t c memo united_states tax_court estate of melvin w ballantyne deceased jean s ballantyne independent executrix and jean s ballantyne petitioners v commissioner of internal revenue respondent russell e ballantyne and clarice ballantyne petitioners v commissioner of internal revenue respondent docket nos filed date kevin p kennedy for petitioners in docket no jon j jensen alexander f reichert and gary a pearson for petitioners in docket no john c schmittdiel and roberta l shumway for respondent memorandum findings_of_fact and opinion ruwe judge respondent determined deficiencies in income_tax and a penalty in docket no as follows accuracy-related_penalty taxpayer year deficiency sec_6662 a jean s ballantyne dollar_figure -- estate of melvin w big_number -- ballantyne jean s ballantyne surviving_spouse estate of melvin w big_number -- ballantyne jean s ballantyne executrix estate of melvin w big_number dollar_figure ballantyne jean s ballantyne executrix respondent determined deficiencies in income_tax and penalties in docket no for russell e ballantyne and clarice ballantyne as follows accuracy-related_penalty year deficiency sec_6662 a dollar_figure -- big_number dollar_figure big_number dollar_figure in order to protect the government from a potential whipsaw respondent has taken inconsistent positions in these dockets ’ after concessions the issues for decision are the proper allocation between the estate of melvin w ballantyne and petitioner russell e ballantyne of gain from the sale of grain in whether petitioner russell e ballantyne had additional gain in in the amount of dollar_figure which should ‘these cases were consolidated for purposes of trial briefing and opinion have been included in gross_income and whether petitioners russell e ballantyne and clarice ballantyne are liable for the accuracy-related_penalties pursuant to sec_6662 for and with respect to certain adjustments contained in the notice_of_deficiency findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts the stipulations of settled issues and the attached exhibits are incorporated herein by this reference petitioner jean s ballantyne jean who is the surviving_spouse of melvin w ballantyne melvin and the executrix for the estate of melvin w ballantyne the estate resided in minot north dakota at the time the petition in docket no was filed at that time the estate was under the jurisdiction of unless otherwise indicated section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure -russell and clarice failed to comply with rule e which requires that in an answering or reply brief the party shall set forth any objections together with the reasons therefor to any proposed findings of any other party showing the numbers of the statements to which the objections are directed under the circumstances we have assumed that russell and clarice do not object to respondent’s or the estate’s proposed findings_of_fact except to the extent that their statements on brief are clearly inconsistent therewith in which event we have resolved the inconsistencies on the basis of our understanding of the record as a whole 101_tc_412 n burien nissan inc v commissioner tcmemo_2001_116 n - probate_court no in bexar county texas the business office for the estate is located in san antonio texas petitioners russell e ballantyne russell and clarice ballantyne clarice resided in westhope north dakota at the time they filed their petition melvin ballantyne and russell ballantyne were brothers in they entered into an oral agreement whereby they formed a general_partnership known as ballantyne brothers partnership bbp melvin and russell were the only partners of bbp during its existence and a written partnership_agreement was never executed the partnership was involved in two separate and distinct business operations russell primarily conducted a farming activity in north dakota russell’s sons orlyn and gary assisted russell in conducting the farming activity melvin primarily conducted an oil_and_gas exploration and production activity in canada and various u s locations melvin employed two of his sons stephen and kab to assist in conducting the oil_and_gas activity in general melvin and russell allowed each other to withdraw from the partnership the profits attributable russell and clarice also had a daughter carolyn ballantyne backelsberg -melvin and jean had another son todd ballantyne who was involved in the oil_and_gas activity up until the mid-1970s they also had two daughters jane ballantyne hegler and sue ballantyne - to the respective activity each brother primarily conducted melvin and russell generally paid the expenses related to the respective activity each conducted many of the assets used by bbp in its activities were not held in the partnership’s name rather these assets were either jointly owned by melvin and russell or individually owned by one of them in late or early melvin was diagnosed with pancreatic cancer and he subsequently died on date the partnership automatically dissolved upon melvin’s death in the months leading up to melvin’s death some of the assets of bbp were equally distributed between melvin or his children and russell at the time of melvin’s death jean stephen kab and todd believed that melvin and russell were equal partners in bbp for at least the taxable years through bbp filed forms u s partnership return of income jules feldmann mr feldmann a certified_public_accountant prepared bbp’s federal_income_tax returns for those years melvin stephen and kab provided mr feldmann with financial information about the oil_and_gas activity russell orlyn and gary provided mr feldmann with financial information about the farming activity the forms for through reported that melvin and ‘mr feldmann also regularly prepared personal income_tax returns for melvin and russell for several years mr feldmann prepared melvin’s return for and russell and clarice’s returns for the years in issue -- - russell each were general partners in bbp and that they each held a 50-percent interest in the profit sharing loss sharing and ownership of capital of the partnership additionally melvin and russell each reported 50-percent of bbp’s income gain loss deduction and credit on their individual federal_income_tax returns for the taxable_year bbp’s gross_income from the farming activity totaled dollar_figure this amount was attributable to grain sales by bbp to bottineau farmers elevator bottineau the grain sold in was grown in prior years and was an asset of bbp the following schedule lists the payments made by bottineau in for the grain date payee amount ballantyne bros dollar_figure ballantyne bros dollar_figure russell ballantyne dollar_figure russell ballantyne dollar_figure ballantyne bros dollar_figure ballantyne bros dollar_figure jean ballantyne dollar_figure total dollar_figure on the schedule f profit or loss from farming attached to its form_1065 bbp reported depreciation and other farm expenses of dollar_figure resulting in a net farm profit of dollar_figure on its form_1065 bbp reported additional income of dollar_figure from oil revenues resulting in total income of dollar_figure after accounting for miscellaneous deductions bbp reported ordinary_income of dollar_figure from trade_or_business activities bbp also reported net oil royalty income from canada of dollar_figure and foreign taxes paid in the amount of dollar_figure the schedules k-1 partner’s share of income credits deductions etc issued to the estate and russell allocated to each as distributive_share items one-half of partnership ordinary_income gross farming income oil revenue income and oil royalty income from canada ’ on a schedule e supplemental income and loss attached to his form_1040 u s individual_income_tax_return russell reported ordinary_income of dollar_figure from bbp on a schedule e attached to its form_1041 u s income_tax return for estates and trusts the estate reported ordinary_income of dollar_figure from bbp ’ during its existence bbp did not maintain a general ledger a balance_sheet a sales journal or a purchases journal bbp ‘the form_1065 u s partnership return of income also reported investment_income of dollar_figure and charitable_contributions of dollar_figure these items were allocated evenly between the estate and russell sattached to the form_1040 u s individual_income_tax_return was a supplemental statement titled schedule e - supplemental information which showed ordinary_income from bbp of dollar_figure less depletion cost percentage totaling dollar_figure resulting in the amount of dollar_figure listed on schedule e attached to the form_1041 u s income_tax return for estates and trusts was a supplemental statement titled flow- thru detail report-form listing income from bbp of dollar_figure a depletion deduction of dollar_figure was listed on the supplemental statement this amount was deducted from the income listed on the form_1041 and resulted in the total of dollar_figure listed on the schedule e --- - did not always maintain a cash disbursements journal or a cash receipts journal mr feldmann was never provided with a complete listing of bbp’s assets and liabilities and he never prepared a balance_sheet for the partnership ’ neither the partnership nor mr feldmann prepared yearend trial balances partnership capital accounts for bbp were never maintained the and forms reported that melvin and russell had balances of o in their respective capital accounts at both the beginning and the end of those taxable years ’ on the and forms bbp reported on the schedules l balance_sheet that the total assets and total liabilities of the partnership at the beginning and the end of those taxable years were none a calculation of each partner’s capital contributions to the partnership cannot be made given the state of bbp’s records additionally a calculation of the distributions made to each tn the mid-1980s mr feldmann recommended that bbp maintain a balance_sheet showing the partnership’s assets and liabilities for the taxable years through the areas designated on the forms and schedules k-1 partner’s share of income credits deductions etc attached to the forms pertaining to information concerning melvin’s and russell’s respective capital accounts were left blank for the taxable years and the forms were also left blank however the schedules k-1 listed the amounts in melvin’s and russell’s respective capital accounts at the beginning and end of those taxable years as o russell signed bbp’s partnership tax returns for the years and 2for the taxable years through the schedules l balance_sheet on bbp’s forms were left blank - partner cannot be made the partnership tax returns for the years through reflect that the oil_and_gas activity was more profitable overall than the farming activity during that period after melvin’s death a dispute arose concerning bbp on date jean individually and in her capacity as independent executrix of the estate filed suit against russell and other parties the original and amended petitions sought among other things an accounting of the assets and liabilities of bbp in order to establish the value of bbp’s assets and liabilities and the respective interests of melvin and russell as of the date of melvin’s death the dispute was also outlined in the estate’s form_1041 on a form_4684 casualties and thefts attached to the form_1041 the estate reported a casualty theft_loss of dollar_figure in an attachment to the form_4684 the estate alleged that russell had embezzled cash from bbp bank accounts and transferred it to his own business and personal accounts resulting in a casualty theft_loss of dollar_figure the estate further alleged a portion of the amount of cash embezzled from the partnership in has been ascertained from the partnership tax_return the estate received it sec_50 portion of the income distributions for oil properties in the u s and canada the estate has not received it sec_50 of the distribution from the farm operations because russell ballantyne the general_partner has taken the money -- - the loss calculation for is calculated as follows net farm revenues dollar_figure add depreciation big_number less distribution big_number interest_income big_number interest_expense big_number total cash embezzled dollar_figure share s560 on both its original and amended form sec_1041 for the taxable_year the estate claimed that as a result of melvin’s death it acquired a 50-percent interest in bbp in a document attached to both the original and amended form sec_1041 the estate made the following statement the estate acquired a interest in ballantyne brothers on date as a result of the death of melvin ballantyne the interest in the partnership was valued at dollar_figure on the on date the assets of ballantyne brothers consisted of cash marketable_securities notes receivable oil_and_gas_properties office furniture and fixtures farm inventory seed buildings and equipment having a fair_market_value of dollar_figure taxpayer has been unable to obtain the basis amounts for these assets currently there is legal action against the partnership to obtain such information on date a settlement agreement was executed which resolved the dispute concerning bbp in negotiating the settlement representatives of the estate relied on the advice of a certified_public_accountant as to the value of bbp’s assets the goal of the estate’s representatives was to obtain percent in value of the partnership’s assets under the settlement agreement russell agreed to transfer dollar_figure million to the estate to be deposited in a_trust account to be held in trust for the benefit of the estate pending the execution of certain releases attached to the settlement agreement all interests in oil properties held on date by bbp and or melvin or russell individually jointly or as tenants in common were divided equally between the estate and russell various bank and stock accounts held in the name of bbp and melvin and russell were to be closed within days with the assets’ being distributed equally between the estate and russell ’ all debts owed by verde oil company to bbp on or after date were assigned to the estate the estate agreed to drop its embezzlement loss claim against russell and the parties stipulated that all grain and any proceeds therefrom held on or after date in the name of bbp were to be the sole property of russell finally the parties stipulated that subject_to the terms and conditions stated in the settlement agreement and stipulations of ownership all assets and liabilities of bbp held on or after date would be the sole property of russell after melvin’s death mr feldmann received information regarding the oil_and_gas activity primarily from carolyn 3title and possession of three vehicles were transferred from bbp to jean ballantyne -- ballantyne backelsberg carolyn russell and clarice’s daughter for the taxable_year carolyn provided mr feldmann with information regarding intangible drilling costs idcs paid_by russell in the taxable_year a portion of the idcs deducted by russell in had actually been reimbursed to him by ballantyne oil_and_gas inc during that year mr feldmann was not informed that russell had been reimbursed for approximately dollar_figure of those expenses the amount russell claimed as a schedule e deduction for production taxes in the taxable_year was based on the information provided to mr feldmann on date respondent issued notices of deficiency to the estate for its taxable years and in addition to other adjustments respondent disallowed the estate’s claimed theft_loss of dollar_figure in on the grounds that the estate had not established there was a theft_loss and the theft_loss was the estate’s to claim in its petition the estate alleged that respondent erred in increasing its income by dollar_figure because that amount was the income of russell and was not taxable to the estate on date respondent issued a notice_of_deficiency to russell and clarice for their taxable years and in addition to other adjustments respondent increased russell and clarice’s gross_income for by dollar_figure respondent identified this adjustment under the heading ordinary - - income whipsaw and stated that we have adjusted your gross_income to include amounts received for grain income for dollar_figure in no further explanation was provided respondent also determined that russell and clarice were liable for the accuracy-related_penalties pursuant to sec_6662 a for and with respect to certain adjustments contained in the notice_of_deficiency these adjustments included the increase in gross_income for grain income issues subsequently conceded by russell and clarice relating to oil_and_gas activities and an issue subsequently conceded by respondent relating to certain royalty income in their petition russell and clarice alleged that respondent erroneously included within the taxpayers’ gross_income grain income in the amount of dollar_figure for the tax_year in his answer respondent denied this allegation but did not elaborate on the reason for the inclusion of the additional_amount in gross_income opinion the primary issue in this case involves the proper allocation between the estate and russell of the grain sales income for respondent has protected the government from a potential whipsaw by taking inconsistent positions in his notices of deficiency respondent’s primary argument is that the estate and russell are each liable for income_tax on their respective -- 50-percent distributive shares of income from bbp in from the sale of grain alternatively respondent contends that the grain sold in was owned solely by russell and thus he had additional gross_income of dollar_figure in respondent also argues that to the extent the distribution of grain sales proceeds and other money to russell exceeded his adjusted_basis in bbp russell had gain on the distribution pursuant to sec_731 finally respondent contends that russell and clarice are liable for the accuracy-related_penalties for and with respect to the grain sales income item and certain erroneous deduction items russell contends that he is responsible for only percent of the income_tax on the grain sales income for because he and melvin agreed to share equally all the income and expenses of bbp russell relies on the fact that tax returns filed by bbp for the taxable years through show that all the income and expenses were shared equally by the partners for income_tax purposes russell also contends that he possessed sufficient basis to withdraw the cash from the grain sales without incurring any additional tax_liability finally russell and clarice claim that they are not liable for the accuracy-related_penalties for -- - and because they relied in good_faith on the advice of their accountant the estate argues that all grain sales income is attributable to russell because he was entitled to receive all the farm income as his distributive_share of bbp income ’ in its reply brief the estate for the first time joins respondent’s alternative argument that the grain was the sole property of on brief russell and clarice argue that sec_7491 applies and that respondent has the burden_of_proof with respect to the issues for decision in certain circumstances if the taxpayer introduces credible_evidence with respect to any factual issue relevant to ascertaining the proper tax_liability sec_7491 places the burden_of_proof on respondent sec_7491 rule a sec_7491 operates to place the burden of production on respondent in any court_proceeding with respect to the liability of the taxpayer for penalties and additions to tax sec_7491 is effective with respect to court proceedings arising in connection with examinations commencing after date internal_revenue_service restructuring and reform act of publaw_105_206 sec c 112_stat_727 russell and clarice have introduced no evidence to establish whether the examination in this case commenced after date and consequently they have failed to show that sec_7491 applies eddie cordes inc v commissioner tcmemo_2001_265 we note that the evidence that is in the record establishes that the examination of the estate as well as an examination of bbp began before date ‘we note that the estate in arguing that melvin’s and russell’s distributive shares were the profits from the respective activity each conducted has not discussed the fact that this finding would mean that the estate should have reported percent of the income from the oil_and_gas activity instead of only percent of the income it appears that the estate is arguing that it should be liable for only percent of the income from the oil_and_gas activity and no portion of the income from the farming activity this conflicts with the estate’s primary argument that its distributive_share was the profits from the oil_and_gas activity -- - russell alternatively the estate argues that the grain sales income is attributable to russell because he received it under a claim of right and without any restriction on his right to dispose_of the income i ownership of grain at time of sale initially we must decide whether the grain sold in was owned by russell or bbp if the grain sold in was owned solely by russell and was not partnership property then he will be liable for any_tax attributable to the entire amount of grain sales proceeds in the grain that was sold in was grown in prior years and was an asset of bbp the parties do not dispute that the grain was part of the farming activity which was an operation of bbp bbp’s form_1065 reported the grain sales gain as income to the partnership and the estate and russell each were allocated one-half of the gain the estate and russell each reported one- half of the grain sales income on their respective tax returns in the settlement agreement signed date it was stipulated that all grain proceeds held on or after date in the name of bbp were the sole property of russell handwritten notes of stephen ballantyne dated date and entitled plaintiff’s settlement proposal state that the plaintiffs need to word agreement so that estate will not pay - taxes on the k-1 and word that cash is estate’s share of ptnrsp sic the evidence in the record reflects that at the time the grain sales were made in the grain was owned by bbp it was not until the settlement agreement in that the grain was labeled as the sole property of russell it is well settled that taxpayers lack the privilege of retroactively allocating between themselves tax obligations owed to the united_states 753_f2d_1420 9th cir 70_tc_1024 curtis v commissioner tcmemo_1995_344 jacobellis v commissioner tcmemo_1988_315 see also 78_tc_100 bonner v commissioner tcmemo_1979_435 an agreement to which respondent is not a party cannot force him to collect taxes from someone other than the person upon whom taxes are imposed citing 13_tc_397 affd per curiam 200_f2d_560 2d cir on the basis of the evidence in the record we hold that the grain sold in was bbp’s property and that the income from the grain sales was therefore bbp’s we now turn to the question of the proper allocation between the estate and russell of the partnership income from the grain sales in il allocation of gain from sale of grain a partner must take into account his distributive_share of each item of partnership income gain loss deduction and - - credit when determining his income_tax sec_702 103_tc_170 hach partner is taxed on his distributive_share of partnership income regardless of whether the amount is actually distributed to him 410_us_441 few principles of partnership_taxation are more firmly established than that no matter the reason for nondistribution each partner must pay taxes on his distributive_share vecchio v commissioner supra pincite sec_1_702-1 income_tax regs a partner’s distributive_share of income or loss is generally determined by the partnership_agreement sec_704 the partnership_agreement may be written or oral stern v commissioner tcmemo_1984_ sec_1 761-l1 c income_tax regs in the case of an oral partnership_agreement all the facts and circumstances surrounding the formation and operation of the partnership are relevant in determining the sharing ratios of the partners barron v commissioner tcmemo_1992_598 hogan v commissioner tcmemo_1990_295 n reed v commissioner tcmemo_1978_58 ryza v commissioner tcmemo_1977_64 if the partnership_agreement does not provide as to a partner’s distributive_share or if the partnership_agreement provides for an allocation that does not have substantial economic_effect then a partner’s distributive_share is determined by the partner’s interest in the partnership sec_704 determinations of substantial economic_effect as well as determinations of a partner’s interest in the partnership are dependent upon an analysis of the partners’ capital accounts interhotel co ltd v commissioner tcmemo_2001_151 a partnership_agreement and substantial economic_effect the estate argues that the oral partnership_agreement was that russell’s distributive_share was the income or loss from the farming activity and melvin’s distributive_share was the income or loss from the oil_and_gas activity russell and respondent argue that the oral partnership_agreement was that russell’s and melvin’s distributive shares were equal but that each brother was entitled to draw from the profits of the activity he operated as explained below either a 50-percent allocation as advocated by russell and respondent or an allocation based on the profits of the respective activities as advocated by the estate lacks substantial economic_effect and therefore the distributive shares must be determined in accordance with the partners’ interest in bbp thus regardless of whether the partnership_agreement contained an allocation of items and what that allocation was the partners’ distributive shares are to be determined in accordance with the partners’ interests in the partnership if the partnership_agreement provides for the allocation of income gain loss deduction or credit or item thereof among - - partners then the allocation will be recognized provided it has substantial economic_effect sec_1_704-1 i income_tax regs substantial economic_effect requires that the allocation have economic_effect and such effect is substantial sec_1_704-1 and income_tax regs an allocation has economic_effect if and only if throughout the full term of the partnership the partnership_agreement provides the partners’ capital accounts be kept in accordance with the regulations liquidating distributions be made in accordance with positive capital_account balances and a partner must be reguired to restore a deficit capital_account balance following the liquidation of the partnership or of his interest in the partnership vecchio v commissioner supra pincite sec_1_704-1 b income_tax regs an allocation does not have economic_effect if it fails to satisfy any of the three parts of the test vecchio v commissioner supra pincite in the instant case capital accounts were never maintained thus the proffered allocations fail the economic_effect test the regulations under sec_704 also provide an alternate_test for economic_effect contingent on satisfaction of requirements and above sec_1_704-1 d the substantial_economic_effect_test is applicable to all partnership_allocations not just special allocations hogan v commissioner tcmemo_1990_295 --- - income_tax regs bbp does not meet requirements and because bbp did not maintain any capital accounts thus the proffered allocations fail the alternate_test for economic_effect allocations which fail the economic_effect test may be deemed to have economic_effect if they pass the economic_effect_equivalence_test in vecchio v commissioner supra pincite we stated allocations made to a partner that do not otherwise satisfy the economic_effect test nevertheless are deemed to have economic_effect provided that as of the end of each partnership taxable_year a liquidation of the partnership at the end of such year or at the end of any future year would produce the same economic results to the partners as would occur if all the requirements of the economic_effect test had been satisfied regardless of the economic_performance of the partnership sec_1 b income_tax regs see also 87_tc_1046 ndollar_figure none of the parties have argued or demonstrated that either of the proffered allocations satisfies this economic_effect_equivalence_test as mentioned earlier where the partnership_agreement does not provide as to a partner’s distributive_share or where the partnership_agreement provides for an allocation that does not have substantial economic_effect a partner’s distributive_share is determined by the partner’s interest in the partnership sec_704 as stated above the allocations proposed by the parties lack economic_effect thus the gain from the grain -- - sales must be allocated in accordance with the partners’ interests in bbp we note that the estate relies on the following language in 72_tc_1147 affd 649_f2d_1168 5th cir to support its position and define the term distributive_share however the power of the partners to fix their overall distributive shares is subject_to another and more sweeping limitation namely that the purported allocations of income and losses nominally made in the partnership_agreement must be bona_fide in the sense that they are genuinely in accord with the actual division of profits and losses inter sese which the partners have in fact agreed upon among themselves thus if provisions of the partnership_agreement itself effectively spell out how the profits are required to be divided and how the losses are required to be borne the distributive shares of the partners will be determined in accordance with such provisions rather than by an artificial label in the agreement which characterizes as distributive an entirely different allocation_of_profits_and_losses and which has meaning in terms of the partnership_agreement only in respect of the partners’ liability to the internal_revenue_service this does not mean that the partners are precluded from fixing their distributive shares in any manner they choose what it does mean is that in construing the partnership_agreement the formula which they select for actually dividing profits and apportioning losses among themselves will be determinative of their distributive shares rather than a different formula arbitrarily included in the agreement which is to be applicable only for the purpose of filing income_tax returns and which is to have no legal consequences in respect of their rights against one another in short where one provision of the agreement which purports to characterize as distributive a certain division of profits and losses is contradicted by another provision which legally fixes the rights of the partners inter sese it is the latter provision rather than the former which establishes the distributive shares of the partners - - within the meaning of the statute the overriding principal is sometimes referred to as the doctrine_of substance over form or is alternatively described as the economic_substance test see eg 1a willis partnership_taxation sec_25 pp boynton v commissioner supra pincite9 our decision in boynton v commissioner supra dealt with sec_704 as in effect in as in effect at that time and as interpreted in boynton sec_704 generally provided that if the partnership_agreement did not provide as to the partners’ distributive shares or the principal purpose of any provision of the partnership_agreement with respect to the partners’ distributive_share of the item was avoidance or evasion of tax described in that subtitle then the partners’ distributive shares were determined with reference to each partner’s agreed-upon share of the economic profits and losses not the basis upon which the partners might agree to report income or claim losses on their individual returns boynton v commissioner supra pincite n sec_704 was subsequently amended for taxable years beginning after date and now provides that if the partnership_agreement does not provide as to the partners’ distributive shares or the allocations to the partners under the partnership_agreement lack substantial economic_effect then the partners’ distributive shares will be determined in accordance with the partners’ interests in the partnership sec_704 tax reform act of publaw_94_455 90_stat_1548 thus in the -- - instant case the statute currently requires that the partners’ distributive shares be determined in accordance with the partners’ interests in the partnership we note that the regulations promulgated under current sec_704 provide that among the factors to be considered is the partners’ interests in the economic profits and losses of the partnership sec_1 b ii 6b income_tax regs ’ b partners’ interests in the partnership all partners’ interests in the partnership are presumed to be equal sec_1_704-1 income_tax regs this presumption may be rebutted upon the establishment of facts and circumstances that the partners’ interests in the partnership are otherwise id a partner’s interest in the partnership is defined as the manner in which the partners have agreed to share the economic benefit or burden if any corresponding to the income gain loss deduction or credit or item thereof that the final regulations promulgated under sec_704 were filed on date and published on date t d 1986_1_cb_254 the final regulations are effective generally for partnership taxable years beginning after date for partnership taxable years beginning after date but before date or before date with respect to special allocations of nonrecourse debt however a special_allocation that does not satisfy the requirements nevertheless will be respected for purposes of the final regulations if the allocation has substantial economic_effect as interpreted under the relevant caselaw and the legislative_history of the tax reform act of publaw_94_455 90_stat_1520 sec_1_704-1 income_tax regs see also 87_tc_1046 ndollar_figure hogan v commissioner tcmemo_1990_295 n - - is allocated sec_1_704-1 income_tax regs all facts and circumstances relating to the economic arrangement of the partners are taken into account id the following factors are considered relevant in determining a partner’s interest in the partnership the partners’ relative contributions to capital the partners’ interests in economic profits and losses the partners’ interests in cashflow and other nonliquidating distributions and the rights of the partners to distributions of capital upon liquidation of the partnership sec_1_704-1 income_tax regs the first factor to consider is the partners’ relative contributions to capital melvin and russell formed bbp in and the partnership became involved in an oil_and_gas activity and a farming activity in general melvin paid the expenses related to the oil_and_gas activity while russell did the same with respect to the farming activity many of the assets used by bbp in its activities were not held in the partnership’s name rather these assets were either jointly owned by russell and melvin or individually owned by one of them during its existence bbp did not maintain a general ledger a balance_sheet a sales journal or a purchases journal bbp did not always maintain a cash disbursements journal or a cash receipts journal partnership capital accounts for bbp were never maintained a calculation of each partner’s capital - - contributions to the partnership cannot be made given the state of bbp’s records thus the evidence in the record is insufficient to determine the partners’ relative contributions to capital the second factor to consider is the partners’ interests in the economic profits and losses of the partnership melvin and russell generally allowed each other to withdraw the profits from the respective activity each brother primarily conducted both russell and mr feldmann testified that they believed that melvin withdrew more money from bbp over the years than russell did russell testified that he and melvin had a great working relationship and that they agreed that they would report the income and loss from bbp equally on both the partnership and their individual income_tax returns russell testified that the amount of income from each activity varied because sometimes the price of grain was good and other times the price of oil was good the amount of profits earned by each activity varied year to year depending on various factors including the market prices for grain or oil for the taxable years through the evidence in the record reflects that the oil_and_gas activity was more profitable overall than the farming activity during this period the profits and losses varied from year to year as between the two activities and the evidence in the record is insufficient from which to define the partners’ interests in the -- p7 - partnership according to any arbitrary percentage of the profits or losses of the entire partnership the third factor to consider is the partners’ interests in cashflow and other nonliquidating distributions in general melvin and russell agreed to allow each other to withdraw the portion of proceeds generated by their respective activities the evidence in the record indicates that different bank accounts were maintained for the two activities with melvin primarily in charge of the oil_and_gas accounts and russell primarily in charge of the farm accounts russell testified that he wrote checks on the bbp farm account as he needed the money not as the income was received by bbp he further testified that although he felt he was entitled to farm income there was nothing that prohibited melvin from writing a check from the bbp farm account and that if melvin wanted money from the farming activity then russell would write him a check russell testified that melvin stated several times that he would take dollar_figure a month out of bbp russell believed that this amount was more than russell withdrew from the partnership additionally russell and mr feldmann both testified that over the life of the partnership melvin probably withdrew more money from the partnership than russell did ' ‘sme note that with respect to the grain sales made in jean ballantyne was listed as the payee for a dollar_figure continued - - as mentioned earlier bbp did not maintain a general ledger a balance_sheet a sales journal or a purchases journal the partnership did not always maintain a cash disbursements journal or a cash receipts journal a calculation of the distributions made to each partner over the years cannot be made given the state of bbp’s records however we note that the parties agree that each partner generally withdrew funds from the respective activity he conducted and our review of bbp’s tax returns for the years through indicates that the oil_and_gas activity was more profitable overall than the farming activity during this period additionally in the months before melvin’s death some of the assets of bbp were equally distributed between melvin or his children and russell the fourth factor to consider is the partners’ rights to distributions of capital upon liguidation of the partnership at trial all the witnesses testified that prior to melvin’s death they believed that melvin and russell shared in the partnership equally stephen testified that as of melvin’s date of death he believed that bbp was a partnership he further testified that he believed this because melvin and russell each scontinued payment made on date russell ballantyne was listed as the payee for two payments totaling dollar_figure the remaining payments were made to bbp thus it appears that a portion of the farm income for was paid directly to jean either to her personally or on behalf of the estate - - had 50-percent ownership in land jean testified that although she generally did not discuss business with melvin she just thought that everything was in bbp kab testified that at the time of melvin’s death he believed that melvin and russell shared bbp profits on an equal basis todd testified that he understood that melvin and russell had an agreement that all property was owned equally and income taxes were split evenly after melvin’s death a dispute arose concerning bbp the parties eventually negotiated a settlement agreement resolving the dispute concerning bbp in negotiating the settlement agreement the goal of the estate’s representatives was to obtain percent in value of the partnership assets the parties stipulated that the grain income was the sole property of russell however russell was also required to pay dollar_figure million to be held in trust for the benefit of the estate the evidence in the record indicates that the remaining assets and liabilities of bbp were split approximately equally between the estate and russell thus the evidence generally indicates that each partner had equal rights to distributions of capital upon liguidation of bbp in addition to the four factors above we also note that other evidence bears on the partners’ interests in bbp for at least the years through bbp reported all partnership items equally and a dispute never arose as to the proper -- - allocation of items until after melvin died ’ the testimony at trial indicated that all witnesses believed that melvin and russell had a close relationship and shared equally in partnership items in fact the estate’s original and amended form sec_1041 for and reflect the estate’s belief that it acquired a 50-percent interest in bbp as a result of melvin’s death no evidence was presented suggesting that either brother had a problem with the partnership arrangement or the way partnership items were reported each brother appeared to have been content with the equal reporting arrangement and held himself out as owning an equal interest in the partnership the tax returns for the years through indicate that in some years the income from the oil_and_gas activity was more than the income from the farming activity and vice versa all partners’ interests in a partnership are considered equal sec_1_704-1 income_tax regs it is undisputed consistent with allocations reported on bbp’s partnership returns melvin and russell reported one-half of partnership items on their individual federal_income_tax returns this court has previously recognized that statements made in a federal tax_return are generally considered an admission by the taxpayer and will not be overcome without cogent evidence that they are wrong 92_tc_312 62_tc_739 affd without published opinion 521_f2d_1399 3d cir gale v commissioner tcmemo_2002_54 the estate’s amended form_1041 for was stamped received by the internal_revenue_service in austin texas on date more than years after the date of melvin’s death --- - that melvin and russell agreed to report all items of bbp equally for federal_income_tax purposes the brothers adhered to this agreement throughout the existence of the partnership and the evidence in the record reflects that neither brother objected to the arrangement there is no evidence to indicate that either melvin or russell was attempting to divide profits and apportion losses solely to avoid undesirable tax consequences mr feldmann who regularly prepared bbp’s partnership returns as well as melvin’s and russell’s individual returns testified that it was his understanding that melvin and russell had an oral agreement that they were equal partners in bbp and they each had 50-percent distributive shares after considering all the facts and circumstances relating to the economic arrangement of melvin and russell including the four factors listed in sec_1 b income_tax regs we conclude that each partner had a 50-percent interest in bbp accordingly the gain from the sale of grain in must be allocated equally between the estate and russell cc whether the estate can avoid reporting grain sales income in if russell received the entire grain sales income under a claim of right the estate argues that all the gain from the sale of grain in is attributable to russell because he received it under a claim of right and without any restriction on his right to dispose_of the income the estate cites 48_tc_929 affd in part and revd in part on another issue 414_f2d_621 2d cir and 79_tc_676 to support its argument that russell should have included all the farm income in his gross_income for and that none of the farm income is includable in the gross_income of the estate for respondent argues that regardless of whether the claim_of_right_doctrine applies and whether russell received the grain sales income under the claim-- of-right doctrine the estate is not relieved from reporting one- half of the gain from the grain sales ’ in bstate of kahr v commissioner supra the taxpayer a 50-percent interest holder in a partnership diverted large amounts of partnership income from the partnership to himself id pincite the taxpayer did not report the diverted funds in the partnership returns of the company id pincite the commissioner determined that the taxpayer was liable for income_tax on one-half of the amount of the diverted funds as his distributive_share of partnership income and that he was taxable on the other half of the amount of the diverted funds as embezzlement income id pincite we held that the taxpayer respondent has not asserted that russell is required to include the gain from the grain sales in under the claim_of_right_doctrine respondent’s contention that russell is liable for income_tax on the entire amount of grain sales income is only on the grounds that the grain was the sole property of russell or russell received distributions in excess of his basis in his partnership_interest - - embezzled company funds in the amounts determined and it is the law that embezzled funds are income to the embezzler in the year in which they are misappropriated id pincite we did not explain whether our holding was based on the reasoning that all the diverted funds were income to the taxpayer as embezzled funds or whether one-half was income to the taxpayer as his distributive_share and the other half was income as embezzled funds in estate of etoll v commissioner supra three partners one of whom was the taxpayer were engaged in a partnership the partnership was a successor to another partnership which had operated under an agreement containing a provision that all assets including accounts_receivable would become the property of the taxpayer upon the partnership’s dissolution id pincite- a new partnership_agreement was prepared and contained a different provision in respect of the distribution of the assets upon dissolution id pincite however that agreement was never executed by one of the partners and never became effective id subsegquently the partnership dissolved and the taxpayer collected partnership accounts_receivable and used a portion to pay personal expenses and deposited a portion into a bank account from which only he was authorized to make withdrawals id the other partners initiated an action against the taxpayer seeking a portion of the amount of the accounts_receivable id one of - -- the issues was whether the original agreement that the taxpayer was entitled to all assets upon dissolution was binding on the partners at the time of the actual dissolution id the commissioner determined that in accordance with the claim--of- right doctrine the entire amount of collected receivables constituted income to the taxpayer id initially we addressed whether the amounts collected by the taxpayer would be taxable to him if he received them in a nonpartner capacity as the result of the dissolution of the partnership and where the amounts were clearly received under a claim of right by virtue of the original agreement and without restriction as to their disposition id pincite we found that if that were the case the amounts were clearly taxable to the taxpayer id next we addressed whether assuming the amounts were partnership income the claim-of-right doctrine applied we stated when a dispute arises over how much partnership income a partner is entitled to we do not believe that sec_702 or any other provision of subchapter_k changes the general principle that a taxpayer must include in income funds which he acquires under a claim of right and without restriction as to their disposition id pincite citing estate of kahr v commissioner supra pincite we assumed without deciding that if the amounts were partnership income taxable in part to the other partners then those partners would appear to have offsetting losses and the taxpayer would still be considered as having income to the full extent of the -- - amounts collected id pincite we did not render a holding as to whether the other partners were relieved of their responsibility of reporting their distributive shares of the receivables in the instant case assuming that the claim--of-right doctrine may apply in this situation we are not convinced that russell acquired the proceeds from the grain sales under a claim of right and without restriction as to their disposition the evidence reflects and we have found that the grain sold in was partnership property the evidence in the record reflects that melvin and russell allowed each other to withdraw the profits from the respective activity each brother primarily conducted not that each partner was entitled to dispose_of the income from his respective activity without restriction russell testified that there was nothing to prevent melvin from writing a check on the bbp farm account and that if melvin wanted some money from the farming activity then russell would either write a check or melvin would sign a note and russell would pay the note in the lawsuit which included the dispute concerning bbp the estate sought to enforce its legal rights against russell to recover one-half of the farm income the estate also originally claimed on its tax_return that it was entitled to additionally the evidence in the record indicates that a payment of dollar_figure was made to jean ballantyne on date from bottineau for the sale of grain - - a theft_loss for one-half of the farm income on the grounds that russell embezzled the income however the estate dropped its embezzlement claim against russell in exchange for dollar_figure million and approximately one-half of the remaining partnership property and the estate has not argued nor does the record establish that russell embezzled the proceeds from the grain sales thus we hold that russell did not have a claim of right to the grain sales proceeds and the estate is not relieved of its obligation to report one-half of the grain sales for proceeds in its gross_income for that year ’ -even if we were to find that russell acquired the grain sale proceeds under a claim of right and without restriction as to their disposition it appears that the estate would still be required to report the full amount of its 50-percent distributive_share in bbp in cipparone v commissioner tcmemo_1985_234 we stated partners are taxable on the full amount of their distributive_share even where a partner is unaware that partnership income has been earned and another partner has embezzled it without his knowledge 213_f2d_78 3d cir affg in part and revg in part sub nom 18_tc_1233 208_f2d_903 3d cir this court has expressly followed goldberger and stoumen in 27_tc_840 we have already found that the grain sold in was partnership property thus because the estate’s distributive_share was one- half of all the partnership items it would have to include one- half of the grain sales proceeds in gross_income the estate has not otherwise argued or presented evidence in this proceeding to establish that it is entitled to deduct one-half of the grain sales proceeds as a theft_loss -- - tii distributions in excess of basis respondent argues that to the extent that the grain sales proceeds and other money russell received from bbp in exceeded his adjusted_basis in the partnership russell had additional taxable_income russell maintains that he possessed sufficient basis to withdraw the cash from the grain sales without incurring any additional tax_liability as a preliminary matter we must determine which party bears the burden_of_proof on this issue russell argues that the notice_of_deficiency containing the adjustment for grain income did not raise the issue of withdrawal in excess of basis as a theory for increasing russell’s gross_income by dollar_figure russell maintains that this alternate theory was not tried by the implied consent of the parties in the event the issue was tried by the implied consent of the parties russell contends that resolution of the issue requires the presentation of evidence that is different from that which would be necessary to resolve the proper reporting of grain sales income as between the estate and russell respondent recognizes that this issue was not expressly raised in the notice_of_deficiency on brief respondent states although not expressly set forth in the notice_of_deficiency this argument is an additional ground for the dollar_figure adjustment to russell ballantyne’s taxable_income in it was addressed by both respondent and russell ballantyne in the parties’ trial memoranda and evidence applicable to the argument was - 3g -- presented at trial thus even if not specifically raised in the pleadings the matter has been tried by the implied consent of the parties t c rule b rule b states that when issues not raised by the pleadings are tried by express or implied consent of the parties they shall be treated in all respects as if they had been raised in the pleadings in the instant case respondent admits that the issue of whether russell withdrew cash in excess of his basis was not specifically raised in the pleadings however the evidence reflects that both parties were aware before trial that respondent was pursuing this alternative argument respondent alleges that before trial he repeatedly requested information from russell regarding his basis in bbp this allegation is supported by respondent’s interrogatories to russell which requested information necessary to calculate russell’s basis in bbp during the years in issue and by mr feldmann’s testimony at trial that an agent of respondent brought up the issue of russell’s basis in bbp during the audit process additionally respondent’s trial memorandum lists one of the issues in this case as whether russell ballantyne had additional income in from the sale of grain in the amount of dollar_figure alternatively whether russell ballantyne received a distribution from bbp in that exceeded his basis in the partnership by dollar_figure russell’s trial memorandum states that russell ballantyne has sufficient basis for his withdrawal of grain income russell -- -- also provided a short analysis of legal authorities governing the determination of a partner’s basis at trial testimony was elicited from various witnesses as to russell’s basis in bbp and whether he withdrew amounts in excess of his basis finally both parties specifically addressed this issue in their opening and reply briefs thus we find that this issue was tried by the implied consent of the parties as a general_rule the commissioner’s determination bears a presumption of correctness and the burden_of_proof rests with the taxpayer ’ rule a 290_us_111 however sec_7522 requires that a notice_of_deficiency describe the basis for the tax_deficiency in certain circumstances the failure to describe the basis for the tax_deficiency results in the raising of a new_matter under rule a 112_tc_183 93_tc_500 in shea v commissioner supra pincite we stated we have previously held that new_matter is raised when the basis or theory on which the commissioner relies was not stated or described in the notice_of_deficiency and the new_theory or basis requires the presentation of different evidence wayne bolt nut co v commissioner t c pincite this rule for determining whether a new_matter has been raised by the commissioner is consistent with and supported by the statutory requirement that the notice_of_deficiency 74ns we noted earlier it has not been established that the examination of russell and clarice began after date or that sec_7491 applies see supra note -- - describe the basis for the commissioner’s determination this rule also provides a reasonable method for enforcing the requirements of sec_7522 fn ref omitted we then held that where the notice_of_deficiency fails to describe the basis on which the commissioner relies to support a deficiency determination and that basis requires the presentation of evidence that is different from that which would be necessary to resolve the determinations described in the notice_of_deficiency the burden_of_proof will be placed on the commissioner with respect to that issue id in the instant case the notice_of_deficiency increased russell and clarice’s gross_income for by dollar_figure respondent identified this adjustment under the heading ordinary_income whipsaw and explained that we have adjusted your gross_income to include amounts received for grain income for dollar_figure in no further explanation was provided regarding the reason for including the additional_amount in gross_income in their petition russell and clarice alleged that respondent erroneously included within the taxpayers’ gross_income grain income in the amount of dollar_figure for the tax_year in his answer respondent denied this allegation but did not elaborate on the reason for the inclusion of the additional_amount in gross_income thus neither the notice_of_deficiency nor respondent’s answer to russell and clarice’s petition describes distributions in excess of basis as respondent’s reason - al --- for increasing gross_income indeed respondent acknowledges on brief that the distributions in excess of basis theory was not set forth in the notice_of_deficiency the evidence in the record demonstrates that the adjustment in the notice_of_deficiency was based on respondent’s whipsaw_position that russell should have reported all the grain sales proceeds in income because the grain was solely russell’s property not partnership property in the instant case the determination of whether the grain sold in was russell’s sole property is not dependent on and does not require a determination of the amount of russell’s basis in his partnership_interest the evidence necessary to establish russell’s basis in his partnership_interest is different from the evidence necessary to establish that the grain sold in was solely russell’s property accordingly respondent bears the burden_of_proof on this issue shea v commissioner supra pincite wayne bolt nut co v commissioner supra pincite sec_731 defines the circumstances under which a partner recognizes gain_or_loss from partnership_distributions in the case of a distribution by a partnership to a partner gain is recognized only to the extent that any money distributed exceeds the adjusted_basis of a partner’s interest in the partnership immediately before the distribution sec_731 96_tc_577 affd f 2d - 8th cir any gain recognized under sec_731 is considered as gain from the sale_or_exchange of the partnership_interest of the distributee partner sec_731 b d b s109_tc_423 in the case of a sale_or_exchange of an interest in a partnership gain recognized to the transferor partner is generally treated as gain from the sale_or_exchange of a capital_asset sec_741 91_tc_793 sec_722 provides that the basis of a partnership_interest acquired by contribution of property including money is the amount of such money and the adjusted_basis of such property to the contributing_partner at the time of the contribution for purposes of sec_722 a contribution of money includes any increase in a partner’s share of the liabilities of a partnership or any increase in a partner’s individual liabilities by reason of the assumption by such partner of partnership liabilities sec_752 sec_705 provides the general_rule for determining the adjusted_basis of a partner’s interest as determined under sec_722 in relevant part sec_705 provides that the adjusted_basis of a partner’s interest in a partnership is the basis determined under sec_722 increased by the partner’s distributive_share of partnership income for the tax_year and prior years and decreased but not below zero by distributions from the -- - partnership under sec_733 and by his distributive_share of partnership losses for the tax_year and prior years sec_733 provides that in the case of a distribution by a partnership to a partner other than in liquidation_of_a_partner’s_interest the adjusted_basis of the partner is reduced by the amount of money distributed to that partner additionally any decrease ina partner’s share of the liabilities of a partnership is considered a distribution of money to the partner by the partnership sec_752 b respondent claims that bbp maintained inadequate accounting_records and that there is no direct evidence establishing each partner’s basis in bbp respondent argues that in a situation such as this one it is appropriate to apply the alternative rule set forth in the regulations under sec_705 to determine russell’s adjusted_basis in his partnership_interest sec_705 grants the secretary the authority to prescribe regulations under which the adjusted_basis of a partner’s interest in a partnership may be determined by reference to his proportionate share of the adjusted_basis of partnership property upon a termination of the partnership sec_1_705-1 income_tax regs provides that the adjusted_basis of a partner’s interest in a partnership may be determined by reference to the partner’s share of the adjusted_basis of partnership property which would be distributable upon - termination of the partnership this alternative rule may be used in circumstances where a partner cannot practicably apply the general_rule set forth in sec_705 and sec_1 l a income_tax regs or where from a consideration of all the facts the commissioner reasonably concludes that the result will not vary substantially from the result obtainable under the general_rule sec_1_705-1 income_tax regs where the alternative rule is used certain adjustments may be necessary in order to ensure the proper determination of the adjusted_basis of a partner’s interest in a partnership id in the instant case bbp was formed in the records of the partnership do not show the amount of cash contributions or the basis in property contributed by melvin or russell to bbp additionally a calculation of the distributions made to each partner cannot be made the partnership tax returns in the record cover only the years through under these circumstances it is appropriate for respondent to apply the alternative rule set forth in sec_1_705-1 income_tax regs in order to attempt to establish russell’s adjusted_basis in his 50-percent partnership_interest respondent points out that bbp reported that the total assets and total liabilities of the partnership at both the beginning and the end of the taxable_year were none additionally respondent notes that bbp’s return reported - - that russell’s capital_account had a balance of zero at both the beginning and the end of the taxable_year the schedule_k-1 attached to the form_1065 listed the amounts in melvin’s and russell’s capital accounts at the beginning and end of the taxable_year as o russell signed bbp’s tax_return respondent claims that russell should not be lightly relieved of the sworn representations he made in bbp’s tax_return mr feldmann explained that the word none that was listed on bbp’s tax returns for total assets and total liabilities for and did not mean that there were zero assets and liabilities rather the word none was the default position generated by the computer_software he used when no entry was made likewise mr feldmann testified that the amount zero for the capital accounts was also a default position when no entry was made mr feldmann testified that he left these areas blank because he did not have the information necessary to fill in these areas on the tax returns mr feldmann explained that had he made an entry he would have put not available or information not available in order to reflect the fact he did not have the necessary information bbp’s records were not maintained in a manner sufficient to determine the partnership’s assets and liabilities consequently mr feldmann did not we note that the estate claimed in its original and amended returns for the taxable_year that as of the date of continued -- - have the necessary information to provide specific amounts when he prepared bbp’s tax returns however the fact that the partnership returns failed to report specific amounts of assets and liabilities does not mean that russell did not have a positive basis in his partnership_interest it is evident that the partnership returns are incorrect and respondent cannot rely upon them to meet his burden at trial russell introduced two loan statements addressed to bbp the first statement from fcs of nw north dakota reflects an operating loan with a principal balance of dollar_figure as of date and dollar_figure as of date the second statement from the first bank minot reflects a loan with a balance of dollar_figure as of date russell claims that these loans reflect a basis of at least one-half of the combined loan balances or dollar_figure because he obligated himself for the partnership debt russell claims that he had additional basis as a result of certain adjustments contained in the notice_of_deficiency russell also contends that melvin withdrew more money from bbp over the year sec_29 continued melvin’s death the assets of bbp consisted of cash marketable_securities notes receivable oil_and_gas_properties office furniture and fixtures farm inventory seed buildings and equipment having a fair_market_value of dollar_figure 7eat trial russell and mr feldmann testified that these loans were fully paid in one-half by russell and one-half by a limited_partnership formed for melvin’s children at - than he did and that this supports his arguments that russell had sufficient basis in bbp in to avoid being taxed on the amounts distributed in excess of his distributive_share finally russell relies on mr feldmann’s testimony that he had withdrawn considerably less money from bbp than melvin had and that russell would have had a positive basis after receiving the grain sales proceeds in respondent argues that russell has not shown that the basis imputed to his partnership_interest from the liabilities still existed in or had not been used up by prior distributions respondent claims that intervening events likely affected russell’s basis in bbp and that the existence of the loans does not establish that russell had any basis in bbp respondent contends that as a result of partnership adjustments proposed to russell and settled for and russell’s basis in the partnership would have increased at most by dollar_figure however respondent claims that without further information as to prior distributions made to russell it cannot be determined that russell had sufficient basis in bbp to withdraw the entire grain proceeds in as a tax-free distribution respondent claims that mr feldmann’s testimony that he was aware of the two loans is inconsistent with his preparation of bbp’s return in which each partner’s capital_account was reported as being zero at both the beginning and the end of finally respondent -- - contends that any basis russell had in his partnership_interest as of date would have been rapidly depleted by the partners’ distribution of assets in anticipation of melvin’s death at trial both russell and mr feldmann testified that russell had withdrawn considerably less money than melvin had from bbp mr feldmann testified that he was aware of the two loans totaling approximately dollar_figure and that he believed that russell paid off one-half of the debt sometime after melvin’s death mr feldmann testified that he attempted to calculate russell’s basis in bbp and although he could not determine a specific amount he believed that russell had a positive basis in bbp after receiving the grain sales proceeds in bbp’s records are insufficient to determine each partner’s relative capital contributions and the amount of distributions made to each partner over the life of the partnership the evidence in the record reflects that during bbp’s existence melvin and russell generally allowed each other to withdraw the profits from the respective activities they conducted and at least for the years through the oil_and_gas activity was more profitable overall than the farming activity the partnership tax returns and the fact that melvin and russell generally kept the profits from their respective activities support russell’s and mr feldman’s testimony that with respect --- - to the amounts withdrawn or distributed from bbp over the existence of the partnership melvin withdrew more money from the partnership than russell did overall the evidence supports russell’s argument that he had a positive basis in his partnership_interest in after receiving the grain sales proceeds it is respondent’s burden to prove that russell received distributions from bbp in excess of his basis in his partnership_interest see shea v commissioner t c pincite wayne bolt nut co v commissioner t c pincite after reviewing all the evidence in the record including russell’s and mr feldmann’s testimony on the issue and the effect of the stipulated adjustments on russell’s basis we conclude that respondent has failed to establish that russell received money from bbp in in excess of his basis in his partnership_interest accordingly we hold for russell on this issue iv accuracy-related_penalties for and in the notice_of_deficiency respondent determined that russell and clarice were liable for the accuracy-related_penalties pursuant to sec_6662 on the portions of their underpayments attributable to the following adjustments contained in the notice_of_deficiency amount of adjustment adjustment schedule e -- depletion dollar_figure dollar_figure ordinary_income big_number -- canadian royalty -- big_number schedule c - production tax -- big_number schedule c - idc -- big_number schedule c - depletion -- big_number respondent subsequently conceded the canadian royalty adjustment russell and clarice conceded the schedule c and schedule e adjustments our decision on the ordinary_income adjustment is in russell and clarice’s favor consequently we must decide whether russell and clarice are liable for the accuracy-related_penalties with respect to the schedule c and schedule e adjustments sec_6662 imposes a penalty equal to percent of the portion of an underpayment_of_tax attributable to a taxpayer’s negligence disregard of rules or regulations or substantial_understatement_of_income_tax sec_6662 b and negligence has been defined as the failure to do what a reasonable and ordinarily prudent person would do under the circumstances 85_tc_934 the term disregard includes any careless reckless or intentional disregard of rules or regulations sec_6662 an understatement is substantial if it exceeds the greater of dollar_figure or percent of the tax required to be shown on the return sec_6662 and the commissioner’s determination that a taxpayer was negligent is presumptively - - correct and the burden is on the taxpayer to show a lack of negligence hall v commissioner 729_f2d_632 9th cir affg tcmemo_1982_337 ’ sec_6664 provides an exception to the accuracy- related penalty under sec_6662 the exception applies if it is shown that there was reasonable_cause for the underpayment and that the taxpayer acted in good_faith with respect to the underpayment sec_6664 the determination of whether a taxpayer acted with reasonable_cause and good_faith is made on a case-by-case basis taking into account all the pertinent facts and circumstances sec_1_6664-4 income_tax regs the extent of the taxpayer’s effort to assess his proper tax_liability is the most important factor id russell claims that he is not liable for the sec_6662 a penalties because he relied in good_faith on the advice of his accountant mr feldmann and most of the adjustments relate to oil_and_gas transactions which were handled by melvin and his family the accuracy-related_penalty under sec_6662 may be avoided if the taxpayer shows reliance on the advice of a professional which was reasonable and in good_faith sec_1_6664-4 b income_tax regs reasonable_cause can be established if a taxpayer can show reasonable reliance on the as previously noted sec_7491 does not apply in this case see supra note - - advice of a competent and experienced accountant or attorney in the preparation of the tax_return 94_tc_473 griffin v commissioner tcmemo_2001_5 in order to show good_faith reliance the taxpayer must establish that all necessary information was supplied to the return preparer and that the incorrect return resulted from the preparer’s mistakes weis v commissioner supra pincite 59_tc_473 mr feldmann prepared bbp’s return and russell and clarice’s and returns in preparing the returns mr feldmann relied on information provided to him by russell and his family and melvin’s family with respect to the oil_and_gas activity conducted by bbp mr feldmann testified that he relied on forms 1099-misc miscellaneous income issued by oil purchasers in determining income and information provided by carolyn in determining expenses at trial russell testified that he did not know anything about the information regarding the oil_and_gas interests which were reported on his and clarice’s and returns because this information was provided to mr feldmann by other persons with respect to the schedule e and schedule c depletion deductions for and mr feldmann testified that he erroneously computed the amounts of these deductions and that the errors were not a result of any_action by russell mr feldmann - - testified that he had the correct information to compute the amounts of the deductions but he explained that the law governing these deductions had changed in previous years and that he had not updated himself on the change overall the evidence reflects that mr feldmann was provided with all the necessary information to compute the correct amounts of the depletion deductions for and and that the incorrect amounts reported on the returns were solely attributable to his failure to apply the law correctly accordingly we hold that russell and clarice are not liable for the accuracy-related_penalties on the portions of the underpayments attributable to the depletion deduction adjustments for the taxable_year carolyn provided mr feldmann with the information regarding idcs paid_by russell in a portion of the idcs deducted by russell in had actually been reimbursed to him by ballantyne oil_and_gas inc during that year mr feldmann was not informed that russell had been reimbursed for approximately dollar_figure of those expenses and he did not account for the amount reimbursed when he computed the amount of the idc deduction at trial russell acknowledged that he knew that a portion of idcs was sometimes reimbursed later however russell claimed that he would not have been aware of any reimbursement because the amount reimbursed was automatically deposited in his bank account and he would not have received a -- check russell testified that he thought mr feldmann was aware of any reimbursements for the drilling costs when the oil_and_gas information was provided to him russell has not shown that there was reasonable_cause for the underpayment attributable to the overstated idc deduction and that the he acted in good_faith with respect to the underpayment russell was aware that a portion of idcs might be reimbursed to him yet he did not take steps to inquire as to whether any amount was reimbursed to him in in the instant situation he cannot avoid his duty to file an accurate tax_return by placing the responsibility with carolyn to provide mr feldmann with the correct information regarding the amount of idcs accordingly we hold that russell and clarice are liable for the accuracy-related_penalty on the portion of the underpayment attributable to the idc adjustment with respect to the schedule c production tax deduction mr feldmann testified that he would have calculated this based on the information he received from russell’s family or melvin’s family russell’s only claim with respect to this adjustment is that he reasonably relied on the advice of mr feldmann he has not shown that all necessary information was supplied to mr feldmann and that the overstated deduction resulted from mr feldmann’s mistake russell and clarice have not established that they had reasonable_cause or good_faith with respect to this -- - adjustment accordingly we hold that russell and clarice are liable for the accuracy-related_penalty on the portion of the underpayment attributable to the production tax adjustment decisions will be entered under rule


uniform issue list department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division oct of he fe ig sec_2 sec_24s oe 2c fe ok 24s fe sec_2s as of ok 2fe 2k af 2c 2x afe 24s ofc of oi of sec_2s 2k legend individual a individual b f sec_24 34k afc oie fe of of oe 2k 2k 2k 2k 2fe 2c 2i oft ok ofc 2k ok bank f bie dis fe f sec_2s of 2fe oie 2c afk fe oe of oft of or sec_24s sec_2 i af afc oie ofc oie of afe ofe oft afc 2fs fs ofc of fe 2s fe of of a 2k ok amount a g7 ee 2h ae ae fe fe 2s oe 2s 9k 2k 3s fe fe sec_24s sec_24 2fe 2k fe 2c ok ofe oi oft oie of oft kc 2s f sec_2s 2g 2is of 2h of of 2c 9k 2c 2k ok ofc 2c ok hie ie 2k ie sec_2s 24s oft 2fe ofc oie afc ofe of fe 2k ofc ofc ofc ofc 2k ic 2fe ois afc ok ok kk amount b g7 ee fe ee ee ee ee oe a 9k f sec_3 oe fee oe fe ale fe fe ae fe ake ak 2k hb sec_2k sec_24g 2fe 2c oe of of 2k of of of of bie fe 24e i sec_24s 2c 2c fe sec_2 ofe oft fe fe ofc of of fe afe afc ais of fs afc 2fs fc of ok 2k amount b g7 ae he 2s he 2h ee ae fe fee of ae oe 2c ke ok bank c ae fe 2c ae af 3c fs ak ac aie eae ae oe ok ne ofa ie 2s f sec_3s 2k it sec_2h 2fe oie ofc 2c ok page dear mr and mrs this is in response to your request received date as supplemented by correspondence dated date in which you request waivers of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code code the following facts and representations have been submitted under penalties of perjury in support the rulings requested individual a and individual b maintained an individual_retirement_accounts iras with all funds from their iras with bank f individual a and individual b withdrew from bank f the moneys were deposited on date in bank c with the instructions that the funds were to remain in their iras individual a and individual b were told that the moneys were in iras individual b received a distribution check for amount b which was less than amount b reported by bank f on form 1099-r earlier in individual b took distributions from his ira for current expenses and to help pay relocating costs in date when individual a and individual b had their federal tax_return prepared for they realized bank c’s mistake and their money was not in iras because bank c reported taxable interest earned on the accounts based on the above facts individual a and individual b request that the service waive the 60-day rollover requirement d of the code with respect to the distribution of amount a and amount b because the failure to waive such requirement would be against equity or good conscience under sec_408 of the code sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code page sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if- i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or ii _ the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 of the code where failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code page revproc_2003_16 2003_4_irb_359 provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the 1-year rollover limitation under sec_408 of the code does not apply to these situations information presented indicates that the individual a and individual b did not reasonably satisfy the requirement that amount a and amount b be deposited into their respective iras within days of the distribution from bank f for reasons beyond their control bank c failed to follow their instructions to keep their money in iras under these circumstances the failure to deposit amount a and amount b the 60-day period was beyond the reasonable control of individual a and individual b and the failure to waive the 60-day requirement would be against equity or good conscience into their respective iras within therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount a and amount b individual a and individual b are granted a period of days from the issuance of this ruling letter to contribute up to amount a and up to amount b to their respective iras to be established by individual a and individual b provided all other requirements of sec_408 of the code are satisfied except the 60-day requirement with respect to such contribution if these requirements are met the amounts will be considered rollover_contributions within the meaning of sec_408 of the code page the difference between amount b and b should be reported as taxable_distributions on their federal_income_tax return because such amount was not deposited in bank c but was used for other purposes no opinion is expressed as to the tax treatment of the transactions described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this ruling is directed only to the individual that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent if you have any questions please contact at sincerely yours ou alan c pipkin jr manager employee_plans technical group enclosures deleted copy of this letter notice of intention to disclose notice


internal_revenue_service number release date index number ----------------------------------- --------------------------------- --------------------------------- ----------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------------------------------- telephone number -------------------- refer reply to cc psi b04 plr-107354-15 date june legend decedent spouse date date dear ----------------- ------------------------------------------------ --------------------- ------------------- ------------------------ this letter responds to your personal representative’s letter of date requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the election under sec_2010 of the internal_revenue_code code a portability election to allow a decedent’s surviving_spouse to take into account that decedent’s deceased spousal unused exclusion dsue amount the facts and representations submitted are summarized as follows decedent died on date survived by spouse date is a date after the effective date of the amendment to sec_2010 to provide for portability of a dsue amount to a surviving_spouse to obtain the benefit of portability of decedent’s dsue amount to spouse decedent’s estate was required to file form_706 united_states estate and generation-skipping_transfer_tax return on or before the date that is months after decedent’s date of death or the last day of the period covered by an extension decedent’s form_706 was due on date but the estate did not file a form_706 to make the portability election the estate discovered its failure to elect portability after the due_date for making the election spouse as executrix of decedent’s estate represents that the value of decedent’s gross_estate is less than the basic exclusion amount in the year of the decedent’s death and that during his lifetime decedent made no taxable_gifts as executrix spouse requests an extension of time pursuant to sec_301_9100-3 to elect portability of decedent’s dsue amount pursuant to sec_2010 plr-107354-15 law and analysis sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2010 provides that a credit of the applicable credit_amount shall be allowed to the estate of every decedent against the tax imposed by sec_2001 sec_2010 provides that the applicable credit_amount is the amount of the tentative_tax that would be determined under sec_2001 if the amount with respect to which such tentative_tax is to be computed were equal to the applicable_exclusion_amount on date congress amended sec_2010 effective for estates of decedents dying and gifts made after date to allow portability of a decedent’s unused applicable_exclusion_amount between spouses tax relief unemployment insurance reauthorization and job creation act of pub_l_no sec_303 124_stat_3296 sec_2010 provides that the applicable_exclusion_amount is the sum of the basic exclusion amount and in the case of a surviving_spouse the dsue amount sec_2010 generally provides that the basic exclusion amount is dollar_figure to be adjusted for inflation annually after calendar_year sec_2010 defines the dsue amount to mean the lesser_of a the basic exclusion amount or b the excess of -- i the applicable_exclusion_amount of the last deceased spouse of the surviving_spouse over ii the amount with respect to which the tentative_tax is determined under sec_2001 on the estate of such deceased spouse sec_2010 provides that a dsue amount may not be taken into account by a surviving_spouse under sec_2010 unless the executor of the estate of the deceased spouse files an estate_tax_return on which such amount is computed and makes an election on such return that such amount may be so taken into account the election once made shall be irrevocable no election may be made if such return is filed after the time prescribed by law including extensions for filing such return sec_2010 provides that the secretary shall prescribe regulations as may be necessary or appropriate to implement sec_2010 sec_6075 prescribes that returns made under sec_6018 relating to estate_taxes shall be filed within months after the date of the decedent’s death plr-107354-15 sec_6018 provides that in all cases where the gross_estate at the death of a citizen or resident exceeds the basic exclusion amount in effect under sec_2010 for the calendar_year which includes the date of death the executor shall make a return with respect to the estate_tax imposed by subtitle b of the code sec_6018 provides in part that the basic exclusion amount referred to in sec_6018 shall be reduced but not below zero by the sum of -- a the amount of the adjusted_taxable_gifts within the meaning of sec_2001 made by the decedent after date plus b the aggregate amount allowed as a specific exemption under sec_2521 as in effect before its repeal by the tax reform act of with respect to gifts made by the decedent after date sec_20_2010-2t a of the estate_tax regulations provides that to allow a decedent’s surviving_spouse to take into account that decedent’s dsue amount the executor of the decedent’s estate must elect portability of the dsue amount on a timely-filed form_706 sec_20_2010-2t a provides that an estate that elects portability will be considered for purposes of subtitle b and subtitle f of the code to be required to file a return under sec_6018 accordingly the due_date of an estate_tax_return required to elect portability is months after the decedent’s date of death or the last day of the period covered by an extension if an extension of time for filing has been obtained sec_20_2010-2t a provides that upon the timely filing of a complete and properly-prepared estate_tax_return an executor of an estate of a decedent survived by a spouse will have elected portability of the decedent’s dsue amount unless the executor chooses not to elect portability and satisfies the requirements for the election not to apply in sec_20_2010-2t a i sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that the term statutory election means an election whose due_date is prescribed by statute the term regulatory election means an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-2 and sec_301_9100-3 provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain statutory and regulatory elections sec_301_9100-3 provides for an extension of time for plr-107354-15 making regulatory elections that do not meet the requirements for an automatic_extension of time under sec_301_9100-2 a request for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election sec_2010 sec_6075 and sec_6018 when construed jointly prescribe a due_date for electing portability for those estates required to file an estate_tax_return under sec_6018 accordingly with respect to those estates the portability election is a statutory election as defined in sec_301_9100-1 however when an executor is not required to file an estate_tax_return under sec_6018 the code does not specify a due_date for an estate_tax_return filed for the purpose of making a portability election rather the regulations under sec_20_2010-2t a which are applicable to all estates electing portability specify that the portability election must be made on a timely-filed form_706 accordingly with respect to estates not required to file an estate_tax_return under sec_6018 the portability election is a regulatory election as defined in sec_301_9100-1 as executrix spouse represents that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is not required to file an estate_tax_return under sec_6018 under these facts the commissioner has discretionary authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly we grant an extension of time of days from the date of this letter in which to elect portability under sec_2010 the election should be made by filing a complete and properly-prepared form_706 and a copy of this letter within days from the date of this letter to the cincinnati service_center at the following address internal_revenue_service cincinnati service_center stop cincinnati oh for purposes of electing portability a form_706 filed by decedent’s estate within days from the date of this letter will be considered to be timely filed in accordance with the power_of_attorney on file with this office we have sent a copy of this letter to your authorized representatives plr-107354-15 except as expressly provided herein we neither express nor imply any opinion 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 if it is later determined that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is required to file an estate_tax_return pursuant to sec_6018 the commissioner is without authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely associate chief_counsel passthroughs and special industries by _________________________ 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-