office_of_chief_counsel internal_revenue_service memorandum number release date cc corp b04 postf-129179-04 uilc date date to james c fee jr associate area_counsel philadelphia large mid-size business attn john e becker from marie c milnes-vasquez senior technician reviewer branch corporate sean p duffley assistant to the chief branch corporate subject nol_carryback from separate_return_year to consolidated_return_year this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent legend p x ---------------------------------------- ------------------------------------ ----------------------- ------------------------------------------------- postf-129179-04 t year year year year year year year date date date ----------------------- ------------------------------------ ------------------------------------------- ------------------------------- ------- ------- ------- ------- ------- ------- ------- -------------------------- ------------------------ ---------------------- issue whether the carryback of net operating losses nols arising in separate_return years of p to consolidated_return years of the old p group is subject_to the separate_return_year limitations of sec_1_1502-21a or sec_1_1502-21t the srly rules as applicable conclusion with respect to the carryback years at issue p does not qualify as the lonely parent of the old p group under sec_1_1502-1 by reason of sec_1_1502-1 therefore the carryback of nols arising in separate_return years of p to consolidated_return years of the old p group is subject_to the srly limitations of sec_1_1502-21a or sec_1_1502-21t as applicable taxpayer’s position the taxpayer argues that the srly limitations do not apply because notwithstanding that x was the common parent of the old p group during the carryback years p should be treated as the common parent of the old p group under sec_1 postf-129179-04 f i the lonely_parent_rule and f as a result of the occurrence of a reverse_acquisition on date facts the information provided indicates that during year p was the common parent of a consolidated_group the p group on date x was incorporated on date p’s shareholders contributed all their p stock along with cash to x in exchange for all of x’s newly issued and outstanding_stock in a transaction purporting to qualify as a reverse_acquisition under sec_1_1502-75 thereafter the p group remained in existence albeit with x becoming the common parent of the group hereinafter referred to as the old p group in year x elected under sec_1362 to be taxable as an s_corporation with the s election effective as of date six members of the p group made qsub elections under sec_1361 and sec_1_1361-3 in connection with x’s s election pursuant to which they were deemed to liquidate into x as a result of x’s s election the p group terminated under sec_1_1502-75 for the year taxable_year p filed a consolidated_return on behalf of a new group that included p and its remaining subsidiary t the new p group the new p group reported an nol for the year taxable_year which p carried back to the year consolidated_return_year a year after but before of the old p group t dissolved during year commencing with the year taxable_year p filed a separate_return p reported nols on its year and separate returns which p carried back to the year consolidated_return_year a year beginning on or after date but before date of the old p group law sec_1_1502-1 defines the term separate_return_year as a taxable_year of a corporation for which it files a separate_return or for which it joins in the filing of a consolidated_return by another group sec_1_1502-1 provides that except as provided in sec_1_1502-1 and the term separate_return_limitation_year or srly means any separate_return_year of a member or a predecessor of a member sec_1_1502-1 provides that the term separate_return_limitation_year or srly does not include a separate_return_year of the corporation which is the common we have not been provided with sufficient information to determine whether the formation of x and the contribution together constituted a reverse_acquisition within the meaning of sec_1_1502-75 we assume for purposes of this memorandum that the two steps together did so qualify postf-129179-04 parent for the consolidated_return_year to which the tax attribute is to be carried except as provided in sec_1_1502-75 and sec_1_1502-1 sec_1_1502-1 provides as follows in the event of an acquisition to which sec_1_1502-75 applies all taxable years of the first_corporation and of each of its subsidiaries ending on or before the date of the acquisition shall be treated as separate_return limitation years and the separate_return years if any of the second corporation and each of its subsidiaries shall not be treated as separate_return limitation years unless they were so treated immediately before the acquisition for example if corporation p merges into corporation t and the persons who were stockholders of p immediately before the merger as a result of owning the stock of p own more than percent of the fair_market_value of the outstanding_stock of t then a loss incurred before the merger by t even though it is the common parent or by a subsidiary of t is treated as having been incurred in a separate_return_limitation_year conversely a loss incurred before the merger by p or by a subsidiary of p in a separate_return_year during all of which such subsidiary was a member of the group of which p was the common parent and for which sec_1562 was not effective is treated as having been incurred in a year which is not a separate_return_limitation_year sec_1_1502-21a provides that in the case of a net_operating_loss of a member of the group arising in a separate_return_limitation_year as defined in paragraph f of sec_1_1502-1 of such member and in a separate_return_limitation_year of any predecessor of such member the amount which may be included under sec_1 21a b of this section computed without regard to the limitation under sec_1_1502-21a of this section in the consolidated_net_operating_loss carryovers and carrybacks to a consolidated_return_year of the group shall not exceed the amount determined under sec_1_1502-21a sec_1_1502-21t i provides in part that the aggregate of the net_operating_loss_carryovers_and_carrybacks of a member arising or treated as arising in srlys that are included in the cnol deductions for all consolidated_return years of the group under sec_1_1502-21t may not exceed the aggregate consolidated_taxable_income for all consolidated_return years of the group determined by reference to only the member’s items of income gain deduction and loss date sec_1_1502-21a sec_1_1502-21a is generally applicable to consolidated_return years beginning before sec_1_1502-21t is generally applicable to consolidated_return years beginning on or after date sec_1_1502-21t taxpayers are also permitted under certain circumstances to apply sec_1_1502-21t to consolidated_return years ending on or after date and beginning before date see sec_1_1502-21t postf-129179-04 sec_1_1502-75 provides in part that a group remains in existence for a tax_year if the common parent remains as the common parent and at least one subsidiary that was affiliated with it at the end of the prior year remains affiliated with it at the beginning of the year whether or not one or more corporations have ceased to be subsidiaries at any time after the group was formed sec_1_1502-75 provides that the group shall be considered as remaining in existence notwithstanding that the common parent is no longer in existence if the members of the affiliated_group succeed to and become the owners of substantially_all of the assets of such former parent and there remains one or more chains of includible corporations connected through stock ownership with a common parent_corporation which is an includible_corporation and which was a member of the group prior to the date such former parent ceases to exist for purposes of applying sec_1_1502-1 to separate_return years ending on or before the date on which the former parent ceases to exist such former parent and not the new common parent shall be considered to be the corporation described in sec_1_1502-1 sec_1_1502-75 provides in part that if a corporation the first_corporation acquires stock of another corporation the second corporation and as a result the second corporation becomes or would become but for the application of sec_1_1502-75 a member of a group of which the first_corporation is the common parent in exchange in whole or in part for stock of the first_corporation and the stockholders immediately before the acquisition of the second corporation as a result of owning stock of the second corporation own immediately after the acquisition more than percent of the fair_market_value of the outstanding_stock of the first_corporation then any group of which the first_corporation was the common parent immediately before the acquisition shall cease to exist as of the date_of_acquisition and any group of which the second corporation was the common parent immediately before the acquisition shall be treated as remaining in existence with the first_corporation becoming the common parent of the group acquisition rule among other things is to identify which group or corporation’s net operating losses unused investment credits foreign tax_credits and capital_loss carryovers and carrybacks will be subject_to the separate_return_limitation_year rules of sec_1_1502-1 of the regulations to identify which group if applicable will be subject_to the continued filing requirement of sec_1_1502-75 of the regulations and to determine which group or corporation’s taxable_year will be used for the filing of the consolidated_return discussion revrul_72_322 1972_1_cb_287 states that the function of the reverse the srly rules generally limit the ability of a consolidated_group to offset a member’s losses arising during a separate_return_limitation_year against the income of postf-129179-04 other members a separate_return_limitation_year srly is generally defined as a separate_return_year of a member sec_1_1502-1 a separate_return_year is a taxable_year in which a corporation files a separate_return or in which it joins in the filing of a consolidated_return by another group sec_1_1502-1 in this case x became the common parent of the old p group following the date reverse_acquisition see sec_1_1502-75 the old p group terminated on date when x ceased to be the common parent as a result of the s election see sec_1504 and sec_1_1502-75 p filed a consolidated_return as the common parent of another consolidated_group ie the new p group for the year taxable_year therefore the year consolidated_return_year constitutes a separate_return_year with regard to the old p group sec_1_1502-1 in addition following the dissolution of p’s remaining subsidiary t during year p filed separate returns for the year and taxable years thus year sec_5 and are also separate_return years with regard to the old p group sec_1_1502-1 p was not the common parent of the old p group during the year and carryback years accordingly the carryback of nols arising during the year and separate_return years is subject_to the limitations of the srly rules unless an exception to those rules applies the taxpayer argues that the srly limitations do not apply notwithstanding that x was the common parent of the old p group during the carryback years the taxpayer argues that p is to be treated as the common parent of the old p group for the purpose of sec_1_1502-1 the lonely_parent_rule and f as a result of the occurrence of a reverse_acquisition on date the lonely_parent_rule the lonely_parent_rule is an exception to the srly rules the lonely_parent_rule provides that a srly does not include a separate_return_year of the corporation which is the common parent for the consolidated_return_year to which the tax attribute is to be carried for example assume that corporation a a standalone corporation filing a separate_return incurs an nol during year in year a purchases all the stock of corporation b and the two elect to file a consolidated_return because a is the common parent of the group during year the lonely_parent_rule permits a’s nol_carryover to be used to offset b’s income without any limitation under the srly rules on date the irs and treasury_department issued proposed_regulations regarding the srly limitation see co-78-90 1991_1_cb_757 on date the irs and treasury_department issued temporary regulations that were substantially identical see t d 1996_2_cb_119 under the srly rules a member’s nol that arises in a srly can be used to offset income on the consolidated_return only to the extent of that member’s current contribution to consolidated_taxable_income see sec_1_1502-21a and sec_1_1502-21t sec_1_1502-21t provides srly subgroup rules that are generally effective for consolidated_return years beginning on or after date under the subgroup rules the srly limitation is applied on a subgroup basis rather than on a member-by-member basis postf-129179-04 see 634_f2d_1029 6th cir the net effect of the lonely_parent_rule is to allow pre-affiliation nol’s of the common parent to be used to offset post-affiliation profits of any member of the group by excluding a’s year nol from the definition of a srly the lonely_parent_rule essentially treats a as the embodiment of its consolidated_group even when it has no subsidiaries see dubroff federal income_taxation of corporations filing consolidated_returns dollar_figure n the lonely_parent_rule thus demonstrates the important role of the common parent under the consolidated_return_regulations the lonely_parent_rule is itself subject_to qualification in two instances in which the continuation of the consolidated_group is at issue see sec_1_1502-1 parenthetical stating that the lonely_parent_rule applies except as provided in sec_1_1502-75 and sec_1_1502-1 both of the situations identified by the parenthetical relate to exceptions to the general_rule of sec_1_1502-75 which makes the consolidated group’s continued existence contingent upon the common parent remaining as the common parent the so-called downstream exception of sec_1 d ii and the reverse_acquisition rule under sec_1_1502-75 if a corporation the first_corporation acquires stock the reverse_acquisition rule_of another corporation the second corporation and as a result the second corporation becomes or would become but for the application of sec_1_1502-75 a member of a group of which the first_corporation is the common parent in exchange in whole or in part for stock of the first_corporation and the stockholders immediately before the acquisition of the second corporation as a result of owning stock of the second corporation own immediately after the acquisition more than percent of the fair_market_value of the outstanding_stock of the first_corporation then any group of which the first_corporation was the common parent immediately before the acquisition shall cease to exist as of the date_of_acquisition and any group of which the second corporation was the common parent immediately before the acquisition shall be treated as remaining in existence with the first_corporation becoming the common parent of the group the continued filing requirement of sec_1_1502-75 of the regulations and to determine which group or corporation’s taxable_year will be used for the filing of the consolidated_return see revrul_72_322 1972_1_cb_287 the rule also serves to identify which group or corporation’s nols and other tax_attributes will be subject_to the srly rules of sec_1_1502-1 id see also wolter constr co f 2d pincite6 the purpose the reverse_acquisition rule functions to identify which group will be subject_to under the downstream exception notwithstanding that the common parent is no longer in existence the group is treated as remaining in existence if members succeed to and become the owners of substantially_all the assets of the former common parent and there remains one or more chains of includible corporations connected through stock ownership with a common parent which is an includible_corporation and which was a member of the group prior to the date the former parent ceases to exist sec_1_1502-75 see generally 60_fedclaims_485 the reverse_acquisition rule is a rule_of substance-over-form that seeks to postf-129179-04 and effect of the reverse-acquisition rules is to prevent trafficking_in_loss_corporations this is accomplished by redirecting the srly limitation to the ostensibly acquiring_corporation identify the larger of two combining groups based upon the relative value of shareholdings thus if a transaction is structured so that a smaller group acquires a larger group in exchange for stock of the smaller group the reverse_acquisition rule provides that the form of the transaction will not control for example assume that a the common parent of a consolidated_group acquires all the stock of b the common parent of a larger group in exchange for stock of a as a result of their prior stock ownership in b the b shareholders end up owning more than percent in value of the a stock the reverse_acquisition rule treats the smaller a group as terminating and the larger b group as remaining in existence albeit with a as the new common parent-in effect as though the larger b group had acquired the smaller a group as discussed supra the reverse_acquisition rule has the effect of reversing the the reverse_acquisition exception to the lonely_parent_rule respective roles of the acquiring and target corporations in a combining transaction because one of the functions of the reverse_acquisition rule is to determine which corporation’s attributes will be subject_to the srly rules this role reversal necessarily has ramifications for the application of the lonely_parent_rule assume that in the example set forth above a had nols from years prior to the reverse_acquisition that it carried over to the consolidated_return years of the continuing b group in this situation it would be inappropriate for a’s pre-acquisition nols to be used to offset income of the b group without limitation under the srly rules because the a group terminated as a result of the acquisition ie a cannot properly be regarded as the embodiment of the b consolidated_group during a’s separate_return years the exception set forth in sec_1_1502-1 serves to harmonize the lonely_parent_rule with the reverse_acquisition rule sec_1_1502-1 provides as follows i n the event of an acquisition to which sec_1_1502-75 applies all taxable years of the first_corporation and of each of its subsidiaries ending on or before the date of the acquisition shall be treated as separate_return limitation years and the separate_return years if any of the second corporation and each of its subsidiaries shall not be treated as separate_return limitation years unless they were so treated immediately before the acquisition in wolter constr co f 2d pincite the sixth circuit explained the application of the sec_1_1502-1 exception as follows postf-129179-04 in a typical reverse_acquisition in the loss carryover context substantially_all the assets or stock of a profit6 corporation are nominally acquired by a loss_corporation in exchange for more than percent of the latter’s stock so that control of the loss_corporation has shifted to the shareholders of the profit corporation as they existed prior to the acquisition the regulations essentially treat the loss_corporation as having been acquired and under f of the treasury regulations all taxable years of the loss_corporation prior to the reverse_acquisition are treated as separate_return limitation years notwithstanding its status as the common parent_corporation of the new affiliated_group consisting of it and the profit corporation conversely the separate_return years of the profit corporation prior to the acquisition are not treated in general as separate_return limitation years accordingly the net operating losses sustained by the loss_corporation but not the profit corporation in its separate_return years are subject_to the carryover limitation contained in c footnote omitted in sum sec_1_1502-1 modifies the lonely_parent_rule to reflect that in the case of a reverse_acquisition the roles of the acquiring and target corporations are effectively reversed response to the taxpayer’s argument the taxpayer argues that sec_1_1502-1 only imposes a srly limitation with regard to the taxable years of the acquiring group ie the first_corporation ending on or before the date of the reverse_acquisition the taxpayer interprets this language as restrictive in contrast the taxpayer asserts that when discussing the target group ie the second corporation sec_1_1502-1 refers broadly to all the separate_return years of the target and its subsidiaries based on its reading of these provisions the taxpayer argues that the imposition of a time limitation on the acquiring group and the lack of a limitation imposed upon the target group signifies an intent that the lonely parent after a reverse_acquisition retain such status indefinitely thus the taxpayer maintains that all separate_return years of p including year sec_4 and the lonely parent after the year reverse_acquisition are not srly with respect to the old p group the taxpayer’s interpretation of sec_1_1502-1 and sec_1_1502-1 is inconsistent with the language and purpose of the lonely_parent_rule and the reverse_acquisition exception to that rule sec_1_1502-1 provides as follows i n the event of an acquisition to which sec_1_1502-75 applies all taxable years of the first_corporation and of each of its subsidiaries ending on or before the date of the acquisition shall be treated as separate_return limitation years and the separate_return years if any of the second corporation and each of its the court explained in a footnote that a profit corporation is a corporation that does not possess tax_attributes which the parties wish to preserve while a loss_corporation is one that possesses favorable tax_attributes wolter constr co f 2d pincite n postf-129179-04 subsidiaries shall not be treated as separate_return limitation years unless they were so treated immediately before the acquisition emphasis added the taxpayer places much emphasis on the fact that the time limitation specified in the clause addressing the taxable years of the first_corporation is not repeated in the clause relating to the second corporation as detailed below such time limitation is implicit in the rule’s application and made explicit in the single example offered by sec_1_1502-1 in the consolidated_return context there can be only one common parent of a group at a given time--including with reference to separate_return years see sec_1504 defining an affiliated_group as or more chains of includible corporations connected through stock ownership with a common parent_corporation which is an includible_corporation the lonely_parent_rule accords special treatment to the common parent by generally excepting the common parent’s separate_return years from the definition of a srly even as the sec_1_1502-1 exception acknowledges that there can be only one common parent it reverses the application of the lonely_parent_rule with respect to carryovers from pre-reverse acquisition years ie the acquiring first corporation’s taxable years are treated as srly while the target second corporation’s separate_return years are not srly nonetheless only one corporation is treated as the lonely parent the reverse_acquisition rule provides that even though the second group is treated as remaining in existence it is the first_corporation that becomes the common parent of the continuing group see sec_1_1502-75 flush language the exception in sec_1_1502-1 imposes srly treatment only on the pre-reverse acquisition years of the first_corporation therefore on a prospective basis any post- acquisition separate_return years of the first_corporation are not subject_to srly by operation of the lonely_parent_rule in the instant case this means that after the break- up of the old p group in year a carryback from the separate_return_year of the first_corporation ie x to a consolidated_return_year of the old p group would not be subject_to the srly limitations because x qualifies as the lonely parent the taxpayer’s interpretation of sec_1_1502-1 however is that the lack of time limitation on the non- srly status of the second corporation following a reverse_acquisition means that the second corporation retains lonely parent status indefinitely-even after the group itself terminates based on this argument the taxpayer concludes that carrybacks from the separate_return years of the second corporation ie p to consolidated_return years of the old p group are not subject_to srly thus the taxpayer’s argument necessarily the consolidated_return_regulations generally confer special treatment on the common parent reflecting its key status see eg sec_1_1502-75 group generally remains in existence so long as the common parent remains the common parent sec_1_1502-76 the consolidated_return must be filed on the basis of the common parent’s taxable_year sec_1_1502-77 common parent is the sole agent for the group authorized to act in its own name with regard to the group’s consolidated_tax_liability sec_1_1502-32 common parent is the only member whose stock is not subject_to the investment_adjustment rules sec_1_1502-92 sec_382 ownership_change generally determined with reference to an ownership_change of the common parent postf-129179-04 leads to the nonsensical conclusion that for years after the break-up of the group the separate_return years of both the first_corporation and the second corporation qualify for the lonely parent exception to the srly rules such an interpretation is clearly contrary to sec_1_1502-1 and sec_1_1502-1 as discussed supra the reverse_acquisition rule reverses the roles of the acquiring and target corporations thereby necessitating a corollary reversal of the lonely_parent_rule the f exception therefore serves to harmonize the lonely_parent_rule with the reverse_acquisition rule with respect to years preceding a reverse_acquisition note that because the reverse_acquisition rule clearly identifies the first_corporation as the common parent of the continuing group on a prospective basis there is no need to deviate from the general lonely_parent_rule the single example that accompanies sec_1_1502-1 further supports that the reverse_acquisition exception to the lonely_parent_rule is directed only to carryovers from pre-acquisition separate_return years to post-acquisition consolidated_return years8 if corporation p merges into corporation t and the persons who were stockholders of p immediately before the merger as a result of owning the stock of p own more than percent of the fair_market_value of the outstanding_stock of t then a loss incurred before the merger by t even though it is the common parent or by a subsidiary of t is treated as having been incurred in a srly conversely a loss incurred before the merger by p or by a subsidiary of p in a separate_return_year during all of which such subsidiary was a member of the group of which p was the common parent is treated as having been incurred in a year which is not a srly emphasis added because the reverse_acquisition rule treats the p group as the continuing group the example appropriately concludes that a loss carryover attributable to p is not subject_to srly while a loss carryover attributable to t is subject_to srly the example thus explicitly establishes not only that the sec_1_1502-1 exception the parenthetical in sec_1_1502-1 identifies a second exception to the lonely_parent_rule in the case of a downstream transfer under sec_1_1502-75 sec_1_1502-75 explicitly provides a timeframe for the non-srly status of the target’s separate_return years for purposes of applying paragraph f i of sec_1_1502-1 to separate_return years ending on or before the date on which the former parent ceases to exist such former parent and not the new common parent shall be considered to the be the corporation described in such paragraph emphasis added the different formulations of the two exceptions to the lonely_parent_rule are likely attributable to their having been drafted at different times the reverse_acquisition rule_of sec_1_1502-75 the downstream exception of sec_1_1502-75 the general lonely_parent_rule of sec_1_1502-1 and the reverse_acquisition exception in sec_1_1502-1 all were issued together as part of the overhaul of the consolidated_return_regulations in t d 1966_2_cb_362 the exception to the lonely_parent_rule in the case of a downstream transfer was added later by t d 1973_1_cb_381 there is no indication however that the drafters intended the non-srly status of the target in the case of a reverse_acquisition to continue indefinitely while it is limited in the case of a downstream transfer postf-129179-04 applies only with respect to losses arising before the reverse_acquisition but also that such time limitation applies equally to both the first and second corporations in summary in the instant case p does not qualify under the lonely parent exception to the srly rules because p was not the common parent of the old p group during the carryback years moreover the exception in sec_1_1502-1 is inapplicable to the nol carrybacks at issue in this case accordingly the carryback of nols arising during the year and separate_return years to the year and consolidated_return years of the old p group is subject_to the limitations of the srly rules this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call sean p duffley at if you have any further questions


2uu717028 department of the treasury internal_revenue_service washington d c tax exempt and government entities jan uniform issue list legend - taxpayer a ira x company m amount a amount b state m court x dear this is in response to letters dated date date and date submitted on your behalf by your authorized representative in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code the following facts and representations have been submitted under penalty of perjury in’support of the ruling requested taxpayer a age represents that she received a distribution from ira x totaling amount a on or about date taxpayer a asserts that her failure to accomplish a rollover of amount b amount a minus funds used to pay various expenses within the 60-day period prescribed by sec_408 was page due to the affects of a mental impairment and mental illness taxpayer a represents that amount b has not been used for any other purpose taxpayer a was discharged from her governmental job in year in october she withdrew amount a from ira x taxpayer a’s friends and family have submitted affidavits that she was suffering from a mental illness and a mental impairment during the period covering her discharge from employment and her withdrawal of amount a from ira x on date taxpayer a was involuntarily committed to a hospital because of her mental state on date pursuant to an order of court x state m taxpayer a was judged to be a mentally ill person and committed to an institution for treatment taxpayer a was discharged from custodial care in date while hospitalized taxpayer a represents that she did not have access to her accounts and could not have accomplished a rollover of amount b into an ira set up and maintained in her name amount b was contributed to an ira set up and maintained in taxpayer a’s name with company m on or about date which date was outside the 60-day rollover period applicable to amount b prescribed by statute based on the facts and representations you request a ruling that the internal_revenue_service waive the 60-day rollover requirement with respect to the distribution of amount c contained in sec_408 of the code the code’ _ sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or page ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that the secretary may waive the day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 2003_4_irb_359 date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer a is consistent with her assertion that her failure to accomplish a rollover within the 60-day period prescribed by sec_408 was due to the affects of a mental impairment and mental illness on date taxpayer a was involuntarily committed to a hospital because of her mental state on date taxpayer a was judged to be a mentally ill person as evidenced by an order of court x state m filed on that date taxpayer a was discharged from page custodial care in date while hospitalized taxpayer a represents that she did not have access to her accounts taxpayer a represents that amount b has not been used for any other purpose and was in fact contributed to an ira on or about date therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution to taxpayer a of amount b from ira x pursuant to this ruling letter taxpayer a's date contribution of amount b to an ira set up and maintained in her name with company m is deemed to have been timely made and deemed to constitute a rollover_contribution as long as all other requirements of code sec_408 except the 60-day requirement are met with respect to such ira contribution - no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto pursuant to a power_of_attorney on file with this office a copy of this letter_ruling is being sent to your authorized representative this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent if you wish to inquire about this ruling please sincerely yours va frances v sloan mafager employee_plans technical group enclosures deleted copy of letter_ruling notice of intention to disclose


internal_revenue_service number release date index number ----------------- ------------------------------ ------------------------------------------ ----------------------------------- -------------------------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc ita b03 plr-125464-15 date october ty ------- legend taxpayer ------------------------------------------------------------------- private equity firm --------------------------------------- taxpayer’s parent --------------------------------------------- seller ------------------------- target’s parent ------------------------ target --------------------------------------- accounting firm ---------------------------------------- products ----------------------------- business ----------------------------- month ------------------ date ----------------------- date --------------------------- date --------------------------- date ------------------------- year ------- dollar_figurea ---------------- dollar_figureb ----------------- dollar_figurec --------------- dollar_figured --------------- dollar_figuree --------------- dear --------------- this is in response to your letter dated ------------------ in your letter you requested an extension of time to file the forms necessary to make a safe_harbor election under revproc_2011_29 to allocate success-based fees between facilitative and non-facilitative amounts incurred for a covered transaction for the taxpayer’s tax_year ending december year the request is based on sec_301_9100-1 and sec_301_9100-3 of the plr-125464-15 procedure and administrative regulations facts taxpayer is the parent of a consolidated_group formed for purposes of acquiring target a large supplier of products in month seller agreed to the sale of the majority of its business to private equity firm and other investors to facilitate the transaction taxpayer’s parent owned by private equity firm and other investors formed an acquisition structure with taxpayer as the top-tier corporation seller owned target’s parent which in turn owned target on date taxpayer and its subsidiaries and seller executed an investment agreement whereby a subsidiary of taxpayer would acquire the preferred_stock of target’s parent in exchange for cash consideration and common_stock in taxpayer pursuant to the terms of the investment agreement upon closing target’s parent and target would merge with and into subsidiaries of taxpayer with target’s parent and target surviving the transaction closed on date following which seller owned the common_stock of taxpayer and taxpayer’s parent owned the preferred_stock total consideration for the transaction was approximately dollar_figurea in conjunction with the transaction taxpayer and one of its subsidiaries engaged private equity firm for financial advisory services and negotiation support relating to the transaction pursuant to the terms of the engagement letter taxpayer paid the private equity firm fees associated with financial advisory and investment banking services subsequent to the closing of the transaction taxpayer engaged accounting firm to perform a transaction costs analysis with respect to the various costs associated with taxpayer’s acquisition of target’s parent and target at the conclusion of the analysis accounting firm provided one of taxpayer’s subsidiaries with a written summary of the results of the transaction costs analysis as reflected in the summary document costs associated with the transaction totaled dollar_figureb the portion of the total costs associated with success-based fees was identified as dollar_figurec this latter amount was specifically identified as available for treatment under the safe-harbor election allowed by revproc_2011_29 moreover the transaction costs analysis contained as an exhibit a statement to be filed in order to make the safe-harbor election pursuant to the revenue_procedure specifically setting forth the amounts to be deducted and the amounts to be capitalized in addition to engaging accounting firm to prepare the transaction costs analysis taxpayer also engaged accounting firm for tax preparation services included in this engagement was the preparation of taxpayer’s form_1120 u s_corporation income_tax return including for the year in which the transaction occurred plr-125464-15 at the time the tax_return was prepared accounting firm was aware of the transaction costs analysis and the determination to allocate the success-based fees under the safe-harbor election provisions of revproc_2011_29 accounting firm thus prepared taxpayer’s return consistent with the allocation permitted under the safe_harbor with dollar_figured percent of the fees deductible either immediately or over time as non-facilitative costs and the remaining dollar_figuree percent capitalized as facilitative costs however due to an oversight accounting firm did not attach the statement required by revproc_2011_29 to make the election to taxpayer’s form_1120 taxpayer’s chief financial officer signed the finalized return which accounting firm timely filed without the statement attached on date subsequent to the filing of taxpayer’s form_1120 for the taxable_year at issue taxpayer’s independent auditors reviewed its financial statements in the course of that review the auditors discovered that the election statement was not attached to the return despite the success-based fees being allocated as permitted under the revenue_procedure the auditors then discussed the missing election statement with accounting firm on date at that point accounting firm after consulting with taxpayer’s chief financial officer recommended that taxpayer seek section relief law and analysis sec_263 of the internal_revenue_code and sec_1_263_a_-2 of the income_tax regulations provide that no deduction shall be allowed for any amount_paid out for property having a useful_life substantially beyond the taxable_year in the case of an acquisition or reorganization of a business_entity costs that are incurred in the process of acquisition and that produce significant long-term benefits must be capitalized 503_us_79 397_us_572 under sec_1_263_a_-5 a taxpayer must capitalize an amount_paid to facilitate a business acquisition or reorganization transaction described in sec_1_263_a_-5 an amount is paid to facilitate a transaction described in sec_1_263_a_-5 if the amount is paid in the process of investigating or otherwise pursuing the transaction sec_1_263_a_-5 of the regulations provides that an amount that is contingent on the successful closing of a transaction described in sec_1_263_a_-5 or success- based fee is presumed to facilitate the transaction a taxpayer may rebut the presumption by maintaining sufficient documentation to establish that a portion of the fee is allocable to activities that do not facilitate the transaction to reduce controversy between the irs and taxpayers over the documentation required to allocate success-based fees alternatively to the regulatory presumption the irs issued revproc_2011_29 2011_1_cb_746 the revenue_procedure states that the irs would not challenge a taxpayer's allocation of a success-based_fee between plr-125464-15 activities that facilitate a transaction described in sec_1_263_a_-5 and activities that do not facilitate the transaction if the taxpayer -- treats percent of the amount of the success-based_fee as an amount that does not facilitate the transaction capitalizes the remaining percent as an amount that does facilitate the transaction and attaches a statement to its original federal_income_tax return for the taxable_year the success-based_fee is paid_or_incurred stating that the taxpayer is electing the safe_harbor identifying the transaction and stating the success-based_fee amounts that are deducted and capitalized the revenue_procedure applies to covered transactions described in sec_1 a - e which include -- i a taxable_acquisition by the taxpayer of assets that constitute a trade_or_business ii a taxable_acquisition of an ownership_interest in a business_entity whether the taxpayer is the acquirer in the acquisition or the target of the acquisition if immediately after the acquisition the acquirer and the target are related within the meaning of sec_267 or sec_707 or iii a reorganization described in sec_368 b or c or a reorganization described in sec_368 in which stock_or_securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under sec_354 or sec_356 whether the taxpayer is the acquirer or the target in the reorganization sec_301_9100-1 through of the procedure and administration regulations provide the standards the commissioner uses to determine whether to grant an extension of time to make a regulatory election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i plr-125464-15 sec_301_9100-3 provides extensions of time to make a regulatory election under code sections other than those for which sec_301_9100-2 expressly permits automatic extensions requests for extensions of time for regulatory elections will be granted when the taxpayer provides evidence including affidavits described in the regulations to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government sec_301_9100-3 states that a taxpayer will be deemed to have acted reasonably and in good_faith if the taxpayer -- i requests relief before the failure to make the regulatory election is discovered by the service ii failed to make the election because of intervening events beyond the taxpayer's control iii failed to make the election because after exercising due diligence the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of the service or v reasonably relied on a qualified_tax professional and the tax professional failed to make or advise the taxpayer to make the election under sec_301_9100-3 a taxpayer will not be considered to have acted reasonably and in good_faith if the taxpayer -- i seeks to alter a return position for which an accuracy related penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief taking into account sec_1_6664-2 and the new position requires or permits a regulatory election for which relief is requested ii was informed in all material respects of the required election and related tax consequences but chose not to file the election or iii uses hindsight in requesting relief if specific facts have changed since the original deadline that make the election advantageous to a taxpayer the service will not ordinarily grant relief taxpayer in this case has represented that it has requested relief before the failure to make the regulatory election was discovered by the service taxpayer has also represented that it reasonably relied on a qualified_tax professional and the tax plr-125464-15 professional failed to make or advise the taxpayer to make the election thus under sec_301_9100-3 and sec_301_9100-3 taxpayer will be deemed to have acted reasonably and in good_faith taxpayer has also represented that none of the circumstances listed in sec_301_9100-3 apply sec_301_9100-3 provides in part that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money sec_301_9100-3 provides in part that the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under sec_6501 before the taxpayer’s receipt of a ruling granting relief under these criteria the interests of the government are not prejudiced in this case taxpayer has represented that granting relief would not result in a lower tax_liability in the aggregate for all taxable years affected by the election than taxpayer would have had if the election had been timely made taking into account the time_value_of_money furthermore the taxable_year in which the regulatory election should have been made and any taxable years that would have been affected had it been timely made are not closed by the period of assessment conclusion taxpayer's election is a regulatory election as defined under sec_301_9100-1 because the due_date of the election is prescribed in revproc_2011_29 in the present situation the requirements of sec_301_9100-1 sec_301_9100-3 and sec_301 b v of the regulations have been satisfied the information and representations made by taxpayer establish that taxpayer acted reasonably and in good_faith furthermore granting an extension will not prejudice the interests of the government taxpayer represented that it will not have a lower tax_liability in the aggregate for all taxable years affected by the election if given permission to make the election than taxpayer would have if the election were made by the original deadline for making the election taxpayer also represented that the period of assessment for year will not be closed before receipt of a ruling accordingly taxpayer is granted an extension of time to file the statement required by sec_4 of revproc_2011_29 until days following the date of this letter except as expressly provided herein no opinion is expressed or implied concerning the federal_income_tax consequences of any aspect of any transaction or item discussed or referenced in this ruling including whether taxpayer properly included the correct costs as its success-based fees subject_to the election or whether taxpayer’s transaction was within the scope of revproc_2011_29 plr-125464-15 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling 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 christopher f kane branch chief branch income_tax accounting cc -------------------------------------- ----------------------------------------------------------------- ---------------------------------- -----------------------------


id office uilc cca-105527-10 ---------- number release date from ----------------- sent wednesday january pm to --------------------- cc ------------------- subject re partnership vs non-partnership question --------- hi --------- i would agree that sec_469 would still apply to limit the amount of losses due to the activity being passive for all the partners involved and not falling within any exception to the passive_activity limitation --------can you please confirm ----


t c summary opinion united_states tax_court david r holland petitioner v commissioner of internal revenue respondent docket no 7951-09s filed date david r holland pro_se nicholas doukas for respondent armen special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any unless otherwise indicated all subsequent section references are to the internal_revenue_code in effect for the taxable_year in issue and all rule references are to the tax_court rules_of_practice and procedure other court and this opinion shall not be treated as precedent for any other case respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax after a concession by respondent the only issue for decision is whether petitioner is entitled to the deduction for employee business_expenses that respondent disallowed for lack of substantiation we hold that petitioner is but only to the extent decided herein background some of the facts have been stipulated and they are so found we incorporate by reference the parties’ stipulation of facts and accompanying exhibits petitioner resided in the state of california when the petition was filed throughout the taxable_year in issue petitioner lived in coalinga california he did not subscribe to landline telephone service at his home but rather relied exclusively on a cellular telephone which he used for both personal and business purposes without regard to the 2-percent floor on miscellaneous_itemized_deductions see sec_67 respondent concedes that petitioner is entitled to a deduction for union dues of dollar_figure as claimed by petitioner on his return by profession petitioner is and has been for some years an operator of heavy equipment such as bulldozers excavators and similar types of machinery used in the building of highways and other construction projects as such petitioner is a member of operating engineers local union no during petitioner obtained most of his work assignments through signing the out-of-work book at the union hall in fresno and waiting for his name to come to the top of the list he did however manage to find some assignments on his own all of petitioner’s assignments throughout were short term lasting as little as a few days or a week to no more than a couple of months for the first months of petitioner worked at various jobsites in california many of which were located in the central valley if the job was within miles or so of his home in coalinga petitioner would drive back and forth on a daily basis if the job were further afield petitioner would stay at a motel during the workweek and return to his home in coalinga for the weekend operating engineers local union no has over big_number members most of whom work as heavy equipment operators and construction workers see http www oe3 org local union no portrays itself as the largest construction trades local in the united_states id it is an affiliated local of the international union of operating engineers see http www iuoe org for much of the last months of petitioner went into arizona and was working for a company in arizona none of the expenses_incurred by petitioner for transportation or for meals was reimbursed by any employer or by his union however they usually paid for the lodging on august and petitioner worked for shasta constructors inc shasta at a project in merced california petitioner also worked for shasta at the same project from august through on each of those days petitioner drove from his home in coalinga to the jobsite and back a total of miles per day thus over the course of those days petitioner drove some big_number work-related miles on october through petitioner worked for american paving co american paving at a project in clovis california petitioner also worked for american paving at the same project from october through and from october through on each of those days petitioner drove from his home in coalinga to the jobsite and back a total of miles per day thus over the course of those days petitioner drove some big_number work-related miles the record does not disclose the name s of the company or companies for whom petitioner worked nor exactly where in arizona he worked presumably they were the employers petitioner filed a federal_income_tax return for petitioner did not prepare the return himself rather it was prepared for him by a small bookkeeping and return preparation business on his return petitioner itemized his deductions among those claimed was one for employee business_expenses of dollar_figure which consisted of the following item amount form_2106 dollar_figure union due sec_368 work gloves boot sec_150 cellular phone big_number dollar_figure on the form_2106 employee business_expenses petitioner claimed vehicle expenses of dollar_figure travel_expenses while away_from_home_overnight other than meals of dollar_figure and meals of dollar_figure next petitioner reduced the amount for meals by dollar_figure for reimbursements received he then reduced the difference ie dollar_figure-dollar_figure or dollar_figure by percent see sec_274 finally petitioner added the balance or dollar_figure to the amounts for vehicle expenses dollar_figure and travel_expenses dollar_figure to arrive at the total deduction of dollar_figure in part ii of form_2106 petitioner computed vehicle expenses based on the standard mileage rate of dollar_figure per mile times big_number business miles in the notice_of_deficiency respondent disallowed for lack of substantiation the entire deduction claimed by petitioner on his schedule a itemized_deductions for employee business_expenses however at trial respondent conceded that petitioner was entitled to deduct union dues of dollar_figure as claimed by petitioner on his return discussion burden_of_proof generally the commissioner’s determinations are presumed correct and the taxpayer bears the burden of proving that those determinations are erroneous rule a 503_us_79 290_us_111 specifically deductions are a matter of legislative grace and the taxpayer bears the burden of proving entitlement to any deduction claimed rule a 308_us_488 292_us_435 although sec_7491 may serve to shift the burden_of_proof to the commissioner under certain circumstances it does not do so here for at least three independent reasons petitioner failed to raise the matter petitioner failed to comply with recordkeeping and substantiation requirements see sec_7491 and b and petitioner failed to introduce the requisite quality of evidence see sec_7491 accordingly petitioner bears the burden_of_proof petitioner’s position and admissions at trial petitioner succinctly set forth his position as well as his understanding of what this case is all about i did run construction i did have expenses i don’t have records of them expenses but i did work this construction all year long and i had the expenses i don’t know of any job that you have no expenses for just because i don’t have the records of it is what this is all about petitioner candidly admitted at trial that i’m not a recordkeeper and that i didn’t save my receipts or nothing indeed in response to respondent’s counsel’s comment on cross- examination that we’re just trying to get the facts out petitioner replied well the only facts here is i have no receipts for this stuff general principles governing substantiation like petitioner we are not aware of any job that you have no expenses for but that truism does not abide because a taxpayer is required to maintain records sufficient to substantiate deductions claimed by the taxpayer on his or her return see generally sec_6001 sec_1_6001-1 e income_tax regs this is because a tax_return is merely a statement of sec_6001 provides that every person liable for any_tax imposed by this title or for the collection thereof shall keep such records and comply with such rules and regulations as the secretary may from time to time prescribe sec_1_6001-1 income_tax regs provides that any person subject_to tax shall keep such permanent books of account or records as are sufficient to establish the continued the taxpayer’s claim and the return is not presumed to be correct 71_tc_633 62_tc_834 in short the fact that a taxpayer claims a deduction on the taxpayer’s income_tax return is not sufficient to substantiate the deduction claimed on the return wilkinson v commissioner supra pincite roberts v commissioner supra pincite 28_tc_1034 7_tc_245 affd 175_f2d_500 2d cir the cohan_rule and its limitations as a general_rule if in the absence of required records a taxpayer provides sufficient evidence that the taxpayer has incurred a deductible expense but the taxpayer is unable to adequately substantiate the amount of the deduction to which he or she is otherwise entitled the court may estimate the amount of such expense and allow the deduction to that extent 39_f2d_540 2d cir however the continued amount_of_deductions sec_1_6001-1 income_tax regs provides that the books_or_records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees and shall be retained so long as the contents thereof may become material in the administration of any internal revenue law court may bear heavily against the taxpayer whose inexactitude is of his or her own making id further in order for the court to estimate the amount of an expense we must have some basis upon which an estimate may be made 85_tc_731 without such a basis any allowance would amount to unguided largesse 245_f2d_559 5th cir strict substantiation for certain expenses in the case of certain expenses sec_274 expressly overrides the so-called cohan doctrine 50_tc_823 affd per curiam 412_f2d_201 2d cir sec_1_274-5t temporary income_tax regs fed reg date specifically and as pertinent herein sec_274 provides that no deduction is allowable for traveling expenses including meals_and_lodging while away from home or with respect to listed_property as defined in sec_280f unless the deduction is substantiated in accordance with the strict substantiation requirements of sec_274 and the regulations promulgated thereunder included within the sec_274 provides in pertinent part as follows sec_274 disallowance of certain entertainment etc expenses d substantiation required --no deduction or credit shall be allowed-- for any traveling expense including meals_and_lodging while away from home for any item with respect to an activity which is continued definition of listed_property in sec_280f is any passenger_automobile or other_property used as a means of transportation and any cellular telephone sec_280f ii v sec_1_280f-6 and c income_tax regs thus under sec_274 no deduction is allowable for expenses_incurred for traveling expenses or in respect of listed_property on the basis of any approximation or the unsupported testimony of the taxpayer see eg murata v commissioner tcmemo_1996_321 golden v commissioner tcmemo_1993_602 in other words in the absence of adequate_records or sufficient evidence corroborating the taxpayer’s own statement any deduction that is subject_to the stringent substantiation requirements of sec_274 is proscribed continued of a type generally considered to constitute entertainment amusement or recreation for any expense for gifts or with respect to any listed_property as defined in sec_280f unless the taxpayer substantiates by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement a the amount of such expense or other item b the time and place of the travel entertainment amusement recreation or use of the facility or property or the date and description of the gift c the business_purpose of the expense or other item and d the business relationship to the taxpayer of persons entertained using the facility or property or receiving the gift analysis expenses subject_to the sec_274 standard the bulk of the expenses subsumed in the deduction for employee business_expenses is subject_to the strict substantiation standard of sec_274 because those expenses relate either to traveling expenses or to listed_property ie petitioner’s vehicle and cell phone the record includes no documentation by petitioner substantiating such expenses however the record does include documentation obtained from two of petitioner’s employers shasta and american paving that documentation which was contemporaneously maintained by those employers painstakingly the stipulation of facts includes an exhibit to which respondent reserved an objection of a copy of a calendar purportedly showing recorded mileage traveled by petitioner during at trial petitioner candidly admitted that the calendar was not kept contemporaneously but rather was prepared from memory three years back in an effort to reconstruct his travel he also frankly admitted that there’s a couple mistakes on it and that we do have a couple of questionables petitioner did not identify the questionables but we note that the calendar is not consistent with certain other evidence in the record under the circumstances we conclude that the exhibit does not constitute the type of documentation mandated by sec_274 and we therefore sustain respondent’s objection to its admissibility at trial petitioner seemed surprised by this third-party documentation even though it was included in the stipulation of facts that he had executed contrary to petitioner’s complaint that shasta and american paving had been willing to provide this documentation to respondent but not to him the cover sheets accompanying the documentation clearly demonstrate that it had been faxed to petitioner’s bookkeeper and return preparer tony gomez and not to any of respondent’s agents details petitioner’s employment by date hour location and project that documentation in combination with petitioner’s testimony satisfies the strict substantiation requirements of sec_274 thus without regard to the 2-percent floor on miscellaneous_itemized_deductions see sec_67 petitioner is entitled to a deduction for mileage expenses of dollar_figure based on the standard mileage rate of dollar_figure per mile times big_number miles see supra p see also brockman v commissioner tcmemo_2003_3 aldea v commissioner tcmemo_2000_136 revrul_99_ c b dollar_figure the cited cases hold that a taxpayer may deduct daily transportation_expenses incurred in going between the taxpayer’s residence and a temporary_work_location outside the metropolitan area where he or she lives and normally works in this regard petitioner’s employment with shasta and american paving was clearly temporary and respondent did not even suggest that locations such as clovis and merced miles and miles distant respectively from petitioner’s home in coalinga were not outside petitioner’s metropolitan area or that he did not normally work in such area but to the extent that petitioner or his return preparer may be under the impression that daily transportation_expenses may be augmented by a flat dollar_figure daily allowance for meals such is not the case rather the law provides that a taxpayer’s daily meals are generally nondeductible under sec_262 as personal living or family_expenses see 389_us_299 54_tc_1210 affd per curiam 435_f2d_1290 1st cir because expenses for meals would have been incurred regardless of whether the taxpayer had engaged in any business activity 841_f2d_809 8th cir 80_tc_1073 affd 758_f2d_211 7th cir and even though meals eaten on the road may cost more than those prepared at home barry v commissioner f 2d pincite expenses for meals may be deducted under sec_162 but only if consumed while traveling on business away continued however apart from the documentation obtained from shasta and american paving there is nothing in the record that suffices to satisfy the strict substantiation requirements mandated by sec_274 although we found petitioner to be a credible individual his testimony standing alone is no substitute for what sec_274 demands thus except for the allowance described in the immediately preceding paragraph we are obliged to sustain respondent’s determination disallowing the deduction claimed by petitioner for form and cellular phone expenses expenses subject_to the cohan standard finally the deduction in issue includes expenses for work gloves dollar_figure and safety boots dollar_figure neither of these items is subject_to strict substantiation rather both are subject_to the more liberal cohan standard given petitioner’s profession we can well appreciate that safety boots are a necessity as are work gloves but while we understand that work gloves wear out or are misplaced and need to be replaced dollar_figure strikes us as a bit much at least in the absence of any documentary_evidence accordingly without regard continued from home overnight ie on a trip requiring that the taxpayer stop for sleep or a substantial period of rest united_states v correll supra 113_tc_106 and then only if the substantiation requirements of sec_274 are satisfied to the 2-percent floor on miscellaneous_itemized_deductions see sec_67 we allow dollar_figure for safety boots and dollar_figure for work gloves see cohan v commissioner f 2d pincite respondent’s determination to the contrary is not sustained conclusion we have considered all of the arguments advanced by petitioner and to the extent that we have not expressly addressed any we conclude that none supports an outcome contrary to that reached herein to reflect our disposition of the disputed issue as well as respondent’s concession see supra note decision will be entered under rule


t c memo united_states tax_court charles j and francesca c sigerseth petitioners v commissioner of internal revenue respondent docket no filed date charles j and francesca c sigerseth pro sese jeremy l mcpherson for respondent memorandum opinion vasquez judge respondent determined deficiencies of dollar_figure and dollar_figure in and sec_6662 accuracy-related_penalties of dollar_figure and dollar_figure on petitioners’ and federal income taxes respectively ’ after having orally ' unless otherwise provided section references are to the internal_revenue_code in effect for the years in issue and rule references are to the tax_court rules_of_practice and procedure - - dismissed this case for lack of prosecution as to the deficiencies in petitioners' income taxes we have remaining for decision whether petitioners are liable for the accuracy-related_penalties and whether to impose a penalty under sec_6673 on petitioners background at the time the petition was filed petitioners resided in el macero california on date respondent determined that for the and tax years petitioners failed to report income with regard to the activities of three trusts and capital_gain from the sale_or_exchange of assets and petitioners were not entitled to a deduction with regard to certain personal exemptions further respondent determined that petitioners were liable for self-employment taxes but allowed a partially offsetting deduction for the self-employment taxes determined respondent additionally determined accuracy-related_penalties based ona substantial_understatement of tax or negligence or disregard of rules or regulations on date petitioners filed a petition in this court averring that respondent’s determinations were erroneous the notice_of_deficiency was issued improperly and respondent had the burden_of_proof with regard to the determinations made by him on date after we allowed an extension of time in which respondent could answer respondent filed his answer with the court on date this case was calendared for the court’s trial session in san francisco california beginning on date on date respondent’s appeals_office contacted petitioners in an attempt to resolve the disputed issues there is no evidence in the record indicating that petitioners responded to the appeals_office on date respondent’s counsel wrote petitioners to obtain informal_discovery prepare a stipulation of facts explain the consequences of not appearing at trial and inform them of respondent’s anticipated motion to seek a sec_6673 penalty in addition respondent’s counsel suggested that the parties meet on date to address the above matters petitioners did not provide respondent with the requested information but on date mr sigerseth wrote respondent to suggest a meeting on september or in the correspondence mr sigerseth stated that cal avila would be petitioners’ counsel and would attend the meeting on date respondent’s counsel stated ina letter to petitioners that he would be willing to meet on date with petitioners and mr avila he informed them however that mr avila could not represent petitioners at the tax_court unless he was an attorney or other person admitted to practice before the tax_court he reminded petitioners again that q4e- respondent was planning to move that the court impose a sec_6673 penalty on that same day respondent served petitioners with a request for production of documents and a request for interrogatories additionally respondent served petitioners with a request for admissions and filed a copy with the court on date respondent filed a second request for admissions with the court which was also served on petitioners petitioners did not respond to the requests for admissions therefore each matter to which respondent requested admission is deemed admitted see rule c some of those deemed admissions were petitioners created the sigerseth family_trust on date in and petitioners charles j sigerseth and francesca c sigerseth were the only two trustees of the sigerseth family_trust on page of the declaration of trust of the sigerseth family_trust it states in the trustees' declaration of purpose that the creator transferred property to the trustees including the exclusive use of his the creator's lifetime services and all of his eharned remuneration accruing therefrom from any current source whatsoever so the charles j sigerseth can maximize his lifetime efforts through the utilization of his - constitutional rights for the protection of his family in the pursuit of his happiness through his desire to promote the general welfare all of which charles j sigerseth feels he will achieve because they are sustained by his religious beliefs petitioners did not report the sale of their half interest in the tahoe city condominium on their federal_income_tax return during all of and the sigerseth family_trust was a beneficiary of trust management services a_trust in and trust management services a_trust was engaged in marketing abusive trusts and providing services to investors in abusive trusts during respondent's examination of petitioners' and federal tax returns petitioners refused to cooperate with respondent to provide any of the documents requested by respondent or to provide any explanations or documents to support the information reported on the tax returns and after the petition was filed in this case petitioners refused to respond to any communication from respondent's appeals_office on date petitioners ina letter to respondent suggested alternative dates september or to meet but they again did not respond to respondent’s discovery requests on date respondent filed motions with -- - the court to compel production of documents and responses to interrogatories on date the court granted respondent’s motions to compel production of documents and responses to interrogatories ordering that the production and responses occur on or before date the court warned petitioners that if they failed to comply with the court’s order it would impose sanctions under rule including dismissal of the case or a decision against petitioners petitioners failed to respond to the court’s order on date respondent’s counsel met with mr sigerseth but petitioners still refused to provide the requested information and documents mr sigerseth however provided respondent’s counsel with a proposed letter to the court requesting that petitioners be allowed to withdraw their petition on date respondent filed a motion to dismiss for failure to prosecute and for a penalty under sec_6673 on date petitioners responded to respondent’s motion by filing a motion to dismiss for lack of jurisdiction claiming that the notice_of_deficiency was improper and making protester type arguments petitioners’ motion to dismiss for lack of jurisdiction was denied on date this case was called for trial in san - francisco california due to petitioners’ failure to appear we orally dismissed the case for lack of prosecution as to petitioners’ liability for the income_tax deficiencies and respondent’s motion for a sec_6673 penalty was taken under advisement on date petitioners filed a document with the court continuing to make protester type arguments based upon those types of arguments petitioners asserted that they were not liable for any taxes respondent had not proven that they owed any taxes and this court in any event lacked jurisdiction with regard to the dispute discussion rule b provides that the court may dismiss a case at any time and enter a decision against a petitioner if he fails to properly prosecute his case or to comply with the rules or any order of the court rule b generally applies in situations where a petitioner bears the burden_of_proof see also rule a providing that the burden_of_proof is on a petitioner unless otherwise provided by statute or determined by the court 290_us_111 we note that when this case was called for trial respondent represented that the examination in the instant case commenced after the effective date of sec_7491 see internal_revenue_service restructuring reform act of rra publaw_105_206 sec c 112_stat_685 providing that sec --- - is applicable to court proceedings arising in connection with examinations commenced after date under sec_7491 congress provided that if a taxpayer presents credible_evidence and meets certain other prerequisites the commissioner shall bear the burden_of_proof with regard to factual issues relating to the liability of the taxpayer for a tax imposed under subtitle a or b because petitioners failed to appear and present credible_evidence the burden_of_proof is not placed on respondent under sec_7491 as to the accuracy-related_penalties imposed by respondent congress provided in sec_7491 that the commissioner bears the burden of production in any court_proceeding with regard to the liability of the taxpayer for such penalties in higbee v commissioner t c __ ___ s - slip op pincite we stated that this provision requires that the commissioner come forward with sufficient evidence indicating that it is appropriate to impose the relevant penalties however the commissioner does not have the obligation to introduce evidence regarding elements such as reasonable_cause or substantial_authority see id petitioners failed to appear at trial and submitted only tax_protester type material to the court during the litigation respondent attempted to obtain informal and formal discovery from petitioners without success as noted in our background --- - discussion petitioners are deemed to have admitted certain facts the deemed admissions were made pursuant to rule c by the deemed admissions petitioners are deemed to admit certain facts which when taken together establish that they failed to exercise the due care of a reasonable and ordinarily prudent person under like circumstances for example petitioners are deemed to admit that they invested in abusive trusts and that they refused to cooperate or provide documents to respondent during the examination of petitioners' and federal_income_tax returns we conclude that respondent met his burden of production under sec_7491 with regard to the accuracy- related penalties determined based on negligence or disregard of rules or regulations see rule c 115_tc_523 because respondent met his burden of production through the deemed admissions and petitioners failed to disprove respondent’s determinations éeg by proving reasonable_cause we hold that petitioners are liable for the accuracy-related_penalties in issue see sec_6662 b c higbee v commissioner supra in that respect respondent's motion to dismiss for failure to prosecute insofar as it relies on the deemed admissions will be treated and granted as a motion for partial summary_judgment we therefore need not address respondent’s determination of the accuracy-related_penalties based on a substantial_understatement of tax -- - finally sec_6673 authorizes this court to penalize a taxpayer who institutes or maintains a proceeding primarily for delay pursues a position in this court which is frivolous or groundless or unreasonably fails to pursue available administrative remedies petitioners’ conduct in this case has convinced us that all of the above factors are present in this proceeding petitioners’ repeated failure to comply with respondent’s discovery requests even in the face of orders from the court directing them to do so has resulted in a waste of limited judicial and administrative resources that could have been devoted to resolving bona_fide claims of other taxpayers see 806_f2d_948 9th cir further petitioners have failed to seek settlement at the administrative level lastly petitioners’ insistence on making protester type arguments even after we have summarily dismissed them indicates an unwillingness on the part of petitioners to respect the tax laws of the united_states accordingly we shall grant respondent’s motion and require petitioners to pay a penalty to the united_states pursuant to sec_6673 in the amount of dollar_figure to reflect the foregoing an appropriate order and decision will be entered


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 b04 plr-131840-09 date date legend ---------------------------------- ------------------------------ -------------------------- ------------------- ---------------------- -------------------- --------------------------------- ------------------------------- ------------------------------ ------------------------------- ------------------- ----------------------------------------------------------------------- ---------- -------------------- ---------------------------- ------------------------ trust a_trust b husband date wife date bank son son’s wife grandchild a grandchild b superior court state date date date state supreme court ------------------------------- x y --------------- --------------- dear ----------------------------- this responds to your date letter requesting rulings regarding the effect of the reformations of trust a and trust b for federal gift estate and generation-skipping_transfer gst tax purposes plr-131840-09 the facts submitted are as follows trust a is a testamentary_trust created under the residuary clause of husband’s will husband died on date survived by wife trust b is a testamentary_trust created under the residuary clause of wife’s will wife died on date shortly after the death of husband trust a and trust b are substantially identical both having been created under the reciprocal wills of husband and wife bank was appointed as the original trustee of trust a and the original trustee of trust b both trusts originally provide as follows the first paragraph of sec_2 of item iii of the wills of husband and wife provides that upon the death of the survivor of husband and wife the trustee may pay trust income to son and son’s wife and also may pay to son and son’s wife such sums from principal as the trustee deems necessary or advisable from time to time for their medical_care comfortable maintenance and welfare considering the income of either from all sources known to the trustee the second paragraph of sec_2 provides that upon the death of the survivor of son and son’s wife the trustee shall distribute whatever balance remains in the respective trusts in equal shares to grandchild a and grandchild b such share to be held in further trust until that grandchild reaches age from the share of the respective grandchild the trustee may make discretionary distributions of income payable until that grandchild reaches age mandatory distributions of income payable after that grandchild reaches age and discretionary distributions of principal payable until the final distribution of that grandchild’s share the trustee must distribute one-third of each grandchild’s share to such grandchild at age one-half of the balance at age and the balance at age both trust a and trust b also provide that in the event any trustee resigns or is unable or refuses to act or whenever a majority of the beneficiaries of the current income decide for any reason whatsoever to remove the trustee any person or another corporation authorized under federal or state law to administer trusts may be appointed as trustees by written instrument son is the executor of the estate of husband and the estate of wife son was advised by an attorney hired to assist with the management of the trust that the first paragraph of sec_2 of item iii of the respective wills of husband and wife potentially creates a general_power_of_appointment over trust principal for federal estate_tax purposes son in separate petitions petitioned superior court in state to reform trust a and trust b respectively on the basis of scrivener’s error on the basis of superior court’s findings superior court entered an order reforming trust a on date and an order reforming trust b on date plr-131840-09 the first paragraph of sec_2 of item iii of the respective wills of husband and wife was reformed to provide that in addition to discretionary distributions of income the trustee may distribute to son and son’s wife such sums from principal of the respective trust as the trustee deems necessary from time to time for either of their health and maintenance considering the income of either from all sources known to the trustee subsequent to the reformations of trust a and trust b by superior court the beneficiaries of trust a and trust b instituted an action against the scriveners of the wills of husband and wife the judgment of the trial_court in that action was eventually appealed to the highest court of state on date the state supreme court in a written opinion concluded that the record shows by clear_and_convincing evidence there was a mistake in the trust language of the original wills and that trust a and trust b were reformed consistent with state law at the time of husband’s death the value of the property available for distribution to trust a was dollar_figurex husband made no lifetime allocation of his gst_exemption and no direct skips of property occurred at his death at the time of wife’s death the value of the property available for distribution to trust b was dollar_figurey wife made no lifetime allocation of her gst_exemption and no direct skips of property occurred at her death you have requested the following rulings the judicial reformations of trust a and trust b will not be treated for purpose sec_1 of sec_2514 as the exercise or release of general powers of appointment by son and son’s wife as a result of the judicial reformations of trust a and trust b son and son’ sec_2 wife will not possess a general_power_of_appointment over the principal of trust a and trust b that would cause the entire value of the principal of such trusts to be includible in the gross_estate of son or son’s wife under sec_2041 for federal estate_tax purposes for gst tax purposes under sec_2632 redesignated as sec_2632 effective date any portion of husband’s unused gst_exemption is deemed to have been allocated at his death to trust a and any portion of wife’s unused gst_exemption is deemed to have been allocated at her death to trust b law and analysis sec_2001 provides that a tax is imposed on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2041 provides that the value of the gross_estate includes the value of all plr-131840-09 property to the extent of any property with respect to which the decedent has at the time of death a general_power_of_appointment or with respect to which the decedent has at any time exercised or released the power_of_appointment by a disposition which is of the nature that if it were a transfer of property owned by the decedent the property would be includible in the decedent's gross_estate under sec_2035 to inclusive sec_2041 provides that the term general_power_of_appointment means a power exercisable in favor of the decedent the decedent's_estate the decedent's creditors or the creditors of the decedent's_estate sec_2041 provides that the lapse of a power_of_appointment during the life of the individual possessing the power shall be considered a release of the power sec_2501 imposes a tax on the transfer of property by gift sec_2511 provides that the gift_tax shall apply whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_2514 provides that the exercise or release of a general_power_of_appointment shall be deemed a transfer of property by the individual possessing the power sec_2514 provides that the term general_power_of_appointment means a power that is exercisable in favor of the individual possessing the power his estate his creditors or the creditors of his estate sec_2601 imposes a tax on every generation-skipping_transfer gst made after date a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the gst tax is determined by multiplying the taxable_amount by the applicable_rate sec_2641 provides that the term applicable_rate means with respect to any gst the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer under sec_2642 the inclusion_ratio with respect to any property transferred in a generation-skipping_transfer is generally defined as the excess of over the applicable_fraction the applicable_fraction as defined in sec_2642 is a fraction the numerator of which is the amount of gst_exemption under sec_2631 allocated to the trust or to property transferred in a direct_skip and the denominator of which is the value of the property transferred to the trust or involved in the direct_skip sec_2631 as in effect during the years of the deaths of husband and wife provided that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable plr-131840-09 sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual's estate determined with regard to extensions regardless of whether such a return is required to be filed sec_2632 as in effect during the years of the deaths of husband and wife sec_2632 redesignated as sec_2632 provides that in general any portion of an individual's gst_exemption that has not been allocated within the time prescribed by sec_2632 is deemed to be allocated as follows a first to property that is the subject of a direct_skip occurring at such individual's death and b second to trusts with respect to which such individual is the transferor and from which a taxable_distribution or a taxable_termination might occur at or after such individual's death sec_26_2632-1 of the generation-skipping_transfer_tax regulations provides that a decedent's unused gst_exemption is automatically allocated on the due_date for filing form_706 to the extent not otherwise allocated by the decedent's executor on or before that date unused exemption is allocated pro_rata subject_to the rules of sec_26_2642-2 on the basis of the value of the property as finally determined for estate_tax purposes the chapter value first to direct skips treated as occurring at the transferor's death the balance if any of unused gst_exemption is allocated pro_rata subject_to the rules of sec_26_2642-2 on the basis of the chapter value of the nonexempt_portion of the trust property to trusts with respect to which a taxable_termination may occur or from which a taxable_distribution may be made however no automatic allocation of gst_exemption is made to a_trust that will have a new transferor with respect to the entire trust prior to the occurrence of any gst with respect to the trust under sec_2652 and sec_26_2652-1 the transferor of the property for gst tax purposes is the individual with respect to whom the property was last subject_to federal estate or gift_tax in commissioner v estate of bosch 378_us_456 the supreme court considered whether a state trial court's characterization of property rights conclusively binds a federal court or agency in a federal estate_tax controversy the court concluded that the decision of a state trial_court as to an underlying issue of state law should not be controlling when applied to a federal statute rather the highest court of the state is the best authority on the underlying substantive rule_of state law to be applied in the federal matter if there is no decision by that court then the federal authority must apply what it finds to be state law after giving proper regard to the state trial court's determination and to relevant rulings of other courts of the state based on the facts submitted and the representations made we conclude that the reformations of trust a and trust b are consistent with applicable state law as applied by the highest court of state accordingly we conclude that the judicial reformation of trust a and trust b as described above will not constitute an exercise release or plr-131840-09 lapse of a general_power_of_appointment that would result in a taxable gift under sec_2514 and as a result of the judicial reformation of trust a and trust b son and son’s wife will not possess nor will ever have possessed a general_power_of_appointment over the principal of trust a and trust b that would cause the entire value of the principal of such trusts to be includible in the gross_estate of son or son’s wife under sec_2041 for federal estate_tax purposes in addition we conclude that as a result of the judicial reformation of trust a and trust b neither trust will be considered to have a new transferor with respect to the entire trust prior to the occurrence of any gst with respect to that trust accordingly we conclude that husband’s unused gst_exemption is deemed to have been allocated at his death to trust a to the extent husband is considered the transferor of trust a further we conclude that wife’s unused gst_exemption is deemed to have been allocated at her death to trust b to the extent wife is considered the transferor of trust b notwithstanding the above rulings we note that under the provisions of trust a and trust b unaffected by the subsequent reformations of the trusts the survivor of son or son’s wife may possess a general_power_of_appointment over the trust income of trust a and trust b which may cause the values of the income interests in the trusts to be includible in the estate of the survivor of son or son’s wife 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 taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent the rulings contained in this letter are based upon information and representations submitted by the taxpayers 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 james f hogan senior technician reviewer passthroughs special industries cc