t c no united_states tax_court leo and evelyn trentadue petitioners v commissioner of internal revenue respondent docket no filed date ps depreciated trellising drip irrigation systems and a well as farm machinery or equipment in connection with their farming activity of growing wine grapes r determined that such property would have a longer class_life and be depreciable as permanent improvements to land held the trellising was properly classified as farm machinery or equipment and the irrigation systems and well should be classified as land improvements philip j terry for petitioners cathy a goodson h clifton bonney jr and andrew r moore for respondent opinion gerber judge respondent determined income_tax deficiencies for petitioners’ and tax years in the amounts of dollar_figure and dollar_figure respectively the deficiencies are solely attributable to respondent’s adjustments to items connected with petitioners’ farming activity which involved the growing of grapes for the production of wine the issues remaining for our consideration involve the class_life and depreciation recovery periods for three different assets used by petitioners in their farming activity in particular we consider whether petitioners’ wine grape trellises irrigation systems and or well should be depreciated as land improvements as determined by respondent 20-year class_life or as agricultural equipment as claimed by petitioners 10-year class_life background petitioners are husband and wife and resided in geyserville california at the time their petition was filed in this case petitioners have operated as a sole_proprietorship the trentadue winery and vineyards farm property primarily in the immediate vicinity of their personal_residence in addition to petitioners’ residence the farm property includes a winery a vineyard an event center and a well during and the vineyard consisted of approximately acres planted with grapevines petitioners sell approximately percent of their grape production to their own winery and the remaining percent is sold to unrelated wineries vines of a particular variety are grown in a block which is not a standard size area of land depending upon the size of the block petitioners typically used or more individuals to install vines on a block after the soil has been ripped or broken and nutrients added the trellis rows are laid out with a mark to identify the location of each vine a 2-foot trench is dug and a pvc pipe is installed along with risers at each trellis row for the irrigation system end and in-line posts are then pounded to feet into the ground and anchors are screwed into the ground to secure the end posts with guy wires various wires are then attached and strung between the posts to train and irrigate the vines next a drip hose is attached to the riser and fastened to the drip wire with clips finally emitters are placed on the drip hose at the eventual site of each vine as of the time of trial petitioners were cultivating different grape varietals including carignane chardonnay zinfandel petite syrah merlot sangiovese montepulciano petite verdot malbec syrah cab franc and cabernet petitioners used two grape-growing methods--trellising and head pruning the trellising method involves the use of trellises and a drip irrigation system whereas the head pruning method does not require a trellis but drip irrigation may be used petitioners use the head pruning method for their carignane zinfandel and petite syrah grapevines and trellising for the others during and petitioners’ son victor trentadue victor managed petitioners’ vineyard operations including the growing of grapes and he also managed trentadue winery petitioners’ separate business for making wine victor also owned his own business called four seasons vineyard management co which installed maintained and removed grapevines trellises and irrigation systems petitioners attached to their and joint federal_income_tax returns a schedule f profit or loss from farming on which they claimed depreciation_deductions for among other items the trellis components trellis systems irrigation systems and the well with respect to the above-listed property depreciation_deductions were calculated using a 10-year class_life which includes to 10-year recovery periods in the notice_of_deficiency respondent determined that the recovery_period for each of these properties wa sec_15 years which would place them in the 20-year class_life which includes to 20-years class lives trellising trellising is a method of training vines used in the production of wine grapes the primary components of a trellis are posts stakes and wires a trellising system is set up in rows with various types of wires strung between posts stakes anchors staples gripples and other types of devices are used to stabilize the posts attach the wires to the posts and to attach various things to the wires in order to train and maintain the grapevines during the grape-growing season wires may be moved or adjusted and new wires may be added to the existing trellises most trellis systems use the same components and vary in configuration depending upon the topography soil conditions farming methods such as mechanical or hand harvesting of grapes and other factors petitioners use two types of trellising-- vertical shoot positioning vsp and t-trellis design systems all of the vine trunks are grown to the same height with a vsp trellis system and the vines grow vertically on the wire petitioners’ approach is not to permit the vines to engulf or grow over the wire so that the wires can be moved and or replaced in the training of the vines a variation on the standard vsp is the scott henry design where the vines are grown vertically at two instead of one levels a t-trellis configuration consists of a series of t-shaped posts placed in a line where the wires are attached to the crossarms of the t-posts the local california county’s sonoma taxing authority treats the trellises as property used in vineyard development and not as land improvement although it may not occur often trellis systems have been dismantled and components reused in a new location trellising components become damaged rust and or wear out and are repaired and or replaced throughout the year the trellising posts stakes wires etc are regularly adjusted tightened and replaced to accommodate the training of the vines for maximum grape-growing performance occasionally trellising may be removed from a few rows of a block or from an entire block of vines and the major components are reused grapevines may be removed from a trellis system without damaging the trellis likewise a trellis system may be removed without damaging the grapevines it is also possible to remove the vines and reuse the trellising components for the new vines vines may be replaced when they become diseased or if a particular varietal becomes unprofitable or unpopular the primary structural_components that affix the trellis to the earth are the end and in-line posts which are rammed to feet into the ground and stabilized and secured_by metal stakes and or mechanically screwed-in anchors the end posts may be metal or wood the wooden posts are to feet in length and the wood posts may be pressure treated with chemicals to retard decay metal end posts are approximately feet long and usually inches in diameter the posts used between the end posts in-line posts are typically feet in length and approximately to inches in diameter if wooden and 3½ inches in diameter if metal the wooden posts may be pressure treated with chemicals to retard decay the purpose of the in-line posts is to support the wires used to train the vines and support the drip irrigation lines the posts support to 14-gauge wires which in turn support drip irrigation lines vine cordons and fruit and foliage all wires are attached by staples and gripples to the end posts and the in-line posts the staples attach the wire to the posts and the gripples provide the ability to adjust the tension of the wire in addition to in-line posts wood or metal training stakes are pounded 1½ to feet into the ground to support each vine the stakes may be wood or metal and are typically feet long and the wooden ones may be pressure treated concrete or cement is not used to affix the posts to the earth petitioners did not intend for their trellising to be permanently affixed to the earth one goal in the use of trellis systems is to improve the intensity and quality of grapes which in turn improves the intensity quality and value of the resulting wine the manner in which the grape quality and intensity is improved is to manage the canopy and foliage in an attempt to control sunlight temperature and moisture to the vines trellising is also used to assist in producing the ideal number of vine shoots and delivering nutrition to the vine some wine grape varietals such as zinfandel and petit syrah are grown without the use of trellises about one-half of petitioners’ vines are not trellised when vines in a particular block are being removed and replaced with new vines the posts and stakes of the trellising are removed for reuse petitioners have removed stakes and posts and stored them for reuse good-quality wire is removed and coiled for reuse and worn or rusted wire or parts are gathered up with the removed vines the vines are burned and the remaining wire is sent to recycling and normally not reused although time intensive it is possible to remove and reuse the wire in the trellising for an or 9-acre block it takes approximately a week for a crew of approximately to people and machines to dismantle the trellising irrigation system remove the vines and prepare the soil for the next planting the time could be shorter or longer depending on the size of the crew in one instance it took about a week to dismantle an or 9-acre block the vines and unusable parts were piled and the vines were burned about days later leaving a pile of wire and metal parts that were taken for recycling drip irrigation drip irrigation systems are used to deliver water and other nutrients to grapevines a drip irrigation system is usually designed for a particular block of vines petitioners use drip irrigation systems in connection with trellised vines petitioners’ systems are composed of pvc pipes plastic tubing emitters risers and other assorted hardware the larger supply pipes are to inches in diameter and there is a series of successively smaller pipes or tubes that ultimately end in drip emitters that deliver water and nutrients to each vine a substantial portion of the pipes and tubes is buried approximately feet underground and come out of the ground at certain intervals where they are attached to drip lines affixed to wires of the trellis system the main lines that come to each field or block can be marked and saved if the vines are removed and the ground ripped the remainder of the piping that delivers water and nutrients to the vines is rendered unusable if the ground is ripped components of drip irrigation systems are subject_to damage and wear and portions of a system are repaired and or replaced annually there was no incidence of the removal of a drip irrigation system separate from the removal of the vines when the vines are removed however the soil of a vineyard is ripped and the drip irrigation system with the exception of some of the drip hoses and sprinklers is destroyed rendering the components unusable ripping is a process by which the hardpan crusted surface of the ground is opened and broken by means of dragging a large knifelike device through the ground normally ripping takes place when vines are being removed for the planting of new vines drip irrigation systems are not designed or constructed to be permanent and may be removed from the ground the removal however results in all piping with the exception of the main lines that carry the water supply to the block manifolds valves and possibly some drip tubing being rendered unusable the local california county’s sonoma taxing authority treats the drip irrigation systems as property used in vineyard development and not as land improvement the well water used by petitioners for all uses on their farm property is supplied by a well in date petitioners began the process of replacing their old well with a new one a well permit was approved date and construction of a new well began on january and was completed on date the boring of the new well was inches in diameter and drilled to a depth of feet a 12-inch pvc casing was inserted in the well and set by means of fine sand poured into the boring around the casing to a height approaching feet from the surface of the ground the final feet of the well boring was filled with concrete around the 12-inch pvc casing in order to seal the well and a pump was inserted into the casing other than the pump which can be removed and replaced the well has no moving parts the average life of this type of well is approximately years but can be longer or shorter depending on the water quality and the existence of minerals in the vicinity that can plug the casing a well can be maintained and cleaned to stem or remove the buildup of mineral deposits in the well casing the cost of such procedures ranges from dollar_figure to dollar_figure the cost of petitioners’ new well was dollar_figure petitioners’ old well was destroyed on date at a cost of dollar_figure the destruction of the old well is accomplished by perforating the casing filling it with a waterproof clay and capping it in general for federal tax purposes petitioners classified and consistently treated the trellis components drip irrigation systems and wells as equipment depreciable over to years for and and for all years before and after petitioners’ certified_public_accountant who specializes in wine industry accounting and taxation advised petitioners that he believed their method for depreciation of the trellising and drip irrigation systems to be correct as grape growers and wine makers it is petitioners’ understanding that the industry has treated trellising and drip irrigation systems as equipment depreciable over to years in sonoma county california grapevines become subject_to property_tax years after planting whereas trellises stakes and irrigation systems are subject_to such tax beginning in the year of installation discussion the parties disagree about whether trellising irrigation systems or a well are to be classified as machinery or land improvements for purposes of depreciation a depreciation deduction is allowed for the exhaustion wear_and_tear and obsolescence of property used in a trade_or_business sec_167 to some extent the recovery_period determines the amount of the depreciation deduction sec_168 the recovery_period is based on the class_life of the property sec_168 e there is no question in this case about whether the subject assets are depreciable for purposes of this case class_life is the asset_guideline_class in which such property is classified under revproc_83_35 1983_1_cb_745 and restated in revproc_87_56 to unless otherwise specified section references are to the internal_revenue_code as amended and in effect for the years under consideration rule references are to this court’s rules_of_practice and procedure incorporate the class lives that had been set under sec_168 see revproc_87_56 1987_2_cb_674 under revproc_87_56 c b pincite asset class land improvements includes improvements directly to or added to land whether such improvements are sec_1245 property or sec_1250 property provided such improvements are depreciable examples of such assets might include sidewalks roads canals waterways drainage facilities sewers wharves and docks bridges fences landscaping shrubbery or radio and television transmitting towers under revproc_87_56 asset class 1--agriculture includes machinery and equipment grain bins and fences but no other land improvements that are used in the production of crops or plants vines and trees the definitions provided in revproc_87_56 supra do not specifically denominate or classify trellises drip irrigation systems or wells and accordingly we must decide the category or class_life in which these assets most properly fit generally the class_life categories cover two broad groupings--permanent improvements to real_property and machinery and equipment that is not a real_property improvement the whiteco factors the question of whether property is a permanent improvement to land has long been a subject of tax controversy there are innumerable depreciation and investment_tax_credit cases where this very question has been addressed the parties here sought guidance from one such case where this court decided whether a particular asset was a land improvement ie permanent 65_tc_664 in whiteco indus inc the court analyzed existing caselaw and derived six factors that had been used in other cases to determine whether an asset is an improvement to real_property id pincite- the court in whiteco decided whether advertising signs outdoor billboards constitute tangible_personal_property within the meaning of sec_48 and therefore may qualify for the investment_credit provided in sec_38 the statute definitions and concepts in whiteco are sufficiently similar to the ones we consider so that we find it appropriate to use those guidelines to assist the court in this case although there are six tests they overlap each other but their primary focus is the question of the permanence of depreciable_property and the damage caused to it or to realty upon removal of the depreciable_property no one factor has been considered to be determinative and the guidelines have been used merely as an aid to deciding whether a particular property is or is not a permanent improvement to real_property 65_tc_664 involved the taxable years through and accordingly was construing sec_38 and sec_48 as in effect for those years the first factor concerns whether the property is capable of being moved and has it in fact been moved whiteco indus inc v commissioner supra pincite a the trellis components comprise posts stakes and wires the posts which vary in size are pounded approximately feet into the ground and are secured or stabilized by means of wire and anchors after the posts are in place wire is strung between them and stakes clips and other attachment devices are used to attach drip lines and to train the grapevines the record in this case reflects that trellising components could be moved ie the wires anchors and post can be dismantled and reused respondent made the point however that it was not financially practical to move trellis components although respondent may be correct about the financial efficacy and practicality nevertheless the concept being considered has more to do with the concepts of portability versus permanence there was credible testimony on behalf of petitioners that trellising had been moved and reused and petitioners’ practice was to store used posts and other trellising components for future use accordingly as to the trellising this factor favors petitioners b the drip irrigation system comprises pipe tubing and emitters risers and other assorted hardware a substantial portion of the pipe is located under the ground the portion above the ground other than the main lines and valves brings water and nutrients to each vine through tubing and drip emitters attached to the horizontal wires most of the drip irrigation systems may not be easily removed from the ground and generally become unusable when they are removed for example if new vines were to be planted the ground would first be broken by ripping with a large blade that incidentally tears up the system of irrigation pipes and tubes from under the ground although it is possible to salvage some of the above-ground tubing it is not always reusable the ripping process however damages the pipes and tubes so as to render them unusable there was no evidence in the record showing that a buried drip irrigation system had been removed and reused therefore the drip irrigation system cannot be readily removed from the earth this factor as it relates to the drip irrigation system favors respondent c the well boring and casing are obviously not capable of being moved and there is no evidence in the record that it could be moved or removed from the ground we note that petitioners’ old well was left in the ground and disabled rather than being removed from the ground this factor favors respondent the second factor is whether the property is designed or constructed to remain permanently in place id a the trellises are intended to be sufficiently secured to support the wires vines tubing etc but they are not designed to remain permanently in place for example the posts are not set in concrete in addition various components of the trellising are changed or modified to accommodate the growth or the feeding of the vines this factor favors petitioners b conversely with the exception of risers plastic tubing and drip emitters the drip irrigation system is placed feet underground in rows or lines that follow the rows of vines the evidence in the record indicates that with the exception of manifolds valves and main lines going to each block removal of the pipes and tubes is not easily accomplished and so for all practical purposes they are permanently embedded in the ground this factor favors respondent c obviously petitioners’ well was designed and intended to remain permanently in the ground this factor favors respondent the third factor concerns whether there are circumstances which tend to show the expected or intended length of affixation ie are there circumstances which show that the property may or will have to be moved whiteco indus inc v commissioner supra pincite a the trellising and drip irrigation systems are built and or installed with the intent that they service the grapevines during their useful_life the evidence shows that grapevines are expected to last approximately years but various factors can affect the usefulness of a vine a vine may become diseased requiring its removal a particular variety of wine grape may decline in demand and become economically obsolescent if those events occur the removal of old vines and the planting of new vines normally necessitate the removal of the trellising and drip irrigation systems as a general matter however it is intended that trellising and drip irrigation systems remain in place for the life of the grapevines for which they are constructed this factor tends to favor respondent with respect to the trellising and drip irrigation systems b the well is intended to remain in place indefinitely however wells have a limited usefulness due to minerals and other things in the water that can obstruct the well casing and pump equipment generally a well is expected to last more than years accordingly this factor favors respondent with respect to the well the fourth factor is how substantial a job is removal of the property and how time-consuming is it is it ‘readily removable’ id pincite the relevance of the movability of an asset was discussed in hosp corp of am subs v commissioner 109_tc_21 we found the following discussion from that case to be instructive movability itself is not the controlling factor in deciding whether the property lacks permanence 488_f2d_728 5th cir affg tcmemo_1972_239 see also consolidated freightways v commissioner f 2d continued a the installation of trellising is labor intensive and likewise the removal of the trellising would be labor intensive if the components were being salvaged for future use clearly the poles and likely the stakes could be easily salvaged for reuse the wire and related materials and hardware however would be more difficult and time consuming to salvage for reuse if one merely wished to remove the wire posts and related materials but not for reuse it could be accomplished quickly with large equipment in these situations the wood wire vines etc are piled in the field and burned with the metal parts including the wire remaining after the fire the resulting salvaged materials would not be suitable for reuse continued 9th cir a variety of factors is considered including where possible the function and design of the component in issue the intent of the taxpayer in installing the component and the effect of removal of the component on the building affg in part and revg in part 74_tc_768 61_tc_328 moveability per se does not determine whether or not property is personal_property dixie manor inc v united_states aftr 2d ustc par w d ky fact that walls often are removed because of a change in design by itself is not sufficient affd without published opinion 652_f2d_57 6th cir the fact that an item is not readily reusable in another location is evidence supporting the conclusion that it is to be treated as permanent in its present location 778_f2d_402 8th cir affg per curiam tcmemo_1984_532 id pincite accordingly with respect to the trellising this factor works both ways and is neutral not favoring petitioners or respondent b installation of a drip irrigation system is likewise labor intensive and its removal would be time consuming if the components were being salvaged for future use similarly if the drip irrigation system were removed by means of the ripping process the removal would be quick and inexpensive but the pipe tubing and related hardware would to a great extent be rendered unusable in the removal process therefore with respect to the drip irrigation system this factor works both ways and is neutral not favoring petitioners or respondent c the well would obviously not be readily removed from the earth and accordingly this factor favors respondent as to the well evidence in this case reflected that when a well has served its usefulness its tangible components are disabled in place rather than removed from the ground the fifth factor concerns how much damage will the property sustain upon its removal whiteco indus inc v commissioner supra pincite a as it relates to the trellising and drip irrigation systems in this case the fifth factor is the converse of the fourth factor if those components systems were carefully removed the time consumption or cost would be great and the damage would be small conversely if the components systems are quickly removed the damage to the property would be great accordingly this factor works both ways and is neutral not favoring petitioners or respondent b the well is permanently affixed to the realty and accordingly this factor favors respondent we note that the old well was disabled by perforation and filling rather than removal from the ground the sixth factor addresses the manner of affixation of the property to the land id in whiteco the court noted that the poles on which the taxpayer’s signs are mounted are placed in the ground and surrounded by concrete yet such poles can easily be removed from the ground and as a matter of practice they are so removed id a petitioners’ trellising similar to the advertising signs in 65_tc_664 were placed in the ground to a depth of to feet unlike the posts in whiteco petitioners’ trellising posts were not set in concrete making them even less difficult to remove from the ground than the posts in whiteco the posts are stabilized with wires and anchors which screw into the ground and may be unscrewed accordingly the trellising component system may easily be removed from the ground favoring petitioners with respect to this factor b although the drip irrigation system is not permanently affixed in the ground it is for the most part buried in trenches or cuts in the ground accordingly the drip irrigation systems may not be easily removed from the ground favoring respondent with respect to this factor c the well which is bored deeply into the ground and set in concrete for almost one-third of its 156-foot length would be most difficult to remove from the ground and accordingly this factor favors respondent final analysis in the context of petitioners’ grape-growing and winery operation there are assets which clearly fit into the category of permanent improvements one such example would be the winery building that is permanently affixed to the real_property it is clear to this court that petitioners’ well fits within that category and is no different from other permanent improvements to the real_property and should be included in the 20-year class_life for purposes of depreciation the six whiteco the parties made some arguments about the local taxing authorities’ classification of the assets we consider such classifications however are not controlling in matters of federal taxation and we have been guided by the federal statutes and case precedent in addition petitioners attempted to show that respondent had not previously questioned petitioners’ depreciation practices however there is ample precedent to the effect that each tax_year is considered separately and the commissioner’s failure to question or his informal approval of a practice in a prior year does not amount to an estoppel indus inc v commissioner supra factors serve to verify and support this result at the other end of the spectrum of assets used in petitioners’ grape-growing operation a tractor would be an example of machinery and equipment that is not a permanent improvement to land so as to classify it within the 10-year class_life for purposes of depreciation the trellising and drip irrigation systems fall somewhere between permanent buildings and farm machinery such as tractors and in some ways are intended to have permanence and in other ways do not the component parts of trellising and drip irrigation systems are personal_property before they are configured and placed in or on the ground by themselves the posts stakes wire pipe and tubing are all personal_property and could not be considered a permanent land improvement it is the manner in which they are combined and or affixed in the ground that changes their classification from personal to real_property there is no bright-line_test by which such assets could be readily classified as always being permanent land improvements or farm machinery or equipment for example an above-ground irrigation system would more likely be classified as machinery or equipment whereas one buried in the ground would more likely be classified as a permanent land improvement in each instance of an asset that is not clearly in one category or another we must consider these factors on an ad hoc basis with respect to the trellising components they are quite similar to fencing with the major difference being that one is intended to keep things in or out and the other to support grape- growing equipment or train grapevines both have posts that are set in the ground and some form of wire as components clearly a trellis may have more components and or be more complex than a fence but both are similarly constructed and maintained in that regard revproc_87_56 supra to the extent pertinent here categorizes the 10-year class_life as one including machinery and equipment grain bins and fences but no other land improvements that are used in the production of vines in that regard petitioners contend that trellising is farming equipment and not a land improvement conversely respondent contends the trellising is an improvement to land adding to the complexity of categorizing the trellising in one class_life category or the other is case precedent holding that posts anchored in concrete were not considered permanent improvements to realty whiteco indus inc v commissioner supra in this case the trellising posts are the component by which the trellis is attached to the ground we note that petitioners did not use concrete to fix the posts in place therefore petitioners’ position in this case is stronger than the taxpayer’s position in whiteco respondent’s best argument is the fact that the trellising is intended to last as long as the grapevines which have an expected life of approximately years respondent also makes the point that it may not be economically practicable to remove the trellising petitioners’ best arguments are that irrespective of the economics they have dismantled moved stored and or reused trellising and it is not permanently affixed to the ground respondent also attempts to convince us that a trellis is not machinery in the ordinary sense of the word perhaps respondent expects us to see generically a complex machine such as a tractor with an internal combustion engine when we think of the concept of a machine a machine however may be a simple lever the posts and stakes used by petitioners in combination with the wires constitute a machine that is adjusted modified and changed in order to train grapevines to produce high-quality grapes for the production of wine we therefore reject respondent’s argument that a trellis is not a machine within the meaning of the statutes and revenue procedures we consider as to the whiteco indus inc v commissioner supra factors as applied to trellising three favored petitioners one favored respondent and two were neutral in that regard we consider the whiteco factors and the assets classifications to mainly distinguish between those things that are permanently affixed to the real_estate and those that are not from that perspective we hold that trellising is not a permanent improvement to the real_property and accordingly petitioners properly classified it in the 10-year class the drip irrigation systems unlike the trellising are to a great extent buried in the ground parts of it may be repaired and maintained like the trellises but a substantial portion of it is under the ground and will remain there until the vines die or are removed for some other reason this court has already decided that grapevines are not tangible_personal_property for purposes of sec_179 see 72_tc_294 where the court held that the grapevines are an ‘inherently permanent structure’ within the meaning of sec_1_179-3 income_tax regs and therefore the grapevines are not tangible_personal_property in reaching the holding in kimmelman the court noted that most of the vines involved were planted at or around the turn of the century and none of these vines has been moved since then kimmelman v commissioner supra pincite to a great extent the underground piping is inextricably connected with the life of the vines we note that trellising was shown to have been adjusted moved or reused without moving or uprooting the vines whereas there was no such showing with respect to irrigation systems by way of analogy this court in deciding the question of whether sprinkler heads were an inherently_permanent_structure found that the sprinkler heads although easily removable were inseparably attached to an underground water system metro natl corp v commissioner tcmemo_1987_38 the court in metro natl corp held that the underground water system and sprinkler heads were an inherently_permanent_structure and not tangible_personal_property within the meaning of sec_48 with respect to the irrigation systems four of the six factors favored respondent’s position and two were neutral with respect to the drip irrigation system again the question of permanent attachment to the real_property is the primary focus of the factors and asset depreciation classes and the drip irrigation systems is more akin to a permanent improvement the placement of a substantial portion of the pipe or tubing in the ground and the difficulty of removing the system are the primary factors that render the irrigation systems we consider here to be permanent land improvements see eg 778_f2d_402 8th cir affg t c memo we note that some portions of petitioners’ irrigation systems were above the ground and regularly repaired and or replaced items such as tubing emmiters and the like may have been considered severable from the irrigation systems and not as land improvements if they had been separately claimed and or accounted for we were however presented with the sole choice of deciding whether the irrigation system as a whole was machinery or a permanent land improvement where the court declared the fact that an item is not readily reusable in another location certainly is evidence supporting the conclusion that it is to be treated as permanent in its present location accordingly we hold that the well and drip irrigation systems are permanent improvements to the real_property petitioners as an alternative argue that if the trellises or irrigation systems are land improvements they come within the exception of section of revproc_87_56 sec_5 c b pincite because we have decided that petitioners’ irrigation systems are in the context of this case land improvements we consider petitioners’ argument to the extent pertinent section dollar_figure of revproc_87_56 c b pincite contains the following special rules incorporated from revproc_83_35 sec_2 c b pincite land improvements includes other tangible_property that qualifies under sec_1_48-1 of the income_tax regulations however a structure that is essentially an item of machinery or equipment or a structure that houses property used as an integral part of an activity specified in sec_48 of the code if the use of the structure is so closely related to the use of the property that the structure clearly can be expected to be replaced when the property it initially houses is replaced is included in the asset_guideline_class appropriate to the equipment to which it is related respondent argues that in order for revproc_87_56 sec_5 to apply the irrigation system must be a structure that is essentially an item of machinery and equipment and there is equipment to which the structure is related from which we can determine the appropriate asset_guideline_class we agree with respondent because this court has already decided that grapevines are permanent improvements to land and or not tangible_personal_property petitioners’ alternative argument must fail accordingly we hold that respondent’s adjustments are sustained with respect to the irrigation systems and the well conversely we hold that the trellising is not a permanent land improvement and that respondent’s determination with respect to the trellising is in error to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number ------------------------------------------------------- ------------------------------------------ ------------------------------ --------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ------------- telephone number --------------------- refer reply to cc psi b03 plr-104758-11 date june x -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- ----------------------------------------- -------------------------------------------------------------------------------------------------- trust ------------------------------------------------------------------------------------------------------------------ ----------------------------------------- d1 d2 ---------------------- ---------------------- dear --------------------------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x by its authorized representative requesting a ruling under sec_1362 of the internal_revenue_code x made an election to be treated as an s_corporation x’s election was terminated effective d1 because all its stock was acquired by an ineligible shareholder x represents that the circumstances resulting in the termination of x’s s_corporation_election were inadvertent and not motivated by tax_avoidance x further represents that from d1 x and its shareholders have filed all returns consistent with x’s status as an s_corporation x and its shareholders have agreed to make such plr-104758-11 adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the ineffectiveness or termination the corporation will be treated as an s_corporation during the period specified by the secretary based solely on the facts submitted and the representations made we conclude that the termination of x’s s_corporation on d1 was inadvertent within the meaning of sec_1362 we further hold that pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from d1 and thereafter provided x’s s_corporation_election was valid and provided that the election was not otherwise terminated under sec_1361 this ruling is conditioned upon the ineligible shareholder of x’s stock transferring it to trust effective d2 in addition within days of the date of this letter the beneficiary of trust must file a qsst election effective d2 if x or its shareholders fail to treat themselves as described above this ruling is null and void except as specifically ruled above we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the code this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent plr-104758-11 pursuant to a power_of_attorney on file a copy of this letter is being sent to x’s authorized representative sincerely richard t probst senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ---------------------------------------- --------------------------- ---------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------------- -------------------------------------------------- telephone number -------------------- refer reply to cc intl b02 plr-103719-13 date date ty ------ legend taxpayer taxpayer fc country a year year year -------------------- ---------------- -------------------- ---------------- ------------------------------------------ ---------- ------ ------- ------- tax firm b ---------------------------------------- tax firm c ------------------------------- tax firm d ---------------------------------- dear ---------------------------------------- this is in response to a letter dated date and supplemental documentation submitted by taxpayers’ authorized representative that requested the consent of the commissioner of the internal_revenue_service commissioner for plr-103719-13 taxpayers to make a retroactive qualified_electing_fund qef election under sec_1295 of the internal_revenue_code code and sec_1_1295-3 with respect to taxpayers’ investment in fc the ruling contained in this letter is based upon information and representations submitted on behalf of taxpayers by their authorized representatives and accompanied by a penalties of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of this request_for_ruling such material is subject_to verification on examination the information submitted in the request is substantially as set forth below facts taxpayers are married u s citizens who own an interest in fc a publicly-traded foreign_corporation incorporated in country a that constitutes a passive_foreign_investment_company pfic within the meaning of sec_1297 of the code taxpayers initially acquired their interest in fc both directly and indirectly in year from year to year taxpayers engaged tax firm b for the preparation of their u s tax_return since year taxpayers have engaged tax firm c for the preparation of their u s tax_return tax firm b and tax firm c are qualified to provide tax_advice on international tax matters including issues related to pfics tax firm b and tax firm c advised taxpayers with regard to u s federal_income_tax matters including with respect to taxpayers’ ownership of fc taxpayers relied on tax firm b and tax firm c to provide advice with respect to filing and reporting requirements in general as well as any elections or statements that would be necessary to elect specific tax treatment neither tax firm b nor tax firm c identified fc as a pfic and as such did not advise taxpayers regarding any potential pfic reporting requirements or available elections in year another shareholder in fc contacted taxpayers about the potential pfic status of fc which led them to consult further with tax firm c after discussing the issue with their tax advisors taxpayers retained tax firm d to help them come into compliance based on the determination that fc had likely been a pfic since before year taxpayers requested tax firm d to submit a private_letter_ruling request on their behalf to make a retroactive qef election with respect to fc under sec_1_1295-3 retroactive to year taxpayers have submitted an affidavit under penalties of perjury describing the events that led to the failure to make the qef election by the election due_date including the roles of tax firm b and tax firm c taxpayers provided information regarding their ownership of fc to tax firm b and tax firm c and tax firm b and tax firm c had access to all relevant information with respect to fc taxpayers represent that in the relevant years fc was not identified as a pfic and taxpayers did not receive any advice regarding the availability of a qef election with respect to fc taxpayers plr-103719-13 have submitted affidavits from tax firm b and tax firm c corroborating the representations made by the taxpayers with respect to the discovery of fc’s pfic status taxpayers have paid an amount sufficient to eliminate any prejudice to the united_states government as a consequence of an inability to file amended returns in accordance with a closing_agreement between taxpayers and the commissioner further taxpayers filed an amended_return for each of their subsequent taxable years affected by the retroactive election if any taxpayers represent that as of the date of this request_for_ruling the pfic status of fc has not been raised by the irs on audit for any of the taxable years at issue ruling requested taxpayers request the consent of the commissioner to make a retroactive qef election with respect to fc under sec_1_1295-3 retroactive to year law sec_1295 of the code provides that a pfic will be treated as a qef with respect to a taxpayer if an election by the taxpayer under sec_1295 applies to such pfic for the taxable_year and the pfic complies with such requirements as the secretary may prescribe for purposes of determining the ordinary_earnings and net capital_gains of such company under sec_1295 a qef election may be made for any taxable_year at any time on or before the due_date determined with regard to extensions for filing the return for such taxable_year to the extent provided in regulations such an election may be made after such due_date if the taxpayer failed to make an election by the due_date because the taxpayer reasonably believed the company was not a pfic under sec_1_1295-3 a shareholder may request the consent of the commissioner to make a retroactive qef election for a taxable_year if the shareholder reasonably relied on a qualified_tax professional within the meaning of sec_1_1295-3 granting consent will not prejudice the interests of the united state sec_3 government as provided in sec_1_1295-3 the request is made before a representative of the internal_revenue_service raises upon audit the pfic status of the corporation for any taxable_year of the shareholder and the shareholder satisfies the procedural requirements of sec_1 f plr-103719-13 the procedural requirements include filing a request for consent to make a retroactive election with and submitting a user_fee to the office of the associate chief_counsel international sec_1_1295-3 additionally affidavits signed under penalties of perjury must be submitted that describe the events that led to the failure to make a qef election by the election due_date the discovery of such failure the engagement and responsibilities of the qualified_tax professional and the extent to which the shareholder relied on such professional sec_1_1295-3 and iii conclusion based on the information submitted and representations made with taxpayers’ ruling_request we conclude that taxpayers have satisfied sec_1_1295-3 accordingly consent is granted to taxpayers to make a retroactive qef election with respect to fc for year provided that taxpayers comply with the rules under sec_1_1295-3 regarding the time and manner for making the retroactive qef election we will accordingly approve a closing_agreement with taxpayers with respect to those issues affecting their tax_liability on the basis set forth above the necessary closing_agreement for taxpayers has been prepared in triplicate and is enclosed in pursuance of our practice with respect to such agreements the agreement contains a stipulation to the effect that any change or modification of applicable statutes enacted subsequent to the date of this agreement and made applicable to the taxable_period involved will render the agreement ineffective to the extent that it is dependent upon such statutes except as specifically set forth above no opinion is expressed or implied concerning the u s federal tax consequences of the facts described above under any other provision of the code this private_letter_ruling is directed only to the taxpayers who requested it sec_6110 provides that it may not be used or cited as precedent plr-103719-13 a copy of this letter_ruling must be attached to any federal_income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to taxpayers’ authorized representative sincerely jeffery g mitchell branch chief branch office of associate chief_counsel international


t c summary opinion united_states tax_court suzanne moore bacon petitioner v commissioner of internal revenue respondent docket no 28012-09s filed date suzanne moore bacon pro_se jeremy d cameron for respondent summary opinion armen special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not unless otherwise indicated all subsequent section references are to the continued reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined a deficiency in petitioner’s federal_income_tax for of dollar_figure the sole issue for decision is whether petitioner received income in from cancellation of indebtedness coi we hold that she did not background all of the facts have been stipulated and they are so found at the time that the petition was filed petitioner resided in the state of florida northridge earthquake following the earthquake that occurred in northridge california in mid- date petitioner applied to the federal emergency management agency fema for disaster assistance funds to make repairs on a residence on mayall street in northridge at the time of her application she represented to fema that the mayall street property was her primary residence continued internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure in late date petitioner received disaster assistance funds from fema totaling dollar_figure to repair earthquake damage sustained at the mayall street address fema subsequently determined that such property did not qualify as petitioner’s primary residence and that petitioner was therefore not eligible to receive assistance in date fema notified petitioner of its determination and sought to recoup the disaster assistance funds that petitioner had previously received petitioner did not dispute fema’s determination nor did she return any of the disaster assistance funds to fema fema’s efforts to recoup the disaster assistance funds between date and date fema sent petitioner eight letters and left four voicemail messages seeking to collect the amount due when petitioner did not make any payments during that period fema ultimately prepared a claims collection litigation report cclr in october1997 and referred petitioner’s account to the department of justice doj for judicial enforcement of its claims the cclr stated that petitioner’s default date was date and that the government’s claim would expire on date six years after the original default this was consistent with the statute limiting the time for the government to commence an action to recover the debt u s c sec discussed below the doj never commenced any suit or initiated any other action to recover the funds in date after petitioner’s account had remained dormant for over years fema mailed petitioner a form 1099-c cancellation of debt reporting discharge_of_indebtedness of dollar_figure for such amount represented the principal_amount initially distributed to petitioner in date plus the interest and penalties accrued through petitioner did not report any coi on her timely filed federal_income_tax return for notice_of_deficiency in date respondent determined a deficiency of dollar_figure for by increasing petitioner’s income by the amount reported on the aforementioned form 1099-c petitioner responded by filing a petition for redetermination with this court subsequently petitioner filed a petition with the bankruptcy court and proceedings in this court were stayed from date through date see u s c sec_362 the internal_revenue_service did not pursue a claim relating to the coi in the bankruptcy court cf sec_6871 discussion the court decides the issue in this case on the basis of the evidence and without regard to either the burden of production see sec_6201 del monico v commissioner tcmemo_2004_92 or the burden_of_proof see rule a 290_us_111 994_f2d_1542 11th cir aff’g tcmemo_1991_636 cf sec_7491 cancellation_of_indebtedness_income sec_61 generally defines gross_income as all income from whatever source derived sec_61 specifically provides that gross_income includes income from the discharge_of_indebtedness commonly referred to as cancellation of indebtedness or coi income see 531_us_206 284_us_1 coi generally produces income in an amount equal to the difference between the amount due on the obligation and the amount_paid for the discharge see 23_f3d_1032 6th cir aff’g tcmemo_1992_673 the rationale of this principle is that coi provides the debtor with an economic benefit that is equivalent to income united_states v kirby lumber co u s pincite see 216_f3d_537 6th cir aff’g tcmemo_1998_196 88_tc_435 see also sec_108 the question as to the year in which a taxpayer realizes coi income is one of fact to be determined on the basis of the evidence see 41_tc_44 callan court co v commissioner tcmemo_1965_261 a debt is deemed discharged and coi income is generated the moment it becomes clear that such debt will never be repaid cozzi v commissioner t c pincite determining when that moment occurs requires a practical assessment of the facts and circumstances id any ‘identifiable event’ which fixes the creditor’s loss with certainty may be taken into consideration id citing 274_us_398 kleber v commissioner tcmemo_2011_233 wl the court has acknowledged that it is often impossible to find only one event that clearly establishes the moment at which a debt is discharged such as pinpointing the moment when property has been abandoned see cozzi v commissioner t c pincite that is not the case here there exist a number of identifiable events any one of which could reasonably indicate that a debt has been discharged sec_1_6050p-1 and iv income_tax regs for example provides an exclusive list of eight identifiable events under which debt is discharged for information reporting purposes when one or more of these identifiable events has occurred the creditor must issue a form 1099-c reporting the existence of coi income accordingly we address the identifiable_event that informs our decision issuance of form 1099-c in date fema issued a form 1099-c reporting the cancellation in of indebtedness petitioner incurred in respondent contends that petitioner’s debt was discharged in because fema issued the form 1099-c for that year although the issuance of a form 1099-c by a creditor is indicative of the coi it is not dispositive of that matter kleber v commissioner wl at in the instant case it appears that the issuance of the form c in was in error because as discussed below petitioner’s debt was in fact discharged by operation of law some six years earlier on date u s c sec between date and date fema attempted to collect the debt from petitioner through administrative procedures on date fema referred the matter to the doj for judicial enforcement of its claims against petitioner according to the cclr that fema prepared to accompany the referral the period of limitations on petitioner’s debt would expire on date six years after the date of petitioner’s original default the six-year limitation period derives from u s c sec which provides in relevant part that every action for money damages brought by the united_states or an officer or agency thereof which is founded upon any contract express or implied in law or fact shall be barred unless the complaint is filed within six years after the right of action accrues as a general proposition the sovereign is not subject_to time limitations on its actions 549_us_84 304_us_126 however in enacting u s c sec congress bound the united_states to act promptly in protecting its financial interest and affirmatively barred actions not brought within the specified six-year period accordingly the expiration of the period of limitations on date extinguished the right of the united_states to collect the debt and extinguished the debt as a result sec_1_6050p-1 income_tax regs recognizes this situation as an identifiable_event that cancels indebtedness generates coi income and requires the issuance of a form 1099-c enumerated as the third of eight identifiable events giving rise to coi income subdivision i c provides although u s c sec a bars the government from filing a complaint greater than six years after the right of action accrues it does not prohibit the assertion of the obligation as a counterclaim in a suit brought against the united_states or by offset see u s c sec f 856_f2d_1165 8th cir however neither of these exceptions is applicable in the instant case c a cancellation or extinguishment of an indebtedness upon the expiration of the statute_of_limitations for collection of an indebtedness subject_to the limitations described in paragraph b ii of this section or upon the expiration of a statutory period for filing a claim or commencing a deficiency judgment proceeding emphasis added the court recognizes that in general the expiration of a period of limitations on collection of indebtedness does not extinguish an underlying debt obligation but simply provides an affirmative defense for the debtor in an action by the creditor miller trust v commissioner 76_tc_191 this is confirmed by sec_1_6050p-1 income_tax regs however the instant case deals with the second clause of the subdivision expiration of a statutory period for filing a claim sec_1_6050p-1 income_tax regs that clause is not so limited petitioner defaulted on her debt to fema in or around date fema curtailed its efforts to collect the debt administratively and referred the matter to the doj in the period of limitations for filing an action expired in date and the underlying debt was extinguished when the united_states became time barred from collection through judicial enforcement because the statutory period for filing an action had expired in there was no debt in existence when fema issued the form 1099-c regarding calendar_year and the form 1099-c appears to have been issued in error see id conclusion petitioner did not receive coi income from fema in accordingly decision will be entered for petitioner


internal_revenue_service department of the treasury number release date index number washington dc in re person to contact telephone number refer reply to cc psi b09-plr-153598-01 date date legend decedent spouse trust date date date date date date attorney dollar_figurex dear this responds to your letter dated date requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to make a reverse qualified_terminable_interest_property qtip_election under sec_2652 of the internal_revenue_code the facts and representations submitted are summarized as follows decedent and spouse created a revocable_living_trust trust on date decedent and spouse amended and restated trust on date and further amended trust on date and date article third section i subsection a of trust provides that as long as both spouses are living the trustee shall pay to both spouses as community_property as much of the net_income and principal of the community estate as either spouse may plr-153598-01 request from time to time any undistributed_income shall be accumulated and added to principal article third section ii provides that after the death of the predeceased spouse the trustee shall divide the trust estate including any additions under the will of the predeceased spouse or otherwise into shares as follows under article third section ii subsection a the survivors trust shall consist of the surviving spouse’s one-half interest in the community estate the surviving spouse’s separate estate if any included in the trust estate the predeceased spouse’s interest in any residential property under article third section ii subsection b the marital_deduction_trust shall consist of the smallest amount necessary to reduce to zero the federal estate_tax payable as a result of the predeceased spouse’s death or if that is not possible to reduce the federal estate_tax to the smallest possible amount under article third section ii subsection c the bypass_trust shall consist of the balance of the trust estate article third section iv subsection a provides that the marital_deduction_trust shall be divided into two trusts the exempt marital trust and the non-exempt marital trust the exempt marital trust shall consist of an amount equal to the predeceased spouse’s generation skipping transfer gst tax exemption reduced by the aggregate amount of the predeceased spouse’s gst tax exemption that has been allocated to other transfers of property the non-exempt marital trust shall consist of the balance of the marital_deduction_trust article third section iv subsection b provides that the trustee shall pay to or apply for the benefit of the surviving_spouse the net_income of the marital trusts quarter-annually or at more frequent intervals article third section iv subsection b provides that the trustee shall pay to or apply for the benefit of the surviving_spouse from time to time as much of the principal of the marital trusts as the trustee deems reasonably necessary for the proper health maintenance and support of the surviving_spouse in his or her accustomed manner of living to the extent practicable all discretionary invasions of principal for the benefit of the surviving_spouse shall be made from the non-exempt marital trust article third section iv subsection b provides that in addition to other_payments that the surviving_spouse may receive the trustee shall pay to the surviving_spouse from the principal of the non-exempt marital trust such amounts as the surviving_spouse may request from time to time in writing not exceeding in any calendar_year the greater of the following amounts five-thousand dollars or five-percent of the value of the principal of the non-exempt marital trust determined at the end of the calendar_year this right of withdrawal is noncumulative plr-153598-01 article third section iv subsection b provides that after the death of the surviving_spouse the trustee shall distribute all or any part of the balance of the marital trusts to or for the benefit of such one or more persons and entities as the surviving_spouse may appoint by a will or codicil thereto specifically referring to and exercising this limited testamentary_power_of_appointment provided however that in no event may the surviving_spouse exercise this power_of_appointment in favor of the surviving_spouse the estate of the surviving_spouse the creditors of surviving_spouse or the creditors of the estate of the surviving_spouse decedent died on date survived by spouse a portion of decedent’s estate was allocated to the marital_deduction_trust which was further divided pursuant to article third section iv subsection a of the trust into exempt and non-exempt trusts spouse as executor of decedent’s estate timely filed a form_706 estate and generation-skipping_transfer_tax return which was prepared by attorney an attorney experienced in the area of estate_planning on schedule m of the form_706 a qtip_election was made under sec_2056 for both the exempt marital trust and the non-exempt marital trust although attorney allocated decedent’s gst_exemption of dollar_figurex to the exempt marital trust by listing the exempt marital trust on schedule r of the form_706 attorney failed to check the box on schedule r to make the reverse_qtip_election spouse died on date while assisting executor in the preparation of form_706 for spouse’s estate attorney reviewed the form_706 filed for decedent’s estate and discovered that the reverse_qtip_election had not been made for the exempt marital trust decedent’s estate now requests an extension of time under sec_301_9100-3 to make a reverse_qtip_election under sec_2652 of the internal_revenue_code with respect to the assets of the exempt marital trust sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a resident_of_the_united_states sec_2056 provides that for purposes of the tax imposed by sec_2001 the value of the taxable_estate is to be determined by deducting from the value of the gross_estate an amount equal to the value of any interest in property that passes or has passed_from_the_decedent to the surviving_spouse sec_2056 provides in pertinent part that no deduction shall be allowed under sec_2056 where on the lapse of time on the occurrence of an event or contingency or on the failure of an event or contingency to occur an interest passing to the surviving_spouse will terminate or fail sec_2056 provides that in the case of qualified_terminable_interest_property the entire property is treated as passing to the surviving_spouse for purposes plr-153598-01 of sec_2056 and no part of such property shall be treated as passing to any person other than the surviving_spouse for purposes of sec_2056 sec_2056 provides that the term qualified_terminable_interest_property means property i which passes from the decedent ii in which the surviving_spouse has a qualifying_income_interest_for_life and iii to which an election under sec_2056 applies sec_2056 provides that an election under sec_2056 with respect to any property shall be made by the executor on the return of tax imposed by sec_2001 such an election once made shall be irrevocable under sec_2044 any property in which the decedent had a qualifying_income_interest_for_life and for which a deduction is allowed under sec_2056 is includible in the decedent’s gross_estate sec_2044 provides that for purposes of chapter and chapter property includible in the decedent’s gross_estate under sec_2044 a shall be treated as property passing from the decedent sec_2601 imposes a tax on every generation-skipping_transfer made after date sec_2611 provides that the term generation-skipping_transfer means a taxable_distribution a taxable_termination and a direct_skip sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst tax exemption of dollar_figure adjusted for inflation under sec_2631 that may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2632 provides that any allocation by an individual of his gstt exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual’s estate determined with regard to extensions regardless of whether such a return is required to be filed sec_2632 provides that in general any portion of an individual’s gstt exemption that has not been allocated within the time prescribed by sec_2632 shall be deemed to be allocated as follows- a first to property which is the subject of a direct_skip occurring at such individual’s death and b second to trusts with respect to which such individual is the transferor and from which a taxable_distribution or a taxable_termination might occur at or after such individual’s death sec_2652 provides in pertinent part that for purposes of chapter the term transferor means- a in the case of any property subject_to the tax imposed by chapter the decedent and b in the case of any property subject_to the tax plr-153598-01 imposed by chapter the donor an individual shall be treated as transferring any property with respect to which such individual is the transferor sec_2652 provides that in the case of- a any trust with respect to which a deduction is allowed to the decedent under sec_2056 by reason of subsection b thereof and b any trust with respect to which a deduction to the donor spouse is allowed under sec_2523 by reason of subsection f thereof the estate of the decedent or the donor spouse as the case may be may elect to treat all of the property in such trust for purposes of this chapter as if the election to be treated as qualified_terminable_interest_property had not been made sec_26_2632-1 of the generation-skipping_transfer_tax regulations provides in pertinent part that no automatic allocation of gstt exemption is made to a_trust that will have a new transferor with respect to the entire trust prior to the occurrence of any gstt with respect to the new trust sec_26_2652-2 provides that a reverse_qtip_election is made on the return on which the qtip_election is made under sec_301_9100-1 the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-2 provides an automatic_extension of time for making certain elections sec_301_9100-3 provides that in general requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 must be made under the rules of sec_301_9100-3 requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore an extension of time is granted until days from the date of this letter for making a reverse_qtip_election under sec_2652 with respect to the exempt marital trust the election should be made on a supplemental form_706 filed with the cincinnati service_center a copy of this letter should be attached to the supplemental form_706 a copy is enclosed for that purpose plr-153598-01 an extension of time to make the reverse_qtip_election under sec_2652 does not extend the time to make an allocation of any remaining gst_exemption on the form_706 schedule r as originally filed dollar_figurex of decedent’s gst_exemption was allocated to the exempt marital trust under sec_2631 this allocation is irrevocable except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely paul f kugler associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter


t c summary opinion united_states tax_court robert lyle verity petitioner v commissioner of internal revenue respondent docket no 2483-04s filed date robert lyle verity pro_se steven i josephy for respondent armen special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time that the petition was filed the decision to unless otherwise indicated all subsequent section references are to the internal_revenue_code in effect for and the taxable years in issue and all rule references are to the tax_court rules_of_practice and procedure be entered is not reviewable by any other court and this opinion should not be cited as authority respondent determined deficiencies in petitioner’s federal income taxes for the taxable years and of dollar_figure and dollar_figure respectively after the parties’ concessions the issue for decision is whether petitioner is entitled to deductions claimed on schedules c profit or loss from business for the years in issue including an additional deduction for lodging of dollar_figure not previously claimed on his schedule c for we hold that he is not adjustments to the amount of petitioner’s itemized_deductions self-employment_tax self-employment_tax deduction and personal_exemption are purely computational matters the resolution of which is dependent on our disposition of the disputed issues petitioner concedes he is not entitled to schedule c deductions of dollar_figure for he is not entitled to a deduction for travel_expenses of dollar_figure for he received unreported schedule c gross_receipts of dollar_figure in he received unreported wages of dollar_figure in he is not entitled to a loss on the sale of his personal_residence of dollar_figure for and he is not entitled to a deduction for contributions to a retirement_plan of dollar_figure for respondent concedes that petitioner is entitled to a reduction of capital_gain reported on the sale of his personal_residence of dollar_figure for he is entitled to a reduction of gain reported on the sale of a depreciable asset of dollar_figure for and he is entitled to an additional schedule e deduction for rental expenses of dollar_figure for background some of the facts have been stipulated and they are so found we incorporate by reference the parties’ stipulation of facts and accompanying exhibits at the time that the petition was filed petitioner resided in aurora colorado from through date petitioner maintained his personal_residence pincite malta street aurora colorado aurora home at the end of date petitioner sold the aurora home and moved to australia at the beginning of date after he sold the aurora home petitioner moved his personal belongings into storage in addition to the aurora home petitioner owned a condominium in a three-story multiunit complex at beaver creek west a resort community in avon colorado which he purchased on date the condominium was big_number square feet with three bedrooms and three bathrooms since purchasing the condominium petitioner has paid a management company to operate the condominium as a fully furnished short-term daily rental property petitioner stayed at the condominium for days at the end of date between the time he sold the aurora home and moved to australia petitioner is a computer consultant he conducts his work through his self-employed business named unix llc unix at all relevant times petitioner’s business address was s syracuse denver colorado syracuse address and petitioner maintained a business bank account in colorado the nature of petitioner’s work is administering large scale computer systems at the software level which petitioner generally performs from a remote location such as his home occasionally petitioner works on site at various companies setting up the system’s hardware as part of expanding his business petitioner desired to develop consulting work with companies in australia petitioner’s goal was to set up the system hardware and then contract to administer the machine remotely to that end petitioner became involved with consultants exchange australasia cxc which is an international contractor management company that matches independent contractors with global companies through cxc petitioner entered into an employment contract with getnere pty ltd getnere an outsourcing agency in australia under this contract getnere agreed to employ petitioner on a full-time basis not to exceed months duration beginning on april through date getnere however employed petitioner only from april through date while with getnere petitioner was contracted out to ibm and hewlett packard petitioner had purchased a round-trip ticket with a fixed return date of or about date petitioner obtained a year business visa which required him to depart australia every months for a short_period when he arrived in australia petitioner opened a bank account at an australian bank petitioner however received payment for his consulting services performed in australia by wire transfer to his business bank account in colorado on date petitioner and melissa lynch ms lynch entered into a residential tenancy agreement to rent a furnished three-bedroom apartment located pincite the crescent manly in manly sydney australia the term of this lease agreement was months beginning on april through date in date petitioner switched to another outsourcing agency called e-tech pty ltd e-tech on date e- tech unix as the subcontractor and petitioner as the assigned worker entered into a subcontractor agreement wherein e-tech agreed to provide petitioner’s services to hewlett packard australia limited the term of this agreement wa sec_3 months beginning on july through date this contract was renewed and continued until petitioner’s departure from australia for these departures petitioner went to new zealand fiji and singapore after returning to the united_states petitioner did not close this account in date while with e-tech petitioner was contracted out to hewlett packard and johnson johnson medical on date petitioner and ms lynch entered into a residential tenancy agreement to rent a residence pincite george street manly the term of this lease agreement was months beginning on date through date on date petitioner returned to the united_states and stayed at the condominium for days thereafter he moved to an apartment in denver colorado to work on another consulting contract during and petitioner spent approximately consecutive days outside of the united_states petitioner returned to australia in september and date to perform additional consulting services for australian companies petitioner filed form sec_1040 u s individual_income_tax_return for each of the years in issue on each return petitioner listed his address as the syracuse address petitioner attached to each return inter alia a schedule c and a schedule e supplemental income and loss on each schedule c petitioner identified his business name as unix his principal business or profession as admin co for in addition petitioner stayed at the condominium as follows days in days in days in days in days in and during christmas in and as computer programming for and his business activity code as signifying computer systems design and related_services on each schedule c petitioner listed his business address as the syracuse address schedules c reflected expenses of dollar_figure and dollar_figure for and respectively expenses consisted of automobile expenses depreciation insurance other interest legal and professional services office expense rent or lease of vehicles machinery and equipment supplies taxes and licenses travel meals and entertainment and other expenses other expenses included bank charges telephone other business telephone continuing education and training expenses contract labor fees internet charges dues and subscriptions storage costs web site maintenance parking fees postage tolls taxis lodging and miscellaneous on each schedule e petitioner identified the avon condominium as rental real_estate property schedules e reflected expenses of dollar_figure and dollar_figure for and respectively the expenses consisted of management fees mortgage interest repairs supplies taxes and utilities in the notice_of_deficiency respondent disallowed as relevant herein the following expense lodging meals and entertainment miscellaneous car expenses car lease total dollar_figure big_number big_number -0- -0- big_number discussion dollar_figure -0- big_number big_number generally the commissioner’s determinations are presumed correct and the taxpayer bears the burden of proving that those determinations are erroneous rule a 290_us_111 moreover deductions are a matter of legislative grace and the taxpayer bears the burden of proving he or she is entitled to any deduction claimed 503_us_79 292_us_435 welch v helvering supra this includes the burden of substantiation 65_tc_87 affd per curiam 540_f2d_821 5th cir sec_162 allows a taxpayer to deduct traveling expenses including amounts expended for meals_and_lodging that are paid_or_incurred while away from home in the pursuit of a we render a decision on the merits based on the preponderance_of_the_evidence without regard to the burden_of_proof under sec_7491 for respondent determined that petitioner substantiated payment of the deductions at issue for we conclude on the basis of the record that petitioner substantiated all of the deductions claimed accordingly substantiation is not in issue trade_or_business for purposes of sec_162 a taxpayer shall not be treated as being temporarily away from home during any period of employment if such period exceed sec_1 year sec_162 sec_262 however disallows deductions for personal living or family_expenses there are three criteria for determining whether travel_expenses are deductible the expense must be reasonable and necessary they must be incurred while away from home and they must be incurred in pursuit of a trade_or_business 326_us_465 for income_tax purposes the term home in sec_162 means a taxpayer’s tax_home ie the taxpayer’s principal place of employment and not where the taxpayer’s personal_residence is located if different from the principal place of employment 74_tc_578 72_tc_190 affd 662_f2d_253 4th cir 49_tc_557 an exception to this rule exists when a taxpayer accepts employment away from the taxpayer’s personal_residence and such employment is temporary rather than indefinite the vocational tax_home concept was first construed by this court in 5_bta_1181 and has been steadfastly upheld by this court see eg 86_tc_589 85_tc_798 67_tc_1 49_tc_557 358_us_59 under this exception a taxpayer’s tax_home becomes the vicinity of the taxpayer’s primary personal_residence in a real and substantial sense id see deamer v commissioner tcmemo_1984_63 affd 752_f2d_337 8th cir rohr v commissioner tcmemo_1982_117 employment is considered temporary only if its termination can be foreseen within a reasonably short_period of time but such temporary employment may become indefinite if it is expected to last for a substantial an indefinite or an indeterminate duration or due to changed circumstances or the passage of time 66_tc_467 kroll v commissioner supra pincite whether a job is temporary or indefinite depends on the facts and circumstances of each case peurifoy v commissioner supra pincite the purpose of the deduction for away from home expenses is to mitigate the burden of the taxpayer who because of the exigencies of his trade_or_business must maintain two places of abode and thereby incur additional and duplicate living_expenses kroll v commissioner surpa pincite an obvious precondition to a taxpayer’s being away from home is that the taxpayer have a home see 67_tc_824 this means that the taxpayer must have incurred substantial continuing living_expenses at a permanent place of residence and must also have paid the expenses_incurred in connection with his or her business while on the road see 513_f2d_697 6th cir affg tcmemo_1974_160 see also 308_f2d_204 9th cir bochner v commissioner supra where the taxpayer maintains two residences for his own convenience however such cost would be considered personal in nature and not deductible sec_262 commissioner v flowers supra pincite in the event that a taxpayer does not have a fixed personal_residence the taxpayer is considered an itinerant and the taxpayer’s tax_home follows the taxpayer to each place of employment see 629_f2d_1071 5th cir affg tcmemo_1977_345 a temporary versus indefinite employment we first decide whether petitioner’s employment in australia was temporary or indefinite petitioner contends that he intended to work in australia only temporarily to establish business contacts such that he could continue consulting for such companies remotely from colorado in contrast respondent contends that petitioner’s employment in australia was indeterminate because petitioner anticipated staying in australia beyond year if he had work we disagree with respondent petitioner purchased a round-trip ticket to australia good for only year which he in fact used to return to the united_states within approximately months in addition he entered into short-term employment contracts the getnere contract was only for months and the e-tech contract was initially for months but it was extended for an additional months petitioner also entered into short-term_lease agreements for 6_month durations respondent however argues that petitioner would have stayed in australia if he had work admittedly petitioner testified at trial that his contracts could be extended and that if he had additional work he could have obtained another visa to stay in australia notwithstanding the fact of the matter is that petitioner’s e-tech contract was not extended he did not receive additional work and he immediately returned to the united_states in less than year in light of the nature of his business and the foreign location where he performed his work termination of petitioner’s employment could be foreseen within a reasonably short_period of time accordingly we conclude that petitioner’s employment in australia was temporary under the facts and circumstances of this case b tax_home we next decide where petitioner’s tax_home was for the relevant period petitioner contends that his tax_home was his condominium in avon colorado in support of his contention petitioner relies on the following factual predicate petitioner lived in the condominium before departing to australia he kept all his personal belongings in storage in colorado he maintained unix’s business headquarters and bank account in colorado which indicate his personal desire to return to colorado and he lived in the condominium when he returned from australia on the other hand respondent contends that australia was petitioner’s tax_home we agree with respondent there is ample evidence in the record to support the conclusion that petitioner’s condominium in avon colorado did not constitute his primary personal_residence petitioner lived in the condominium for only days before departing the united_states in and only days after he returned from australia in it appears that petitioner resided in the condominium in for days because it was between the time that he sold the aurora home in which he resided for approximately years before departing the united_states and his departure to australia in fact petitioner did not move any of his personal belongings into the condominium but rather placed them in storage in petitioner resided in the condominium between the time he returned from australia and moved into an apartment in denver colorado living temporarily in the condominium for petitioner testified at trial that he kept some personal belongings in the condominium we note however that petitioner maintained the condominium as a fully-furnished rental property as such petitioner did not move his personal belongings from the aurora home to the condominium before relocating to australia and days in and respectively hardly constitutes classifying it as his primary personal_residence at trial petitioner provided conflicting testimony about his intent with regard to the condominium first petitioner testified that the condominium was his second home when he owned the aurora home then it was his home after he sold the aurora home and finally it was his retirement home thus we are unable to conclude that the condominium was his home in the real and substantial sense before he left for australia during his stay in australia and after his return from australia petitioner argues however that he paid living_expenses for both the condominium and the apartments in australia during the relevant time period we decline to find that the expenses petitioner paid with regard to the condominium constitute duplicate living_expenses at all times the condominium has always been petitioner’s rental property which he reports as such on schedule e petitioner continued to pay the same management fees since he has owned the condominium including during the time he resided in the aurora home and in australia these expenses constitute investment_expenses in rental property rather than substantial continuing living_expenses for purposes of sec_162 simply put petitioner’s labeling of the condominium as his home does not satisfy the requirements of a tax_home within the meaning of sec_162 on the basis of the record petitioner was an itinerant for purposes of sec_162 therefore his place of residence follows him to his place of employment see michel v commissioner f 2d pincite4 although petitioner may have maintained his business headquarters in colorado and had all his compensation wired to his business bank account in colorado his principal place of employment was in australia indeed all of the expenses at issue were incurred for petitioner’s consulting services performed in australia not in colorado accordingly we conclude that petitioner’s tax_home for purposes of sec_162 for the relevant time period was australia we thus sustain respondent’s determination conclusion we have considered all of the other arguments made by petitioner and to the extent that we have not specifically addressed them we conclude that they are without merit reviewed and adopted as the report of the small_tax_case division to reflect our disposition of the disputed issues as well as the parties’ concessions decision will be entered under rule