t c memo united_states tax_court scott r wilson and christine r yano petitioners v commissioner of internal revenue respondent docket no filed date paul j sulla jr for petitioners jonathan jiro ono and peter r hochman for respondent memorandum findings_of_fact and opinion cohen judge respondent determined deficiencies of dollar_figure and dollar_figure for and respectively with regard to the jointly filed federal_income_tax returns of scott r wilson petitioner and christine r yano the issue for decision is whether losses claimed in and with respect to petitioner’s micro-utility activity are limited by the passive_activity_loss rules of sec_469 unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure findings_of_fact some of the facts have been stipulated and the stipulated facts are incorporated in our findings by this reference at the time their petition was filed petitioners resided in hawaii petitioner is a self-employed architect after conducting research on photovoltaic systems and the possibility of using solar-generated electricity to meet a portion of petitioners’ electricity needs petitioner met with a representative of hawaii environmental holdings d b a mercury solar mercury solar to learn about its solar equipment one of mercury solar’s purchase programs the program is marketed as a zero net free program through this program mercury solar encourages buyers to purchase one system for personal_use and at least one other for investment purposes investment system the purchase is at least partially financed through one or more loans mercury solar installs the investment system at the residence of a ratepayer who pays a set monthly fee for a number of years to the equipment owner to purchase the solar_energy produced by the investment system a ratepayer is not an owner or purchaser of the equipment under mercury solar’s program the equipment owner contracts with another company the power change co llc pcc to collect the ratepayer’s monthly payments on behalf of the equipment owner from these collections pcc makes the equipment owner’s loan and state excise_tax payments and at the end of the year reports the annual income to the equipment owner mercury solar’s sales literature explains that the equipment owner is responsible for paying income_tax and state excise_tax on the ratepayer income and that the income should be reported using a schedule c profit or loss from business mercury solar suggests that the equipment owner will qualify for certain tax deductions and credits and extends a tax_credit guarantee to the equipment owner so long as he or she has a federal or state tax_liability a referral fee is paid_by mercury solar to the equipment owner if he or she refers others who listen to a sales presentation and or purchase equipment mercury solar represents to the prospective equipment owner that the purchase is potentially free through this combination of loans tax refunds resulting from credits and deductions and referral and ratepayer payments in date petitioner bought two photovoltaic systems along with a solar water heating system from mercury solar mercury solar installed one of the photovoltaic systems at petitioners’ residence the investment system consisting of a photovoltaic system and a connected solar water heating system was installed by mercury solar at the residence of petitioner’s only ratepayer who is also petitioner’s father-in-law petitioner agreed to have pcc collect the ratepayer’s monthly payments maintain payment records and make petitioner’s loan and state excise_tax payments petitioner yano did not participate in the micro-utility activity and the activity had no employees petitioner visited his ratepayer’s residence at least monthly to inspect the solar equipment and consult with the ratepayer about the solar service during these inspections petitioner checked the solar roof panels and the inverter which are components of the photovoltaic system petitioner tried to find other ratepayers but was not successful he did not refer any sales leads to mercury solar on their and joint income_tax returns petitioners claimed net losses in connection with the micro-utility activity of dollar_figure and dollar_figure respectively respondent disallowed the losses as passive_activity_losses under sec_469 opinion respondent argues that petitioner’s micro-utility losses are disallowed because the losses stem either from an activity in which petitioner did not materially participate or from a rental_activity which is a presumptively passive_activity petitioner counters that his micro-utility business is not a passive rental_activity and that he materially participated in its operations losses from a passive_activity are generally allowed for the year they are sustained only to the extent of passive_activity income sec_469 d in general a passive_activity is a trade_or_business in which the taxpayer does not materially participate sec_469 a taxpayer materially participates in an activity when he or she is involved on a regular continuous and substantial basis sec_469 participation generally means all work done in connection with an activity by an individual who owns an interest in the activity sec_1_469-5 income_tax regs a taxpayer can establish material_participation by satisfying any one of seven tests provided in the regulations sec_1_469-5t temporary income_tax regs fed reg date see miller v commissioner tcmemo_2011_219 bailey v commissioner tcmemo_2001_296 of these petitioner asserts that the three following tests are most relevant to this case the individual’s participation in the activity for the taxable_year constitutes substantially_all of the participation in such activity of all individuals including individuals who are not owners of interests in the activity for such year the individual participates in the activity for more than hours during the taxable_year and such individual’s participation in the activity for the taxable_year is not less than the participation in the activity of any other individual including individuals who are not owners of interests in the activity for such year based on all of the facts and circumstances the individual participates in the activity on a regular continuous and substantial basis during such year to satisfy the material_participation test under paragraph a a taxpayer must participate in an activity for more than hours during the taxable_year sec_1_469-5t temporary income_tax regs fed reg date generally petitioners bear the burden_of_proof see rule a 503_us_79 512_f2d_882 9th cir aff’g tcmemo_1972_133 this burden may shift to respondent if petitioners introduce credible_evidence with respect to any relevant factual issue and to meet other conditions including maintaining required records see sec_7491 petitioners have not proven or presented adequate evidence to shift the burden_of_proof that any of the material_participation tests they rely upon are satisfied petitioner argues that as the sole owner of the micro-utility activity he performed all tasks functions and services of and for the business including management with the exception of sending invoices to and collecting payments from his ratepayer however because individuals with pcc collected payments maintained records regarding the income and made petitioner’s loan and state excise_tax payments and individuals with mercury solar1 installed the equipment at his ratepayer’s home petitioner’s participation did not constitute substantially_all of the participation of any individual in the micro-utility activity petitioners also have failed to prove that petitioner participated in the micro- utility activity for more than hours during each of the years in issue a taxpayer can prove participation by any reasonable means sec_1_469-5t temporary income_tax regs fed reg date reasonable means may 1for other cases involving activities of mercury solar see sparkman v commissioner tcmemo_2009_308 sparkman v commissioner tcmemo_2005_136 aff’d 509_f3d_1149 9th cir hvidding v commissioner tcmemo_2003_151 richter v commissioner tcmemo_2002_90 and sparkman v united_states wl d haw date include but are not limited to the identification of services performed over a period of time and the approximate number of hours spent performing such services during such period based on appointment books calendars or narrative summaries id petitioner maintained no business records such as appointment books calendars or logs his testimony was based solely on his recollections and was completely lacking in detail with respect to dates and time spent performing specific tasks while the regulations permit some flexibility regarding the records required to prove material_participation they do not allow this type of postevent ballpark guesstimate and we are not bound to accept the unverified undocumented testimony of taxpayers see estate of stangeland v commissioner tcmemo_2010_185 shaw v commissioner tcmemo_2002_35 scheiner v commissioner tcmemo_1996_554 in addition petitioner’s testimony concerning his participation was inconsistent at best at one point petitioner testified that he spent approximately hours each month at his ratepayer’s home inspecting the solar equipment and talking to the ratepayer about the solar_energy service later petitioner described his inspections as cursory and admitted that he sometimes combined the inspections with social visits with his in-laws even if petitioner’s testimony had not been inconsistent however the number of hours of participation he initially claimed appears excessive in relation to the tasks described furthermore petitioner has not established that his participation was not less than that of individuals associated with pcc or mercury solar we conclude that petitioner did not materially participate in the micro-utility activity during the years in issue and that his micro-utility business was a passive_activity under sec_469 petitioners’ losses reported for and with respect to the micro-utility activity are subject_to the passive loss limitations imposed by sec_469 and are disallowed thus we need not address whether petitioner’s micro-utility activity constitutes a passive rental_activity see sec_469 we have considered the arguments of the parties not specifically addressed in this opinion they are either without merit or irrelevant to our decision to reflect the foregoing decision will be entered for respondent


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 plr-130629-11 date date legend decedent spouse a b c d date date attorney state statute ---------------------------------------------- ------------------------------------------------- ------------------------ ------------------------- ----------------------- --------------------- ---------------------- ----------------------- ------------------ ------------------- dear ---------------- this letter responds to your letter dated date requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to sever a_trust pursuant to sec_26_2654-1 of the generation-skipping_transfer_tax regulations and make an election under sec_2652 of the internal_revenue_code facts decedent died testate on date survived by spouse and a b c and d spouse died on date c and d are skip persons as defined in sec_2613 in his will will decedent named spouse as executrix of his estate decedent bequeathed all of his tangible_personal_property to spouse and the remainder of his plr-130629-11 estate to a trustee the trustee was directed to fund two trusts marital trust and residuary_trust under article iv of the will the trustee is to fund a_trust with the minimum amount necessary to reduce decedent’s federal estate_tax to zero by utilizing the marital_deduction available marital trust under article v of the will the remaining assets will fund residuary_trust under the terms of marital trust spouse receives all income during her lifetime and principal distributions in the trustee’s discretion for her health education support and maintenance upon her death the trustee will distribute the corpus of marital trust to residuary_trust under the terms of residuary_trust the trustee may make discretionary distributions of income and principal to spouse during her lifetime for her health education support and maintenance upon spouse’s death the trustee may make discretionary distributions of income and principal for the health education support and maintenance of a b c and d upon the death of the survivor of a and b residuary_trust shall be divided into two separate shares and distributed outright to c and d or their respective issue per stirpes if deceased spouse hired attorney to prepare the form_706 united_states estate and generation-skipping_transfer_tax return attorney made a qualified_terminable_interest_property qtip_election under sec_2056 with respect to the property in marital trust in an affidavit attorney stated that he failed to advise spouse that marital trust should be severed into a gst exempt qtip_trust and a gst nonexempt qtip_trust attorney also failed to advise spouse that a reverse_qtip_election under sec_2652 should be made with respect to the gst exempt marital trust and that decedent’s gst_exemption should be allocated to gst exempt marital trust upon the death of spouse the executors of spouse’s estate discovered that marital trust was not severed a reverse_qtip_election had not been made and decedent’s gst_exemption had not been allocated on form_706 the trust instrument does not provide for the severance of marital trust however state statute authorizes a trustee to establish two or more separate trusts provided that such division will not materially impair the accomplishment of the trust purposes or the interests of any beneficiary to date there have been no taxable terminations or taxable_distributions from marital trust requested ruling sec_1 an extension of time under sec_301_9100-1 and sec_301_9100-3 to sever marital trust into two separate trusts on a fractional basis - one intended to be a gst exempt trust and the other a gst nonexempt trust - as permitted under sec_26_2654-1 and to make a reverse_qtip_election under sec_2652 with respect to the proposed gst exempt trust severed from marital trust and plr-130629-11 the automatic allocation rules of sec_2632 apply to cause the unused portion of decedent’s gst_exemption to be allocated to gst exempt marital trust law and analysis sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2056 provides that for purposes of the tax imposed by sec_2001 the value of the taxable_estate is determined by deducting from the value of the gross_estate an amount equal to the value of any interest in property that passes or has passed_from_the_decedent to the surviving_spouse under sec_2056 no deduction shall be allowed for an interest passing to the surviving_spouse if on the lapse of time on the occurrence of an event or contingency or on the failure of an event or contingency to occur the interest will terminate or fail and a an interest in such property passes or has passed for less than an adequate_and_full_consideration in money_or_money's_worth from the decedent to any person other than the surviving_spouse or the estate of such spouse and b if by reason of such passing such person or his heirs or assigns may possess or enjoy any part of such property after such termination or failure of the interest so passing to the surviving_spouse sec_2056 provides that in the case of qtip the property shall be treated as passing to the surviving_spouse for purposes of sec_2056 and no part of the property shall be treated as passing to any person other than the surviving_spouse for purposes of sec_2056 sec_2056 defines qualified_terminable_interest_property as property which passes from the decedent in which the surviving_spouse has a qualifying_income_interest_for_life and to which an election under sec_2056 applies sec_2056 provides that an election under sec_2056 with respect to any property shall be made by the executor on the return of tax imposed by sec_2001 the election once made is irrevocable under sec_2044 any property in which the decedent had a qualifying_income_interest_for_life and for which a deduction was allowed under sec_2056 is includable in the decedent's gross_estate sec_2601 imposes a tax on every generation-skipping_transfer gst plr-130629-11 sec_2631 as in effect on date provided that for purposes of determining the gst tax every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation that 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 once an allocation of gst_exemption is made it is irrevocable under sec_2632 any allocation by an individual of his gst_exemption may be made at any time on or before the date prescribed for filing the individual's estate_tax_return including extensions sec_2632 as in effect on date provided that any portion of an individual's gst_exemption which has not been allocated within the time prescribed by sec_2632 shall be deemed to be allocated as follows - a first to property which is the subject of a direct_skip occurring at the individual's death and b second to trusts with respect to which the individual is the transferor and from which a taxable_distribution or a taxable_termination might occur at or after the individual's death sec_26_2632-1 provides in relevant part 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 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 b 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 individual with respect to whom property was last subject_to federal estate or gift_tax is the transferor of that property for purposes of chapter sec_2652 provides that in the case of any trust with respect to which a deduction is allowed to the decedent under sec_2056 the estate of the decedent may elect to treat all of the property in the trust for purposes of the gst tax as if the qtip_election had not been made this election is referred to as the reverse_qtip_election the consequence of a reverse_qtip_election is that the decedent remains for gst tax purposes the transferor of the qtip_trust for which the election is made as a result the decedent's gst_exemption may be allocated to the qtip_trust sec_26_2652-2 provides that the reverse_qtip_election is to be made on plr-130629-11 the return on which the qtip_election is made sec_26_2654-1 provides in part that the severance of a_trust that is included in the transferor's gross_estate or created under the transferor's will into two or more trusts is recognized for purposes of chapter if the governing instrument does not require or otherwise direct severance but the trust is severed pursuant to discretionary authority granted either under the governing instrument or under local law and a the terms of the new trusts provide in the aggregate for the same succession of interests and beneficiaries as are provided in the original trust b the severance occurs or a reformation proceeding if required is commenced prior to the date prescribed for filing the federal estate_tax_return including extensions actually granted for the estate of the transferor and c the new trusts are severed on a fractional basis if severed on a fractional basis the separate trusts need not be funded with a pro_rata portion of each asset held by the undivided trust the trusts may be funded on a nonpro rata basis provided funding is based on either the fair_market_value of the assets on the date of funding or in a manner that fairly reflects the net appreciation or depreciation in the value of the assets measured from the valuation_date to the date of funding sec_301_9100-1 through provide standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election under sec_301_9100-1 the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-3 provides that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 must be made under the rules of sec_301_9100-3 requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax plr-130629-11 professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election in this case the executor of decedent’s estate made a qtip_election with respect to marital trust’s assets and marital trust's assets are includible in spouse's gross_estate under sec_2044 accordingly spouse is the transferor of marital trust's assets for gst tax purposes and the estate is precluded from allocating decedent’s gst_exemption to marital trust's assets however if decedent’s estate is granted an extension of time pursuant to sec_26_2654-1 to sever marital trust into two trusts a gst exempt trust and a gst nonexempt trust and to make a reverse_qtip_election under sec_2652 with respect to gst exempt marital trust decedent will be treated as the transferor of gst exempt marital trust's assets and decedent’s gst_exemption will be automatically allocated to gst exempt marital trust it has been represented that decedent has sufficient gst_exemption to allocate to the gst exempt marital trust the allocation will be effective as of the decedent’s date of death date based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 and sec_26_2654-1 have been satisfied accordingly decedent’s estate is granted days from the date of this letter to sever marital trust into a gst exempt trust and a gst nonexempt trust and to file a supplemental form_706 united_states estate and generation-skipping_transfer_tax return on which the reverse_qtip_election is to be made for the gst exempt trust the automatic allocation rules will then apply to cause decedent’s unused gst_exemption to be allocated to gst exempt marital trust the supplemental form_706 should be filed with the internal_revenue_service center cincinnati ohio a copy of this letter should be attached to the return furthermore 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 specifically no opinion is expressed or implied regarding whether marital trust qualifies as a qtip_trust under sec_2056 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative plr-130629-11 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 associate chief_counsel passthroughs special industries by leslie h finlow leslie h finlow senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes one copy of this letter


department of the treasury internal_revenue_service washington d c cc dom fs it a tl-n-4930-98 number release date uilc from subject internal_revenue_service national_office field_service_advice memorandum for deborah a butler assistant chief_counsel field service cc dom fs this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend taxpayer subsidiary affiliate a b c d e f unrelated party f g year x issue s whether in the exchange of multiple assets between taxpayer and unrelated party it was proper to classify certain assets in a single exchange_group for purposes of computing the gain_or_loss to be deferred under i r c ' conclusion it does not appear that all of the exchanged assets in dispute should have been classified in one exchange_group the assets should be grouped in different product classes in accordance with treas reg ' a -2 b facts we primarily rely on the facts set out in your memorandum dated date in addition we rely on facts obtained from discussions with your office and from the revenue_agent s workpapers and other documents we were provided a was formed in as a wholly-owned subsidiary of taxpayer in year the year in dispute a was renamed subsidiary affiliate is also indirectly owned by taxpayer at the time of the exchange e and f were wholly-owned subsidiaries of subsidiary in addition subsidiary owned and operated b c and d b was a operation c and d operated the parties to the exchange in dispute were unrelated party on one side and subsidiary and affiliate for taxpayer on the other in january of year subsidiary and affiliate entered into an asset exchange_agreement with unrelated party under the agreement unrelated party exchanged assets for assets the exchanged assets included real_property such as and and machinery and equipment the exchange was completed on june of year for tax purposes subsidiary accounted for the exchange as a multiple-properties exchange under treas reg ' j the exchanged properties that could be classified into exchange groups in accordance with general asset classes were so classified the remaining properties consisting of machinery and equipment were placed in a distinct group identified as equipment examination agrees that treas reg ' j covers the instant asset exchange however examination disputes the classification of the remaining properties into a single exchange_group accordingly the revenue_agent has proposed separating the machinery and equipment into three separate groups based on product classes set forth in the standard industrial classification manual grouping the assets in this manner results in the recognition of additional gain in the amount of x law and analysis sec_1031 provides that no gain_or_loss shall be recognized on the exchange of property held for productive use in a trade_or_business or for investment if such property is exchanged solely for property of like_kind which is to be held for productive use in a trade_or_business or for investment treas reg ' a -1 b defines the words alike kind as having reference to the nature or character of the property and not to its grade or quality further the regulation provides that one kind or class of property may not under the nonrecognition provisions of sec_1031 be exchanged for property of a different kind or class treas reg ' a -2 a provides that personal_property of a like_class is considered to be of a like_kind for purposes of sec_1031 in addition an exchange of properties of a like_kind may qualify under sec_1031 regardless of whether the properties are also of a like_class in determining whether exchanged properties are of a like_kind no inference is to be drawn from the fact that the properties are not of a like_class treas reg ' a -2 b provides that depreciable tangible_personal_property is exchanged for property of a like_kind within the meaning of sec_1031 if the property is exchanged for property that is either of a like_kind or a like_class depreciable tangible_personal_property is of a like_class to other depreciable tangible_personal_property if the exchanged properties are either within the same general asset class or within the same product_class a single property may not be classified within more than one general asset class or within more than one product_class in addition property classified within any general asset class may not be classified within a product_class a property s class is determined as of the date of the exchange treas reg ' a -2 b provides that except as modified property within a product_class consists of depreciable tangible_personal_property that is listed in a 4-digit product_class within division d of the standard_industrial_classification_codes set out in the standard industrial classification manual the sic manual produced by the office of management and budget the regulation further provides that if a property is listed in more than one product_class the property is treated as listed in any one of those product classes revrul_72_151 1972_1_cb_225 discusses the application of the nonrecognition rules of sec_1031 to multiple property exchanges in the revenue_ruling the taxpayer owned real_property consisting of land and a house the property was used as rental income- producing property the taxpayer exchanged the rental property for farm properties owned by a related corporation the farm properties included farm_land improvements and personal_property citing revrul_55_79 1955_1_cb_370 revrul_72_151 rejected treatment of the exchange of multiple assets as a disposition of a single piece of property specifically the ruling indicated that athe fact that the assets in the aggregate comprise a business or an integrated economic investment did not result in treating the exchange as a disposition of single property instead the ruling required an analysis of the underlying property involved in the exchange under the facts presented the rental real_property and the farm real_property were properties of a like_kind however the farm machinery was not accordingly the taxpayer was required to allocate basis to the farm machinery in an amount equal to its fair_market_value on the date of the exchange and recognize any gain realized from the exchange to the extent of the fair_market_value of the farm machinery revrul_89_121 1989_2_cb_203 addressed head-on the question of whether the exchange of the assets of a business for the assets of a similar_business should be treated as an exchange of a single property for another single property for purposes of applying sec_1031 the ruling concluded that in applying sec_1031 the transfer of multiple assets could not be treated as an exchange of a single property for another single property rather the determination of the applicability of sec_1031 to an exchange of the assets of one business for the assets of another business required an analysis of the underlying assets exchanged consistent with the revenue rulings treas reg ' j -1 formalizes a methodology for analyzing the property involved in a multiple-property exchange the regulation provides an exception to the general_rule under sec_1031 that requires a property-by-property comparison for computing the gain recognized and the basis_of_property received in a like- kind exchange generally the regulation requires that the properties transferred and received in the exchange be separated into exchange groups the separation of properties into exchange groups involves to the extent possible the matching up of properties of a like_kind or like_class treas reg ' j -1 b i indicates that each exchange_group should consist of the properties transferred and received in the exchange all of which are of a like_kind or like_class the regulation expressly provides that if a property could be included in more than one exchange_group the taxpayer may include the property in any of those exchange groups each exchange_group must consist of at least one property transferred and at least one property received in the exchange treas reg ' j -1 is effective for exchanges occurring on or after date consequently treas reg ' j -1 is applicable to the exchange in this case in the instant case taxpayer treated the exchange as a multiple-asset exchange in accordance with treas reg ' j -1 the bulk of the exchanged assets was categorized into exchange groups using general asset classes we understand that examination is not challenging the treatment of these assets however the remaining assets consisting of machinery and equipment were combined into one group the revenue_agent argues that these assets should be broken down into three different exchange groups based on three separate sic product codes according to your memorandum taxpayer makes the following arguments first taxpayer argues the assets are of a like_kind therefore according to taxpayer the fact that the assets may not be like_class is irrelevant second taxpayer argues the intent of the parties to effect a like-kind_exchange controls this issue third taxpayer argues that the purpose of sec_1031 to defer recognition of gain_or_loss until the taxpayer cashes in on its investment should control since taxpayer s money is still tied up in equipment used in its business taxpayer argues it should not be required to recognize additional gain fourth taxpayer argues that this transaction should be treated as the exchange of one business for another and that the exchange of one business for another is per se a like- kind exchange as used in sec_1031 the words alike kind describe the nature or character of property not its grade or quality treas reg ' a -1 b 71_tc_54 courts have found it significant that the statute refers to property of a like rather than an identical kind koch pincite as a result the term has been construed fairly broadly particularly in the context of exchanges of interests in real_estate in these cases courts have given far greater deference to the nature and character of the transferred rights than to the physical characteristics of the exchanged property 24_tc_818 aff d in part and rev d in part 241_f2d_78 5th cir rev d sub nom 356_us_260 clemente inc v commissioner tcmemo_1985_367 however the issue of what constitutes like-kind_property in the context of an exchange of personal_property has not been the subject of much judicial review in 680_f2d_85 9th cir aff g 76_tc_107 the ninth circuit affirmed the tax_court s determination that the exchange of swiss francs for united_states double eagle gold coins was not an exchange of like-kind_property the court concluded that athe tax_court did not err in refusing to apply the lenient treatment of real_estate exchanges to the exchange of personal_property id pincite in addition to california federal life the examples in the regulations provide some guidance on the issue of what constitutes like-kind_property where the property is personalty these examples consistently speak of exchanges of assets of the same type treas reg ' a -2 b to the extent there are references to exchanges of assets of different types ie an exchange of a grader for a scraper the references are made in the context of demonstrating the use of general asset classes or product classes to determine whether assets are of a like_class the examples do not suggest that different types of depreciable_personal_property would be considered like_class or like_kind with this in mind we have reviewed the lists of property you provided we agree that there are sufficient distinctions between certain assets for example a and a to warrant the conclusion that the nature or character of those assets is fundamentally different such properties should not be considered of a like_kind despite the fact that they are used in connection with a similar activity accordingly we concur in your conclusion that in order to qualify for nonrecognition of gain under sec_1031 taxpayer will have to establish these assets are of a like_class for the most part we also concur in your assessment of the agent s approach to classifying the assets the methodology used by the agent appears to be wholly consistent with that set out in treas reg b and j -1 we note however that certain assets are listed in more than one of the three sic_codes used by the agent if a property is listed in more than one product_class a taxpayer is permitted to treat the property as listed in any one of those product classes treas reg ' a -2 b thus an asset listed both as equipment and as equipment may be categorized to the taxpayer s benefit in either product_class although we agree that the agent s approach in separating the property into exchange groups is reasonable we disagree with the suggestion that machinery used in is per se not of the same kind or class as machinery used in we understand that the examples of like-kind_exchanges in the regulations speak of exchanges of property such as automobiles or trucks ato be used for a like purpose treas reg ' a -1 c however we do not interpret this language as imposing a strict same use requirement rather we believe this language is intended to reinforce the more general_rule requiring like-kind_exchanges to involve property_held_for_investment or for productive use in a trade_or_business this interpretation is supported by the example in the regulations dealing with exchanges of real_estate in that example it is clear that as long as the real_estate is held for use in business or for investment the ultimate use of the property for residential rental purposes as opposed to as a farm is immaterial to the determination of whether the property is of a like_kind id in addition a strict same use requirement appears inconsistent with the more expansive approach taken under the regulations which provide relatively broad categories for determining what constitutes like-class property the explanation of the final regulations amending sec_1_1031_a_-1 and sec_1_1031_b_-1 and adding sec_1_1031_a_-2 and sec_1 f -1 indicates that the purpose of adopting the 4-digit product coding system of the standard_industrial_classification_codes was to simplify the administration of sec_1031 in transactions involving a number of items of depreciable_personal_property by reducing the number of categories and exchange groups a taxpayer would have to use the broader product classes were intended to insure that properties would amore often be of a like_class and thus fewer taxpayers would have to demonstrate that depreciable tangible personal properties exchanged were of a like_kind t d 1991_1_cb_165 the following example from the explanation is illustrative for example under the 5-digit numerical list dairy equipment is in product code and haying machinery is in product code thus under the numerical list these properties would not be of a like_class under the 4-digit sic manual however dairy equipment and haying machinery are both within the same product_class sic code and are of a like_class it is fairly clear that dairy equipment and haying machinery have different uses thus it appears the regulations contemplate a determination as to like-class status without regard to whether the assets are put to the same use with respect to taxpayer s other arguments we agree that the intent of the parties to effect a like-kind_exchange does not control the issue of whether a like-kind_exchange in fact occurred taxpayer is correct in asserting that stated intent has received deference where parties have acted consistently therewith 80_tc_491 however it is well established that the mere intention of a taxpayer to avail himself of the advantages of a particular provision in the code does not determine the tax consequences of his actions id see also 385_f2d_238 5th cir moreover in this case the issue is not whether an exchange or a sale occurred the issue is whether the property exchanged was of a like_kind or like_class while the parties intentions may be relevant to the determination of whether an exchange occurred it does not follow that the parties intentions affect the determination of whether the property exchanged was of a like_kind or like_class similarly while we agree with taxpayer that the underlying rationale for allowing nonrecognition_of_gain_or_loss under sec_1031 is the concept that the taxpayer s economic situation before and after the exchange is basically the same it does not follow that an exchange automatically qualifies as a tax-free_exchange merely because the taxpayer has not cashed in on its investment sec_1031 not only requires an exchange of property held for productive use in a trade_or_business or for investment but also requires the property to be of a like_kind accepting taxpayer s position would effectively eliminate the requirement that the property be of a like-kind thus as you have stated taxpayer must demonstrate it meets all of the requirements of the statute and the regulations thereunder in order to avail itself of the nonrecognition provisions of sec_1031 with respect to taxpayer s final argument that an exchange of multiple assets should be treated as the exchange of one business for another the service has expressly rejected this position see revrul_89_121 1989_2_cb_203 moreover taxpayer s proposed treatment of the exchange as a single asset for a single asset is fundamentally at odds with the provisions of sec_1_1031_j_-1 which mandate use of exchange groups and require an examination of the various assets that are exchanged case development hazards and other considerations with the exception of the line of cases dealing with multiple-party exchanges and the use of qualified intermediaries there is little precedential authority on issues arising under sec_1031 while we believe our interpretation of the statute and regulations thereunder is reasonable and logical there is little judicial guidance available to support our views we regard the limited authority in this area as a litigation hazard in addition most of the authority available on the issue of what constitutes a like-kind asset focuses on exchanges of interests_in_real_property this line of authority is problematic for several reasons first the reasoning behind the opinions and the distinctions the courts draw in determining whether exchanged interests_in_real_property are of a like_kind can be fairly obscure second these cases do not address the problems of a case such as this one where the exchanged assets consist of tangible_personal_property and the nature of the ownership rights is not at issue third to the extent it is followed this line of authority suggests a broader interpretation of the term alike kind than we are advocating in this case with respect to personal_property we believe that california federal life supports our view that the standard for determining whether personal_property is like_kind may be more stringent than for real_property however we acknowledge the analysis of this issue is fairly limited with respect to case development we note that our review of the agent s workpapers reveals that certain items such as loaders and crushers were categorized under sic code construction machinery and equipment rather than under sic code mining machinery and equipment these items appear in both product classes and it is unclear to us why the agent selected sic code there appears to be considerable overlap in the items included under more than one of the three sic_codes selected by the agent accordingly we recommend with respect to the disputed assets review of these classifications keeping in mind that to the extent an item is listed in more than one product_class the property may be treated as listed in any one of those product classes thus in this case if the property is listed under construction machinery and equipment and under mining machinery and equipment taxpayer is entitled to have treat the property as listed under mining machinery and equipment for purposes of applying the exchange_group rules under treas reg ' j -1 by richard l carlisle chief income_tax accounting branch


t c memo united_states tax_court robert a gerri m smith petitioners v commissioner of internal revenue respondent docket no filed date george b smith and carolyn a truby for petitioners george d curran for respondent memorandum findings_of_fact and opinion foley judge respondent determined the following deficiencies additions to tax and accuracy-related_penalties for through addition_to_tax penalty year deficiency sec_6651 sec_6662 dollar_figure dollar_figure dollar_figure - -2 big_number big_number big_number big_number big_number big_number big_number big_number big_number after concessions the issues for decision are whether respondent's determinations are entitled to the presumption of correctness we hold that they are whether petitioners demonstrated that respondent's determinations were erroneous we hold that they did to the extent provided below whether petitioners are liable for additions to tax for failure_to_file their tax returns in a timely manner we hold that they are whether petitioners are liable for accuracy-related_penalties for substantial understatements we hold that they are to the extent provided below all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure findings_of_fact some of the facts have been stipulated and are so found robert and gerri smith resided in felton delaware at the time they filed their petition at all relevant times petitioners owned and operated guns goodies a retail sporting goods store located in dover delaware and national distributors an ammunition wholesale business mrs smith managed guns - -3 goodies which sold a wide variety of hunting and fishing goods while mr smith managed national distributors which sold ammunition at gun shows petitioners also owned three residential rental properties petitioners did not maintain any personal bank accounts but did maintain two business accounts a general checking account into which they deposited business and rental receipts and a payroll checking account during each year in issue guns goodies and national distributors had total gross_receipts of approximately dollar_figure million percent to percent of which were in cash petitioners regularly deposited most of their business receipts into their general checking account some of petitioners' business receipts however were never deposited and were used to pay petitioners' personal living_expenses petitioners did not maintain records of the cash that they received but did not deposit and they regularly disposed of cash register tapes and deposit slips they did not maintain inventory records except for ending inventory or sales receipts petitioners retained monthly bank statements and maintained a firearms log which recorded the identity of the purchaser and serial number of every gun purchased petitioners failed to pay taxes relating to their employees and as a result on date the internal_revenue_service irs seized guns goodies the irs informed - -4 petitioners that they would not be allowed to reopen their business until they paid their payroll tax delinquencies and filed their and federal_income_tax returns the accounting firm of faw casson co llp faw prepared petitioners' and returns and filed them on date on each return the activities of both businesses are combined and reported under the name national distributors accrual is designated as the method_of_accounting and cost is designated as the method of valuing closing_inventory petitioners failed to provide faw with sufficient information to calculate accurately gross_receipts and cost_of_goods_sold as a result the return entries were based largely on estimates eg gross_receipts were ascertained by analyzing bank_deposits each return contains the following statement amounts contained in this return were obtained from the best available information in certain cases this includes estimates as additional better information becomes available this return may be amended on date petitioners filed amended returns for and each amended_return contains the following statement taxpayers' original form_1040 was prepared using estimates where data was not available missing information has been obtained and reviewed and the original figures have been adjusted accordingly petitioners on their amended returns designated accrual as the method_of_accounting and cost as the inventory_method on june - -5 petitioners filed their return on which they designated cash as the method_of_accounting and marked the does not apply box when asked to identify the inventory_method most of the entries on the and amended returns and on the return were estimates based on faw's work papers in april of respondent assigned petitioners' case to revenue_agent eric brown agent brown issued information document requests for a variety of documents and work papers including financial statements general ledgers books of original entry inventory records bank statements canceled checks deposit slips cash register tapes and purchase invoices petitioners did not provide financial statements contemporaneous books of original entry other than for ending inventory deposit slips or cash register tapes petitioners did provide copies of bank statements canceled checks a disorganized assortment of purchase invoices and work papers that faw prepared agent brown requested information from vendors that sold goods to petitioners but received only documents relating to guns sold to petitioners in and after reviewing the documents that petitioners maintained and that faw created to prepare petitioners' returns agent brown requested a clarification of how petitioners arrived at the ending inventory figure on petitioners' return in a letter - -6 prepared by faw signed by mrs smith and dated date petitioners responded inventory was counted at retail market price after all inventory was counted and totaled guns were marked down to cost by multiplying retail price by and other inventory was marked down to cost by multiplying retail price by this method of deriving the year-end inventory_valuation has been used by me since the inception of the business approximately years ago after reading the letter agent brown determined that petitioners had a 15-percent gross_profit on guns and a 40-percent gross_profit on other goods mrs smith intended however for the percentages stated in her letter to reflect markup rather than gross_profit percentages a markup percentage is profit divided by cost while a gross_profit_percentage is profit divided by sales for example an item that costs dollar_figure and sells for dollar_figure has an 18-percent markup ie dollar_figure profit divided by dollar_figure cost and a 15-percent gross_profit ie dollar_figure profit divided by dollar_figure sales accordingly a 15-percent gross_profit is equal to an 18-percent markup and a 40-percent gross_profit is equal to a 67-percent markup with the information from petitioners and third parties agent brown adjusted petitioners' cost_of_goods_sold and reconstructed their gross_receipts as follows original amended adjusted original amended adjusted gross_receipts dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure cost_of_goods_sold big_number big_number big_number big_number big_number big_number beginning_inventory big_number big_number big_number big_number big_number big_number - -7 purchases big_number big_number big_number big_number big_number big_number ending inventory big_number big_number big_number big_number big_number big_number original amended adjusted original dollar_figure gross_receipts dollar_figure dollar_figure dollar_figure dollar_figure big_number cost_of_goods_sold big_number big_number big_number big_number big_number beginning_inventory big_number big_number big_number big_number purchases big_number big_number big_number big_number big_number ending inventory big_number big_number big_number big_number adjusted to determine gross_receipts agent brown first allocated cost_of_goods_sold between guns and other goods he determined that each beginning and ending inventory figure for through consisted of percent guns and percent other goods ie this allocation was consistent with petitioners' inventory records he accepted as correct the purchase amounts from faw's work papers used information received from vendors to determine the amount of purchases attributable to gun purchases and subtracted gun purchases from total purchases to determine the amount of purchases attributable to other goods agent brown did not have sufficient information to categorize the and purchases after allocating cost_of_goods_sold between guns and other goods agent brown applied the gross_profit percentages to determine gross_receipts for and he applied a gross_profit of percent to the cost of guns ie he multiplied cost by percent and percent to the cost of other goods ie he multiplied cost by percent he did not have sufficient information to allocate between the cost of guns and the cost of other goods sold in and so he - -8 determined gross_receipts by applying a 37-percent weighted gross_profit_percentage which was based on his analysis of and gross_profit percentages to the total cost_of_goods_sold for and on date respondent issued a notice_of_deficiency to petitioners for their through tax years on date petitioners filed their petition and on date they submitted a second amended_return for i respondent's presumption of correctness opinion we must first ascertain whether respondent's determinations are presumed correct 794_f2d_884 3d cir vacating and remanding tcmemo_1985_101 see 290_us_111 for the presumption to attach respondent must link petitioners to a tax- generating activity anastasato v commissioner supra pincite respondent has linked petitioners to two tax-generating activities--guns goodies and national distributors petitioners contend however that respondent's determinations were arbitrary first petitioners contend that they kept adequate_records and therefore respondent did not have the authority to reconstruct gross_receipts to support their contention - -9 petitioners note that respondent accepted as correct most of the information that petitioners provided and that maintenance of the records that petitioners did not provide eg cash register receipts is not required the fact that petitioners' own accountants had to resort to estimates and reconstruction methods to prepare the original and amended returns however belies petitioners' contention it is well settled that taxpayers have a duty to maintain records that enable them to file correct returns 96_tc_858 affd 959_f2d_16 2d cir sec_1_446-1 income_tax regs and that in the absence of such records respondent has the authority to reconstruct a taxpayer's income 92_tc_661 petitioners' records for national distributors were nonexistent and their records for guns goodies were at best scant in addition they routinely disposed of important source documents such as cash register tapes and sales slips cf kikalos v commissioner tcmemo_1998_92 finding that failure to maintain source documents particularly cash register tapes justified respondent's use of an indirect method of reconstruction edgmon v commissioner tcmemo_1993_486 finding that the absence of source documents such as cash register tapes and sales slips amounted to inadequate records therefore we reject petitioners' contentions second petitioners contend that respondent could only resort to an indirect method of reconstruction ie the gross_profit_percentage_method if the direct methods of reconstruction eg bank_deposit_method net_worth_method etc were infeasible contrary to petitioners' assertion respondent may use the gross_profit_percentage_method as long as such method is reasonably implemented see 40_tc_30 stating that respondent is not limited to any particular method of reconstruction and may use any method that is reasonable in light of the surrounding facts and circumstances bollella v commissioner tcmemo_1965_162 affd 374_f2d_96 6th cir respondent's use of the gross_profit_percentage_method was both appropriate and reasonable in light of the information that petitioners provided eg petitioners' letter to respondent third petitioners contend that respondent's determination was arbitrary because respondent had no authority or factual basis to adjust cost_of_goods_sold or to change petitioners' method_of_accounting respondent may change a taxpayer's method_of_accounting whenever the taxpayer's method_of_accounting does not clearly reflect income sec_446 439_us_522 for and petitioners kept virtually no records yet they reported their income on the accrual method--a method that demands strict accounting for petitioners changed to the cash_method without the commissioner's permission to do so and they used a method of valuing inventory that fails to comport with any recognized method respondent in essence placed petitioners on the cash_method_of_accounting and the retail_method of valuing inventory which is the method that most closely resembles petitioners' inventory_method given respondent's broad authority pursuant to sec_446 the paucity of information that petitioners maintained with respect to cost_of_goods_sold and the fact that petitioners did not have a valid method_of_accounting for reporting inventories we reject petitioners' contention accordingly respondent's determinations were not arbitrary and petitioners must prove the correct amount of their tax_liability by a preponderance_of_the_evidence ii adjustments to respondent's determinations the court may redetermine petitioners' tax_liability if and to the extent that petitioners demonstrate by a preponderance_of_the_evidence that respondent's determination is wrong anastasato v commissioner supra pincite 237_f2d_830 5th cir affg in part revg in part and remanding tcmemo_1955_112 with respect to cost_of_goods_sold to the extent the cost of hunting and fishing licenses was included in purchases for the years in issue such costs should be subtracted from purchases and deducted as business_expenses with respect to gross_receipts two adjustments are warranted first the cost_of_goods_sold used in the calculations of gross_receipts should be adjusted pursuant to the previous sentence second instead of applying gross_profits of percent ie a markup of percent to guns and percent ie a markup of percent to other goods the cost of guns and other goods should be marked up by percent and percent respectively ie cost of guns should be multiplied by percent and cost of other goods should be multiplied by percent in all other respects that have not been specifically addressed we conclude that respondents' deficiency determination is correct iii the additions to tax respondent determined additions to tax pursuant to sec_6651 for each of the years in issue sec_6651 provides an addition_to_tax for failure_to_file a tax_return in a timely manner unless such failure was due to reasonable_cause and not due to willful neglect petitioners concede liability for and and have the burden of proving that their return was timely see welch v helvering u s pincite they contend that they filed their return in a timely manner but they failed to present any credible_evidence supporting their contention accordingly petitioners are liable for the sec_6651 additions to tax iv the accuracy-related_penalties respondent also determined that for through petitioners were liable pursuant to sec_6662 for substantial understatements of tax penalties sec_6662 imposes a penalty equal to percent of the amount of any underpayment attributable to a substantial_understatement_of_income_tax pursuant to sec_6662 an understatement is the amount by which the correct_tax exceeds the tax reported on the return the understatement is substantial if it exceeds the greater of dollar_figure or percent of the correct_tax sec_6662 respondent calculated petitioners' understatement by subtracting the tax reported on their originally filed returns from the tax that should have been reported on those returns petitioners contend that the amount of any understatement should be based on the tax reported on the amended returns for and instead of the original returns for those years we reject petitioners' contention petitioners filed their returns only upon the demand of the irs collection officer that seized their retail store under these circumstances we conclude that it was appropriate for respondent to use the amount reported on petitioners' original returns see sec_1 b income_tax regs cross-referencing sec_1_6664-2 income_tax regs accordingly if the recomputed deficiencies satisfy the statutory_percentage or amount petitioners will be liable for such penalty all other contentions raised by the parties are either irrelevant or without merit to reflect the foregoing decision will be entered pursuant to rule


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 ita b02 plr-131891-14 date date ----------------------------------------------------- -------------------------------- ------------------------------- taxpayer llc corporation merger subsidiary ---------------------- cpa taxable_year amount state year date date date date date -------------------------- ------------------------------------------- -------------- ------------ ------ -------------------- ----------------------- ----------------------- ------------------------ --------------------------- dear ------------------- this is in response to your letter submitted on date on behalf of the taxpayer requesting rulings that pursuant to sec_301_9100-1 the internal_revenue_service grant the taxpayer an extension of time to file an election statement required by sec_4 of revproc_2011_29 with respect to the taxable_year facts on date the taxpayer was formed as a limited_liability_company pursuant to the laws of state on date the taxpayer filed a form_8832 with the i r s and elected to be treated as a corporation for u s federal_income_tax purposes the taxpayer’s sole owner was llc an entity treated as a partnership for u s income_tax purposes plr-131891-14 on date pursuant to a plan of merger the taxpayer acquired of the stock of corporation through a wholly-owned subsidiary merger sub pursuant to the plan of merger the taxpayer caused merger sub to merge into corporation with corporation surviving the merger as a direct wholly-owned subsidiary of the taxpayer the taxpayer has represented that the transaction qualified as a taxable_acquisition of corporation stock by the taxpayer pursuant to revrul_73_427 as well as a covered transaction pursuant to sec_1_263_a_-5 in the process of pursuing the merger with corporation the taxpayer incurred transaction costs including fees paid to professional advisors for legal accounting and consultative services some of the costs were attributable to fees paid_by the taxpayer to a professional financial advisor due only upon the successful closing of the merger with corporation success-based_fee upon completion of the merger the taxpayer remitted a success-based_fee in the amount of amount to the financial advisor the taxpayer represents that it does not have in-house tax knowledge or expertise with respect to u s federal tax filings due to its lack of knowledge and expertise with respect to u s federal tax filings the taxpayer has historically engaged professional tax advisors in the ordinary course of its business to prepare all of its required u s federal tax_return filings in year the taxpayer engaged cpa to prepare the taxpayer’s u s federal_income_tax return for the taxable_year the taxpayer represents that it believed and understood that cpa had extensive experience in preparing income_tax returns and advising clients regarding all statements and other information that should be included on such returns on date the taxpayer filed a consolidated u s federal_income_tax return for the taxable_year the taxpayer elected to capitalize of the success-based_fee pursuant to sec_263 and treated the remaining of the success-based_fee as a deductible start-up cost pursuant to the safe_harbor election set forth in sec_4 of revproc_2011_29 the taxpayer represents that cpa failed to attach the election statement required by sec_4 of revproc_2011_29 to the taxpayer’s return for the taxable_year subsequent to the filing of the return the taxpayer engaged cpa to file a request for relief to file the election statement pursuant to sec_301_9100-1 law sec_263 provides generally that no deduction shall be allowed for any amount_paid in exchange for property having a useful_life extending beyond the end of the taxable_year see also sec_1_263_a_-2 costs incurred in the process of acquisition or reorganization of a business_entity that produce significant long-term benefits must be capitalized 503_us_79 plr-131891-14 sec_1_263_a_-5 providing that taxpayers must capitalize amounts paid to facilitate certain transactions set forth in that section sec_1_263_a_-5 provides that an amount is paid to facilitate a transaction if the amount is paid in investigating or otherwise pursuing the transaction whether an amount is paid in the process of investigating or otherwise pursuing the transaction is determined based on all of the facts and circumstances sec_1_263_a_-5 sets forth the rule governing success-based fees and provides that an amount_paid that is contingent on the successful closing of a transaction described in sec_1_263_a_-5 is treated as an amount_paid to facilitate the transaction except to the extent the taxpayer maintains sufficient documentation to establish that a portion of the fee is allocable to activities that do not facilitate the transaction this documentation must be completed on or before the due_date of the taxpayer’s timely filed original federal_income_tax return including extensions for the taxable_year during which the transaction closes a taxpayer’s method for determining the portion of a success-based_fee that facilitates a transaction and the portion that does not facilitate the transaction is a method_of_accounting under sec_446 because the treatment of success-based fees was a continuing subject of controversy between taxpayers and the service the service published revproc_2011_29 revproc_2011_29 provides a safe_harbor election for allocating success-based fees paid in business_acquisitions or reorganizations described in sec_1_263_a_-5 pursuant to section dollar_figure of revproc_2011_29 the service will not challenge a taxpayer’s allocation of success-based fees between activities that facilitate a transaction described in sec_1_263_a_-5 and activities that do not facilitate the transaction if the taxpayer treats of the amount of the success- based fee as an amount that does not facilitate the transaction capitalizes the remaining as an amount that does facilitate the transaction and attaches a statement to its original federal_income_tax return for the tax_year the success-based_fee is paid_or_incurred stating that the taxpayer is electing the safe_harbor identifying the transaction and stating the amount of the success-based fees that are deducted and capitalized sec_301_9100-1 sets forth the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 provides that a regulatory election is an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin pursuant to sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election plr-131891-14 sec_301_9100-2 sets forth the rules applicable to automatic 12-month extensions of time to make certain regulatory elections sec_301_9100-3 sets forth the rules applicable to requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief pursuant to sec_301_9100-3 will be granted when the taxpayer provides evidence including affidavits described in sec_301_9100-3 that establishes that the taxpayer acted reasonably and in good_faith and that the grant of relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer i ii iii iv v requests relief before the failure to make the regulatory election is discovered by the service failed to make the election because of intervening events beyond the taxpayer’s control failed to make the election because after exercising reasonable diligence taking into account the taxpayer’s experience and the complexity of the return at issue the taxpayer was unaware of the necessity for the election reasonably relied on the written advice of the service or reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the taxpayer failed to make or to advise the taxpayer to make the election sec_301_9100-3 provides that a taxpayer will not be deemed to have acted reasonably and in good_faith if the taxpayer i ii iii 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 and the new position requires or permits a regulatory election for which relief is requested was informed in all material respects of the required election and related tax consequences but chose not to file the election or uses hindsight in requesting relief sec_301_9100-3 provides that an extension of time to make a regulatory election will be granted only when the interests of the government are not prejudiced by the granting of relief the interests of the government are prejudiced if granting relief would result in a 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 plr-131891-14 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 under sec_6501 before the taxpayer’s receipt of a ruling granting relief under this section sec_301_9100-3 sec_301_9100-3 provides special rules for accounting_method regulatory elections the interests of the government are deemed to be prejudiced except in unusual and compelling circumstances if the accounting_method regulatory election for which relief is requested i ii iii iv is subject_to the procedure set forth in sec_1_446-1 of this chapter requiring advance written consent of the commissioner requires an adjustment under sec_481 or would require an adjustment under sec_481 if the taxpayer changed to the method_of_accounting for which relief is requested in a taxable_year subsequent to the taxable_year the election should have been made would permit a change from an impermissible method_of_accounting that is an issue under consideration by examination an appeals_office or a federal court and the change would provide a more favorable method or more favorable terms and conditions than if the change were made as part of an examination or provides a more favorable method_of_accounting or more favorable terms and conditions if the election is made by a certain date or taxable_year conclusion based upon on the information submitted and representations made we conclude that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government therefore the requirements of sec_301_9100-1 and sec_301_9100-3 have been met taxpayer is granted an extension of days from the date of this ruling to file its mandatory statement as required by section dollar_figure of revproc_2011_29 stating that it is electing the safe_harbor for success-based fees identifying the transaction and stating the success-based_fee amounts that are deducted and capitalized 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 in particular no opinion is expressed as to whether the taxpayer properly included the correct costs as its success-based fees subject_to the retroactive election or whether the taxpayer’s transaction was within the scope of revproc_2011_29 plr-131891-14 this ruling is directed only to the taxpayer requesting it pursuant to sec_6110 this ruling may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively a taxpayer filing its return 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 __________________________ thomas d moffitt branch chief income_tax accounting cc


t c memo united_states tax_court nina h kazazian petitioner v commissioner of internal revenue respondent docket no filed date nina h kazazian pro_se gerard mackey and peter n scharff for respondent memorandum opinion lauber judge this case is before the court on petitioner’s motion for award of litigation and administrative costs pursuant to sec_7430 and rule neither party requested a hearing on this matter and no material fact is in 1all statutory references are to the internal_revenue_code in effect at all relevant times and all rule references are to the tax_court rules_of_practice and continued dispute we will therefore decide petitioner’s motion on the basis of the parties’ submissions and the existing record see rule a we conclude that petitioner is not a prevailing_party within the meaning of sec_7430 even if she were a prevailing_party she has not proven that she incurred meaningful costs with respect to the innocent spouse issue that is the subject of this case we will accordingly deny her request for litigation and administrative costs background the following facts are derived from the parties’ pleadings and motion papers including the declarations and the exhibits attached thereto petitioner resided in colorado when she filed her petition during petitioner practiced law as a sole_proprietor and owned rental real_estate she filed a joint federal_income_tax return for with michael j stackpool this return was prepared by hulet watson and associates hulet and was filed on date included with the return was a continued procedure we round all monetary amounts to the nearest dollar 2petitioner moved to sweden after she filed her petition but before she filed her motion for litigation and administrative costs absent stipulation to the con- trary the proper appellate venue is generally the circuit in which the taxpayer re- sided on the date that the tax_court petition was filed sec_7482 schedule c profit or loss from business that reported income and expenses attributable to petitioner’s legal practice and a schedule e supplemental income and loss that reported income expenses and losses attributable to petitioner’s rental_real_estate_activities the joint_return showed an overpayment of dollar_figure and requested a refund the internal_revenue_service irs paid the refund by depositing dollar_figure into a bank account titled in mr stackpool’s name and dollar_figure into a bank account titled in petitioner’s name petitioner and mr stackpool separated in date and divorced in for petitioner filed her form_1040 u s individual income_tax re- turn as married_filing_separately and for she filed her return as single for each year she reported the income and expenses of her law practice on a schedule c and the income and expenses of her rental_real_estate_activities on a schedule e respondent selected the joint_return and petitioner’ sec_2010 and sec_2011 individual returns for examination during the examination petitioner and mr stackpool each requested with respect to the joint_return relief from joint_and_several_liability pursuant to sec_6015 commonly called innocent spouse relief by filing a form_8857 request for innocent spouse relief in its examina- tion report the irs proposed to disallow deductions for petitioner’s schedule e losses for all three years on the ground that they were passive losses under sec_469 to disallow a claimed deduction for a net_operating_loss nol carryforward to arising from petitioner’s reported schedule e loss for to disallow a portion of petitioner’s schedule c deductions for lack of substantiation to impose accuracy-related_penalties under sec_6662 for all three years and to reject both petitioner’s and mr stackpool’s requests for innocent spouse relief petitioner and mr stackpool challenged the examination_report at the irs appeals_office following a conference the appeals officer ao recommended the following adjustments to the examination_report of petitioner’s claimed deductions for schedule e losses and deduction for the nol carryforward would be allowed given the hazards_of_litigation on the question whether she qualified as a real_estate_professional see sec_469 petitioner’s claimed schedule c deductions would be allowed in full as having been adequately sub- stantiated and the irs would concede the accuracy-related_penalty these adjustments yielded a proposed deficiency of dollar_figure for and smaller defic- iencies for and on the question of relief from joint_and_several_liability the ao concluded that mr stackpool was entitled to partial relief and petitioner to none with re- spect to sec_6015 and c the ao concluded that petitioner was entitled to no relief because all of the erroneous items were attributable to her rental_real_estate_activities and thus were known to her with respect to equitable relief under sec_6015 the ao concluded that only one of the seven factors viz marital status in revproc_2013_34 2013_43_irb_397 weighed in petitioner’s favor as to the other factors the ao found among other things that petitioner owned substantial real_estate_assets including a condo in vail colorado and did not show that liability for the tax_deficiency would cause her economic hardship had actual knowledge of the erroneous items giving rise to the tax_deficiency and derived a substantial benefit from the erroneous items by re- ceiving a tax_refund of dollar_figure largely attributable to withholding from mr stackpool’s wages mr stackpool and petitioner both alleged spousal abuse in support of their requests for innocent spouse relief the ao noted that their short-lived marriage was tumultuous with the police having been called to their residence on several occasions indeed mr stackpool ultimately secured a judicial restraining order against petitioner which she violated on at least one occasion leading to her arrest and jailing but the ao concluded that any abuse petitioner encountered played no role in the preparation and filing of the joint_return petitioner and mr stackpool had separated before then and she actively engaged with hulet in the details of preparing the return as evidenced by substantial email communications between them taking all of these facts into account the ao concluded that petitioner was entitled to no relief and that mr stackpool was entitled to relief with respect to dollar_figure of the dollar_figure proposed deficiency on date petitioner executed a form 870-ad offer to waive restrictions on assessment and collection of tax_deficiency and to accept over- assessment consenting to the assessment of the deficiency but not to the denial of innocent spouse relief for mr stackpool executed a form 870-ad by which he consented to the granting of partial relief from joint_and_several_liability and an assessment of dollar_figure for dollar_figure dollar_figure and petitioner exe- cuted forms 870-ad covering all issues for and on date the irs sent petitioner a final appeals determination re- jecting her request for innocent spouse relief for on date she time- ly petitioned this court to challenge that determination in his answer and amend- ed answer respondent adhered to his position that petitioner was entitled to no in- nocent spouse relief 3the record does not include the ao’s analysis of mr stackpool’s request for innocent spouse relief however his analysis of petitioner’s request for relief states that the nonrequesting spouse wants to be relieved of dollar_figure because that is the amount of withholdings he overpaid to the requesting spouse the case was calendared for trial on date in new york on date the parties filed a stipulation of settled issues in which they agreed that petitioner is granted relief under sec_6015 in the amount of dollar_figure for taxable_year on date petitioner filed a motion for reasonable litigation and administrative costs to which respondent filed a response on sep- tember extensive briefing by both parties ensued discussion sec_7430 provides for the award of litigation and or administrative costs to a taxpayer in a proceeding involving the determination of any_tax interest or penalty such an award may be made where the taxpayer is the prevailing_party has exhausted administrative remedies within the irs has not un- reasonably protracted the proceeding and has claimed reasonable costs sec_7430 b c and polz v commissioner tcmemo_2011_ nguyen v commissioner tcmemo_2003_313 respondent concedes that the second and third of these requirements are satisfied here these requirements are conjunctive thus failure to satisfy any one pre- cludes an award of costs to the taxpayer see 88_tc_492 marten v commissioner tcmemo_2000_186 the taxpayer has the burden of establishing that he or she has satisfied each of these requirements rule e to be the prevailing_party the taxpayer must have substantially prevailed with respect to either the amount in controversy or the most significant issue or set of issues presented and must satisfy a net_worth requirement sec_7430 respondent concedes that petitioner meets the net_worth require- ment a taxpayer will not be treated as the prevailing_party if the position_of_the_united_states in the proceeding was substantially justified sec_7430 the commissioner has the burden of proving that his position was substantially justified id see 108_tc_430 where a taxpayer seeks both litigation and administrative costs we apply the substantially justified standard with respect to the irs’ position on two sep- arate dates see id pincite for purposes of the administrative_proceeding the irs’ position is that taken at the earlier of the date the taxpayer receives the determination of the irs appeals_office or the date of the notice_of_deficiency sec_7430 for purposes of a tax_court proceeding the irs’ position is that taken at the time the commissioner files his answer e g 861_f2d_131 5th cir aff’g 89_tc_79 respondent maintained the same position in the final appeals determination and in his answer to the petition viz that petitioner was not entitled to relief from joint_and_several_liability for under sec_6015 c or f we will ac- cordingly evaluate those positions together see huffman v commissioner 978_f2d_1139 9th cir aff’g in part rev’g in part tcmemo_1991_144 maggie mgmt co t c pincite a petitioner’s status as a prevailing_party the position_of_the_united_states is substantially justified if it is justified to a degree that could satisfy a reasonable person and has a reasonable basis both in law and fact 106_tc_76 citing 487_us_552 see also 100_tc_457 aff’d in part rev’d in part 43_f3d_172 5th cir sher t c pincite the determination of reasonableness is based on all the facts of the case and the available legal precedent 94_tc_685 in determining whether the commissioner’s position was substantially justified we consider the basis for his legal position and the manner in which he maintained that position the commissioner’s position may be substantially justified even if incorrect ‘if a reasonable person could think it correct ’ fitz- patrick v commissioner tcmemo_2017_88 at quoting maggie mgmt co t c pincite the fact that the irs loses a case or makes a concession does not by itself establish that the position taken is unreasonable but is a factor that may be considered maggie mgmt co t c pincite see 991_f2d_359 7th cir 92_tc_760 fitzpatrick at we conclude that the irs’ position in this case as reflected in the final ap- peals determination denying petitioner’s claim for relief under sec_6015 c and f was substantially justified to be entitled to relief under subsection b the taxpayer must show among other things that in signing the return she did not know and had no reason to know there was an understatement_of_tax on the return sec_6015 the ao reasonably found that petitioner was directly involved in preparation of the return and had actual knowledge of the erro- neous items on that return--ie the partially disallowed real_estate loss deduction and the partially disallowed nol carryforward deduction--because those items were attributable to activities in which she actively engaged see eg doyle v commissioner tcmemo_2003_96 aff’d 94_fedappx_949 3d cir petitioner asserts that the erroneous items were not attributable to her be- cause hulet acting on behalf of mr stackpool allegedly made the decision to treat her as a real_estate_professional without consulting her there is no factual basis for this argument petitioner actively engaged with hulet in the preparation of the joint_return at the irs appeals_conference petitioner affirmatively contended that she was a real_estate_professional indeed she convinced the ao that the irs had litigation hazards on this point we agree with respondent that the erroneous items were attributable to petitioner and that denial of relief under sec_6015 was substantially justified sec_6015 provides proportional relief in specified circumstances to a requesting spouse who is no longer married to or is legally_separated from the nonrequesting spouse see sec_6015 115_tc_183 aff’d 282_f3d_326 5th cir since all of the erroneous items in this case arose from petitioner’s rental_real_estate_activities the ao rea- sonably concluded that of those items would be allocated to her if she had filed separately see sec_6015 by definition therefore no proportional relief would be available under subsection c a taxpayer who does not qualify for relief under subsection b or c may seek equitable relief under subsection f which permits relief from joint and sev- eral liability if it would be inequitable to hold the requesting spouse liable for the deficiency on the basis of all the facts and circumstances the irs con- siders a nonexclusive list of factors to determine whether relief under sec_6015 is warranted marital status economic hardship knowledge or reason to know legal_obligation significant benefit compliance with income_tax laws and mental or physical health revproc_2013_34 sec_4 i r b pincite the irs also considers whether the requesting spouse was abused before the return was filed id sec_4 c iv i r b pincite the ao addressed these seven factors in a lengthy memorandum and con- cluded that only one factor marital status weighed in favor of relief he found that petitioner’s actual knowledge of the erroneous items weighed against relief that she had failed to submit persuasive evidence of economic hardship or poor health and that the other factors were neutral or weighed against relief he con- cluded that petitioner was both the perpetrator and the victim of spousal abuse but that any abuse she suffered had no impact on how the joint_return was pre- pared or filed in challenging the reasonableness of the ao’s determination petitioner re- lies heavily on her charge of spousal abuse generally abuse is a relevant factor where it undermines the requesting spouse’s ability to reason independently and be able to do what is required under the tax laws id this may be true where the requesting spouse was not able to challenge the treatment of any items on the return or was not able to question the payment of any balance due reported on the return for fear of the nonrequesting spouse’s retaliation id sec_4 d i r b pincite the ao reasonably concluded that petitioner could not make this kind of showing petitioner and mr stackpool had permanently separated in date three months before the joint_return was filed in november of that year she was directly and actively involved in the preparation of that return as evidenced by her extensive communications with the hulet firm although respondent initially adhered to the ao’s position that petitioner was entitled to no relief he ultimately agreed to concede the case stipulating that petitioner would receive relief from joint_and_several_liability under sec_6015 with respect to the dollar_figure balance of the assessed deficiency there is no evidence in the record as to the basis for this concession although this con- cession is a factor that may be considered a concession does not by itself es- tablish that the position taken is unreasonable maggie mgmt co t c pincite see swanson t c pincite holding that irs position was substantially justified even though the commissioner ultimately conceded th e matter in the taxpayers’ favor prior to trial shaw v commissioner tcmemo_2005_106 89_tcm_1244 denying motion for costs where the commissioner made a full concession before trial notwithstanding this concession we conclude that the ao’s determination that petitioner was entitled to no relief under sec_6015 had a reasonable basis both in law and fact and was justified to a degree that could satisfy a reasonable person swanson t c pincite quoting underwood u s pincite rosario v commissioner tcmemo_2002_247 84_tcm_392 lozon v commissioner tcmemo_1997_537 74_tcm_1315 we accordingly conclude that the position_of_the_united_states was sub- stantially justified under sec_7430 because petitioner was not a prevailing_party she is not entitled to an award of fees or costs see sec_7430 c b reasonableness of petitioner’s costs even if we were to conclude that petitioner was a prevailing_party she has not proven the dollar amount of professional fees that she incurred in pursuing her claim for innocent spouse relief the taxpayer has the burden of establishing the fees incurred and of proving that the amount claimed is reasonable rule e see cowie v commissioner tcmemo_2007_108 absent agreement on the amount that is reasonable the moving party is required to file within days after receiving the irs response to the motion for fees and costs a detailed affidavit setting forth among other things a summary of the time expended by each individual for whom fees are sought including a description of the work per- formed and the costs associated with this work rule d see malowney v commissioner tcmemo_2006_135 petitioner did not submit the affidavit required by rule d instead she relies on the declaration included with her original motion which sought dollar_figure for professional fees and dollar_figure for tax_court filing costs and postage she claims to have paid dollar_figure in fees to a denver attorney and dollar_figure to a denver accounting firm petitioner prepared her petition herself and appeared pro_se in this court apart from her tax_court filing costs therefore she incurred no litigation costs the attorney’s fees covered work performed between march and date in connection with her protest to the irs appeals_office there is no reference in the attorney’s invoices to innocent spouse or sec_6015 relief rather the time entries refer specifically to other aspects of the examination eg responding to document requests pursuing a freedom_of_information_act_request 4petitioner does not explain why these fees do not total dollar_figure research concerning real_estate_professional classification and preparation of real_estate_professional narratives for and other time entries refer generally to the appeals_office protest eg assembling documents and preparing for and attending the conference petitioner has not established what if any attorney’s fees were incurred in connection with the innocent spouse issue that is the sole subject of this case petitioner’s accountant’s fees covered work performed between date and date there is no reference in the accountant’s time entries to inno- cent spouse or sec_6015 relief a few entries refer generally to the protest without describing the exact work performed but much of the time was spent on return preparation eg assembling tax_return return review review data for amended_return completion of amended_return and review of mileage and vehicle expenses on amended tax_return as in the case of her attorney’s fees petitioner has not established what if any accountant’s fees she incurred in connection with the innocent spouse issue for 5all of the attorney’s time was billed at dollar_figure per hour and most of the ac- counting time was billed at dollar_figure per hour for fees incurred in calendar_year the fee award limitation under sec_7430 was dollar_figure per hour see revproc_2014_61 2014_47_irb_860 for fees incurred in calendar_year sec_2013 and sec_2014 the fee award limitation under sec_7430 was dollar_figure per hour see revproc_2013_35 2013_47_irb_537 revproc_2012_41 2012_45_irb_539 continued respondent noted these defects in his response to petitioner’s motion for fees and costs invoking rule d respondent urged that petitioner was re- quired to file an additional affidavit or declaration establishing the time that her professionals devoted to the innocent spouse issue for she filed with her reply no such declaration and she did not address any of the defects to which re- spondent pointed instead petitioner noted in her reply that she is an attorney and asserted that her billing rate is dollar_figure an hour she had devoted big_number hours during the previous four years to resolution of her tax_liabilities and she was therefore entitled to additional attorney’s fees of dollar_figure this contention is frivolous the plain language of sec_7430 allows reimbursement only for actual expenditures not for lost opportunity_costs see eg minahan t c pincite citing 87_tc_838 the time pe- titioner expended as a pro_se litigant gives rise to no actual expenditure within the meaning of sec_7430 frisch t c pincite see also dixon v com- continued petitioner has the burden of showing that a special factor justified a higher hourly rate see sec_7430 sec_301_7430-4 proced ad- min regs she made no effort to do this missioner 132_tc_55 attorneys’ fees cannot exist and therefore cannot be incurred unless there is an attorney-client relationship in sum even if petitioner were a prevailing_party under sec_7430 she incurred no costs for professional assistance during the litigation phase of this case and she has not carried her burden of proving the amount of reasonable_administrative_costs allocable to the innocent spouse issue for as opposed to the numerous other issues that were the subject of the irs examina- tion and her appeals_office protest the only sum that she has established as at- tributable to her claim for innocent spouse relief is the dollar_figure she paid for the tax_court filing fee and postage but because we have determined that she is not a prevailing_party she is entitled to no fees or costs at all to implement the foregoing an appropriate order and decision will be entered