t c memo united_states tax_court ralph e wesinger jr and catherine r wesinger petitioners v commissioner of internal revenue respondent docket nos filed date ps deducted losses sustained in their cattle- ranching and aircraft-rental operations r disallowed these deductions on the grounds that the ranching and rental activities were not engaged in for profit within the meaning of sec_183 i r c and also assessed accuracy-related_penalties under sec_6662 i r c held on the facts the cattle-ranching and aircraft-rental activities were not engaged in with a profit objective and ps are not entitled to deduct the losses therefrom held further ps failed to establish that they exercised reasonable care in deducting such losses and are thus liable for accuracy-related_penalties based on negligence r’s determinations are sustained steven j roth for petitioners andrew r moore and caroline tso chen for respondent - - memorandum findings_of_fact and opinion nims judge in these consolidated cases respondent determined the following deficiencies and accuracy-related_penalties with respect to petitioners’ federal income taxes for the taxable years through year deficiency penalty sec_6662 a dollar_figure dollar_figure big_number big_number big_number big_number big_number respondent also disallowed schedule f deductions of dollar_figure for petitioners’ taxable_year thereby reducing the net_loss claimed for that year however respondent did not determine a deficiency for we consider facts with relation to other years to the extent we deem necessary to redetermine petitioners’ income_tax_liability for the years before the court see sec_6214 b after concessions the issues remaining for decision are whether petitioners’ cattle-ranching activities constituted activities not engaged in for profit within the meaning of sec_183 for the taxable years through whether petitioners’ rental of their personal aircraft constituted an activity_not_engaged_in_for_profit within the meaning of sec_183 for the taxable years and - - whether petitioners are liable for sec_6662 a accuracy-related_penalties on account of negligence for the taxable years through unless otherwise indicated all section references are to sections of 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 the stipulations filed by the parties with accompanying exhibits are incorporated herein by this reference ralph eb and catherine r wesinger petitioners are married and resided in livermore california when they filed their petitions however because no evidence was presented as to mrs wesinger’s involvement in the ranching and rental operations our discussion of these activities will focus upon mr wesinger petitioner petitioner was born and raised in concord massachusetts he then attended the university of massachusetts for years and took courses in computer science and general liberal arts but he did not earn a degree shortly after leaving the university of massachusetts he was hired by digital equipment corporation digital petitioner remained with digital for approximately years and during that time worked as a computer systems q4e- specialist a layout designer for a chip set anda field service representative then in he left digital and started his own business scientific research management_corporation srmc in san jose california srmc was engaged in the building and servicing of custom computers by although srmc was begun without a formal business plan and with little capital the company’s annual gross_income had reached dollar_figure million in late and early petitioner purchased acres of unimproved land parcel in modoc county california for approximately dollar_figure he intended to raise cattle on the property and hoped in the future to change and slow down his fast-lane lifestyle prior to acquiring this land petitioner’s experience with farming operations consisted of helping out occasionally on two dairy farms near where he grew up and visiting a ranch in new zealand between five and seven times for to weeks per visit petitioner did not seek any professional assistance at the time he purchased parcel with regard to whether the land was suitable for cattle ranching petitioner also did not prepare a formal business plan detailing how a profit was to be made from the ranching operations his plan was to buy cows feed cows sell cows however due in part to lack of rainfall petitioner never grazed any cattle on parcel and he sold the land in june of for dollar_figure - - during his ownership of parcel in june of petitioner purchased an additional acres of unimproved land in modoc county parcel for approximately dollar_figure parcel was near but not contiguous with parcel as with parcel petitioner intended to raise cattle on parcel but he neither investigated the suitability of the land for grazing nor prepared any formal business plans for operation of the ranch prior to making the acquisition then in petitioner had fencing installed on parcel and purchased head of cattle from a neighbor however while the cattle were still in the possession of the seller petitioner hired a cowboy in june of to perform an informal grass survey when this survey indicated that the grasses on parcel would not support the cattle and before the animals were placed on the property petitioner resold the cattle to the seller at the same price petitioner also did not graze any cattle on his land in and a well was dug on the property during these years and in late petitioner began removal of sagebrush from the land in addition in november of a field inventory report from a united_states department of agriculture soil conservationist was obtained this report identified the soil types on the property and the potential plant communities for such soils but it did not indicate the number of cattle the land was capable of supporting in its current condition in petitioner placed cattle on his ranch for the first time grazing head animals were also placed on parcel in and when and head respectively were grazed with regard to other activity on the property petitioner dug an additional well in began ripping the land in for purposes of growing alfalfa and planted a 40-acre field of winter wheat in he also obtained additional field inventory reports in and the report recommended grazing no more than animals with the land in its current condition and all reports addressed the use of an irrigation system to facilitate increased grass crop and animal production as of early no alfalfa had been planted no winter wheat had been harvested and parcel was not yet irrigated through petitioner visited his ranch to times per year and stayed to days per visit he kept no separate books_and_records for his ranching operations but he recorded the checks and receipts relating to the ranch in a separate file on his personal computer he then gave this information each year to his accountant for use in preparing petitioners’ tax_return - also throughout the years in issue petitioner worked or more hours per week at srmc and received a salary for his services petitioner mrs wesinger was likewise employed by srmc during these years and was compensated for her work as the human resources manager however during the period following petitioner’s decision to embark upon a ranching venture srmc began experiencing business reverses an audit by the irs and a subsegquent bank audit disrupted the company’s operations and culminated in with the bank calling its outstanding loan to srmc of dollar_figure million srmc was forced to seek sources of short-- term credit and eventually paid the debt in meanwhile in petitioner began the process of changing srmc’s primary line_of_business from custom hardware to internet-related software several patents dealing with this software either have been issued to petitioner or are pending and petitioner expects the new technology to generate a profit in the future as of early srmc now known as nes was not making money yet another event affecting petitioners’ economic situation during the years at issue was a hurricane which damaged property they held in hawaii the damage occurred in late and necessitated that time be spent in hawaii during the following winter but the situation was largely resolved by the spring of --- - one further item bearing upon petitioners’ income and finances for the contested years was the rental of a personal aircraft petitioner owned a turbo dakota plane this aircraft was both flown by petitioner for his personal_use and rented to srmc for business use petitioner kept a handwritten log of flight times which indicated the number of hours flown and the purpose of the usage in and the years as to which respondent disallowed plane losses trips labeled business accounted for an approximate to percent of the total usage travel related to the ranch ranged between three-fourths and two- thirds of the total hours the remaining time was apparently devoted to other personal_use as no evidence was presented of rentals or attempts to rent to additional third parties petitioner charged srmc an hourly lease rate when the company utilized the plane for traveling to customer premises he set the price by calling local businesses that rent aircraft and inquiring what they charged for similar machines he then established a price consistent with the local market using this practice petitioner’s aircraft-rental operations reported losses in and profits were generated in and the overall financial impact of the circumstances related above is summarized in the following table the ranch losses deducted for through the years at issue totaled - dollar_figure the aircraft-rental losses deducted for the contested years and totaled dollar_figure year claimed gross ranch ranch aircraft adjusted_income from expenses profits rental gross ranch losses profits income losses dollar_figure dollar_figure dollar_figure dollar_figure -dollar_figure big_number big_number big_number big_number -big_number -big_number big_number big_number -big_number -big_number big_number big_number -26 big_number big_number big_number -big_number big_number -big_number big_number big_number --big_number big_number -big_number big_number big_number -big_number -158 big_number big_number big_number ' during these years the property taxes for the ranch were deducted by petitioners on schedule a of their form_1040 dollar_figure of the gross_income in consists of consulting fees paid to these are estimated petitioner for the planning and building of a ranch amounts because petitioners’ trial we must decide whether or not petitioners’ opinion cattle tax_return had not been filed at the time of ranching and aircraft rental were activities engaged in for profit within the meaning of sec_183 petitioners contend that their objective with respect to these ventures was at all times to make a profit and that the costs incurred were therefore properly deductible under sec_162 as ordinary and necessary expenses of carrying_on_a_trade_or_business conversely respondent argues that the requisite -- - profit objective was lacking hence according to respondent petitioners were not entitled to deduct losses sustained in the ranching and rental operations and are liable for the deficiencies determined by respondent we agree with respondent that on these facts petitioners failed to establish the mandatory profit objective evidentiary issue as a preliminary matter before addressing the substantive issues related to profit objective an evidentiary objection raised by respondent must be decided respondent filed a motion in limine to exclude the testimony of petitioners’ expert jonathan cosby a certified_public_accountant the court permitted petitioners to make an offer of proof and reserved ruling on the admissibility of the evidence rule of the federal rules of evidence which governs the admissibility of expert testimony reads as follows if scientific technical or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue a witness qualified as an expert by knowledge skill experience training or education may testify thereto in the form of an opinion or otherwise here mr cosby’s testimony fails to meet this standard his statements were neither specialized in nature nor helpful to the court his in-court testimony consisted of broad generalizations eg neither absence of a business plan nor failure to consult with experts necessarily indicates lack of profit objective his written report largely restates facts already in the record and offers no independent research mr cosby has never been engaged in the business of cattle ranching and has not made any study of profitable cattle operations upon which to base his comparisons respondent’s motion in limine is granted statutory provisions and interpretation - for profit activity sec_183 states the following general_rule in the case of an activity engaged in by an individual if such activity 1s not engaged in for profit no deduction attributable to such activity shall be allowed under this chapter except as provided in this section sec_183 then goes on to prescribe that if an activity is not engaged in for profit a taxpayer may take those deductions which would be allowable without regard to profit_motive eg certain interest and tax expenses furthermore if the activity is not engaged in for profit sec_183 permits the taxpayer to claim those deductions which would be allowable if the activity were engaged in for profit but only to the extent that the gross_income derived from such activity for the taxable_year exceeds the deductions allowable by reason of paragraph in other words because deductions for expenses related to a not-for- profit activity are generally limited to the amount of gross -- income from that particular activity the practical effect of sec_183 is to preclude a taxpayer from deducting losses_incurred in such ventures an activity_not_engaged_in_for_profit is defined in sec_183 as any activity other than one with respect to which deductions are allowable for the taxable_year under sec_162 trade_or_business_expenses or under paragraph or of sec_212 expenses_incurred in the production_of_income see also sec_1_183-2 income_tax regs deductions are allowable under these sections only if a taxpayer’s primary purpose and intention in engaging in the activity is to make a profit 72_tc_411 affd without published opinion 647_f2d_170 9th cir the taxpayer’s expectation of a profit need not be reasonable but he or she must possess an actual and honest objective of making a profit 94_tc_41 quoting 78_tc_642 affd without opinion 702_f2d_1205 d c cir conversely no deductions are allowable under sec_162 or sec_212 for activities which are carried on primarily as a sport hobby or for recreation sec_1_183-2 income_tax regs in determining the category into which a particular venture falls the taxpayer bears the burden of establishing the requisite profit objective keanini v commissioner supra pincite golanty v commissioner supra pincite however greater weight is accorded to objective facts and circumstances than to a taxpayer’s mere statement of intent see sec_1_183-2 income_tax regs a nonexclusive list of factors set forth in sec_1 b income_tax regs guides sec_183 analysis by indicating relevant facts and circumstances for consideration manner in which the taxpayer carries on the activity the expertise of the taxpayer or his advisers the time and effort expended by the taxpayer in carrying on the activity expectation that assets used in activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar activities the taxpayer’s history of income or losses with respect to the activity the amount of occasional profits if any which are earned the financial status of the taxpayer and elements of personal pleasure or recreation application --- cattle ranching manner in which the taxpayer carries on the activity sec_1_183-2 income_tax regs provides that carrying on an activity in a businesslike manner may be indicative of profit objective the regulations further identify three practices consistent with businesslike operations maintaining complete and accurate books_and_records conducting the activity in a manner substantially_similar to profitable businesses of the same nature and attempting changes in methods and techniques to improve profitability see id a fourth practice that of establishing a business plan is added by case law as likewise evidencing businesslike operations see sanders v commissioner tcmemo_1999_208 first with respect to books_and_records petitioner here did not maintain separate books for his ranch operations instead petitioner simply recorded the checks and receipts relating to the ranch in a separate file on his personal computer he then annually gave this information to his accountant for use in preparing petitioners’ tax_return this minimal record keeping however falls short of what has been identified by courts as signaling a bona_fide intent to profit for example in burger v commissioner tcmemo_1985_523 affd 809_f2d_355 7th cir the court explained the purpose of maintaining books_and_records is more than to memorialize for tax purposes the existence of the subject transactions it is to facilitate a means of periodically determining profitability and analyzing expenses such that proper cost saving measures might be implemented in a timely and efficient manner hence while a sophisticated accounting system is not necessary the usage of cost accounting technigues that at a minimum provide the entrepreneur with the information he requires to make informed business decisions is essential id the court reasoned that without such a basis for decisions affecting the enterprise the incidence of a profit in any given period would -- - be a wholly fortuitous result id given this standard the court in burger found the taxpayers’ annual posting to a ledger from bills and receipts accumulated throughout the year under headings for revenues and expenses to be insufficient see id the court declared the ledger inadequate for any meaningful cost analysis in part because it failed to allocate costs and overhead among the animals of the taxpayers’ dog-breeding operations see id as a result of this failure the taxpayers’ records did not provide enough information for even determining what the break-even point might be for dog sale purposes see id the annual posting was also fatal to the taxpayers’ contentions because it precluded frequent monitoring of costs and profitability see id similar focus on maintaining records useful in making business decisions is found in dodge v commissioner tcmemo_1998_89 affd without published opinion 188_f3d_507 6th cir in that case the taxpayers kept invoices and receipts for their horse-breeding business and maintained an itemized list of expenses see id nonetheless the court noted that petitioners did not prepare any business or profit plans profit or loss statements balance sheets or financial break-even analyses for their horse-breeding activity id this lack of -- - detail keeping only the minimum records necessary to prepare tax returns was considered by the court to be an indication that the activity was not carried on for profit see id moreover even in golanty v commissioner t c pincite where the taxpayer kept a separate ledger on a monthly basis for her horse-breeding enterprise the court stated that there has been no showing that books_and_records were kept for the purpose of cutting expenses increasing profits and evaluating the overall performance of the operation the court labeled these records merely the trappings of a business because the taxpayer failed to show that she used them to improve the operation of the enterprise id petitioner here like the taxpayers in burger dodge and golanty appears to have kept the minimum records necessary to prepare his tax returns as indicated above simply maintaining lists or files of expenses and receipts without any further cost accounting or analysis carries little weight in establishing a profit objective second as regards similarity with comparable businesses neither petitioner nor respondent has offered any evidence as to how profitable cattle ranches are run however it seems unlikely that entrepreneurs seriously intending to profit from a ranching venture would allow land allegedly purchased for that purpose to sit unused for years before first placing cattle on the property third concerning attempts to improve profitability through changes in methods and techniques petitioner’s efforts in this area for the years in issue can again only be termed minimal fencing was installed in two wells were added to the property between and sagebrush removal was begun in late yet was the first year any cattle were grazed spreading a small number of improvements over the 7-year period of ranch land ownership from to cannot overcome petitioner’s failure to abandon more expeditiously the provenly unprofitable technique of grazing no cattle fourth regarding a business plan petitioner is correct in asserting that lack of a formal written business plan is not determinative of lack of profit objective see sanders v commissioner tcmemo_1999_208 nonetheless some indication of a plan for success e profitability should be given id petitioner’s situation and buy cows feed cows sell cows testimony here seem analogous to that in sanders where the court stated given the substantial but expected costs associated with the schedule f activity we need more than petitioner’s representation that he could make money if he sold enough horses at high enough prices to conclude that petitioner had a plan to -- - make a profit id petitioner here testified without any supporting data that he would need to sell approximately cows to make a profit but in none of the years at issue did he ever attempt to place animals on his property it is therefore doubtful that petitioner had any plan to profit in those years thus based on the above considerations petitioner’s cattle ranch does not appear to have been operated in a businesslike manner this factor fails to indicate a profit objective the expertise of the taxpayer or his advisors sec_1_183-2 income_tax regs reads preparation for the activity by extensive study of its accepted business economic and scientific practices or consultation with those who are expert therein may indicate that the taxpayer has a profit_motive where the taxpayer carries on the activity in accordance with such practices case law further explains that while a formal market study is not required a basic investigation of the factors that would affect profit is burger v commissioner tcmemo_1985_523 see also 72_tc_659 underwood v commissioner tcmemo_1989_625 moreover in considering this factor courts have made clear that the focus is upon expertise and preparation with regard to the economic aspects of the particular business and failure to possess or obtain expertise in this area will not be excused by study of other aspects of the enterprise or by general business acumen see eg golanty v commissioner t c pincite sanders v commissioner supra dodge v commissioner supra underwood v commissioner supra burger v commissioner supra for instance in golanty v commissioner supra pincite the court recognized that the taxpayer was an intelligent person who had acquired a good deal of knowledge about horses and their breeding nonetheless the court emphasized that because the taxpayer never consulted any books nor any person who gave her advice regarding the business side of the operation she failed to show that she sought or acquired the expertise that would enable her to turn the horse-breeding operation into a profitable business id similarly the court in burger v commissioner supra first observed that the taxpayers there read numerous books and periodicals pertaining to the breeding of dogs and consulted with individuals whom petitioners considered to be expert in the field again however the court found these activities not indicative of a profit objective because the taxpayers undertook the venture without consulting with any experts on the business end of the activity and with no concept of what their ultimate costs might be how they might operate at the greatest cost efficiency how much revenues they could expect or what risks could impair the generation of revenues id - - cases following burger are replete with analogous statements in underwood v commissioner supra the taxpayers were successful in business and experienced investors but despite this business background failed to adequately investigate their new venture before embarking the court in dodge _v commissioner tcmemo_1998_89 likewise opined with regard to a taxpayer admittedly expert and knowledgeable about horses significantly petitioners did not seek professional or economic advice on the economic aspects of horse breeding a nearly identical emphasis is seen in sanders v commissioner supra while petitioner received free and paid advice from individuals he considered ‘experts’ in the cutting horse industry the advice did not focus on the economic aspects of the activity viewing the present matter in light of these judicial pronouncements petitioner here is similarly bereft of the requisite economic expertise he had no previous experience with the cattle-ranching business no advice with regard to the economic side of the venture was ever sought prior to or during the years at issue furthermore even attempts to gain expertise regarding the operational side of a cattle ranch were both tardy and minimal petitioner did not ask a cowboy for an informal opinion on whether the land had sufficient grass for cattle until june of he did not obtain a professional analysis of the - soil on his property or its suitability for ranching until november of he also did not receive any estimate of the number of cattle his ranch could support which turned out to be only until this scenario of holding ranch land for years without even determining whether it could economically or physically support a profitable operation is hardly consistent with a profit objective the time and effort expended by the taxpayer in carrying on the activity sec_1_183-2 income_tax regs specifies that devoting much personal time to an activity as well as withdrawal from another occupation in order to devote such time may be evidence of a profit objective although the regulations do not define the term much cases offer some guidance as to gualifying quantities ina large percentage of decisions where time spent was found to be probative of intent to profit the taxpayers were devoting more than hours to the enterprise on a weekly basis see eg engdahl v commissioner supra pincite taxpayers spending an average of to hours per week on horse-breeding venture dodge v commissioner supra husband and wife combining for approximately hours per week spent working on horse farm mcguire v commissioner tcmemo_1992_ taxpayer spending more than hours per week on cattle business haladay v commissioner tcmemo_1990_45 husband and wife combining for more than hours per week spent working -- - on farm activities hllis v commissioner tcmemo_1984_50 taxpayer spending to hours per week engaged in care and training of his horses also even where lesser amounts have been validated as evidence of profit objective the expenditures have typically been regular and consistent see eg givens v commissioner tcmemo_1989_529 taxpayer spent to hours daily on weekdays doing farm chores and more time on weekends christensen v commissioner tcmemo_1988_484 taxpayer worked consecutive days at another occupation during which time he usually spent several evening hours on his challenged activities then worked consecutive days of at least hours each on his challenged venture here in contrast petitioner testified to going to the ranch only to times a year during the years at issue and spending to days per visit no evidence was presented as to the hours of labor expended while there furthermore while limited time spent may be excused where a taxpayer employs competent personnel to carry on the activity sec_1_183-2 income_tax regs petitioner offered no record of having hired anyone to run his ranching operations thus the time and effort devoted by petitioner amounted on average to visiting approximately once or twice a month for the equivalent of a long weekend on these facts petitioner’s level of involvement would appear to be more akin to a hobby than a business - - expectation that assets used in activity may appreciate in value sec_1_183-2 income_tax regs identifies asset appreciation as potentially relevant to the profit analysis however in the case of farm property the standard for determining if such appreciation may be considered differs depending on whether land is held primarily for appreciation or primarily for farming see eg engdahl v commissioner t c pincite n hoyle v commissioner tcmemo_1994_592 bllis v commissioner supra if land is held primarily to profit from the increase in value the farming and holding of the land will be considered a single activity only if the income derived from farming exceeds the deductions attributable to the farming activity which are not directly attributable to the holding of the land such that the farming activity reduces the net cost of carrying the land sec_1_183-1 income_tax regs conversely if asset appreciation is merely collateral to a primary purpose of farming courts have permitted unrealized_appreciation to be considered as part of an overall intent to profit from the property irrespective of the amount of income from farming see eg engdahl v commissioner supra pincite n hoyle v commissioner supra ellis v commissioner supra in the present matter the same result is obtained regardless of whether petitioner’s ranch land was held primarily -- - for appreciation or for farming if appreciation was the dominant motive the activities cannot be considered together because income from ranching did not exceed deductions for the through years at issue the ranch generated dollar_figure in gross_income as deductions directly attributable to ranch operations exceeded this figure in all years ranching did not reduce the net cost of carrying the land likewise even if farming was the primary objective a claimed expectation of appreciation cannot help petitioners because no appraisal or value of the ranch was offered as evidence it is impossible to determine the extent to which losses may have been offset by such appreciation furthermore even if we were to accept petitioner’s uncorroborated estimate of a to percent area-wide increase in value the resulting amount would be insufficient to establish a legitimate expectation to profit from the property since the losses through total dollar_figure they exceed the original purchase_price of dollar_figure for parcel petitioner would have needed to expect more than a percent appreciation to recoup his losses the success of the taxpayer in carrying on other similar or dissimilar activities as stated in sec_1_183-2 income_tax regs the fact that the taxpayer has engaged in similar activities in the past and converted them from unprofitable to profitable enterprises may indicate that he is engaged in the present - - activity for profit here petitioner previously started a computer service business srmc and brought it to the point of achieving over dollar_figure million in gross_income however given the marked differences between petitioner’s history at srmc and his ranching venture general business acumen carries little probative weight on these facts prior to forming srmc petitioner had gained experience with computer systems through his previous employment at digital equipment corporation prior to purchasing his land petitioner had virtually no experience with cattle ranching in addition to create a profitable enterprise through full-time efforts is one thing to dabble several days a month is quite another moreover srmc has now gone from profitable to unprofitable during petitioner’s tenure based on these differences an observation by the court in haladay v commissioner tcmemo_1990_45 would seem equally appropriate here the wholesale sporting goods business is sufficiently dissimilar from farming that even if raymond’s midway business had been a consistently profitable one a conclusion that the farming activity should have been equally profitable would not be warranted the admonition by the court in dodge v commissioner tcmemo_1998_89 that the taxpayers there did not show that their acquired_business expertise was - - used in the horse activity is likewise warranted petitioner’s experiences in the high-tech arena simply did not translate meaningfully into his cattle-ranching operations the taxpayer’s history of income or losses with respect to the activity according to sec_1_183-2 income_tax regs losses that continue to be sustained beyond the period which customarily is necessary to bring the operation to profitable status may be indicative of a lack of profit objective exceptions exist for losses due to customary business risks or reverses and unforeseen or fortuitous circumstances which are beyond the control of the taxpayer id here it is undisputed that petitioner’s ranch has never generated a profit in the years from their first land purchase in through losses were incurred in each of the years at issue moreover the profit petitioners claim for is attributable to a dollar_figure consulting fee paid to petitioner by a neighbor for help in planning and building a ranch the cattle operations themselves continued to show a loss even in although no evidence was presented as to the customary startup_period for a cattle ranch or years would seem excessive petitioner however asserts that his losses should nonetheless be excused as attributable to unforeseen circumstances and casualties he points to a hurricane damaging other_property held in hawaii the calling of a bank loan with -- p7 - respect to the srmc business and drought conditions in the area of the ranch as responsible for his continued losses we disagree that these circumstances are sufficient to justify the lengthy period of losses at issue the hurricane and the srmc misfortunes are only tangentially related to the ranching enterprise in addition the hurricane damage was resolved within a relatively short_period impacting only the winter of so cannot explain the many years of losses as to srmc’s reverses since petitioner’s level of involvement in ranch affairs prior to the corporate problems does not appear to differ significantly from his subsequent activities the srmc hardships are a less than convincing reason for losses at the ranch the alleged drought too falls short of offering a legitimate excuse petitioner testified that he learned of the dry conditions after he bought parcel in so the lack of rainfall was hardly unforeseen when parcel was purchased in prior to the years at issue petitioner should have been aware of the need to plan for such conditions if he truly intended to make a profit from his property as of early an irrigation system was still not in place on the property - - the amount of occasional profits if any which are earned as indicated above petitioner has earned no profits from his cattle-ranching operations apart from the consulting fee so this factor does little to substantiate his intent the financial status of the taxpayer sec_1_183-2 income_tax regs explains this factor as follows substantial income from sources other than the activity particularly if the losses from the activity generate substantial tax benefits may indicate that the activity is not engaged in for profit here at the time petitioner purchased both parcel and parcel he had adjusted_gross_income of over dollar_figure his income remained above the six- figure mark through given this significant level of income it would not be unreasonable to conclude that making a profit was not petitioner’s primary concern when he began his cattle-ranching venture the fact that petitioner has continued his operations despite his decrease in income could offer support for a contrary view but his failure to make significant changes to increase profitability belies this notion at least with respect to the years in issue elements of personal pleasure or recreation underlying this final factor is the premise that the presence of personal motives in carrying on of an activity may indicate that the activity is not engaged in for profit especially where there are recreational or personal elements involved on the other hand a - - profit motivation may be indicated where an activity lacks any appeal other than profit sec_1 b income_tax regs in the case of a ranching endeavor such as petitioner’s however this consideration does not weigh strongly either for or against intent to profit aspects of potential enjoyment coexist with aspects of demanding labor as observed by the court in barter v commissioner tcmemo_1991_124 affd without published opinion 980_f2d_736 9th cir while we agree with petitioner fixing fences and dragging roads is not in and of itself pleasurable petitioner did glean some pleasure from the ranch and petitioner received the personal gain of building and maintaining what was to be his retirement home similarly petitioner here engaged in toilsome work such as ripping soil for planting but he also testified that he embarked upon cattle ranching in part because he desired to slow down his lifestyle hence despite the presence of difficult tasks a personal motive was an instigator for the venture as a result this factor does little to either advance or detract from petitioner’s position in summary the circumstances of these cases when considered within the framework of the nine factors above indicate that petitioner did not possess the requisite intent to profit from his cattle-ranching operations petitioners therefore are subject_to the restrictions set forth in sec_183 and improperly deducted losses -- - application - aircraft rental turning then to whether petitioner intended to make a profit through the rental of his personal aircraft analysis of the surrounding circumstances again establishes that he did not although the parties presented far less evidence and argumentation on this issue than with respect to the ranch those of the nine factors to which the record does speak fail to paint the picture of a profit-driven enterprise first regarding businesslike manner petitioner did not testify to maintaining books_and_records for his rental operations that would allow either for regular and meaningful evaluation of the enterprise’s financial health or for the making of informed business decisions on the contrary the only business decision addressed by the parties at trial or on brief appears to have been made in a strikingly unbusinesslike manner petitioner set the rate he charged for use of his aircraft by calling other businesses inquiring what they charged and establishing a comparable fee he seems to have undertaken no analysis whatsoever of his own expenses his probable balance of rental versus personal_use or his likely break-even point it is doubtful that most serious entrepreneurs would simply charge what competitors charge without ever calculating whether their --- - business could stay afloat at that price level as was the case with the cattle ranch turning a profit while employing such techniques would best be characterized as merely fortuitous next as to expertise there again appears to have been no basic investigation of the economic aspects of the business there also was no evidence that petitioner had any experience in the rental of airplanes furthermore the time and effort expended by petitioner on his rental business was negligible no advertising or marketing was undertaken the plane was rented only to petitioner’s own business srmc moreover between and percent of the plane’s total usage for the years as to which losses were disallowed was by petitioner for traveling to and from his ranch with such a comparatively small amount of time available for rental a bona_fide intention to profit seems rather far- fetched in addition no appreciation could have been expected because vehicles including aircraft typically depreciate rather than increase in value the only factors weighing to any significant degree in favor of a profit_motive are those addressing history of losses and occasional profits losses were reported in and but petitioner’s aircraft-rental operations earned a profit in and such profits could be - - indicative of the requisite intent nonetheless because of the complete absence of evidence to show that the profits resulted from any conscious efforts or calculation on the part of petitioner the apparent fortuitous nature of the positive returns is not overcome the financial status factor is likewise not supportive of petitioner’s claims adjusted_gross_income from other sources totaled over dollar_figure in both of the years for which losses were disallowed petitioner could afford and benefit taxwise from the loss finally it is unlikely that petitioner owned maintained and flew a personal aircraft without finding some pleasure in the activity also the much greater percentage of time that the aircraft was devoted to personal rather than business use given that the ranch failed to qualify as a business indicates that personal motives predominated over profit motives thus as with the cattle-ranching enterprise sec_183 precludes petitioners from deducting losses related to the aircraft-rental business respondent’s determinations of deficiencies are therefore sustained as to both activities penalty issue the final issue we must decide is whether petitioners are liable as respondent contends for accuracy-related_penalties based on negligence sec_6662 and b imposes an - - accuracy-related_penalty in the amount of percent of any underpayment that is attributable to negligence or disregard of rules or regulations negligence is defined in sec_6662 c as any failure to make a reasonable attempt to comply with the provisions of this title and disregard as any careless reckless or intentional disregard sec_1_6662-3 income_tax regs further explains negligence is strongly indicated where--- a taxpayer fails to make a reasonable attempt to ascertain the correctness of a deduction credit or exclusion on a return which would seem to a reasonable and prudent person to be ‘too good to be true’ under the circumstances case law similarly states that negligence is the failure to exercise the due care of a reasonable and ordinarily prudent person under like circumstances sanders v commissioner tcmemo_1999_208 see also 85_tc_934 the taxpayer bears the burden of establishing that he or she was not negligent had reasonable_cause for the underpayment and acted in good_faith see sec_6664 neely v commissioner supra pincite sanders v commissioner supra here petitioners do not aver any specific facts to rebut respondent’s finding of negligence other than that the amounts reported were uncontested this assertion fails to meet petitioners’ burden of showing that the treatment of these - - amounts was reasonable and in good_faith deducting over dollar_figure without further investigation would also appear to fall short of the prudence standard accordingly respondent’s determination of sec_6662 penalties is sustained to reflect the foregoing decisions will be entered under rule


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division uics apr setep ra tb legend taxpayer a taxpayer b company s ira x amount amount date date date date charity u charity v annuity agreement w annuity agreement x page dear fii this is in response to the letter in which you through your authorized representative request an extension of the 60-day rollover period found in sec_408 of the internal_revenue_code applicable to individual_retirement_accounts iras your request to the internal_revenue_service service is based on the following facts and representations taxpayer a who had attained age as of the date of this ruling_request and who was married to taxpayer b owned ira x an individual_retirement_account ira set-up and maintained in his name with company s on or about date taxpayer a withdrew amount from his ira x on or about date which was approximately five weeks after date taxpayer a entered into annuity agreement w with charity u and annuity agreement x with charity v taxpayer a paid amount approximately one-half of amount for the annuity purchased under each of said annuity agreements in exchange for each annuity taxpayer a made an irrevocable gift totaling amount to the respective charity furthermore taxpayer a received federal charitable income_tax deductions in exchange for each gift when filing his calendar_year federal_income_tax return form_1040 taxpayer a realized that his date withdrawal of amount from ira x constituted a taxable_distribution the 60-day rollover period applicable to taxpayer a’s withdrawal of amount from his ira x expired on or about date taxpayer a died on date which was after date the date in which the day rollover period applicable to the distribution of amount from ira x expired this ruling_request was submitted by taxpayer b taxpayer a’s widow and the executrix of his estate based on the facts and representations you taxpayer b request that the internal_revenue_service waive the 60-day rollover requirement found in sec_408 of the internal_revenue_code code with respect to the distribution of amount from ira x because the failure to waive such requirement would be a hardship and against equity or good conscience sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code page sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if - the entire amount received including money and any other_property is i paid into an ira for the benefit of such individual not later than the 60th day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers code sec_408 provides in general that rules similar to the rules of sec_401 shall apply to the distribution of the entire_interest of an individual for whose benefit the trust is maintained sec_408 of the code provides that the secretary may waive the day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 r b date provides that in determining whether to grant a waiver of the 60-day rollover requirement page pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented on behalf of taxpayer a demonstrates that the failure of taxpayer a to make a rollover_contribution of amount distributed from ira x to either ira x or another ira within days of receiving amount was due to taxpayer a's gifting almost all of amount in equal installments to charities u and v only after taxpayers a and b realized that the transactions entered into between charities u and v and taxpayer a had federal_income_tax consequences did taxpayer b seek to avoid said consequences by asking the service to permit her to roll amount into another ira therefore pursuant to code sec_408 under the set of facts presented above the service hereby declines to waive the 60-day rollover requirement with respect to the withdrawal of amount as a result taxpayer b on behalf of taxpayer a deceased is not granted any period of time to make a rollover_contribution of amount distributed from ira x to another ira set up and _maintained in taxpayer a’s name no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto page this letter is directed only to the taxpayer who requested it sec_61 k of the code provides that it may not be used or cited as precedent if you wish to ire about this rulin esquire i d at cee a toll-free number ax please address any correspondence to se t ep ra t3 ntact sincerely yours frances v sloan manager employee_plans technical group enclosures deleted copy of letter_ruling notice of intention to disclose


number release date id office uilc cca-791718-08 ----- ------------ from -------------------- sent date to ------------- cc subject re ----------- case --------- i talked to ---------------- who told me that the case is closed and that she didn't need anything from me we had already accepted the offer and there was no way to rescind it the taxpayer didn't have any money and showed that in his offer ------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------i did tell ---------that the taxpayer needs to go back to the court to have the court order us to refund the money i don't know if she has any contact with the taxpayer since the case is now closed i hope that helps again feel free to call me with any restitution issues that you have ----------


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 b01 plr-151672-07 date date ------------------------------------------------- legend x ------------------------------------------- country d1 dear --------------- ---------------------- --------------------- this letter responds to the letter dated date submitted on behalf of x requesting a ruling that x be granted an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a partnership for federal tax purposes facts according to the information submitted x was formed on d1 under the laws of country x intended to elect to be treated as a partnership for federal tax purposes effective d1 however x inadvertently failed to timely file the proper election law and analysis sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with at least two members may elect to be treated as a partnership pursuant to the rules under ' c section plr-151672-07 c provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date on which the form is filed under ' c the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term aregulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards that the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under ' will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301 a conclusion based solely on the facts submitted and the representations made we conclude that the requirements of ' have been satisfied as a result x is granted an extension of time of days from the date of this letter to make an election to be treated as a partnership for federal tax purposes effective d1 x should make the election by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the form except as specifically provided herein no opinion is expressed or implied concerning the federal tax consequences of the facts described above under any other provision of the code the code provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer requesting it sec_6110 of pursuant to the power_of_attorney on file with this office a copy of the letter is plr-151672-07 being sent to your authorized representative enclosures copy of this letter copy for sec_6110 purposes sincerely s william p o’shea associate chief_counsel passthroughs and special industries


tcmemo_2012_150 united_states tax_court thomas c sandoval and bobbie j sandoval petitioners v commissioner of internal revenue respondent docket no 25881-10l filed date thomas c sandoval and bobbie j sandoval pro sese bruce m wilpon for respondent memorandum findings_of_fact and opinion cohen judge this case was commenced under sec_6330 in response to a notice_of_determination concerning collection action the issue for decision is whether petitioners may challenge in this case the failure of decisions in prior cases to allow net_operating_loss carryforwards all section references are to the internal_revenue_code 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 petitioners resided in texas when their petition was filed petitioners’ federal_income_tax liabilities for and were the subject of this court’s docket no filed date after extended pretrial proceedings the case was tried date a memorandum opinion was filed date as tcmemo_2000_189 and directed entry of decision under rule among the issues decided was whether petitioners may claim net_operating_loss carrybacks or carryforwards for the years in issue the court held that they could not because they offered only tax returns for prior years and no other evidence of such losses petitioners and respondent each filed separate computations for decision under rule and the court ultimately accepted respondent’s computation and rejected petitioners’ the decision was entered date and was not appealed thomas c sandoval jr ’s petitioner income_tax_liability for was the subject of docket no filed date after multiple pretrial proceedings the case was tried date a memorandum opinion was filed date as tcmemo_2001_310 and directed entry of decision under rule among the issues decided was whether petitioner has net operating losses to offset a portion of his taxable_income as to this issue the court held a net_operating_loss carryforwards petitioner contends but failed to establish that his income is offset by net operating losses see 25_tc_1100 holding that a taxpayer must prove the amount of the net_operating_loss carryforward deductions claimed and that his gross_income in other years did not offset those losses revd and remanded on other grounds 259_f2d_300 5th cir petitioner’s documentary_evidence consisted of his tax returns and a worksheet with figures differing from those on the returns see 71_tc_633 holding that tax returns alone do not establish a taxpayer’s entitlement to claimed deductions respondent concedes petitioner had eligible net operating losses of dollar_figure dollar_figure dollar_figure and dollar_figure in and respectively these losses were absorbed by income in carryback and carryover years prior to see sec_172 stating that net operating losses must be carried back years and the remaining portion carried forward years accordingly petitioner does not have a net_operating_loss carryfoward in id petitioner and respondent filed separate computations for decision the court accepted respondent’s computations and entered a decision on date petitioner filed a motion to vacate or revise the decision and to grant a new trial but that motion was denied petitioner appealed the decision to the court_of_appeals for the fifth circuit and the decision was affirmed by mandate issued date in sandoval v commissioner 67_fedappx_252 5th cir aff’g tcmemo_2001_310 the court_of_appeals stated in part t he tax_court found that sandoval had incurred net operating losses in past years but those losses had been absorbed prior to sandoval challenges this finding but he presents no substantive evidence in support of his argument for this reason the tax court’s judgment is not clearly erroneous petitioners’ income_tax_liability for was the subject of docket no filed date after the case was set for trial the parties stipulated a decision that was entered date on date a notice_of_intent_to_levy for unpaid income taxes for and was sent to petitioners petitioners requested and were granted a hearing pursuant to sec_6330 petitioners did not seek alternatives to collection and raised only petitioner’s underlying liability for as determined in the decision in docket no contending that the court_of_appeals for the fifth circuit had ruled that petitioner was entitled to net_operating_loss carryovers a notice_of_determination sustaining the levy was sent date the parties here stipulated the only issue in this case is whether the computations of tax in petitioners’ prior tax_court cases were accurate opinion sec_6330 establishes a taxpayer’s right to notice and the opportunity for a hearing before a levy to collect assessed federal taxes may be made sec_6330 specifies the matters to be considered at the hearing sec_6330 provides underlying liability --the person may also raise at the hearing challenges to the existence or amount of the underlying tax_liability for any_tax period if the person did not receive any statutory_notice_of_deficiency for such tax_liability or did not otherwise have an opportunity to dispute such tax_liability sec_6330 provides certain issues precluded --an issue may not be raised at the hearing if-- i the issue was raised and considered at a previous hearing under sec_6320 or in any other previous administrative or judicial proceeding and ii the person seeking to raise the issue participated meaningfully in such hearing or proceeding these sections adopt the generally recognized doctrines of res_judicata and collateral_estoppel in the collection_due_process category of tax litigation res_judicata bars repetitious suits on the same claim and collateral_estoppel precludes the relitigation of an issue previously litigated between the parties in one controversy when it recurs in other litigation between those parties see generally koprowski v commissioner t c slip op pincite date petitioners contend that their right to offset net_operating_loss carryforwards was never fairly addressed in the prior cases in which their liabilities for and were finally adjudicated the records in those cases belie their assertion however the claimed net operating losses for and were specifically rejected for lack of proof in tcmemo_2000_189 and tcmemo_2001_310 respectively after petitioners actively litigated those claims they subsequently disputed the computations for decision in each case and appealed the decision as to the court_of_appeals for the fifth circuit affirmed this court’s conclusion that there was no proof that petitioner’s net operating losses had not been absorbed and were available to offset petitioner’s liability for that conclusion necessarily means that there were no net operating losses available to be carried over to the year that was resolved by entry of a stipulated decision petitioners’ attempt to relitigate matters previously decided against them is exactly what sec_6330 and a is intended to preclude they persist in the previously rejected implication that all they must show to be allowed a net_operating_loss_carryover are copies of their tax returns claiming the losses they have not raised and have by stipulation excluded any other argument the notice_of_determination was not erroneous factually or legally and decision will be entered for respondent


department of the treasury internal_revenue_service washington d c uniform issue list legend taxpayer plan a plan_administrator amount e amount f amount g amount h county b month v date w month x date y month z ira dear taxpayer this letter is in response to a ruling_request submitted by you dated which you request a waiver of the 60-day rollover requirement contained in in page sec_402 of the internal_revenue_code code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested you are a retired employee of county b and a participant in plan a a sec_457 plan in month v you received a form 1099-r for in the mail from the administrator of plan a indicating a total_distribution of amount e with federal tax withholding of amount f and state tax withholding of amount g you had not applied for retirement benefits and you expected to begin receiving required distributions from plan a in month z when you reached years of age the administrator issued a distribution check of amount h amount e less amounts f and g in but you never received it you immediately contacted the plan_administrator when you received the form 1099-r on date w the plan_administrator issued a replacement check in amount h that you received in month x you rolled cash representing amount e into an individual_retirement_arrangement ira on date y this deposit was made more than 60-days from the date of the original distribution but less than 60-days from the date the replacement check was issued to you based on the above facts and representations you request that the internal_revenue_service waive the 60-day rollover requirement with respect to the distribution of amount e because the failure to waive such requirement would be against equity or good conscience sec_457 of the code provides that to the extent provided in sec_72 of the code sec_72 shall apply to any amount includible in gross_income under this subsection sec_457 of the code states that in general rollovers from a sec_457 eligible_deferred_compensation_plan are subject_to the rules set-forth in sec_402 of the code subparagraphs through and and sec_402 sec_402 of the code requires that an eligible_rollover_distribution from a qualified_retirement_plan must be transferred to an eligible_retirement_plan no later than the day following the day of receipt in order to avoid having to include that distribution in the distributee’s gross_income for that year sec_402 of the code provides that the secretary may waive the 60-day requirement under sec_402 of the code where the failure to waive such requirement would be against equity or good conscience revproc_2003_16 2003_4_irb_359 provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_402 of page the code the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information you presented demonstrates hardship because of the unexpected and unrequested distribution from plan a and your non-receipt of the distribution check you could not reasonably satisfy the requirement that amount e be deposited in an eligible_retirement_plan or ira within days of the distribution from plan a the failure to deposit amount e into an ira within the 60-day period was beyond your reasonable control and the failure to waive the 60-day requirement would be against equity or good conscience therefore pursuant to sec_402 of the code we waive the 60-day rollover requirement with respect to the part of amount e that constitutes an eligible_rollover_distribution pursuant to sec_402 of the code an eligible_rollover_distribution can consist only of pre-tax amounts and earnings and does not include after-tax employee contributions or distributions required by sec_401 of the code you are granted a period of days from the issuance of this ruling letter to make your rollover if all other requirements of sec_402 of the code except the 60-day requirement are met with respect to such contributions this amount will be considered rollover_contributions within the meaning of sec_402 of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations that may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent if you wish to inquire about this ruling please contact -_ yours alan dae b pi ipki manager technical group employee_plans page enclosures deleted copy of ruling letter notice of intention to disclose cc


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi br 1-plr-125317-01 date date legend a b c x y trust a b c dollar_figured e f state1 year1 plr-125317-01 d1 d2 d3 d4 this letter responds to your date request for a private_letter_ruling submitted on behalf of trust requesting rulings on the transactions described below facts according to the information submitted x is a state1 corporation incorporated in year1 x elected subchapter_s status for federal tax purpose effective d1 on d2 a created five irrevocable trusts including trust trust was created for the benefit of b a then transferred to trust a shares of stock in y a corporation for which an s election was in effect trust elected to be treated as a qualified_subchapter_s_trust qsst effective d2 on d3 y merged into x and trust received b shares of x stock in exchange for its stock in y under the terms of its trust agreement if trust holds or receives stock in an s_corporation the trustee is required to hold such stock in a separate s_corporation trust for the benefit of trust’s beneficiary b all of the net_income of the s_corporation trust is required to be distributed to that beneficiary at least annually so long as the s_corporation trust holds s_corporation stock upon termination of the s_corporation trust the remaining principal and accumulated income of the trust estate is required to be distributed to trust’s beneficiary b effective d4 trust purchased c additional shares of x from c pursuant to the stock purchase agreement the stock purchase agreement required trust to execute a promissory note the terms of the promissory note required_payment of dollar_figured payable in e monthly installments the promissory note is secured_by the stock of x the stock pledge agreement if any of the x stock purchased from c is sold by trust during the period of f years following the date of purchase trust must pay c an additional_amount equal to a defined percentage of the amount in excess of the purchase_price in conjunction with the stock purchase agreement trust executed a separate agreement the dividend agreement which provided that monthly payments under the promissory note would be made from cash distributions received from x by trust law and analysis plr-125317-01 sec_1_1361-1 provides that for purposes of sec_1361 and d a substantially separate and independent share of a_trust within the meaning of sec_663 and the regulations thereunder is treated as a separate trust for a separate share which holds s_corporation stock to qualify as a qsst the terms of the trust applicable to that separate share must meet the qsst requirements stated in sec_1_1361-1 and ii under sec_1361 if the beneficiary of a qsst makes an election under sec_1362 the qsst is treated as a_trust described in sec_1361 and the beneficiary of such trust is treated as the owner of the portion of the trust which consists of stock in an s_corporation under sec_678 sec_1361 provides that a qsst is a_trust the terms of which require that during the life of the current income_beneficiary there shall be only one income_beneficiary of the trust any corpus distributed during the life of the current income_beneficiary may be distributed only to the beneficiary the income_interest of the current income_beneficiary in the trust shall terminate on the earlier of the beneficiary’s death or the termination of the trust and upon the termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to the beneficiary in addition sec_1361 provides that the qsst must distribute or be required to distribute all of its income within the meaning of sec_643 currently to one individual who is a citizen or resident_of_the_united_states sec_1_1361-1 of the income_tax regulations provides in part that if the income_beneficiary transfers or assigns the income_interest or a portion of the income_interest to another the trust may no longer qualify as a qsst depending on the facts and circumstances because the transferee of the current income beneficiary’s income_interest and any person treated as a beneficiary under sec_1_643_c_-1 will be treated as a current income_beneficiary sec_1_1361-1 provides in part that the income_beneficiary who makes the qsst election and is treated for purposes of sec_678 as the owner of that portion of the trust that consists of s_corporation stock is treated as the shareholder for purposes of sec_1361 sec_1366 sec_1367 and sec_1368 plr-125317-01 based on the information submitted and representations made we conclude that the execution of the stock purchase agreement the stock pledge agreement and the dividend agreement will not cause trust to fail to qualify as a qsst and will not terminate the election by x to be treated as an s_corporation moreover the transfer of x stock to trust and the performance of the trustee’s obligations to trust will not terminate the election by x to be treated as an s_corporation except as specifically ruled on above we express no opinion about the federal tax consequences of any aspect of the above described transaction specifically no opinion is expressed as to whether x met or continues to meet the requirements of sec_1361 of the code or whether x’s s election terminated under sec_1362 as a result of events not specifically addressed and ruled on by this letter_ruling furthermore no opinion is expressed as to whether trust met or continues to meet the requirements of sec_1361 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 the taxpayer and to the taxpayer’s second authorized representative sincerely david r haglund senior technical reviewer office of associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number - ----------------- ------------- --------------------------------------------- ----------------------------------------------- ------------------------- - department of the treasury washington dc person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 - plr-160955-05 date february legend x state date dear ----- ---------- --------------------------------------------- ein ---------------- ------------- -------------------------- this responds to your letter dated date submitted on behalf of x x was incorporated on date under the laws of state it was intended that x requesting a ruling under sec_1362 of the internal_revenue_code elect to be an s_corporation effective on date but no form_2553 election by a small_business_corporation was timely filed for x sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation’s taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under b however if an s election is made after the first two and one-half months of a corporation’s taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed plr-160955-05 sec_1362 of the code provides that if a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 effective date along with a copy of this letter with the appropriate service_center within days from the date of this letter then such election will be treated as timely made for date except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transaction described above under any other provision of the code specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes 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 pursuant to the power_of_attorney on file with this office a copy of this letter is sincerely yours j thomas hines chief branch office of the associate chief_counsel passthroughs and special industries being sent to x’s authorized representative enclosures copy of this letter copy for sec_6110 purposes