t c summary opinion united_states tax_court graciela helguero-balcells petitioner v commissioner of internal revenue respondent docket no 7968-09s filed date graciela helguero-balcells pro_se timothy l smith for respondent summary opinion carluzzo special_trial_judge this case was heard pursuant to the provisions of sec_7463 pursuant to sec_7463 the decision to be entered 1section references are to the internal_revenue_code_of_1986 as amended in effect for the relevant period rule references are to the tax_court rules of continued is not reviewable by any other court and this opinion shall not be treated as precedent for any other case in a notice_of_deficiency dated date notice respondent determined a dollar_figure deficiency in petitioner’s federal_income_tax the issue for decision is whether petitioner is entitled to a deduction for unreimbursed employee business_expenses in excess of the amount allowed by respondent background some of the facts have been stipulated and are so found at the time the petition was filed petitioner resided in florida petitioner holds a number of advanced educational degrees including a ph d in global and international education from lynn university in boca raton florida lynn awarded in and a ph d in spanish literature from the university of leon in spain awarded in during petitioner was employed by lynn as an assistant professor and served as the chairperson of lynn’s language department at the time lynn’s reimbursement policy for employee business-related expenses including travel_expenses required preapproval from one of lynn’s vice continued practice and procedure presidents authorized to determine whether projected business-related expenses would be reimbursed for business-related travel_expenses lynn required its professors to request approval three weeks in advance of domestic trips and four weeks in advance of foreign trips for the most part the deductions here in dispute arise from expenses_incurred in connection with several trips petitioner made for various purposes including to attend conferences related to her employment as an assistant professor at lynn and to pursue one or the other of her ph d degrees some of the details of the trips are summarized in the following paragraphs madrid spain petitioner traveled to madrid on date and remained in spain until she returned to the united_states on date during her trip and in furtherance of one of her ph d degrees petitioner attended a symposium on the bologna agreement of the european union neither the duration of the symposium nor the time petitioner spent at the program have been established on date petitioner traveled to madrid and remained in spain until she returned to the united_states on date during this trip she presented two papers related to one of her doctoral dissertations at a conference for the american association of teachers of spanish and portuguese she also served as a chaperon to two lynn students who were then studying in spain the record does not disclose the duration of the conference or exactly how much time she spent in the presentation of her papers petitioner was not entitled to reimbursement from lynn for the expenses attributable to either of these trips tampa florida on date petitioner traveled to tampa florida where she remained until she returned home on date during this trip petitioner made a presentation at a conference for the teachers of english as a second language in accordance with lynn’s employee_business_expense reimbursement policy petitioner requested but was denied reimbursement from lynn for this trip chicago illinois on unknown dates and for an unknown duration during petitioner attended a conference in chicago illinois hosted by the national association of bilingual education the conference focused on the development of new techniques for teaching english as a second language petitioner did not seek approval or reimbursement from lynn for expenses_incurred during this trip rome italy on date petitioner traveled to rome italy where she remained until she returned to the united_states on date the purpose of petitioner’s trip was to attend a forum on education culture language and literature in accordance with lynn’s employee_business_expense reimbursement policy more than four weeks in advance of this trip petitioner requested approval for and reimbursement of anticipated expenses but her request was denied montreal canada on date petitioner traveled to montreal canada to attend a conference hosted by the national association of international education she returned to the united_states on date during this trip petitioner did research related to one of her dissertations she also represented lynn at a recruitment booth at the conference petitioner did not submit a request for reimbursement to lynn for expenses_incurred during this trip nashville tennessee on date petitioner traveled to nashville tennessee to attend a conference hosted by the american council of teachers of foreign languages she returned home on date in accordance with lynn’s employee_business_expense reimbursement policy petitioner requested but was denied reimbursement from lynn for this trip petitioner’s employment as an assistant professor with lynn terminated at some point during or by that time her relationship with lynn was less than cordial frustrated with the situation and believing herself to be a victim of ethnic discrimination she intentionally destroyed or discarded many documents relating to her association with lynn including receipts or other materials showing employee business_expenses she incurred while employed there petitioner’s federal_income_tax return petitioner’s timely filed federal_income_tax return includes a schedule a itemized_deductions among the deductions claimed on the schedule a are miscellaneous_itemized_deductions that after the application of sec_67 total dollar_figure for education-related expenses publications job search expenses teaching materials cell phone charges meals tax preparation fees and professional association fees in the notice respondent disallowed all of the miscellaneous_itemized_deductions claimed on the schedule a according to the notice petitioner did not establish that the business_expense was paid_or_incurred during the taxable_year and that the expense was ordinary and necessary to her business respondent now concedes that petitioner is entitled to a miscellaneous itemized_deduction that includes all or portions of some of the above-listed expenses discussion we begin our discussion with a summary of some fundamental principles of federal income_taxation applicable to the issues here in dispute as we have observed in countless opinions deductions are a matter of legislative grace and the taxpayer bears the burden_of_proof to establish entitlement to any claimed deduction rule a 503_us_79 292_us_435 a taxpayer claiming a deduction on a federal_income_tax return must demonstrate that the deduction is allowable pursuant to some statutory provision and must further substantiate that the expense to which the deduction relates has been paid_or_incurred see sec_6001 65_tc_87 aff’d per curiam 540_f2d_821 5th cir sec_1_6001-1 income_tax regs if a taxpayer establishes that an expense is deductible but is unable to substantiate the precise amount we may 2respondent now agrees that petitioner is entitled to a deduction for professional association fees in excess of the amount claimed on her return estimate the amount bearing heavily against the taxpayer whose inexactitude is of his own making 39_f2d_540 2d cir taxpayers may deduct ordinary and necessary expenses paid in connection with operating a trade_or_business sec_162 122_tc_305 generally the performance of services as an employee constitutes a trade_or_business 54_tc_374 to be ordinary the expense must be of a common or frequent occurrence in the type of business involved 308_us_488 to be necessary an expense must be appropriate and helpful to the taxpayer’s business 290_us_111 the expenditure must be directly connected with or pertaining to the taxpayer’s trade_or_business sec_1_162-1 income_tax regs ignoring exceptions not relevant here education expenditures including travel_expenses while away from home in connection with such education may be deducted as trade_or_business_expenses if the education maintains or improves the skills required by a taxpayer in his or her employment or if the education meets the 3petitioner does not claim that the provisions of sec_7491 are applicable and we proceed as though they are not we assume that petitioner did not appreciate or anticipate the consequences of her decision to discard or destroy records relating to the deductions here in dispute express requirements of the taxpayer’s employer sec_1_162-5 income_tax regs the travel_expenses petitioner incurred in pursuit of her ph d degrees satisfy at least one of these conditions sec_274 imposes strict substantiation requirements for travel meals entertainment and listed_property expenses that supersede the cohan doctrine 50_tc_823 aff’d per curiam 412_f2d_201 2d cir sec_1_274-5t temporary income_tax regs fed reg date listed_property includes cellular telephones cell phones sec_280f under sec_274 the taxpayer generally must substantiate either by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement a the amount of the expense b the time and place the expense was incurred c the business_purpose of the expense and d in the case of an entertainment or gift expense the business relationship to the taxpayer of each expense incurred for listed_property expenses in addition to the recordkeeping requirements in sec_274 the taxpayer must establish the amount of business use and the amount of total use for such property see sec_1_274-5t temporary income_tax regs fed reg date in addition to the strict substantiation requirements of sec_274 foreign_travel expenses if otherwise deductible are subject_to the allocation requirements of sec_274 see sec_1_274-4 income_tax regs sec_274 generally requires the proration of foreign_travel expenses between business and nonbusiness expenses lastly we note that sec_262 disallows deductions for personal living or family_expenses a educational expenses petitioner claimed unreimbursed employee_business_expense deductions on her federal_income_tax return for expenditures related to her trips to madrid and montreal in pursuit of one or the other of her ph d degrees petitioner did not have the right to be reimbursed for these expenses under lynn’s reimbursement policy see 788_f2d_1406 9th cir aff’g tcmemo_1984_533 sec_274 provides that no deduction otherwise allowable under sec_162 shall be allowed for that portion of the expenses attributable to travel outside the united_states which under regulations prescribed by the secretary is not allocable to the taxpayer’s trade_or_business see also sec_1_274-4 income_tax regs the allocation contemplated by sec_274 and its corresponding regulation requires that the taxpayer distinguish between time spent on business- related activities and time spent on activities not related to the taxpayer’s trade_or_business the provisions of sec_274 do not apply if a the travel outside the united_states does not exceed one week or b the portion of the time of such travel which is not attributable to the pursuit of the taxpayer’s trade_or_business is less than of the total time of such travel see sec_274 sec_1_274-4 income_tax regs both of petitioner’s trips to madrid exceeded one week furthermore petitioner has not established that she spent less than of her time on activities not attributable to her trade_or_business during either trip consequently the provisions of sec_274 are applicable to the expenses_incurred during these trips and petitioner’s failure to allocate as required by that section operates to deny her any deduction for travel_expenses incurred during those trips see sec_1 a f income_tax regs respondent’s disallowances of petitioner’s deductions for travel_expenses related to her trips to madrid are sustained see sec_274 sec_1_274-4 f income_tax regs petitioner’s trip to montreal did not exceed one week consequently she need not allocate between time spent on business versus nonbusiness activities because the expenses_incurred during that trip are otherwise deductible as trade_or_business_expenses she is entitled to a deduction for the expenses of the montreal trip up to the amount substantiated b expenses_incurred to attend conferences the unreimbursed employee_business_expense deduction here in dispute includes expenditures petitioner claims to have incurred for trips to tampa chicago rome and nashville in order to attend conferences related to her employment as an assistant professor a taxpayer may deduct travel and related expenses_incurred to attend seminars conferences or continuing education courses related to the taxpayer’s trade_or_business see sec_1_162-5 income_tax regs but only if the taxpayer is not entitled to reimbursement for the expenses from the taxpayer’s employer see orvis v commissioner f 2d pincite if an employee is entitled to reimbursement under the employer’s reimbursement policy and fails or forgets to seek it the employee is not allowed a deduction for the expenses see id 79_tc_1 56_tc_936 aff’d without published opinion 456_f2d_1335 2d cir 4in the supplemental stipulation of facts the parties stipulated that petitioner substantiated dollar_figure for travel_expenses associated with her trip to montreal petitioner’s trips to tampa chicago rome and nashville were related to her trade_or_business as an employee of lynn a point not disputed by respondent according to respondent however because the expenses were reimbursable by lynn petitioner’s failure to request reimbursement in accordance with lynn’s reimbursement policy means that she is not entitled to a deduction for any travel_expenses she might have incurred in connection with those trips lynn’s reimbursement policy required its professors to submit requests for preapproval for reimbursement for planned business-related travel three weeks before a domestic trip and four weeks before an international trip petitioner admitted at trial that she did not seek reimbursement for her trip to chicago furthermore she has not shown that she would have been denied reimbursement if she had made a request for reimbursement that complied with lynn’s reimbursement policy see 24_tc_21 spielbauer v commissioner tcmemo_1998_80 accordingly petitioner is not entitled to a deduction for expenses related to her trip to chicago petitioner appropriately requested reimbursement for her trips to tampa rome and nashville lynn denied her requests because the travel_expenses associated with these trips are otherwise deductible as trade_or_business_expenses see sec_162 sec_1_162-5 income_tax regs petitioner is entitled to an unreimbursed employee_business_expense deduction for those expenses up to the amounts substantiated c other unreimbursed employee business_expenses the unreimbursed employee_business_expense deduction here in dispute also includes expenses petitioner claims to have incurred for a cell phone publications teaching materials meals and job search respondent now concedes that petitioner is entitled to deductions for portions of some of these expenses and we turn our attention to amounts that remain in dispute publications and job search expenses petitioner failed to present any evidence substantiating her claimed deductions for publications and job search expenses consequently she is not entitled to deductions for these expenses in excess of the amounts now allowed by respondent teaching materials petitioner claims that she spent dollar_figure for teaching materials during which amount is included in the unreimbursed employee_business_expense deduction here in dispute petitioner was not entitled to reimbursement from lynn 5in the supplemental stipulation of facts the parties stipulated that petitioner substantiated dollar_figure dollar_figure and dollar_figure for travel_expenses associated with her trips to tampa rome and nashville respectively for this type of expense respondent now concedes that petitioner is entitled to a dollar_figure deduction for teaching materials according to petitioner the dollar_figure includes the cost of a new computer speakers and basic teaching supplies including pens and legal pads in support of her claim she submitted receipts from office depot and chip virtual the receipts however substantiate only a fraction of the total amount she claims to have spent considering the evidence presented we find that petitioner is entitled to a dollar_figure deduction for teaching materials in addition to the amount respondent now concedes cell phone service the unreimbursed employee_business_expense deduction here in dispute includes dollar_figure that petitioner claims to have spent for cell phone service according to petitioner she was required to maintain a cell phone to be available to her students to faculty and to administration petitioner was not reimbursed for her cell phone expense nor was she entitled to reimbursement as previously noted cell phones are included in the definition of listed_property and are subject_to the strict substantiation requirements of sec_274 sec_280f petitioner failed to present adequate_records or other_sufficient_evidence substantiating her claimed cell phone expenses accordingly petitioner is not entitled to a deduction for this expense meals a portion of the unreimbursed employee_business_expense deduction here in dispute apparently includes amounts petitioner claims to have spent for meals although the specific amount included in the deduction cannot be determined from her return or other evidence in the record in support of her claim petitioner submitted receipts that show the names and locations of restaurants amounts spent and dates as noted expenses for meals are subject_to the strict substantiation requirements of sec_274 and its corresponding regulation the mere fact that the cost of a meal has been substantiated by adequate_records however does not make the expense deductible the expense must be otherwise deductible under some provision of the internal_revenue_code according to petitioner the meals allowed for opportunities to meet with publishers a colleague and a study abroad representative none specifically identified by name petitioner’s generalized testimony on the circumstances surrounding the various meals however fails to establish that any of the related expenses were other than personal see sec_262 accordingly petitioner is not entitled to a deduction for the costs of the meals evidenced by the receipts included in the record to reflect the foregoing decision will be entered under rule


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc dom p si 7-plr-114036-99 date date legend a decedent trust b son son daughter company foundation c d a b e city f plr-114036-99 trust a_trust b_trust c g grandson granddaughter plr-114036-99 h bank i court j dear sir or madam in a letter dated you requested a ruling concerning the generation-skipping_transfer gst tax consequences of the partition and the modification and clarification of the administrative provisions of the trust a grandfathered trust this letter responds to your request the facts and representations submitted are summarized as follows on a decedent created the trust for the benefit of decedent’s lineal_descendants decedent died testate in b survived by son son and daughter the terms of the trust are summarized as follows distribution of income the trustee is to pay the income from the trust semiannually or more often in its discretion to the lineal_descendants of decedent who are living at the time of the respective distributions all per stirpes and not per capita in the event however that there is no income_beneficiary living at the time of any distribution of income the trustee is to pay the income to company to be held in trust for foundation accumulation of income the trustee in so far as retention is not forbidden by law is to accumulate and retain in the trust as a part of any income that otherwise would be payable to any person under the age of c years provided that the trustee in its discretion may pay that part of the income as may be necessary for his proper support and maintenance to any person to whom income otherwise would be payable were it not for the accumulation plr-114036-99 except that no payment of income is to be made to any person toward whom decedent owes any legal duty_of support termination the trust is to terminate on the first to occur of the following two events a the death of the survivor among decedent and all of decedent’s lineal_descendants and b d years after the death of the survivor among decedent son son and daughter distribution of principal on the final termination of the trust the then principal and corpus of the trust is to be distributed to the then living lineal_descendants of decedent all per stirpes and not per capita in the event that there are no lineal_descendants of decedent living at the time of the termination of the trust then the principal or corpus is to be divided into as many equal parts as there are children of decedent who have died testate and who by their wills have exercised powers of appointment with respect to the principal and thereupon the trustee is to pay over deliver and convey each of the parts to the persons or institutions that decedent’s children respectively have appointed by will provided that if only one of decedent’s children has exercised a power_of_appointment with respect to the principal or corpus then the entire principal or corpus or that part thereof over which the power has been exercised is to be paid delivered and conveyed to the persons or institutions that the child has appointed and provided further that if no one of decedent’s children has exercised a power_of_appointment with respect to the principal or corpus or if any of decedent’s children has exercised a power_of_appointment only as to a portion of the property over which the power is given then the principal or corpus over which no power_of_appointment has been exercised is to be paid delivered and conveyed to company in trust for foundation and thereupon if practicable the moneys or properties that may be turned over to that charity are to be added to the moneys or properties received by foundation from decedent’s husband’s father a and in the future the total of the gifts is to be referred to as b and provided finally however that no appointment is to be made to or for the benefit of decedent successor to trustee plr-114036-99 in the event of the merger consolidation or sale of substantially_all of its assets by company to or with another bank or trust company authorized to carry on a_trust business the merged consolidated or purchasing company is to become the trustee a majority of the adults then entitled to receive income from the trust or if only one then that one may at any time or times by instrument in writing delivered to the then trustee name a successor trustee and may change any designation of a successor trustee previously made prior to the time when the successor trustee has become the trustee hereunder provided that the successor trustee is to be a bank or trust company authorized to carry on a_trust business in one or more states of the united_states having a capital surplus and undivided profits of not less than e if any adult renounces his or her right to name a successor trustee a majority of the remaining adults or if only one then that one then entitled to receive income are to have the right provided in this paragraph to name a successor trustee in the event that the then trustee resigns is removed or fails or ceases to serve for any reason the successor trustee named in the manner provided in this paragraph is to succeed to all the powers and duties of the original trustee the right to name or designate a successor to the trustee is to be construed as including the right to remove the trustee or successor trustee in the event that the then trustee or successor trustee resigns is removed or fails or ceases to serve for any reason and a successor trustee has not been named as above provided the successor trustee is to be a bank or trust company with its principal office and place of business in city and authorized to carry on a_trust business which has the largest total of capital surplus and undivided profits of any such bank or trust company in city that is willing and able to serve in f the trustee divided the trust into three separate trusts trust a for the benefit of son and his descendants trust b for the benefit of daughter and her descendants and trust c for the benefit of son and his descendants collectively the trusts each trust has its own taxpayer_identification_number and files its own fiduciary income_tax return son died in g and his children grandson and granddaughter currently receive the income from trust a by representation grandson and granddaughter have reached age c therefore no income currently is being accumulated over the years the relationships among the income beneficiaries have deteriorated until h the trusts were administered by bank the income beneficiaries of the trusts requested the resignation of bank as trustee but could not come to a majority agreement regarding the naming of a successor trustee as provided in the trust because the trust does not authorize the income beneficiaries to name a different successor trustee for each trust bank petitioned the court to give each income_beneficiary the power to name a separate successor trustee for his or her plr-114036-99 respective trust bank also petitioned the court to divide trust a into sub-trusts for the benefit of grandson and granddaughter on i the court issued an order granting the trustee permission to divide trust a into two sub-trusts for the benefit of grandson and granddaughter respectively collectively the sub-trusts subject_to the income beneficiaries obtaining a ruling from the internal_revenue_service that the trust will not lose its exemption from the gst tax the court order further authorizes and directs the trustee to allow the income_beneficiary to appoint a separate successor trustee for his or her respective trust the court order also authorizes and directs each successor trust until the termination of the trust to administer each sub-trust by making current income distributions only to the income_beneficiary or his or her respective living lineal_descendants per stirpes it is represented that following the court order it became apparent that the terms for distribution prior to the trust’s termination also needed clarification all interested parties entered into consent and stipulation as to terms governing the distribution of trust assets consent and stipulation the court approved the consent and stipulation on j paragraph of the consent and stipulation provides that each of trust b and trust c collectively the separate trusts and sub-trusts created from the division of trust a the sub-trusts will terminate at the same time on the first to occur of the following events a the death of the survivor among all of decedent’s lineal_descendants and b d years after the death of the survivor between son and daughter paragraph of the consent and stipulation provides that on the final termination the assets of each of each separate trust and sub-trust are to remain separated along the family lines of decedent’s children except as otherwise specifically provided in the consent and stipulation paragraph of the consent and stipulation provides that on final termination the balance of the assets in each separate trust is to be distributed per stirpes to the then-living descendants of the child of decedent for whose benefit the separate trust was created under paragraph of the consent and stipulation on final termination the balance of the assets in each sub-trust is to be distributed to the income_beneficiary of the sub-trust in the event that the income_beneficiary is not then living the balance of the assets is to be distributed to the deceased income beneficiary’s then-living descendants per stirpes or if none the assets are to be distributed per stirpes among the then-living descendants of the deceased income beneficiary’s nearest lineal ancestor who was a descendant of decedent and who has one or more then-living descendants in the event a sub-trust has more than one income_beneficiary the plr-114036-99 balance of the assets in the sub-trust is to be distributed per stirpes to the then-living lineal_descendants of the beneficiary for whose benefit the sub-trust was created paragraph of the consent and stipulation provides that on the final termination in the event that a child of decedent has no living lineal_descendants the balance of the assets in that child’s separate trust or a sub-trust created therefrom as the case may be is to be distributed to the then-living descendants of decedent per stirpes paragraph of the consent and stipulation provides that in the event that no lineal_descendants of decedent are living on the final termination all trust assets are to be distributed pursuant to the distribution of principal section of the trust paragraph of the consent and stipulation provides that prior to the final termination of the separate trusts the trustee is to pay the income from a separate trust semiannually or more often in its discretion to the child of decedent for whom the separate trust was created paragraph of the consent and stipulation provides that after the death of a child of decedent the trustee is to pay the income from that the separate trust semiannually or more often in its discretion to the lineal_descendants of the child who are living at the time of the respective distributions per stirpes subject_to the accumulation of income section of the trust notwithstanding the foregoing if a b c one or more of the descendants of a deceased child request the trustee to divide the separate trust into sub-trusts for the descendants the trustee in its discretion considers it advisable to make such a division and the internal_revenue_service issues a favorable private_letter_ruling determining that such a division will not cause the trust to lose its grandfathered exemption from the federal generation-skipping_transfer_tax then the trustee in its discretion may divide the separate trust per stirpes among the then-living descendants of the deceased child each share created for a descendant is to be held and administered as a sub-trust for the benefit of that descendant paragraph of the consent and stipulation provides that in the event that prior to final termination any separate trust ceases to have a current income_beneficiary eg a separate trust’s sole beneficiary dies without then-living lineal_descendants the balance of that trust’s assets is to be divided per stirpes among the then-living plr-114036-99 lineal_descendants of decedent and the share of such descendant is to be transferred to the separate trust or sub-trust benefitting the descendant paragraph of the consent and stipulation provides that the trustee is to pay the income from a sub-trust semiannually or more often in its discretion to the descendant of decedent for whom the sub-trust was created paragraph provides that after the death of the descendant the trustee is to pay the income from a sub-trust semiannually or more often in its discretion to the lineal_descendants of the deceased descendant who are living at the time of the respective distributions per stirpes subject_to the accumulation of income section of the trust notwithstanding the foregoing if d e f one or more of the descendants of a deceased descendant request the trustee to divide the sub-trust into further sub-trusts for the descendants the trustee in its discretion considers it advisable to make such a division and the internal_revenue_service issues a favorable private_letter_ruling determining that such a division will not cause the trust to lose its grandfathered exemption from the federal generation-skipping_transfer_tax then the trustee in its discretion may divide the sub-trust per stirpes among the then-living descendants of the deceased descendant each share created for a descendant is to be held and administered as a sub-trust for the benefit of such then-living descendant paragraph of the consent and stipulation provides that in the event that prior to final termination a sub-trust ceases to have a current income_beneficiary eg a sub-trust’s sole income_beneficiary dies without then-living lineal_descendants the balance of the assets of the sub-trust is to be divided per stirpes among the then-living descendants of the deceased income beneficiary’s nearest lineal ancestor who was a descendant of decedent and who has one or more then-living descendants or if none per stirpes among the then-living lineal_descendants of decedent each share created for a then-living descendant is to be transferred to the separate trust or sub-trust benefitting the descendant paragraph of the consent and stipulation provides that each separate trust and each sub-trust need not have the same trustee it is represented that the trust was irrevocable on date and there have been no additions actual or constructive to it since that date plr-114036-99 you have requested the following rulings the proposed partition of trust a will into sub-trusts for the benefit of grandson and granddaughter respectively will not cause the resulting sub-trusts to be subject_to the gst tax the modification and clarification of the administrative provisions of the trust will not cause the trust to be subject_to the gst tax sec_2601 of the internal_revenue_code imposes a tax on every generation-skipping_transfer made by the transferor to a skip-person sec_26_2601-1 of the generation-skipping_transfer_tax regulations provides that the tax does not apply to any generation-skipping_transfer under a_trust as defined in sec_2652 that was irrevocable on date the rule_of the preceding sentence does not apply to a pro_rata portion of any generation-skipping_transfer under an irrevocable_trust if additions are made to the trust after date sec_26_2601-1 provides that except as provided in sec_26_2601-1 or c any trust in existence on date is considered an irrevocable_trust sec_2611 defines the term generation-skipping_transfer to mean a taxable_distribution a taxable_termination and a direct_skip sec_26_2611-1 provides that a generation-skipping_transfer is an event that is either a direct_skip a taxable_distribution or a taxable_termination the determination as to whether an event is a generation-skipping_transfer is made by reference to the most recent transfer subject_to the estate or gift_tax sec_2612 defines the term direct_skip to mean a transfer subject_to a tax imposed by chapter or of an interest in property to a skip_person sec_2613 defines the term skip_person to mean -- a natural_person assigned to a generation that is two or more generations below the generation assignment of the transferor or a_trust -- a if all interests in such trust are held by skip persons or b if -- plr-114036-99 i there is no person holding an interest in the trust and ii at no time after the transfer may a distribution including distributions on termination be made from the trust to a non-skip_person the trust is a generation-skipping_trust because it provides for distributions to more than one generation of beneficiaries below decedent’s generation because however the trust was irrevocable on date and there have been no additions actual or constructive to it since that date it has been exempt from the gst tax pursuant to sec_26_2601-1 you have requested a ruling that the partition of trust a into sub-trusts for the benefit of grandson and granddaughter and the proposed modification of the provisions relating to the appointment of successor trustees of the trust will not cause the trusts to be subject_to the gst tax an amendment to a_trust that was irrevocable on date and thus is exempt from the gst tax will cause the trust to lose its exemption if the amendment modifies or otherwise changes the quality value or timing of any of the powers beneficial interests rights or expectancies originally provided under the terms of the trust a trust's exemption from the gst tax is not affected however by amendments relating to the administration of a_trust based on the information submitted and the representations made the interests of the income beneficiaries under the division of trust a will remain the same and the timing of the termination of the sub-trusts will remain the same consequently the value of the income or corpus interest of each income_beneficiary will not change materially as a result of the division of trust a into two separately administered sub-trusts therefore the division of trust a into two sub-trusts will not change the quality value or timing of any powers beneficial interests rights or expectancies originally provided for under the terms of the trust accordingly we conclude that the division of trust a into two sub-trusts will not cause distributions from the sub-trusts to be subject_to gst tax imposed by chapter provided that no additions are made to the sub-trusts after date in addition we conclude that the modification and clarification of the separate trust and the sub-trusts relates to the administration of those trusts and will not modify or otherwise change the quality value or timing of any of the powers beneficial interests rights or expectancies originally provided under the terms of the trust accordingly neither distributions from the separate trusts or the sub-trusts to skip persons nor terminations of interests of non-skip persons in the separate trusts or sub-trusts will be subject_to the gst tax except as ruled above we express or imply no opinion concerning the federal tax consequences of this transaction under the cited provisions or any other provision of the code plr-114036-99 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative sincerely yours joseph h makurath joseph h makurath senior technician reviewer branch office of the assistant chief_counsel passthroughs and special industries


department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b04 plr-126243-11 date december internal_revenue_service number release date index number ------------------------- ---------- -------------------- ----------------------------------------------- re --------------------------------------------------- ---------------------- legend taxpayer decedent trust residuary_trust bank date date date date state statute attorney court individual individual individual individual individual a b ------------------------------------------------------- ------------------------------------------------------ ------------------------------------------------------------ ------------------------------------------------------------------------------------- ---------------------------------------- -------------------------------------- ------------------------- --------------------------- ---------------- ------------------- --------------------------------------- --------------------- -------------------------------------------------------------- ----------------------- --------------------------------- ---------------------------------------- --------------------------------- ------------------------------------ -------- -------------- plr-126243-11 dear ------------------- this letter responds to your authorized representative’s letter dated date requesting estate and generation-skipping_transfer gst tax rulings with respect to the proposed reformation and modification of trust the facts and representations submitted are summarized as follows decedent was married to taxpayer decedent executed trust on date pursuant to the terms of trust upon the death of decedent trust becomes irrevocable upon the death of decedent after payment of claims and debts the balance of the estate is to be held in trust in accordance with the provisions of article iv article iv of trust provides that the largest amount needed to permit decedent’s estate to use decedent’s unified_credit shall be held in residuary_trust and the balance is to be held in the marital trust article iv paragraph a provides as follows until the death of taxpayer the trustee shall pay the income of residuary_trust to or for taxpayer such right of withdrawal shall be exercised by taxpayer notifying the trustee in writing to that effect specifying the cash or assets at current market_value which taxpayer wishes to withdraw and promptly thereafter the trustee shall make such distribution to taxpayer such right of withdrawal shall be noncumulative and shall lapse with respect to each calendar_year to the extent that it is not exercised during said calendar_year article iv paragraph a provides that upon the death of taxpayer the trustee shall pay to individual a sum of dollar_figurea and the balance of residuary_trust shall be divided equally into separate shares for individual individual and individual article vii provides in relevant part that decedent and taxpayer are appointed as co-trustees upon the death incapacity resignation or discharge of decedent or taxpayer then bank shall be the successor co-trustee in the event taxpayer dies prior to the termination of trust individual shall be successor co-trustee decedent died on date taxpayer was the beneficiary of certain outright bequests from decedent the remainder of decedent’s estate was transferred into plr-126243-11 residuary_trust pursuant to the provisions of trust the marital trust was not funded decedent’s executor taxpayer did not timely file a united_states estate and generation-skipping_transfer_tax return form_706 to report the transfer and thereby did not affirmatively allocate decedent’s gst_exemption to the transfer to residuary_trust attorney an attorney who was retained by decedent for the purpose of preparing trust states that he made a scrivener’s error in article iv paragraph a attorney represents that decedent intended that residuary_trust would be utilized to provide income for taxpayer and provide principal to taxpayer based upon an ascertainable_standard for the remainder of taxpayer’s lifetime and that residuary_trust would not be included in taxpayer’s gross_estate in order to correct the scrivener’s error in trust the trustee of residuary_trust filed a petition with court seeking authorization to reform and modify trust on date court issued an order reforming trust effective retroactively as of date article iv paragraph a is reformed to provide as follows until the death of taxpayer the trustee shall pay the income of residuary_trust to or for taxpayer and to the extent not sufficient so much of the principal at such times and in such manner as the trustee may deem advisable in the trustee’s discretion for the support in her accustomed manner of living education maintenance in health and reasonable comfort in addition taxpayer shall have the right to withdraw from principal property not exceeding dollar_figure in the aggregate for the year and if taxpayer is living on the last day of the year to withdraw property having a value on that day equal to an amount if any by which five percent of the then market_value of the principal exceeds the value of the property previously withdrawn by taxpayer for such year such right of withdrawal shall be exercised by taxpayer notifying the trustee in writing to that effect specifying the cash or assets at current market_value which taxpayer wishes to withdraw and promptly thereafter the trustee shall make such distribution to taxpayer such right of withdrawal shall be noncumulative and shall lapse with respect to each calendar_year to the extent that it is not exercised during said calendar_year court’s date order also modified the trustee succession provisions of trust article vii is modified to provide that upon the death incapacity resignation or discharge of decedent or taxpayer then the remaining co-trustee is to continue to serve singly upon the death incapacity resignation or discharge of both decedent and taxpayer individual shall be successor trustee upon the death incapacity resignation or discharge of decedent taxpayer and individual bank or its corporate successor is to be the final successor trustee plr-126243-11 it is represented that at the time of decedent’s death decedent had dollar_figure million of available gst_exemption and that the value of the assets transferred to residuary_trust was dollar_figureb an amount less than dollar_figure million taxpayer as executor of decedent’s estate filed decedent’s form_706 on date to report the automatic allocation of decedent’s gst_exemption to residuary_trust you have requested the following rulings residuary_trust as reformed and modified does not provide taxpayer with a general_power_of_appointment over the assets of residuary_trust and upon the death of taxpayer the assets of residuary_trust will not be includible in taxpayer's gross_estate under sec_2041 of the internal_revenue_code the reformation and modification of residuary_trust does not cause the assets of residuary_trust to be includible in taxpayer's estate under sec_2036 the reformation and modification of residuary_trust does not constitute the exercise or release of a general_power_of_appointment by taxpayer resulting in a gift under sec_2514 as a result of the reformation and modification of residuary_trust decedent will be considered the transferor as defined in sec_26_2652-1 of the generation-skipping_transfer_tax regulations of the assets in residuary_trust for gst tax purposes as a result of the reformation and modification of residuary_trust residuary_trust has an inclusion_ratio as defined in sec_2642 of zero pursuant to the gst_exemption automatic allocation rule_of sec_2632 law and analysis ruling sec_1 - sec_2001 provides that a tax is imposed on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2033 provides that the value of the gross_estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death sec_2036 provides generally that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise plr-126243-11 under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death the possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom sec_2041 provides that to the extent of any property with respect to which the decedent has at the time of his death a general_power_of_appointment created after date or with respect to which the decedent has at any time exercised or released such a power_of_appointment by a disposition which is of such nature that if it were a transfer of property owned by the decedent such property would be includible in the decedent's gross_estate under sec_2035 to inclusive sec_2041 provides in relevant part that for purposes of sec_2041 the term general_power_of_appointment means a power which is exercisable in favor of the decedent his estate his creditors or the creditors of his estate except that a power to consume invade or appropriate property for the benefit of the decedent which is limited by an ascertainable_standard relating to the health education support or maintenance of the decedent shall not be deemed a general_power_of_appointment sec_2041 provides that the lapse of a power_of_appointment created after date during the life of the individual possessing the power shall be considered a release of such power the preceding sentence shall apply with respect to the lapse of powers during any calendar_year only to the extent that the property which could have been appointed by exercise of such lapsed powers exceeded in value at the time of such lapse the greater of the following amounts a dollar_figure or b percent of the aggregate value at the time of such lapse of the assets out of which or the proceeds of which the exercise of the lapsed powers could have been satisfied sec_2501 provides generally that a tax is imposed for each calendar_year on the transfer of property by gift by any individual resident or nonresident sec_2511 provides that the gift_tax shall apply whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_2514 provides that the exercise or release of a general_power_of_appointment created after date shall be deemed a transfer of property by the individual possessing such power sec_2514 provides that for purposes of sec_2514 the term general_power_of_appointment means a power which is exercisable in favor of the individual possessing the power his estate his creditors or the creditors of his estate plr-126243-11 sec_2514 provides that the lapse of a power_of_appointment created after date during the life of the individual possessing the power shall be considered a release of such power the rule_of the preceding sentence shall apply with respect to the lapse of powers during any calendar_year only to the extent that the property which could have been appointed by exercise of such lapsed powers exceeds in value the greater of the following amounts dollar_figure or percent of the aggregate value of the assets out of which or the proceeds of which the exercise of the lapsed powers could be satisfied in 387_us_456 the court considered whether a state trial court's characterization of property rights conclusively binds a federal court or agency in a federal estate_tax controversy the court concluded that the decision of a state trial_court as to an underlying issue of state law should not be controlling when applied to a federal statute rather the highest court of the state is the best authority on the underlying substantive rule_of state law to be applied in the federal matter if there is no decision by that court then the federal authority must apply what it finds to be state law after giving proper regard to the state trial court's determination and to relevant rulings of other courts of the state in this respect the federal_agency may be said in effect to be sitting as a state court state statute provides that upon application of a settlor or any interested person the court may reform the terms of a_trust even if unambiguous to conform the terms to the settlor's intent if it is proved by clear_and_convincing evidence that both the accomplishment of the settlor's intent and the terms of the trust were affected by a mistake of fact or law whether in expression or inducement in determining the settlor's original intent the court may consider evidence relevant to the settlor's intent even though the evidence contradicts the apparent plain meaning of the trust instrument in this case an examination of the relevant trust instruments affidavits and representations of the parties indicate that the original terms of paragraph a of article iv resulting from scrivener's error were contrary to the intent of decedent the purpose of the reformation is to correct the scrivener’s error not to alter or modify the trust instrument accordingly based on the facts presented and the representations made we conclude that the reformation and modification of residuary_trust does not provide taxpayer with a general_power_of_appointment over the assets of residuary_trust the reformation and modification of residuary_trust does not constitute a gift under sec_2514 and upon the death of taxpayer the assets of residuary_trust will not be includible in taxpayer's gross_estate under sec_2041 or sec_2036 ruling sec_4 and sec_2601 imposes a tax on every generation-skipping_transfer which is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip plr-126243-11 sec_2602 provides that the amount of the gst tax is determined by multiplying the taxable_amount by the applicable_rate sec_2641 provides that the term applicable_rate means with respect to any gst the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer under sec_2642 the inclusion_ratio with respect to any property transferred in a generation-skipping_transfer is generally defined as the excess of over the applicable_fraction the applicable_fraction as defined in sec_2642 is a fraction the numerator of which is the amount of gst_exemption under sec_2631 allocated to the trust or to property transferred in a direct_skip and the denominator of which is the value of the property transferred to the trust or involved in the direct_skip sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption amount which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual's estate determined with regard to extensions regardless of whether such a return is required to be filed sec_2632 provides that in general any portion of an individual's gst_exemption that has not been allocated within the time prescribed by sec_2632 is deemed to be allocated as follows a first to property that is the subject of a direct_skip occurring at such individual's death and b second to trusts with respect to which such individual is the transferor and from which a taxable_distribution or a taxable_termination might occur at or after such individual's death sec_26_2632-1 provides that a decedent's unused gst_exemption is automatically allocated on the due_date for filing form_706 to the extent not otherwise allocated by the decedent's executor on or before that date the automatic allocation occurs whether or not a return is actually required to be filed unused exemption is allocated pro_rata subject_to the rules of sec_26_2642-2 on the basis of the value of the property as finally determined for estate_tax purposes the chapter value first to direct skips treated as occurring at the transferor's death the balance if any of unused gst_exemption is allocated pro_rata subject_to the rules of sec_26_2642-2 on the basis of the chapter value of the nonexempt_portion of the trust property to trusts with respect to which a taxable_termination may occur or from which a taxable_distribution may be made plr-126243-11 under sec_2652 for purposes of chapter the term transferor means the decedent in the case of any property subject_to tax imposed by chapter and the donor in the case of any property subject_to tax imposed by chapter sec_26_2652-1 provides that the individual with respect to whom property was most recently subject_to federal estate or gift_tax is the transferor of that property for purposes of chapter based on the facts submitted and the representations made we conclude that as a result of the reformation and modification of residuary_trust decedent will be considered the transferor of residuary_trust for gst purposes based upon the representation that decedent had dollar_figure million gst_exemption available on the date of his death then pursuant to the automatic allocation rules of sec_26_2632-1 decedent’s gst_exemption was automatically allocated to residuary_trust to the extent the date of death value as finally determined of the assets transferred to residuary_trust does not exceed dollar_figure million residuary_trust will have a zero inclusion_ratio in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives 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 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 the rulings in this letter pertaining to the federal estate and or generation-skipping_transfer_tax apply only to the extent that the relevant sections of the internal_revenue_code are in effect during the period at issue plr-126243-11 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely ______________________________ lorraine e gardner senior counsel branch office of the associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter cc


internal_revenue_service p o box cincinnati oh number release date date date department of the treasury employer_identification_number contact person - id number contact telephone number legend uil x program name y country a z country b q major city u university names v number of fellowships dear you asked for advance approval of your educational grant procedures under internal_revenue_code sec_4945 this approval is required because you are a private_foundation that is exempt from federal_income_tax our determination we approved your procedures for awarding educational grants based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding educational grants meet the requirements of code sec_4945 as a result expenditures you make under these procedures won't be taxable description of your request your letter indicates that you will operate an educational grant program called x your purpose is to support talented individuals with great potential and high aspirations in the arts sciences and social entrepreneurship with a special emphasis on furthering international cultural collaboration and ensuring social benefits the purpose of x is to encourage social scientific and artistic innovation and to promote cultural and personal development you will implement your program for undergraduate and graduate students from z in a two-week study abroad program you designed your program to empower the next generation of leaders with the skills and networks they will need to thrive in an increasingly globalized society you will provide participants of your program with opportunities to gain new perspectives directly from leaders at prominent organizations through a series of lectures given by experts in their respective fields your mission is elaborated by your program by focusing on intercultural collaboration between y and z encouraging development of an individual’s personal vision and acknowledging a basic belief in the power of the individual to make positive societal changes through strong leadership you will award fellowships for the purpose of educating individuals and improving their entrepreneurial and leadership capabilities and skills you will determine the number of fellowships to be provided each year you expect to award no more than v fellowships per program running two or three programs each year your fellowship grants will not be renewable you will provide grants in the form of accommodation payment of transportation_expenses and meals and subsistence during the students’ stay in q you do not make any payment to individual students other than de_minimis out of pocket expense reimbursements you will publicize your program through your website newsletters social media and emails through the network of partner universities and organizations you will require the following eligibility requirements to qualify for your program must be at least years of age undergraduate or graduate student at u universities proficient in english applicant must show the evidence of english proficiency level by providing one of the following test scores - ielts score or greater - toefl score or greater - ibt score or greater - toec score or greater expected to participate in all program activities be aware of the demanding schedule be interested in international affairs development be interested in the y-z relationship be able to act responsibly throughout the duration of the program be inquisitive and proactively engaged being able to actively take part in q a sessions give a final presentation on experiences in front of invited guests and program staff be open to experiences outside of his or her academic field be open to the program that is inter-disciplinary by nature academic excellence an applicant must provide academic transcript you will select fellowship recipients based on the following criteria applicant must meet all eligibility requirements academic transcript resume cv past living study abroad experiences work internship experience extra-curricular activities other skills certifications includes awards long essay words catalog number 58222y letter - describing the applicant’s motivation for applying to your program and future career goals - description of how your program will help the applicant's personal development response to additional short questions applicants to choose questions from those that are provided in the application form you will choose a selection committee each year that includes experts and stakeholders from universities non-profit and for-profit organizations with a strong experience interest and involvement with intercultural collaboration and development of leadership skills between y and z you will require selection committee candidates to agree to your conflict of interest policy prior to joining the selection committee you will keep permanent records of the application and supporting material records of meetings and actions of the selection committee you will account for all funds and disburse the funds you will investigate if any of the funds are diverted from their intended purposes you will take all reasonable and appropriate actions to recover any funds if they are diverted you will check the ofac list of specially designated nationals and blocked persons you will comply with all united_states statutes executive orders and regulations that restrict or prohibit us persons from engaging in transactions and dealings with designated countries entities or individuals or otherwise engaging in activities in violation of economic sanctions administered by ofac you will acquire from ofac appropriate license and registrations when necessary you represent you will complete the following arrange to receive and review grantee reports annually and upon completion of the purpose for which the grant was awarded investigate diversion of funds from their intended purposes take all reasonable and appropriate steps to recover the diverted funds ensure other grant funds held by a grantee are used for their intended purposes and withhold further payments to grantees until you obtain grantees’ assurances that future diversions will not occur and that grantees will take extraordinary precautions to prevent future diversions from occurring you represent that you will maintain the following all records relating to individual grants including information obtained to evaluate grantees identify whether a grantee is a disqualified_person establish the amount and purposes of each grant and establish that you undertook the supervision and investigation of grants described above basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that meets all of the following requirements of code sec_4945 is not a taxable_expenditure e e the foundation awards the grant on an objective and nondiscriminatory basis the irs approves in advance the procedure for awarding the grant letter catalog number 58222y e the grant is - - - ascholarship or fellowship subject_to sec_117 and is to be used for study at an educational_organization described in sec_170 or a prize or award subject_to the provisions of sec_74 if the recipient of the prize or award is selected from the general_public or to achieve a specific objective produce a report or similar product or improve or enhance a literary artistic musical scientific teaching or other similar skill or talent of the recipient to receive approval of its educational grant procedures sec_53_4945-4 requires that a private_foundation show e e e the grant procedure includes an objective and nondiscriminatory selection process the grant procedure results in the recipients performing the activities the grants were intended to finance the foundation plans to obtain reports to determine whether the recipients have performed the activities that the grants were intended to finance other conditions that apply to this determination e e e e e e this determination covers only the grant program described above this approval will apply to succeeding grant programs only if their standards and procedures don't differ significantly from those described in your original request this determination applies only to you it may not be cited as precedent you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you must report any significant changes in your program to the cincinnati office of exempt_organizations at internal_revenue_service exempt_organizations determinations p o box cincinnati oh you cannot make grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives all funds distributed to individuals must be made on a charitable basis and must further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 you should keep adequate_records and case histories so that you can substantiate your grant distributions with the irs if necessary we've sent a copy of this letter to your representative as indicated in your power_of_attorney letter catalog number 58222y please keep a copy of this letter in your records if you have any questions please contact the person listed at the top of this letter sincerely stephen a martin director exempt_organizations rulings and agreements letter catalog number 58222y


stephen g woodsum and anne r lovett petitioners v commissioner of internal revenue respondent docket no filed date in ps received gain of dollar_figure million upon the termi- nation of a swap transaction p-h was personally involved in terminating the transaction and received from the payor a form 1099-misc miscellaneous income that reported the payment ps retained a firm with a lawyer and a certified_public_accountant to prepare their income_tax return ps gave to the firm all the 160-plus information returns they had received from third-party payors including the form misc reporting the dollar_figure million the 115-page return that the firm prepared reported dollar_figure million of adjusted_gross_income but omitted the dollar_figure million from the swap trans- action ps signed and filed the return the irs determined a deficiency of tax which ps conceded and paid and an accuracy-related_penalty under sec_6662 which ps dispute on grounds of reasonable_cause under sec_6664 held ps’ reliance on their return preparer did not constitute reasonable_cause for their omission of the dollar_figure mil- lion income item david h hopfenberg for petitioners patrick f gallagher for respondent verdate 0ct date jkt po frm fmt sfmt v files woodsum sheila united_states tax_court reports opinion gustafson judge this case is before the court pursuant to sec_6213 for redetermination of an accuracy- related penalty of dollar_figure that the internal_revenue_service irs determined against petitioners stephen g woodsum and anne r lovett for tax_year pursuant to sec_6662 the issue for decision is whether petitioners had reasonable_cause under sec_6664 for omitting dollar_figure million of income from their joint federal_income_tax return background the parties submitted this case fully stipulated pursuant to rule we incorporate by this reference the stipulation of facts filed date and the associated exhibits petitioners’ backgrounds petitioners stephen g woodsum and anne r lovett are married at the time they filed their petition they resided in new hampshire ms lovett received a bachelor of arts degree from yale university in and the stipulated record shows nothing more about her background mr woodsum received a bach- elor of arts degree from yale university in and a mas- ter’s in management from the kellogg school of management at northwestern university in mr woodsum is the founding managing director of summit partners a private equity_investment firm founded in petitioners are not tax experts but mr woodsum is finan- cially sophisticated and he has a basic understanding of the taxation of interest_income dividend income and income from the sale of stocks and bonds the swap transaction in mr woodsum signed an agreement that undertook a financial transaction that the parties describe as a ten year total return limited_partnership linked swap and that we refer to herein as the swap in entering into this trans- except as otherwise noted all section references are to the internal_revenue_code_of_1986 u s c as amended and in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure verdate 0ct date jkt po frm fmt sfmt v files woodsum sheila woodsum v commissioner action mr woodsum was advised by attorney david h hopfenberg who as we show below supervised the prepara- tion of the tax_return for the year at issue mr woodsum originally entered into the swap with the london branch of bankers trust company but bankers trust was succeeded in its interest in the swap by deutsche bank the parties’ stipulation explains the swap as follows the swap required deutsche bank to pay petitioners the value of the reference fund less the calculation amount on the termi- nation date the reference fund was spring point partners l p a delaware limited_partnership according to the terms of the swap the specified interest in the ref- erence fund was a limited_partnership_interest in the reference fund that would result from a capital_contribution to such reference fund of usd big_number on date if one were to be made the swap required petitioners to make quarterly payments to deutsche bank based upon the product of the notional amount as adjusted times the usd-libor-bba rate plu sec_1 the libor pay- ments the agreement further required the petitioners to provide collat- eral to deutsche bank after the end of every calendar_quarter petitioners received account statements with respect to the swap showing the total appreciation or depreciation in the value of their interest they began receiving these quarterly reports at least as early as date when petitioners’ interest had appreciated to dollar_figure and until date to dollar_figure on their returns for the tax years preceding petitioners reported income and deductions relating to the collateral and libor payments in connection with the swap interest had appreciated when petitioners’ the swap’s ten-year term was apparently scheduled to end in early but mr woodsum believed that the reference fund was not performing as well as it should he therefore informed deutsche bank in writing on date of his intention to terminate the swap effective date the net payout to petitioners in connection with the termi- nation of the swap was dollar_figure all of which the par- ties agree was taxable_income to petitioners mr woodsum discussed the termination with mr hopfenberg before it took place and mr hopfenberg advised mr woodsum when the verdate 0ct date jkt po frm fmt sfmt v files woodsum sheila united_states tax_court reports swap had been terminated after the end of deutsche bank issued to petitioners a form 1099-misc miscellaneous income reporting other income of dollar_figure from the termination of the swap and a form 1099-int interest_income reporting dollar_figure of interest_income petitioners’ income in in petitioners received adjusted_gross_income totaling almost dollar_figure million including the dollar_figure million from termi- nating the swap petitioners’ payors reported that income to petitioners and to the irs on more than information returns eg schedules k-1 and forms including the deutsche bank forms 1099-misc and 1099-int the dollar_figure million reported on deutsche bank’s form misc was not the largest amount reported on the information returns that petitioners received for however if the dollar_figure million from deutsche bank had been included on peti- tioners’ return it would have been the third largest long-term_capital_gain amount reported as a line item on schedule d capital_gains_and_losses preparation of petitioners’ return for petitioners filed state_income_tax returns and a joint federal_income_tax return to prepare their federal_income_tax return peti- tioners hired venture tax services inc vts a niche firm specializing in tax work for private equity and hedge funds as well as such funds’ general partners vts employed mr hopfenberg whom petitioners had retained for investment and tax_advice since as of mr hopfenberg had more than years of tax compliance and consulting experi- ence including employment in the tax departments of major accounting firms for vts’s preparation of petitioners’ return mr hopfenberg acted as reviewer the vts employee charged with actually preparing the return was a massachu- setts certified_public_accountant c p a who similarly had more than years of tax compliance experience including employment with major accounting firms the deutsche bank form 1099-misc shows an amount of dollar_figure but the parties have stipulated that the net payout and the taxable_income was dollar_figure the discrepancy is not explained in the record for purposes of discussion in this opinion hereafter we round the number to dollar_figure million verdate 0ct date jkt po frm fmt sfmt v files woodsum sheila woodsum v commissioner petitioners provided to vts all 160-plus information returns including the deutsche bank form 1099-misc reporting dollar_figure million from the termination of the swap and form 1099-int reporting dollar_figure of interest_income vts duly scanned the form 1099-misc into its records for use in preparing the return the form_1040 u s individual_income_tax_return that vts prepared for petitioners wa sec_115 pages long the return did report the dollar_figure of interest_income that petitioners received from deutsche bank however for reasons the record does not show the return that vts prepared did not include the dollar_figure million that deutsche bank paid and reported if the dollar_figure million had been included on the return that amount would have appeared on schedule d as a dis- tinct line item in part ii long-term_capital_gains and losses-assets held more than one year but again it was not reported on the return that vts prepared review and signing of petitioners’ return petitioners had obtained an extension of the due_date for filing their return as a result the return was due_date at a m on that date petitioners met with mr hopfenberg to discuss several subjects including their return at that meeting mr hopfenberg turned the pages of the return and discussed various items of income and deduction with mr woodsum petitioners characterize this as their perform ing more than a cursory review of the return however the parties have stipulated that peti- tioners do not recall- which specific items of income and deduction were dis- cussed at the meeting or the amount of time they spent reviewing the return or the amount of time they spent reviewing the schedule d and the attachments and statements thereto during the discussion of the return mr woodsum did not compare or match the items of income reported on the form_1040 and its schedules with the information returns that the third-party payors had provided consequently petitioner sec_3 in their briefs petitioners seem to imply that the omission was the result of mistake or over- sight by the c p a who prepared the return however the stipulation does not state the reason for the omission and because petitioners chose to submit the case under rule they did not call the c p a as a witness thus we do not know why the dollar_figure million was omitted verdate 0ct date jkt po frm fmt sfmt v files woodsum sheila united_states tax_court reports failed to make sure that all their income items were reported on the return that vts had prepared petitioners signed the return on that same day-date we assume that when they did so petitioners were unaware of the omission of the dollar_figure million the irs received deutsche bank’s form 1099-misc reporting the dollar_figure million compared it with petitioners’ return and determined a deficiency in tax of dollar_figure and an accuracy-related_penalty under sec_6662 of dollar_figure petitioners agreed to the assessment of tax in the amount determined by the irs as a result their tax due which they reported as dollar_figure was actually dollar_figure petitioners paid the tax_deficiency plus interest however petitioners filed their petition in this court dis- puting the accuracy-related_penalty the parties jointly sub- mitted the case fully stipulated under rule i the relevant law discussion a accuracy-related_penalty under sec_6662 sec_6662 and b imposes an accuracy-related_penalty of percent of the portion of the underpayment_of_tax attributable to any substantial_understatement_of_income_tax by definition an understatement of income_tax for an individual is substantial if it exceeds the greater of dollar_figure or percent of the tax required to be shown on the return sec_6662 under sec_7491 the commissioner bears the burden of production and must produce sufficient evidence that the imposition of the penalty is appropriate in petitioners argue in their brief that neither the tax advisor nor the petitioners noticed that the tax preparer failed to include the deutsche bank 1099-misc which showed income of dollar_figure on the return but no evidence in the record explicitly asserts that petitioners were unaware of the omission the closest assertion is the parties’ stipulation that petitioners relied upon venture tax services to prepare their tax_return and include all of the items relating to the over information returns provided to venture tax services on said return for purposes of this opinion we interpret this stipulation in the manner most favorable to peti- tioners-an approach admittedly at odds with the fact that they have the burden to prove rea- sonable cause and good_faith as we show below under sec_6662 the accuracy-related_penalty is also imposed where an under- payment is attributable to the taxpayer’s negligence or disregard of rules or regulations and respondent argues that petitioners’ omission of the income reflects negligence however as we show below respondent has demonstrated that petitioners substantially understated their in- come tax for thus we need not consider whether under sec_6662 it is also true that petitioners were negligent or disregarded rules or regulations verdate 0ct date jkt po frm fmt sfmt v files woodsum sheila woodsum v commissioner a given case 116_tc_438 once the commissioner meets this burden the tax- payer must come forward with persuasive evidence that the commissioner’s determination incorrect rule a higbee v commissioner supra pincite is b reasonable_cause under sec_6664 a taxpayer who is otherwise liable for the accuracy-related_penalty may avoid the liability if he can show under sec_6664 that he had reasonable_cause for a portion of the underpayment and that he acted in good_faith with respect to that portion the pertinent regulation provides the determination of whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all perti- nent facts and circumstances generally the most important factor is the extent of the taxpayer’s effort to assess the taxpayer’s proper tax_liability circumstances that may indicate reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances including the experience knowl- edge and education of the taxpayer an isolated computational or transcriptional error generally is not inconsistent with reasonable_cause and good_faith reliance on professional advice con- stitutes reasonable_cause and good_faith if under all the circumstances such reliance was reasonable and the taxpayer acted in good_faith sec_1_6664-4 income_tax regs whether the taxpayer acted with reasonable_cause and in good_faith thus depends on the pertinent facts and cir- cumstances including his efforts to assess his proper tax_liability his knowledge and experience and the extent to which he relied on the advice of a tax professional ii application of the law to petitioners a substantial_understatement the undisputed tax_deficiency attributable to petitioners’ omitted income is dollar_figure that amount is obviously in excess of dollar_figure that amount is also in excess of percent there are other defenses to the penalty that petitioners do not invoke here ie sec_6662 provides that an understatement may be reduced first where the taxpayers had substantial_authority for their treatment of any item giving rise to the understatement or sec- ond where the relevant facts affecting the item’s treatment are adequately disclosed and the taxpayers had a reasonable basis for their treatment of that item neither of those defenses is applicable here where petitioners admit that the income was taxable and simply allege an inad- vertent omission from the return verdate 0ct date jkt po frm fmt sfmt v files woodsum sheila united_states tax_court reports of the tax required to be shown on the return sec_6662 because the correct_tax liability which petitioners have conceded is dollar_figure petitioners’ understatement_of_tax was therefore substantial for purposes of sec_6662 consequently respondent has carried the burden of production that sec_7491 imposes the accuracy-related_penalty is mandatory the statute provides that it shall be added sec_6662 petitioners bear the burden of proving the defense of reasonable_cause and good_faith see higbee v commissioner supra pincite b reasonable_cause and good_faith reliance on professional advice for purposes of sec_6664 a taxpayer may be able to establish reasonable_cause and good_faith and thereby avoid the accuracy-related_penalty of sec_6662 by showing his reliance on professional advice sec_1_6664-4 as we stated in 115_tc_43 affd 299_f3d_221 3d cir for a taxpayer to rely reasonably upon advice so as possibly to negate a sec_6662 accuracy-related_penalty determined by the commissioner the taxpayer must prove by a preponderance_of_the_evidence that the tax- payer meets each requirement of the following three-prong test the adviser was a competent professional who had sufficient expertise to jus- tify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment seeking to meet these standards petitioners assert that vts and its attorney and c p a were competent and experi- enced professionals that petitioners provided vts with the necessary and accurate information ie the form misc reporting the dollar_figure million and that petitioners relied on vts to prepare the return and report the dollar_figure mil- lion-all of which the parties have stipulated however for purposes of proving reliance on professional advice these assertions miss the mark the irs’s regulations define advice as follows advice defined -advice is any communication including the opinion of a professional tax advisor setting forth the analysis or conclusion of a person other than the taxpayer provided to or for the benefit of the tax- verdate 0ct date jkt po frm fmt sfmt v files woodsum sheila woodsum v commissioner payer and on which the taxpayer relies directly or indirectly with respect to the imposition of the sec_6662 accuracy-related_penalty advice does not have to be in any particular form sec_1_6664-4 a premise only implicit in petitioners’ position is that their return preparer’s unexplained omission ie the omission of what mr woodsum knew to be includable as a substantial income item on their return constituted advice to exclude that item however the fact that the regulation defines advice broadly enough to include any communication whether or not in any particular form provides no grounds for reliance by petitioners in 469_us_241 where the taxpayer knew or should have known of the applicable filing deadline he lacked reasonable_cause for his attorney’s untimely filing of his return similarly since petitioners knew their form_1099 income should have been included they lack reasonable_cause for their preparer’s failure to include the income in order to constitute advice within the definition of the regulation the communication must reflect the adviser’s analysis or conclusion the taxpayer must show in the words of neonatology associates t c pincite emphasis added that he relied in good_faith on the adviser’s judg- ment petitioners present no testimony of the preparer nor any other evidence to show that the income was omitted from the return because of any analysis or conclusion or judgment by vts that the income was not taxable when the supreme court discussed the reasonable_cause defense in boyle it characterized the relevant professional role as giving substantive advice u s pincite and contrasted that professional function with things that require no spe- cial training id pincite no special training was required for mr woodsum to know that the law required him to include on that return an item_of_income that he had received and that deutsche bank had reported on form_1099 the including of that income on their tax_return is what petitioners say they intended when they handed over their information returns to vts petitioners make no suggestion that vts gave them sub- stantive advice to omit the dollar_figure million or that petitioners relied on any such substantive advice on the contrary peti- tioners stipulated that they relied upon venture tax serv- verdate 0ct date jkt po frm fmt sfmt v files woodsum sheila united_states tax_court reports ices to prepare their tax_return and include all of the items relating to the over information returns provided to venture tax services on said return emphasis added there is no evidence that when vts instead omitted the dollar_figure million it thereby was exercising analysis or judgment or was making a professional recommendation to petitioners rather it was failing in that specific instance to carry out petitioners’ general instruction in signing the return thus erroneously prepared petitioners were not deliberately fol- lowing substantive professional advice they were instead unwittingly they contend perpetuating a clerical mistake the defense of reliance on professional advice has no applica- tion here return preparer’s error more pertinent to this case is the principle quoted above that a n isolated computational or transcriptional error generally is not inconsistent with reasonable_cause and good_faith sec_1_6664-4 however petitioners fail to place their understatement within the category of com- putational or transcriptional error s because they provided no evidence to explain the nature of or the reason for vts’s omission of the dollar_figure million it may be and petitioners seem to expect the court to assume that the omission was the result of the c p a ’s oversight of one form_1099 amid such forms but no actual evidence supports that character- ization the omission is unexplained and since petitioners have the burden to prove reasonable_cause and good_faith this evidentiary gap works against their defense even if we assume that the dollar_figure million omission was an innocent oversight by the return preparer the reasonable_cause defense is unavailing here taxpayers sometimes do avoid the accuracy-related_penalty by showing that their understatement was the result of a return preparer’s error see eg thrane v commissioner tcmemo_2006_269 92_tcm_501 however as we stated in metra chem in thrane the erroneous income figure for windsor dollar_figure appeared only on a worksheet to the sched- ule e attached to petitioner’s form_1040 that figure required a further offsetting adjustment before being reported on the face of the schedule e as dollar_figure thus only a rather detailed tracing through the schedule e worksheet would have alerted petitioner to the error at issue t c m cch pincite verdate 0ct date jkt po frm fmt sfmt v files woodsum sheila woodsum v commissioner corp v commissioner 88_tc_654 citations omitted as a general_rule the duty_of filing accurate returns cannot be avoided by placing responsibility on a tax_return_preparer as the petitioners have noted this court has declined to sustain the addition_to_tax under sec_6653 in cases in which the taxpayer relied in good_faith on the advice of a tax expert however a close examination of these cases reveals that they raised questions as to the tax treatment of complex transactions and that the position taken on the returns with respect to such items had a reasonable basis this case presents no such difficult issues ronald laroche simply failed to report over dollar_figure in cash dividends which he received from corpora- tions controlled by him richard laroche similarly failed to report over dollar_figure in such dividends the unreported dividends constituted over percent of ronald and beverly laroche’s gross_income for and over percent of richard and shirley laroche’s gross_income for such year we believe that such a substantial underreporting of income would not have gone unnoticed if the petitioners had made even a cursory review of their returns under such circumstances the petitioners may not shift responsibility for the accuracy of their returns to their accountant however complex the swap may have been in its creation and its operation its termination resulted in deutsche bank’s issuing to petitioners a standard and uncomplicated form 1099-misc that petitioners admit should have resulted in a distinct and identifiable entry on schedule d of their return like metra chem this case presents no such difficult issues id even if all data is furnished to the preparer the taxpayer still has a duty to read the return and make sure all income items are included 70_tc_465 affd 651_f2d_1233 6th cir we do not hold that a taxpayer must duplicate the work of his return preparer or that any omission of an income item in in this case however the facts are quite different in that the dollar_figure million figure on the form 1099-misc should simply have appeared as a distinct and visible entry on schedule d we thus observed in metra chem that a cursory review would have disclosed the under- reporting in that case petitioners attempt to construe this passage in the metra chem opinion as announcing a rule that the reasonable_cause defense requires only a more than cursory re- view metra chem does not state this low standard as we explain below what is required for reasonable_cause is that the taxpayer conduct a review the purpose of which is to make sure all income items are included 70_tc_465 affd 651_f2d_1233 6th cir see also 21_tc_678 the duty_of filing accurate returns cannot be avoided by placing responsibility upon an agent the fact that petitioner told the per- son who made up the partnership return about the sale of leasehold interests totaling dollar_figure cannot excuse his failure to read the return and ascertain the inclusion of this item verdate 0ct date jkt po frm fmt sfmt v files woodsum sheila united_states tax_court reports a return prepared by a third party is necessarily fatal to a finding of reasonable_cause and good_faith on the taxpayer’s part rather for purposes of this opinion we assume that the reasonable_cause defense may be available to a taxpayer who conducts a review of his third-party prepared return with the intent of ensuring that all income items are included and who exerts effort that is reasonable under the circumstances but who nonetheless fails to discover an omis- sion of an income item mr woodsum however makes no showing of a review reasonable under the circumstances he personally ordered the termination that gave rise to the income he received a form 1099-misc reporting that income that amount should have shown up on schedule d as a distinct item but it was omitted the parties stipulated that petitioners’ review of the defective return was of an unknown duration and that it consisted of the preparer’s turning the pages of the return and discussing various items petitioners understated their income by dollar_figure million-an amount that was substantial not only in absolute terms but also in relative terms ie it equaled about percent of petitioners’ adjusted_gross_income a review undertaken to make sure all income items are included in the words of magill -or even a review undertaken only to make sure that the major income items had been included-should absent a reasonable explanation to the contrary have revealed an omission so straightforward and substantial in evaluating reasonable_cause the most important factor is the extent of the taxpayer’s effort to assess the taxpayer’s proper tax_liability c f_r sec_1_6664-4 but peti- tioners do not recall how much time they spent reviewing the return how much time they spent reviewing schedule d or which income items they reviewed and they recall that they did not compare or match the items of income reported on the return with the information returns they had received they have thus failed to prove the most important factor - ie the taxpayer’s effort petitioners did not fulfill their duty to review the return that vts had prepared mr woodsum terminated the swap ahead of its set termi- nation date because his watchful eye noted that it was not performing satisfactorily as an investment that is when his own receiving of income was in question mr woodsum was verdate 0ct date jkt po frm fmt sfmt v files woodsum sheila woodsum v commissioner evidently alert and careful but when he was signing his tax_return and reporting his tax_liability his routine was so casual that a half-million-dollar understatement of that liability could slip between the cracks we cannot hold that this understatement was attributable to reasonable_cause and good_faith to reflect the foregoing decision will be entered for respondent f by way of analogy c f_r sec_1_6664-4 suggests that an error on a corporate re- turn arising from data compiled by the various divisions of a multidivisional corporation may result from reasonable_cause provided the corporation employed internal controls and proce- dures reasonable under the circumstances that were designed to identify such factual errors petitioners here lacked controls and procedures reasonable under the circumstances verdate 0ct date jkt po frm fmt sfmt v files woodsum sheila