner argued however that since airplanes began to use the runway in the taxpayer had placed it in service--and thus had to take the credit--that year id pincite we rejected the commissioner’s position we said that the runway was not in a condition or state of readiness in because the rock surface was clearly only a stage in the construction of the facility and it was quite unsatisfactory and pilots risked damaging their aircraft by landing on it we also said that the rock surface could not be used on a permanent basis since the landing area easily could be ruined by the weather we therefore held that since the facility wasn’t available for full service until the runway was paved in the taxpayer hadn’t placed the landing facility in service in id pincite the commissioner makes a similar argument here he says the configuration of the challenger in was clearly only a stage in the construction of the asset and that the delivery of the challenger in portland on december was nothing more than an interruption in the completion of the the regulation defining placed_in_service for purposes of the investment_tax_credit is identical to the placed_in_service definition in the depreciation regulations compare sec_1_46-3 income_tax regs with sec_1 a - e i income_tax regs see generally shirley v commissioner tcmemo_2004_188 proper to use regulations of repealed section if new section nearly identical aircraft while that characterization likely understates how much of the aircraft had been completed by the end of we do agree with the commissioner that noell is relevant here that is so because in the plane like the runway in noell was simply not available for full service for its intended function--serving brown’s air transportation needs in his insurance_business see id pincite and until an asset is available for full service it hasn’t been placed_in_service see id brown disagrees and argues that his plane was fully functional for air transportation and that unlike planes landing on the runway described in noell his plane neither suffered nor threatened safety hazards from its use or weather limitations when placed_in_service in the modifications brown says merely provided enhancing features that did not involve improvements necessary to allow the challenger to serve its specific function of providing air transportation in connection with brown’s insurance_business we agree with brown that the challenger was fully functional for air transportation but that’s not quite the right question the regulation tells us to decide when the plane was ready and available for a specifically assigned function sec_1_167_a_-11 income_tax regs what exactly was the specifically assigned function of brown’s new plane brown asserts in his brief that the modifications were merely enhancing features which implies that the specifically assigned function was simply to fly brown to and from meetings with his clients or leads but this would contradict his testimony according to that testimony his insurance_business required that the airplane have a conference table and the larger screens so he could make his power point presentations to clients and other agents--and those presentations were not a peripheral part of his business without those two requirements the challenger wasn’t fully functional for the very specific needs of brown’s insurance_business the commissioner cites two other cases that point us in the same direction-- 89_tc_710 and valley natural fuels v commissioner tcmemo_1991_341 tax ct memo lexis aff’d without published opinion 990_f2d_1266 9th cir we’ll start with consumers power there an electric utility began construction of a hydroelectric plant in id pincite regulators approved the utility’s request to begin operating the plant subject_to successful completion of preoperational testing on a particular unit id pincite that unit--unit 1--began pumping water and for about a two-week period in late november and early date generated electrical power substantially_all of which was sold to the taxpayer’s customers id pincite on december however a disruption in the unit’s electrical power caused damage that led to a temporary shutdown for repairs id pincite preoperational testing didn’t resume until early in id the taxpayer claimed a depreciation deduction on the plant for but the commissioner determined the plant wasn’t placed_in_service that year and thus disallowed the deduction id we agreed with the commissioner finding that unit was not available to provide electrical power on a regular basis in and that the amount of electrical power generated that year wasn’t sufficient to establish that the plant was available for full operation on a regular basis id pincite emphasis added we found instead that the plant wasn’t available for use until it had completed all preoperational testing in date only after the unit had demonstrated that it was available for service on a regular basis was the unit in a state of readiness and availability for its specifically assigned function id emphasis added the analogy to this case is close just as unit actually pumped water and generated electrical power that was sold to customers in late so did brown actually fly in the challenger halfway across the country in late to talk business with at least one of the people he said he did but the fact that a taxpayer uses an asset in his business sometime during the course of a year doesn’t necessarily mean that he placed it in service that year consumers power tells us instead that the asset needs to be available on a regular basis for its specifically assigned function and like the unit in consumers power that suffered an interruption in its use after it had generated electricity the challenger after brown flew in it one day in was grounded for three weeks at the beginning of so midcoast could make the modifications that brown required for his new plane to serve him on a regular basis for its specifically assigned function--not just moving brown across country but enabling him to make his pitches on big screens to executives sitting at a conference table and not sprawled out in a lounge chair brown would have us distinguish consumers power on the simple grounds that the challenger had already completed and passed flight testing was flightworthy and licensed for flight when brown used it for the regular service of air transportation in this might be a good argument if precedent focused for example on an asset’s having cleared any regulatory hurdles it needed to clear but there are a great many depreciable assets which unlike power plants and jet_aircraft don’t have these sorts of regulatory obstacles for these assets--and here we make the test a generally useful one--as well as assets like power plants and planes our caselaw tells us to look at whether the asset involved is ready and available for full operation on a regular basis for its specifically assigned function see id pincite brown himself testified that the challenger--as it was on date--wasn’t sufficient to meet his specific business needs because the big screens and the conference table weren’t yet installed we turn next to valley natural fuels that case arose from a partnership’s acquisition of an ethanol-distillation plant since the partnership’s objective was to produce and sell anhydrous ethanol proof ethyl alcohol it bought the facility on an understanding that the plant could produce at least big_number gallons of proof ethanol per day valley natural fuels tax ct memo lexis at the plant began operations in date but couldn’t at first produce 2-proof ethanol without a molecular sieve and actual ethanol production was less than big_number gallons per day id at the partnership didn’t have the molecular sieve installed until spring and the plant needed still more equipment installed in to make it run properly id on its return however the partnership claimed a depreciation deduction on the ethanol- distribution equipment id at the commissioner argued that the plant wasn’t placed_in_service or in a state of readiness to be placed_in_service by the end of that year id at we sided with the commissioner we ultimately found that the assigned function of the facility was to produce and sell proof ethanol and concluded that the facility was not in a condition or state of readiness and availability for its assigned function in id at we rejected the partnership’s argument that it was improper to assume that the taxpayer’s business objective must automatically equate to the assigned function of the taxpayer’s equipment id at we also rejected its argument that consumers power was distinguishable because the partnership in valley natural fuels formally accepted the facility in whereas the taxpayer in consumers power didn’t formally accept the plant until a year later than the one at issue id at we pointed out that this distinction was likely not a fair characterization of the facts but in any event that alleged difference was not dispositive id instead the dispositive question was whether the plant ‘was available for service on a regular basis’ and hence in a state of readiness and availability for its specifically assigned function id quoting consumers power t c pincite while we acknowledged that the regulation doesn’t require that property be free of all flaws and defects as of the time that it is first operated we ultimately said the property must be operating in the fulfillment of its specifically assigned function id at citing noell t c pincite because the facility wasn’t capable of performing its specifically assigned function--the production of proof ethanol--in we concluded that it wasn’t placed_in_service that year id at rather only after all of the component assets were installed and functioning in did the facility constitute a complete unit that was operational and served the purpose intended by the partnership id at we agree with the commissioner that brown’s case is similar to these two precedents like the unit in consumers power that wasn’t quite fully ready and available for regular service in for its specifically assigned function the challenger wasn’t first available for full operation in brown’s insurance_business on a regular basis in and just as the ethanol plant in valley natural fuels needed to have all of its components in place and functioning in the right way to fulfill its specifically assigned function before we could find that it was placed_in_service so too did the challenger require installation of all of its necessary parts-- including the conference table and enlarged display screens--to fulfill its specifically assigned function before it was placed_in_service valley natural fuels is also helpful in its observation that there’s nothing wrong in equating a taxpayer’s stated business objective for some feature eg brown’s requirement that his plane have a conference table and larger screens to help him sell insurance with an asset’s specifically assigned function much of the code and regs is written in the passive voice and it is sometimes hard to figure out who the actor in any particular sentence is supposed to be not so here cases like consumers power and valley natural fuels tell us to look at the taxpayer--he’s the one who gets to determine what an asset’s specifically assigned function is and here that asset’s function wasn’t just to fly brown around it was to be configured in a particular way to meet his very particular business needs even though an asset like the challenger may be operational it’s not placed_in_service until it is operational for its intended use on a regular basis the commissioner directs us next to gorgonio wind generating co v commissioner tcmemo_1994_544 wl that case started with a partnership that invested in two wind-turbine generators id wl at it acquired them mounted drivetrains on towers and even connected them to a grid by the end of id but they were fitted only with helicopter blades significantly shorter than those called for in the design specifications and neither one had been equipped with a controller id and although the turbines could produce electricity under favorable wind conditions through manual operation with those blades the lack of instrumentation prevented continuous ground-level monitoring of the wind turbines’ sensors in an efficient manner id one of the turbines was fitted with an automatic controller in and the other one wasn’t fitted until sometime after that id the partnership took depreciation_deductions with respect to the turbines for but the commissioner disallowed them for that year id at we found that the partnership acquired the generators for the purpose of producing electricity for sale to a utility id at and we then found that n either wind turbine acquired by the partnership was capable of regular ongoing operation for the production of electricity during id we therefore found that in neither of the generators was placed in a condition of readiness and availability for its assigned function--the ongoing production of electricity id although we acknowledged that operation of the turbines without the controllers was theoretically possible it was unlikely that they could’ve been operated on a regular ongoing basis for the production of electricity without electronic controllers id at in conclusion relying on noell consumers power and valley natural fuels we held that since neither of the generators was available for full service in neither was placed_in_service that year id these cases teach us that not just any use of an asset will satisfy the placed-in-service standard an asset must instead be available for its intended use on a regular ongoing basis before we can find it placed_in_service in the tax_year in question brown argues however that in contrast to the wind turbines-- whose operation was theoretically possible --the challenger’s operation on date was not a question of theory but a matter of plain fact as evidenced by the round trip flights halfway across the continent in there were no impairments to its full regular functionality as a business aircraft in but that’s not what the cases tell us to look for the problem with the challenger was that although it would have been as brown said perfect for some buyers it wasn’t complete for him without the two business requirements that he needed and without those two post-2003 modifications the challenger wasn’t in a state of availability for the specific intended function in brown’s insurance_business in we do agree with brown that the caselaw does not require that an asset actually be used before it’s regarded as placed_in_service in 359_f2d_191 2d cir aff’g in part rev’g in part tcmemo_1965_39 a barge was ready for use in the taxpayer’s business by december but couldn’t actually be used because it was locked in ice in a canal until date id the second circuit held that because the barge was ready for use and subject_to the weather elements all winter i t seem ed only proper in order to reflect the gradual deterioration of the completed asset that was taking place during this period that part of the cost of the asset be allocated as a depreciation deduction to date and the remaining months of the winter of id pincite what we can glean from that holding is that it’s possible for a taxpayer to place an asset in service for a certain tax_year even without using it that year see consumers power t c pincite t he assets in question in sears oil were held to have been placed_in_service during the taxable_year because they were ready and available to perform their specifically assigned functions even though the taxpayers were precluded from using the assets during the taxable_year due to circumstances beyond their control contrary to what brown contends however sears oil doesn’t stand for the different proposition that as long as an asset has been used in a certain year it has also been placed_in_service that year brown points us in his reply brief to one case--hellings v commissioner tcmemo_1994_24 wl 17916--that does support his position in hellings two taxpayers formed a partnership on date to engage in sailboat chartering and their partnership bought a sailboat that same day id wl at it quickly entered into a charter agreement for the final ten days of with a third party--bay yacht agency--that both sold and managed boats it also entered into a separate charter agreement with bay yacht for since bay yacht didn’t have a similar sailboat in stock it wanted to have the sailboat available as a demonstration model to show prospective buyers-- and the parties agreed on a discounted fee because the boat would not be subject_to the normal wear_and_tear of a regular charter we found that by the end of the boat was fully equipped and charter-ready except for sails which could be easily borrowed id emphasis added the taxpayers took a depreciation deduction in for the sailboat but the commissioner disallowed it because he thought that the boat wasn’t placed_in_service until id at we sided with the taxpayers we found that the boat’s specifically assigned function was use as a charter boat and at the time the taxpayers purchased the boat it was charter-ready id at although we acknowledged that additional equipment was added later and the boat may not have been as attractive to prospective charterers at that time as it was after the additional equipment was added the boat was sailable and ready to be chartered in id although the commissioner emphasized that the boat was not actually in the water when the taxpayers purchased it and was not placed in the water until date we found those facts not controlling noting that the boat was in the water two months before the taxpayers purchased it id we also found persuasive the fact that the charter agreement between the partnership and bay yacht didn’t restrict bay yacht from placing the boat in the water and sailing it id brown contends that i f a sailboat without sails and apparently without an array of safety equipment is ready for the assigned function of charter transportation there’s no doubt that the challenger was fully ready for the assigned function of transporting him when it was lacking only the conveniences of a conference table and larger video screens truly if hellings were the only case on point we’d have to agree with brown but where we have gaps in the code and regs that need to be welded or riveted together to keep like cases decided alike any one case’s persuasiveness often depends on how it treats earlier ones in hellings we did not mention much less distinguish noell consumers power or valley natural fuels in concluding that the taxpayers placed the boat in service in and though we did find that the boat was fully equipped even without having sails we also found that those sails could be easily borrowed id perhaps the sail in that case were like jet fuel in this one--essential to making the asset move but so readily available that its absence at a particular time would not prevent the asset’s being placed_in_service but we have to admit that that’d be a stretch--so we think it best to confine hellings to its peculiar facts consumers power is a t c opinion so we must follow it -- which means that we should follow its reasoning as elaborated and illuminated by the facts of later cases that discuss it and not a possible outlier that doesn’t brown understandably downplays the significance of the modifications while acknowledging in his briefs that those modifications made the challenger more valuable to him and allowed him to more comfortably conduct business as a passenger he says they have nothing to do with the challenger’s assigned function of transporting him for his business the problem is that this posttrial framing just doesn’t square with the trial testimony in which brown testified that those two modifications were needed and required we therefore find that the challenger simply was not available for its intended use on a regular basis until those modifications were installed in brown thus didn’t place the challenger in service in and can’t take bonus_depreciation on it that year iv penalties a fraud_penalty sec_6663 imposes a penalty equal to of the portion of the underpayment that is attributable to fraud the commissioner asserted that the fraud_penalty applied to some of the adjustments in the notices of deficiency he has the burden of proving fraud and to do so must have clear_and_convincing evidence that a taxpayer underpaid and that his underpayment was attributable to fraud sec_7454 rule b 767_f2d_618 9th cir aff’g tcmemo_1983_249 however that’s only the general_rule the burden can shift in some cases-- and it does so here because if the commissioner proves that any part of the underpayment for a taxable_year is attributable to fraud then the entire underpayment shall be treated as attributable to fraud except with respect to any portion of the underpayment which the taxpayer establishes by a preponderance of evidence is not attributable to fraud sec_6663 in the stipulation of settled issues the browns agreed that more than dollar_figure million of the adjustments made to their income for will be subject_to the fraud_penalty this puts on them the burden of showing that the bonus-depreciation deduction taken for the challenger in was not attributable to frauddollar_figure fraud is the intentional wrongdoing with the specific purpose of avoiding a tax believed to be owed see 96_tc_858 aff’d 959_f2d_16 2d cir in other words it’s the willful_attempt_to_evade_tax 55_tc_85 since direct proof of a taxpayer’s fraudulent intent is rarely available we usually look to circumstantial evidence to determine whether it exists dileo t c pincite over the years courts have developed a nonexclusive list of factors--often referred to as badges of fraud--that demonstrate fraudulent intent those badges include understating income maintaining inadequate records failing to file tax returns implausible or inconsistent explanations of behavior concealing assets failing to cooperate with tax authorities in the case of a joint return--as there is here-- sec_6663 doesn’t apply with respect to both spouses unless some part of the underpayment is due to both spouses’ fraud sec_6663 mary brown stipulated to the adjustments made in the stipulation of settled issues so the burden also shifts with respect to her filing false documents engaging in illegal activity and attempting to conceal illegal activity see 317_us_492 796_f2d_303 9th cir aff’g tcmemo_1984_601 99_tc_202 we also consider a taxpayer’s level of sophistication in tax matters see 889_f2d_910 9th cir aff’g tcmemo_1987_265 the browns point to several facts that they contend should negate the fraud_penalty with respect to the bonus-depreciation deduction they say that it’s clear that brown bought the challenger in didn’t misstate its cost flew in it on december of that year and used it on that day to meet with people with whom he had a significant business connection the commissioner would nevertheless focus us on three factors that he says support imposition of the fraud_penalty for any portion of the underpayment due to the bonus-depreciation deduction the false thank you letters brown’s level of sophistication and brown’s pattern of substantially overstating deductions the commissioner first contends that the thank you letters--purportedly from mastro and pasquale but really drafted by one of brown’s employees years later--were false documents the commissioner is correct that making false documents is one of the factors that indicates fraud see eg spies u s pincite still while these letters weren’t actually written by mastro or pasquale we know at least pasquale did sign the one with his name on it thus while the contents of pasquale’s letter were--as pasquale mildly put it-- a little bit over the top it’s not clear that the contents of either letter were patently false but even if they were we don’t find that they bear on the fraud analysis here it’s well established that fraudulent intent must exist at the time the taxpayer files the return see 24_tc_941 aff’d 245_f2d_237 6th cir holmes v commissioner tcmemo_2012_251 at we found that brown via fitzgerald generated those letters during the audit process that is actions that took place after the filing of the return while we have said that postfiling events can indicate fraudulent intent at the time of filing see holmes at we don’t see any evidence that brown formed the intent to create those letters when he filed the return brown testified that his practice was to have fitzgerald write letters on behalf of business associates only when the irs requests them --that is after a return has been filed on the unusual facts of this case we do find this bit of brown’s testimony credible and it does persuade us that the letters are not good proof that brown intended to evade tax at the time he filed his returns see id at finding that a lthough petitioner failed to cooperate with respondent’s agents by intentionally submitting a false document his failure does not compel the conclusion that he had a fraudulent intent in filing his tax returns id at although respondent has proffered some evidence of fraud that evidence relates exclusively to petitioner’s postfiling actions and does not convince us of his intention to evade tax when he filed his tax_return for each year in issue the commissioner also argues that we should factor in brown’s level of sophistication he would have us weigh two other incidents that he says show brown committed fraud--brown’s signature on a false letter to the california board_of equalization to avoid california sales_tax when he bought the hawker and fitzgerald’s drafting of false letters for former employees to sign to corroborate that position at trial however we didn’t admit this extrinsic evidence to prove specific instances of brown’s conduct with respect to these collateral matters see fed r evid b and thus we won’t let the commissioner use it here to support a fraud finding through a backdoor argument that brown’s alleged bad acts show his sophistication lastly the commissioner argues that--by virtue of the stipulation of settled issues--brown has engaged in a four-year pattern of fraud and that a pattern of substantially overstating deductions supports a finding of fraud generally a pattern of underreporting in years not at issue does tend to show fraud fiore v commissioner tcmemo_2013_21 at particularly when accompanied by other circumstances exhibiting an intent to conceal holmes tcmemo_2012_ at indeed the stipulation of settled issues reflects tens of millions of dollars of increased adjustments to income made to the browns’ returns between and 2006--including about dollar_figure million resulting in underpayments subject_to the fraud_penalty that document does indicate a pattern of substantial underreporting of income we’re not focusing here however on whether brown committed fraud on the returns generally rather we’re looking at whether he has shown by a preponderance of evidence that he didn’t commit fraud with respect to one specific the commissioner also points out that even though brown--as an experienced businessmen--was well aware of the need for contemporaneous substantiation he failed to keep such records and instead resorted to create false backdated letters as we stated above those letters don’t help support a finding of fraud because they were created after the filing of the returns deduction the commissioner concedes that the bonus-depreciation deduction at issue is a legitimate business_expense albeit for not while that concession alone certainly doesn’t shield brown from fraud we also find persuasive that brown actually bought the plane and took ownership of it in and we also find noteworthy that pasquale credibly testified that brown flew to chicago that year to talk business with him we do acknowledge that the absence of one of those facts would make it a closer call cf hicks v commissioner tcmemo_2011_180 wl at finding fraud when taxpayer improperly took depreciation deduction in on unfinished airplane that he flew once that year because neither did the taxpayer take delivery of it that year nor was there any evidence that he used it for any business_purpose smith v commissioner tcmemo_1992_353 wl finding fraud when taxpayers improperly took depreciation deduction on charter boat for instead of based on finding that taxpayers had no reasonable belief that boat was even delivered to its port of final destination--much less actually chartered--in aff’d without published opinion 993_f2d_1539 4th cir the facts here--although insufficient to satisfy the placed-in-service standard --taken together do show that brown actually tried to meet the code’s requirements for bonus_depreciation by the end of and we conclude that he has shown that he actually believed that he completed all of the steps necessary to use the plane in his business in which would allow him to properly claim the bonus-depreciation deduction for that year we therefore find that brown didn’t intend to willfully evade tax when he claimed the bonus-depreciation deduction for dollar_figure b accuracy-related_penalty but that doesn’t necessarily mean that the browns escape penalty free as an alternative to the fraud_penalty the commissioner seeks a accuracy- related penalty under sec_6662 on the underpayment_of_tax attributable to the disallowance of the bonus-depreciation deduction the commissioner who we again note that we make no determination here whether brown met his burden to substantiate qualified_business_use for the challenger in this may have an unusual effect the disallowance of the bonus- depreciation deduction may well be the only adjustment that causes an underpayment for and the parties stipulated not that a part of brown’s underpayment for was due to fraud but rather that a portion of the adjustment to income shall be subject_to an addition_to_tax under section sec_6663 doesn’t kick in unless the commissioner proves that part of an underpayment is attributable to fraud we will fly over but note the strangeness of sec_6663’s shifting the burden_of_proof when one can’t tell until the end of a case whether there’s actually been an underpayment bears the burden of production as to the imposition of this penalty see sec_7491 argues for it on two separate grounds negligence and substantial_understatement_of_income_tax see sec_6662 we focus on the latter by definition an understatement of income_tax is substantial if it exceeds the greater of dollar_figure or percent of the tax required to be shown on the return sec_6662 here brown reported a tax_liability of a mere dollar_figure arising solely from an additional tax on a tax-favored account for after we add to income both the agreed adjustments from the stipulation of settled issues and the disallowed bonus-deprecation deduction the understatement of the browns’ income_tax is greater than dollar_figure--it’s around dollar_figure because the browns reported that they owed only dollar_figure the total_tax required to be shown on the return is around dollar_figure thus the commissioner has met his burden of production with respect to the substantial_understatement since the commissioner has met that burden to avoid the penalty the browns must come forward with persuasive evidence that the commissioner’s penalty determination is incorrect see rule a 116_tc_438 they can meet this burden by showing that the penalty isn’t appropriate because their return position was based on substantial_authority under sec_6662 or reasonable_cause under sec_6664 see higbee t c pincite the browns focus on substantial_authority if taxpayers have shown there is or was substantial_authority for the tax treatment of an item the amount of an understatement subject_to the penalty shall be reduced by the portion of the understatement attributable to that item sec_6662 the browns contend that they relied on the express language of the internal_revenue_code to support their claim for bonus_depreciation and that reliance was explicit because brown told all of the other transaction participants that he needed to use the challenger in his business before the end of the year to claim bonus_depreciation and that reliance they say is clearly reliance on ‘substantial authority ’ which makes the penalty for substantial_understatement of tax inapplicable that chain of reasoning doesn’t persuade us first the browns don’t cite to the express language of the code they allegedly relied on assuming they’re referring to the term placed_in_service in sec_168 we previously noted that the discussion in their opening brief of that term was limited to one footnote that didn’t even discuss the regulation or any pertinent caselaw interpreting it second we’re not sure why the browns believe they can meet the substantial_authority standard on the basis that brown told people he needed the plane by year end to use in his business unlike applying the fraud standard its irrelevant what brown subjectively believed for purposes of determining substantial_authority see sec_1_6662-4 income_tax regs rather the substantial_authority standard is an objective standard involving an analysis of the law and application of the law to the relevant facts sec_1_6662-4 income_tax regs and we will find the existence of substantial_authority only if the weight of the authorities --which include the code regulations and caselaw-- supporting the treatment is substantial in relation to the weight of authorities supporting contrary treatment sec_1_6662-4 income_tax regs not until their reply brief did the browns even discuss the key regulation that required the challenger be in a condition or state of readiness and availability for its specifically assigned function see sec_1_167_a_-11 income_tax regs even then they were able to cite only one case favorable to their position hellings t c memo and that case--which we have determined is materially distinguishable on its facts see sec_1_6662-4 income_tax regs --was substantially outweighed by other cases that compel us to a contrary treatment and because the browns didn’t even attempt to construe the term placed_in_service in a manner favorable to themselves we cannot say that they have established substantial_authority by providing a well-reasoned construction of the applicable statutory provision see id thus we find that the browns haven’t established there is or was substantial_authority to claim the bonus-depreciation deduction for see sec_1_6662-4 income_tax regs taxpayers can also except themselves from the sec_6662 penalty with respect to any portion of an underpayment if they can establish that under all the facts and circumstances they acted with reasonable_cause and in good_faith sec_6664 sec_1_6664-4 income_tax regs this determination turns on the pertinent facts and circumstances sec_1_6664-4 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 the most important factor generally is the taxpayers’ efforts to assess their proper tax_liability id however other than relying solely on their substantial-authority argument to show they also acted with reasonable_cause and in good_faith the browns don’t bring forth any evidence--for example reliance on their cpa’s advice or some credible proof that they were aware of hellings and the other cases when they filed their returns--showing how they did so the browns therefore have not met their burden and we sustain the commissioner’s determination that they are liable for an accuracy-related_penalty based on a substantial understatementdollar_figure decisions will be entered under rule our finding of a sec_6662 penalty based on a substantial_understatement means that we don’t need to address the commissioner’s argument that the browns are also subject_to that penalty on account of negligence


internal_revenue_service number release date index number ------------------- ----------------------------------------------------- ---------------------------------------- ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc psi b03 plr-153340-08 date june legend x y ----------------------------------------------------------------------------------------------------- ----------------------- ------------------------------------------------ state ------------- date ------------------------- dear ------------- we received your letter dated date submitted on behalf of x requesting a ruling under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations that x be granted an extension of time to file an election to be treated as an association_taxable_as_a_corporation under sec_301_7701-3 this letter responds to your request facts x was formed on date as a state limited_liability_company x is wholly-owned by y y intended that x be treated as an association_taxable_as_a_corporation for federal tax purposes effective date however x inadvertently failed to timely file a form_8832 entity classification election law and analysis plr-153340-08 sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with a single owner can elect to be classified as an association and thus a corporation under sec_301_7701-2 or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301_7701-3 unless the entity elects otherwise a domestic eligible_entity is i a partnership if it has two or more members or ii disregarded as an entity separate from its owner if it has a single owner sec_301_7701-3 provides in part that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed if an election specifies an effective date more than days prior to the date on which the election is filed it will be effective days prior to the date it was filed sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 accordingly x is plr-153340-08 granted an extension of time of sixty days from the date of this letter to elect to be treated as an association_taxable_as_a_corporation for federal tax purposes effective date the election should be made by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely s curtis g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number release date index number 468a ---------------------- -------------------------------------------- ----------------------------------------------- --------------------------------- -------------------------------- re revised schedule of ruling amounts 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 b06 plr-106616-15 date date ------------------------------------------------------------------------- ------------------------ ---------------------------------------------------------- ----------------------------------------------- -------------------------------------------------------------------------------------- ------------ -------------------------------------------------------------------------------------- -------------------------------------- ------------------------------------------------------------ ----------------------------------- legend taxpayer company a company b parent plant state director location commission order independent study -------------------------------------------------------------------------------------- method date date date date a b c d e f g h year year year year year year year ---------- -------------------- ----------------- ----------------- ----------------- --- ----- ------ ------ ----------------- ------ ----------------- -------------- ------ ------ ------ ------ ------ ------ ------ plr-106616-15 fund ------------------------------------------ dear -------------- this letter responds to your request dated date for a mandatory revised schedule of ruling amounts under sec_468a of the internal_revenue_code and sec_1_468a-3 of the income_tax regulations taxpayer was previously granted revised schedules of ruling amounts most recently on date taxpayer submitted supplemental information by letters dated date and date pursuant to sec_1_468a-3 taxpayer represents the facts and information relating to its request for a revised schedule of ruling amounts as follows taxpayer is incorporated in state and is wholly owned by company which is wholly owned by parent a state corporation the company is principally engaged in the generation transmission and distribution of electric energy in state parent and its affiliated_group_of_corporations including the company file a consolidated federal_income_tax return on a calendar_year basis using the accrual_method of accounting the company is under the audit jurisdiction of the industry director taxpayer has a direct ownership_interest in the plant of a percent as a tenant in common the plant is situated at location and is operated by company b on date company b informed the nuclear regulatory commission that it had permanently ceased operation of the plant effective date permanent retirement date with respect to the decommissioning costs related to the plant which are included in the taxpayer’s cost of service for ratemaking purposes taxpayer is subject_to regulation by commission b percent commission in order effective date established the amount of decommissioning costs to be included in taxpayer’s cost of service for ratemaking purposes the order relies upon assumptions provided in the independent study the proposed method of decommissioning the plant is method based on the assumptions adopted by commission in order it is estimated that fund assets will earn an after-tax rate of return between c percent and d percent for for year through year commission approved rates for taxpayer containing a decommissioning cost component based upon an estimated cost of dollar_figuree in year dollars as a base cost for decommissioning taxpayer’s interest in the plant this base cost for decommissioning the taxpayer’s interest in the unit was escalated from c percent to f percent resulting in total estimated future decommissioning costs for taxpayer’s interest in the plant of approximately dollar_figureg in year to year dollars it is estimated that substantial decommissioning costs will first be incurred in year and that decommissioning will be substantially complete at the end of year plr-106616-15 sec_468a as amended by the energy tax incentives act of the act publaw_109_58 119_stat_594 allows an electing taxpayer to deduct payments made to a nuclear decommissioning reserve fund sec_468a limits the amount that may be paid into the nuclear decommissioning fund in any year to the ruling_amount applicable to that year prior to the changes made by the act the deduction was limited to the lesser_of the amount included in the utility’s cost of service for ratemaking purposes or the ruling_amount generally as a result only regulated utilities could take advantage of sec_468a the act amendment of sec_468a eliminated the cost-of-service limitation accordingly decommissioning costs of an unregulated nuclear power plant may now be funded by deductible contributions to a qualified nuclear decommissioning fund sec_468a provides that no deduction shall be allowed for any payment to the nuclear decommissioning fund unless the taxpayer requests and receives from the secretary a schedule of ruling amounts the ruling_amount for any_tax year is defined under sec_468a as the amount which the secretary determines to be necessary to fund the total nuclear decommissioning cost of that nuclear power plant over the estimated_useful_life of the plant this term is further defined to include the amount necessary to prevent excessive funding of nuclear decommissioning costs or funding of these costs at a rate more rapid than level_funding taking into account such discount rates as the secretary deems appropriate sec_468a provides that a taxpayer shall be deemed to have made a payment to the nuclear decommissioning fund on the last day of a taxable_year if the payment is made on account of such taxable_year and is made within 2½ months after the close of the tax_year this section applies to payments made pursuant to either a schedule of ruling amounts or a schedule of deduction amounts sec_1_468a-1 provides that an eligible_taxpayer may elect to deduct nuclear decommissioning costs under sec_468a of the code an eligible_taxpayer as defined under sec_1_468a-1 of the regulations is a taxpayer that has a qualifying interest in any portion of a nuclear power plant a qualifying interest is among other things a direct ownership_interest sec_1_468a-2 provides that the maximum amount of cash payments made or deemed made to a nuclear decommissioning fund during any_tax year shall not exceed the ruling_amount applicable to the nuclear decommissioning fund for such taxable_year the limitation on the amount of cash payments for purposes of sec_1_468a-2 does not apply to any special transfer permitted under sec_1_468a-8 sec_1_468a-3 provides that in general a schedule of ruling amounts for a nuclear decommissioning fund is a ruling specifying annual payments that over the plr-106616-15 tax years remaining in the funding_period as of the date the schedule first applies will result in a projected balance of the nuclear decommissioning fund as of the last day of the funding_period equal to and in no event more than the amount of decommissioning costs allocable to the fund sec_1_468a-3 provides that to the extent consistent with the principles and provisions of this section each schedule of ruling amounts shall be based on reasonable assumptions concerning the after-tax rate of return to be earned by the amounts collected for decommissioning the total estimated cost of decommissioning the nuclear plant and the frequency of contributions to a nuclear decommissioning fund for a taxable_year under sec_1_468a-3 the internal_revenue_service shall provide a schedule of ruling amounts identical to the schedule proposed by the taxpayer but no such schedule shall be provided by the service unless the taxpayer’s proposed schedule is consistent with the principles and provisions of that section sec_1_468a-3 provides that the taxpayer bears the burden of demonstrating that the proposed schedule of ruling amounts is consistent with the principles of the regulations and that it is based on reasonable assumptions that section also provides additional guidance regarding how the service will determine whether a proposed schedule of ruling amounts is based on reasonable assumptions for example if a public_utility commission established or approved the currently applicable rates for the furnishing or sale by the taxpayer of electricity from the plant the taxpayer can generally satisfy this burden_of_proof by demonstrating that the schedule of ruling amounts is calculated using the assumptions used by the public_utility commission in its most recent order in addition a taxpayer that owns an interest in a deregulated nuclear plant may submit assumptions used by a public_utility commission that formerly had regulatory jurisdiction over the plant as support for the assumptions used in calculating the taxpayer’s proposed schedule of ruling amounts with the understanding that the assumptions used by the public_utility commission may be given less weight if they are out of date or were developed in a proceeding for a different taxpayer the use of other industry standards such as the assumptions underlying the taxpayer’s most recent financial assurance filing with the nrc are described by the regulations as an alternative means of demonstrating that the taxpayer has calculated its proposed schedule of ruling amounts on a reasonable basis sec_1_468a-3 further provides that consistency with financial_accounting statements is not sufficient in the absence of other supporting evidence to meet the taxpayer’s burden_of_proof sec_1_468a-3 provides that in general the ruling_amount for any_tax year in the funding_period shall not be less than the ruling_amount for any earlier tax_year under sec_1_468a-3 the funding_period begins on the first day of the first tax_year for which a deductible payment is made to the nuclear decommissioning fund and ends on the last day of the taxable_year that includes the last day of the estimated_useful_life of the nuclear power plant to which the fund relates plr-106616-15 sec_1_468a-3 provides rules for determining the estimated_useful_life of a nuclear plant for purposes of sec_468a in general under sec_1_468a-3 if the plant was included in rate base for ratemaking purposes for a period prior to date the date used in the first such ratemaking proceeding as the estimated date on which the nuclear plant will no longer be included in the taxpayer’s rate base is the end of the estimated_useful_life of the nuclear plant sec_1_468a-3 provides that if the nuclear plant is not described in sec_1_468a-3 the last day of the estimated_useful_life of the nuclear plant is determined as of the date the plant is placed_in_service under sec_1_468a-3 any reasonable method may be used in determining the estimated_useful_life of a nuclear power plant that is not described in sec_1_468a-3 sec_1_468a-3 provides that the amount of decommissioning costs allocable to a nuclear decommissioning fund is the taxpayer’s share of the total estimated cost of decommissioning the nuclear power plant sec_1_468a-3 provides that a taxpayer’s share of the total estimated cost of decommissioning a nuclear power plant equals the total estimated cost of decommissioning such plant multiplied by the taxpayer’s qualifying interest in the plant sec_1_468a-3 provides the rules regarding the manner of requesting a schedule of ruling amounts sec_1_468a-3 provides that the service will not provide or revise a ruling_amount applicable to a taxable_year in response to a request for a schedule of ruling amounts that is filed after the deemed payment_date as defined in sec_1_468a-2 for such taxable_year sec_1_468a-3 enumerates the information required to be contained in a request for a schedule of ruling amounts filed by a taxpayer in order to receive a ruling_amount for any taxable_year sec_1_468a-3 provides that the service may prescribe administrative procedures that supplement the provisions of sec_1_468a-3 and in addition that section provides that the service may in its discretion waive the requirements of sec_1_468a-3 and under appropriate circumstances sec_1_468a-3 describes the circumstances in which a taxpayer must request a revised schedule of ruling amounts sec_1_468a-3 requires that a taxpayer request a revised schedule of ruling amounts for the fund if the operating license of the nuclear plant to which the fund relates is extended the request for the revised schedule of ruling amounts must be submitted on or before the deemed payment deadline for the taxable_year that includes the date on which the license extension is granted sec_1_468a-3 provides that any taxpayer that has previously obtained a schedule of ruling amounts may request a revised schedule of ruling amounts such a plr-106616-15 request must be made in accordance with the rules of sec_1_468a-3 the internal_revenue_service shall not provide a revised schedule of ruling amounts applicable to a taxable_year in response to a request for a schedule of ruling amounts that is filed after the deemed payment deadline date for such taxable_year we have examined the representations and information submitted by the taxpayer in relation to the requirements set forth in sec_468a and the regulations thereunder based solely upon these representations of the facts we reach the following conclusions pursuant to sec_1_468a-3 taxpayer has met its burden of demonstrating that the proposed schedule of ruling amounts is consistent with the principles of the code and regulations and is based on reasonable assumptions taxpayer has a qualifying interest in the plant and is therefore an eligible_taxpayer under sec_1_468a-1 of the regulations taxpayer as owner of an interest in the plant has calculated its decommissioning costs under sec_1_468a-3 of the regulations the proposed schedule of ruling amounts was derived by following the assumptions contained in an independent study that taxpayer has represented is a standard type study used in the industry in addition the same underlying assumptions were used by commission in order to calculate the amount of decommissioning costs to be included in taxpayer’s cost of service for ratemaking purposes thus taxpayer has demonstrated pursuant to sec_1_468a-3 that the proposed schedule of ruling amounts is based on reasonable assumptions and is consistent with the principles of sec_468a and the regulations thereunder the maximum amount of cash payments made or deemed made to the fund during any_tax year is restricted to the ruling_amount applicable to the fund as set forth under sec_1_468a-2 of the regulations based solely on the determinations above we conclude that the taxpayer’s proposed schedule of ruling amounts satisfies the requirements of sec_468a of the code we have approved the following revised schedule of ruling amounts approved schedule of ruling amounts years year year commission dollar_figureh plr-106616-15 if any of the events described in sec_1_468a-3 occur in future years the taxpayer must request a review and revision of the schedule of ruling amounts generally the taxpayer is required to file such a request on or before the deemed payment deadline date for the first taxable_year in which the rates reflecting such action became effective when no such event occurs the taxpayer must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline of the tenth taxable_year following the close of the tax_year in which this schedule of ruling amounts is received except as specifically determined above no opinion is expressed or implied concerning the federal_income_tax consequences of the transaction described above in particular while we have approved the proposed schedule of ruling amounts based on cost estimates contained in independent study we make no ruling express or implied whether any particular item contained in that study constitutes a nuclear decommissioning cost within the meaning of sec_1_468a-1 this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative we are also sending a copy of this letter_ruling to the director pursuant to sec_1_468a-7 a copy of this letter must be attached with the required election statement to the taxpayer's federal_income_tax return for each tax_year in which the taxpayer claims a deduction for payments made to the fund sincerely yours peter c friedman senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries cc


internal_revenue_service number release date index number ------------------------------ ------------------------- -------------- --------------------------------------------- - ty ---------------- department of the treasury washington dc person to contact ------------------------- id no ------------- telephone number --------------------- refer reply to cc intl b05 - plr-112399-03 date april legend ------------------------------ ----------------------- ---------------------- ---------------------- ---------------------- --------------------------- ---------------------------------------- ------------------------------------------------ taxpayer date a date b individual a individual b company company dear individual b this replies to a letter dated date in which taxpayer requests an extension of time under sec_301_9100-3 to file an agreement described in sec_1_1503-2 g i agreement and to file the annual certification described in sec_1_1503-2 g vi b annual certification in accordance with attachment a which is attached to and made a part of this ruling letter the information submitted for consideration is substantially as set forth below the ruling contained in this letter is predicated upon facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in plr-112399-03 support of the request for a ruling verification of the factual information representations and other data may be required as part of the audit process taxpayer’s global tax department was responsible for the preparation of the income_tax return of taxpayer for the tax_year ended on date a this preparation included the oversight of both substantive tax issues and compliance requirements for taxpayer and each of its foreign entities company and company individual a had overall responsibility for overseeing the preparation of taxpayer’s return and its technical accuracy for the tax_year ended on date a individual b was the individual that was primarily responsible for the preparation of the consolidated corporation tax_return for the tax_year ended on date a the affidavits of individual a and individual b and the facts submitted describe the circumstances surrounding the failure_to_file the g i agreements for the tax_year ended on date a and the g vi b annual certifications for the tax_year ended on date b the affidavits and the facts show that taxpayer relied on these tax professionals to advise taxpayer with respect to filing these statements but these tax professionals failed to make certain that the statements were filed sec_301_9100-1 provides that an election includes an application_for relief in respect of tax and defines a regulatory election as an election whose due_date is prescribed by a regulation a revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 provides that the commissioner has discretion to grant a taxpayer a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government in the present situation the agreement and annual certification described in sec_1_1503-2 are regulatory elections as defined in sec_301_9100-1 therefore the commissioner has discretionary authority under sec_301 c to grant taxpayer an extension of time provided that taxpayer satisfies the rules set forth in sec_301_9100-3 plr-112399-03 based on the facts and information submitted we conclude that taxpayer satisfies sec_301_9100-3 accordingly taxpayer is granted an extension of time of days from the date of this ruling letter to file the agreement described in sec_1_1503-2 and to file the annual certification described in sec_1 g vi b in accordance with attachment a the granting of an extension of time is not a determination that taxpayer is otherwise eligible to file the g i agreements or the g iv b annual certifications sec_301_9100-1 a copy of this ruling letter should be associated with the g i agreements and the g vi b annual certifications this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent no ruling has been requested and none is expressed as to the application of any other section of the code or regulations to the facts presented pursuant to a power_of_attorney on file in this office a copy of this ruling letter is being furnished to your authorized representative sincerely associate chief_counsel international by allen goldstein reviewer enclosure copy for purposes attachment a cc plr-112399-03 attachment a legend a ruling is requested under sec_1_1502-2 b ruling is requested under sec_1_1503-2 --------------------------- ------------- --------------------------- --------------------------- ------------- ---------------------- ---------------------- a a b b