t c memo united_states tax_court talbot matthew almquist and rula almquist petitioners v commissioner of internal revenue respondent docket no filed date ps claimed a deduction for rental real_estate losses on their schedule e supplemental income and loss for two rental real_estate properties r determined that ps were not real_estate professionals and issued a notice_of_deficiency disallowing a current deduction for the claimed rental real_estate losses r also determined an sec_6662 accuracy-related_penalty held ps are unable to currently deduct their losses from their rental real_estate activity pursuant to sec_469 because they did not meet the passive_activity_loss exception for a rental real_estate_professional held further ps are liable for the sec_6662 accuracy- related penalty talbot matthew almquist and rula almquist pro_se kris h an for respondent memorandum findings_of_fact and opinion wherry judge this case is before the court on a petition for redetermination of a deficiency in income_tax respondent determined for petitioners’ tax_year petitioners timely filed a joint federal_income_tax return for the tax_year that was prepared for them by their certified public accounting firm of marks devine respondent issued a notice_of_deficiency on date for the tax_year disallowing a deduction for petitioners’ losses from their rental real_estate activity as passive and determining an accuracy- related penalty under sec_6662 unless otherwise indicated all section references are to the internal_revenue_code_of_1986 code as amended and in effect for the taxable_year at issue all rule references are to the tax_court rules_of_practice and procedure after concessions by the parties the only issues for decision are whether petitioners’ real_estate loss of dollar_figure reported on schedule e supplemental income and loss for the tax_year is subject_to the passive loss limitation under sec_469 and whether petitioners are liable for the sec_6662 accuracy-related_penalty findings_of_fact some of the facts have been stipulated and are so found the stipulations of the parties with accompanying exhibits are incorporated herein by reference at the time the petition was filed petitioners resided in encino california general background talbot matthew almquist worked as an executive at oakwood worldwide oakwood a k a r b realty group for over years including the tax calendar_year while working for oakwood mr almquist managed rental buildings and oversaw employees since mr almquist and rula almquist have owned and managed from one to three rental properties of their own the parties agree that petitioners did not receive the unreported capital_gain of dollar_figure that was determined in the notice_of_deficiency petitioners incurred a capital_loss of dollar_figure for the taxable_year and petitioners are entitled to a mortgage interest_deduction of dollar_figure reported on schedule a itemized_deductions for the taxable_year petitioners’ occupations in mr almquist worked as the vice president of operations for oakwood and received a salary of dollar_figure in mr almquist estimated that he spent no more than hours a week working for oakwood and that over the course of the year he worked between and hours petitioners did not provide any paperwork from oakwood or other documents supporting mr almquist’s claim that he worked no more than to hours in for oakwood mr almquist continued to work for oakwood until when his job was terminated and he was provided with a severance check for dollar_figure in mrs almquist worked as an operations manager for archstone communities llc archstone mrs almquist oversaw archstone’s properties buildings and apartments rental properties in petitioners owned two rental real_estate properties one of their rental properties is in indio california indio property petitioners’ home in oakwood california is approximately miles from indio california the indio property is an approximately big_number square-foot residence purchased new in petitioners rented the indio property out to beverly humphrey in and all dollar amounts are rounded to the nearest dollar renewed the lease from january through date for dollar_figure a month mr almquist maintained the indio property which although purchased new did not come with the amenities needed to rent it as a furnished apartment accordingly he spent considerable time preparing it for potential renters some of the preparation activities included replacing the air conditioner condenser landscaping the yard posting ads and making sure the property had sufficient furnishings the other rental property is in naples florida naples property the naples property was constructed in and is approximately big_number square feet in size on date petitioners hired naples realty services inc realty to find possible renters for the naples property in petitioners did not visit the naples property petitioners rented out the naples property to one renter starting date for one year realty collected the dollar_figure per month rent from the renter withheld its fee and then forwarded the remaining rent to petitioners both of petitioners’ properties were furnished and were intended to be rented out as fully furnished units generally renting furnished residential property requires more upkeep and time than renting unfurnished residential property because the furnished property should be equipped with reasonable appliances furnishings and necessities for the renters renters and potential renters faxed correspondence to an electronic fax number then the correspondence was automatically forwarded to mrs almquist’s email address mr almquist had access to mrs almquist’s email and he worked on the rental property business using her email documentation of the hours worked petitioners provided one calendar and two different logs describing the hours worked on the rental properties at the start of respondent’s examination of petitioners’ tax_return petitioners created the calendar from very brief cryptic notes in mr almquist’s personal spiral notebook daily records he did this about a year after the fact long after the asserted work was completed the calendar’s short notes about the days mr almquist worked on the rental properties occasionally included the hours worked as respondent’s revenue_agent requested that this information be included when petitioners prepared the calendar mr almquist contends that the calendar was created on the advice of petitioners’ certified_public_accountant and was as noted purportedly based on mr almquist’s daily record handwritten notes petitioners did not provide the purported supporting handwritten notes to the court more than a year after the work was completed petitioners also created the first log purportedly based on the calendar documents and emails the first log listed the hours mr almquist spent working on the properties and a brief description of the type of work he performed that log indicated that mr almquist worked hours on the indio property and hours on the naples property the first log also indicated that mr almquist spent another hours looking for investment properties and attending open houses other than the calendar prepared after the audit started petitioners did not provide any of the purported supporting documents or emails to the court mr almquist explained w e’ve moved twice since then so i can’t find the original spiral but you know it was transferred to this which then was transferred to the final document after a meeting with a revenue_agent petitioners created a second log listing additional time allocated to the activity mr almquist contends that the second log lists more hours because it included additional activities such as craigslist ads and emails he did not previously include as well as additional hours for his drive to the indio property petitioners contend the 280-mile round trip takes on average as much as six to seven hours because of los angeles traffic and gas stops this second greatly expanded log containing many more entries indicated that mr almquist worked hours on the indio property and hours on the naples property among the changes from the first log to the second log was a modification for date where the first log reported that mr almquist spent hours on the indio property but the second log reported that mr almquist spent a little over hours on the indio property petitioners did not provide the court with any of the purported new supporting documents or other emails for the later log opinion as a general_rule the commissioner’s determination in the notice_of_deficiency is presumed correct and the taxpayer bears the burden of proving by a preponderance_of_the_evidence that the determination is improper see rule a 290_us_111 although sec_7491 may shift the burden_of_proof to the commissioner in specified circumstances petitioners have not established that they meet the requirements under sec_7491 and for such a shift consequently the burden_of_proof remains on petitioners deductions are a matter of legislative grace and taxpayers bear the burden of proving that they are entitled to any claimed deductions rule a see 503_us_79 taxpayers are required to identify each deduction maintain adequate_records substantiate each deduction and show that they have met all requirements sec_6001 62_tc_834 sec_1_6001-1 income_tax regs i real_estate activity a taxpayer is generally allowed deductions for certain business and profit- seeking investment_expenses see sec_162 sec_212 sec_469 disallows a taxpayer’s deductions attributable to a passive_activity_loss for the taxable_year sec_469 defines passive_activity_loss as the amount if any by which-- a the aggregate losses from all passive activities for the taxable_year exceed b the aggregate income from all passive activities for such year passive_activity is defined as any activity which involves the conduct of any trade_or_business and in which the taxpayer does not materially participate sec_469 and b the code specifically provides that the term passive_activity also includes any rental_activity sec_469 the code then provides an exception from that rule for rental real_estate activity of a taxpayer who is engaged in a real_property_trade_or_business see sec_469 strict substantiation rules for deductions other than those subject_to sec_274 scrutiny may in some situations not present here be relaxed by the cohan_rule see 39_f2d_540 2d cir there is an additional exception for rental real_estate activity losses of a natural_person s however that exception does not apply here because the continued consequently the first issue is whether mr almquist was actively engaged in a real_property_trade_or_business real_estate_professional as provided in sec_469 a taxpayer qualifies as a real_estate_professional if i more than one-half of the personal services performed in trades_or_businesses by the taxpayer during such taxable_year are performed in real_property trades_or_businesses in which the taxpayer materially participates and ii such taxpayer performs more than hours of services during the taxable_year in real_property trades_or_businesses in which the taxpayer materially participates sec_469 and ii unless the taxpayer timely elects otherwise the taxpayer must satisfy the requirement of material_participation as applied separately to each rental real_estate interest sec_469 continued exception is completely phased out for taxpayers whose adjusted_gross_income agi equals or exceeds dollar_figure see sec_469 petitioners do not contend their agi was less than dollar_figure for or that any special phaseout rule applies therefore this exception does not apply in order for a taxpayer to make this election the taxpayer is required to attach a statement to his or her original federal_income_tax return stating an intention to make this election see sec_469 sec_1_469-9 income_tax regs petitioners asserted at trial and in their opening brief that they elected in their income_tax return to combine their rental real_estate properties as one activity respondent however did not respond or separately raise this issue in the notice_of_deficiency at the trial or in his opening brief rather respondent waited until his reply brief to bring up this matter we discuss infra why the court need not resolve this issue in determining whether a taxpayer performs more than hours_of_service in a real_property_trade_or_business any time spent as an employee performing real_estate activities is ignored except if the employee is also a owner as defined in sec_416 see sec_469 mr almquist does not contend that he was a owner of oakwood therefore any time spent managing property as oakwood’s employee is not included in determining whether mr almquist is a real_estate_professional petitioners do not contend that mrs almquist qualifies as a real_estate_professional in the case of a joint_return a spouse must separately satisfy the requirements of sec_469 to qualify as a real_estate_professional see sec_469 petitioners do not allege nor does the record support that mrs almquist spent any time on the rental properties that should be included in determining whether there was material_participation therefore any time mrs almquist spent working on the rental properties is not included in determining whether mr almquist qualifies as a real_estate_professional all of a taxpayer’s real_property_trade_or_business activity is taken into account in determining whether the 750-hour requirement is satisfied see fowler v commissioner tcmemo_2002_223 slip op pincite a real_property_trade_or_business is defined in sec_469 as any real_property development redevelopment construction reconstruction acquisition conversion rental operation management leasing or brokerage trade_or_business this list does not include any research or other preparatory activities the regulations provide that the extent of an individual’s participation in an activity may be established by any reasonable means sec_1_469-5t temporary income_tax regs fed reg date contemporaneous daily time reports logs or similar documents are not required if the extent of such participation may be established by other reasonable means reasonable means may include but are not limited to the identification of services performed over a period of time and the approximate number of hours spent performing such services during such period based on appointment books calendars or narrative summaries id although reasonable means may be interpreted broadly a postevent ‘ballpark guesstimate’ will not suffice 135_tc_365 citing bailey v commissioner tcmemo_2001_296 and goshorn v commissioner t c memo petitioners introduced a calendar containing cryptic brief notes about the work completed on the two rental properties the calendar occasionally stated some of the hours mr almquist purportedly worked petitioners purportedly created the first log using the calendar supporting documents and emails however other than the calendar petitioners did not supply the court with any of the purported supporting documents or emails even if this court were to accept petitioner’s calendar and first log as accurate mr almquist would still not qualify as a real_estate_professional because the first log shows that mr almquist spent only hours on the indio property hours on the naples property and hours on investment_property combined these would account for hours worked on real_estate property which would only be enough for the hour requirement petitioners have not shown that mr almquist spent more than one-half of his trade_or_business personal service time in a real_property_trade_or_business in which he materially participates as required by sec_469 mr almquist estimated that he spent somewhere between and hours working at oakwood if this court were to accept mr almquist’s assertion and generously place him at the low end of his estimate of hours worked at oakwood mr almquist would still not qualify as a real_estate_professional petitioners contend that this court should look past the fact that petitioners did not provide any supporting documentation of the hours mr almquist worked should ignore petitioners’ calendar and first log and should look only to the second log in determining whether mr almquist is a real_estate_professional we again emphasize that the court was not provided any of the purported supporting documentation or email and was provided only petitioners’ self-serving testimony we are not required to accept such self-serving testimony and we are not willing to rely on that testimony to establish petitioners’ position see 87_tc_74 see also chapman glen ltd v commissioner t c __ slip op pincite n date without any supporting documentation the second log created by petitioners over a year after the work was completed is nothing more than a postevent ‘ballpark guesstimate’ see moss v commissioner t c pincite therefore mr almquist does not meet the minimum requirements for a qualified_real_estate_professional accordingly petitioners’ rental real_estate activity shall be treated as passive and the claimed deduction relating to the passive_activity_losses is disallowed for the tax_year petitioners’ disallowed deduction is treated as a deduction or credit allocable to such activity in the next taxable_year see sec_469 at trial petitioners made a motion for attorney’s fees sec_7430 provides relief for a taxpayer seeking attorney’s fees if among other requirements the taxpayer is the prevailing_party we need not address the other requirements of sec_7430 because petitioners are not the prevailing_party sec_7430 generally provides that a taxpayer may qualify as a prevailing_party only if either the taxpayer has substantially prevailed with respect to the amount in controversy or has continued ii accuracy-related_penalty respondent bears the burden of production with respect to the sec_6662 accuracy-related_penalty see sec_7491 116_tc_438 in order to meet the burden of production under sec_7491 the commissioner need only make a prima facie case that imposition of the penalty or the addition_to_tax is appropriate sec_6662 imposes an accuracy-related_penalty equal to of the underpayment_of_tax respondent contends that petitioners are liable for the accuracy-related_penalty because of their negligence or alternatively because the underpayment is due to a substantial_understatement_of_income_tax see sec_6662 and we agree negligence includes any failure to make a reasonable attempt to comply with the provisions of the code including any failure to keep adequate books_and_records or to substantiate items properly see sec_6662 sec_1_6662-3 continued substantially prevailed with respect to the most significant issue or set of issues presented or the taxpayer has made a qualified_offer to settle more favorable to the commissioner than what the commissioner actually achieved in certain circumstances qualified_offer_rule see knudsen v commissioner tcmemo_2013_87 at petitioners do not allege they qualify for the qualified_offer_rule this court has found that petitioners are not able to currently deduct the disputed deduction see rule c accordingly petitioners are not entitled to attorney’s fees income_tax regs a substantial_understatement is an understatement of income_tax that exceeds the greater of of the tax required to be shown on the return or dollar_figure see sec_6662 sec_1_6662-4 income_tax regs respondent has met his burden of production respondent showed that the understatement exceeds of the tax required to be shown on the return which is greater than dollar_figure and we therefore need not decide whether petitioners were negligent or disregarded rules or regulations petitioners bear the burden of proving a defense to the penalty see higbee v commissioner t c pincite there is an exception to the sec_6662 penalty when a taxpayer can demonstrate that the taxpayer had reasonable_cause for the underpayment and acted in good_faith with respect to the underpayment sec_6664 sec_1_6664-4 income_tax regs a determination of whether a taxpayer acted with reasonable_cause is made on a case-by-case basis taking into account all pertinent facts and circumstances sec_1_6664-4 income_tax regs the most important factor is the extent of the taxpayer’s effort to assess the taxpayer’s proper tax_liability id circumstances indicating that a taxpayer acted with reasonable_cause and in good_faith include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances including the experience knowledge and education of the taxpayer id reliance on the advice of a tax professional may but does not necessarily establish reasonable_cause and good_faith for the purpose of avoiding a sec_6662 penalty sec_1_6664-4 income_tax regs see also 469_us_241 reliance on an accountant or attorney as to a matter of tax law may be reasonable 135_tc_199 the right to rely on professional tax_advice however is not unlimited to avoid liability for a sec_6662 penalty on the basis of reliance on a tax professional a taxpayer must meet the following three requirements the adviser was a competent professional who had sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser's judgment 115_tc_43 aff’d 299_f3d_221 3d cir see also 425_f3d_1203 n 9th cir quoting with approval the above three-prong test aff’g 121_tc_89 in addition the advice must not be based on unreasonable factual or legal assumptions including assumptions as to future events and must not unreasonably rely on the representations statements findings or agreements of the taxpayer or any other person sec_1_6664-4 income_tax regs the fact that petitioners had an accountant prepare their returns does not in and of itself prove that they acted with reasonable_cause and in good_faith see neonatology assocs p a v commissioner t c pincite additionally petitioners’ failure to properly document the time spent performing rental_activity was detrimental to their ultimate effort to substantiate all of the time they spent on their rental property activity see sec_6001 sec_1_6001-1 income_tax regs this made it impossible for their accountant to have all the accurate information necessary to make an informed tax decision id the accountant relied on petitioners for an accurate representation of the amount of hours worked on their rental_activity however petitioners were unable to prove the purported hours worked petitioners have not proven reasonable_cause for their underpayment thus this court concludes petitioners are liable for the sec_6662 accuracy- related penalty the court has considered all of petitioners’ contentions argument requests and statements to the extent not discussed herein we conclude that they are meritless moot or irrelevant to reflect the foregoing decision will be entered under rule


t c summary opinion united_states tax_court verta hill petitioner v commissioner of internal revenue respondent docket no 5946-04s filed date verta hill pro_se kathleen c schlenzig for respondent goldberg special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency in petitioner’s federal_income_tax of dollar_figure for the taxable_year the issue for decision is whether petitioner is entitled to a casualty_loss deduction of dollar_figure for damage to her personal_property and residence due to a flood background some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioner resided in chicago illinois on the date the petition was filed in this case during petitioner resided in a single-family home consisting of a first floor and a full basement in chicago illinois on or about date a severe 3-hour thunderstorm dumped up to inches of rain on a 30-mile corridor from lake county south through cook county and on to kankakee the flash flooding caused by the thunderstorm damaged thousands of homes governor george ryan declared the area a state disaster_area damage from the torrential rain shut down expressways and chicago transit authority trains the resulting runoff overwhelmed the city’s combined storm and sewer systems causing sewer backup flooding petitioner returned home on date to discover that her basement had flooded petitioner had insurance which unfortunately did not cover flooding petitioner did not attempt to file any claim with her insurance carrier petitioner timely filed a federal_income_tax return for the taxable_year on her form_1040 u s individual_income_tax_return petitioner claimed a casualty_loss deduction of dollar_figure after application of the dollar_figure limitation pursuant to sec_165 and the percent of adjusted_gross_income limitation pursuant to sec_165 petitioner attached to the form_1040 a schedule a itemized_deductions and a form_4684 casualties and thefts along with schedules that were meant to verify such casualty calculations on form_4684 petitioner described the property for which she claimed a casualty_loss as clothing acquired appliances tools and electronics the form_4684 reflected in pertinent part as follows section a--personal use property clothing acquired property description dollar_figure line a2 cost or other basis of each property line a3 insurance or other reimbursement line a5 fair_market_value before casualty or theft big_number line a6 fair_market_value after casualty or theft big_number line a7 subtract line from line big_number line a8 enter the smaller of line or line line a9 subtract line from line big_number property description appliances dollar_figure line a2 cost or other basis of each property line a3 insurance or other reimbursement line a5 fair_market_value before casualty or theft big_number line a6 fair_market_value after casualty or theft big_number line a7 subtract line from line big_number line a8 enter the smaller of line or line line a9 subtract line from line big_number property description line a2 cost or other basis of each property tools dollar_figure line a3 insurance or other reimbursement line a5 fair_market_value before casualty or theft big_number line a6 fair_market_value after casualty or theft line a7 subtract line from line big_number big_number line a8 enter the smaller of line or line line a9 subtract line from line big_number electronics property description dollar_figure line a2 cost or other basis of each property line a3 insurance or other reimbursement line a5 fair_market_value before casualty or theft big_number line a6 fair_market_value after casualty or theft line a7 subtract line from line big_number big_number line a8 enter the smaller of line or line line a9 subtract line from line big_number line a10d casualty or theft_loss line a11d the smaller of line or dollar_figure line a12d subtract line from line line a13d add the amounts on line of all line a14d add the amounts on line of all forms forms the difference line a16d if line is less than line enter line a17d enter of your adjusted_gross_income big_number line a18d total personal_property loss amount dollar_figure from form_1040 line big_number big_number big_number big_number petitioner attached to her return a schedule for each category each schedule contained the following information a description of each item purportedly lost the quantity of each item purportedly lost the number of years prior to the loss that petitioner purportedly acquired each item of property the cost or other basis of each item of property the fair_market_value of each item of property before the casualty and the fair_market_value of the property following the casualty the schedules reflected in pertinent part as follows schedule - clothing women’s clothing item no of fmv before fmv after items acquired1 other basi sec_2 casualty casualty cost or date blouses dollar_figure dollar_figure dollar_figure work shoe sec_3 coat sec_11 dresses hat sec_4 jackets scarve sec_12 shirts shoes pants wind breaker suits sweaters sweatsuit nightgown leather coat softcover book hardcover book artwork dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure total dollar_figure 1date item was acquired prior to the year of the casualty 2amount of individual item 3petitioner did not explain how she calculated this amount the appropriate calculation appears to be dollar_figure 4petitioner did not explain how she calculated this amount the appropriate calculation appears to be dollar_figure schedule - clothing children’s clothing item no of fmv before fmv after items acquired1 other basi sec_2 casualty casualty cost or date blouse sec_2 boot sec_4 coats dresse sec_5 glove sec_3 hats shirt sec_4 shoes slacks sock sec_15 sport jacket sec_2 sweaters underwear bra sec_15 undershirt slips long john sec_12 tight sec_5 dollar_figure dollar_figure dollar_figure total 3dollar_figure 1date item was acquired prior to the year of the casualty 2amount of individual item 3petitioner added the total_amounts for the women’s clothing and children’s clothing and then subtracted dollar_figure for depreciation to calculate the amount of dollar_figure used on the form_4684 for clothing dollar_figure dollar_figure - dollar_figure dollar_figure schedule - appliances item no of fmv before fmv after items acquired1 other basi sec_2 casualty casualty cost or date carpet sofa television deep freezer refrigerator desk dollar_figure dollar_figure dollar_figure big_number big_number total 3dollar_figure 1date item was acquired prior to the year of the casualty 2amount of individual item 3petitioner decreased this amount by dollar_figure for depreciation which resulted in a final claimed casualty_loss for electronics of dollar_figure however petitioner only claimed a casualty_loss of dollar_figure for appliances schedule - tools item no of fmv before fmv after items acquired1 other basi sec_2 casualty casualty cost or date dryer3 washing mach snow blower lawn mower dollar_figure total 4dollar_figure dollar_figure dollar_figure 1date item was acquired prior to the year of the casualty 2amount of individual item 3in the above schedule and on form_4684 petitioner claims the dryer was a total loss however at trial petitioner admitted that she repaired the dryer and did not throw it away 4petitioner did not decrease this amount for depreciation schedule - electronics item no of fmv before fmv after items acquired1 other basi sec_2 casualty casualty cost or date years computer printer year games boy sec_3 years sega genesi sec_1 years playstation years years games supplie sec_3 years computer years books dollar_figure big_number big_number dollar_figure big_number big_number big_number dollar_figure total 4dollar_figure 1date item was acquired prior to the year of the casualty 2amount of individual item 3supplies include software files disks copier paper etc 4petitioner decreased this amount by dollar_figure for depreciation which resulted in a final claimed casualty_loss for electronics of dollar_figure with respect to each item identified on each schedule petitioner reported that the cost or other basis of the property was the same as the fair_market_value of the property before the casualty petitioner also reported that each item had a fair_market_value of zero after the casualty however once petitioner calculated the total purported loss for each category of property petitioner reduced the loss for what she described as depreciation as follows category fmv before reduction for casualty depreciation reported loss percentage reduction clothing dollar_figure dollar_figure appliances dollar_figure dollar_figure tools dollar_figure electronics dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure on date respondent issued petitioner a notice_of_deficiency for taxable_year in the notice_of_deficiency respondent disallowed petitioner’s claimed casualty_loss deduction and determined petitioner is liable for a deficiency in the amount of dollar_figure discussion as a general_rule the determinations of the commissioner in a notice_of_deficiency are presumed correct and the taxpayer bears the burden of proving the commissioner’s determinations in the notice_of_deficiency to be in error rule a 290_us_111 as one exception to this rule sec_7491 places upon the commissioner the burden_of_proof with respect to any factual issue relating to liability for tax if the examination of the taxpayer’s records for the subject year began after date and the taxpayer maintained adequate_records satisfied the substantiation requirements cooperated with the commissioner and introduced during the court_proceeding credible_evidence with respect to the factual issue in the present case the burden does not shift with respect to any factual issue relating to petitioner’s liability for the income_tax deficiency because petitioner neither alleged that sec_7491 was applicable nor established that she complied with the substantiation requirements of sec_7491 as shown below sec_7491 and b deductions are a matter of legislative grace and are allowed only as specifically provided by statute and petitioner bears the burden of proving that she is entitled to the claimed deduction 503_us_79 292_us_435 with these well-established propositions in mind we must determine whether petitioner has satisfied her burden of proving that she is entitled to a casualty_loss deduction allegedly incurred during taxable_year respondent argues that petitioner has failed to produce any credible_evidence to substantiate her claimed loss including the occurrence of any casualty or if a casualty occurred the amount deductible sec_165 a allows as a deduction any loss sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise sec_165 limits the allowance of losses in the cases of individuals sec_165 allows as a deduction to an individual certain losses commonly referred to as casualty losses a casualty_loss is allowable to an individual for a loss of property not connected with a trade_or_business or with a transaction entered into for profit if the loss results from fire storm shipwreck or other_casualty subject_to limitations set forth in sec_165 sec_165 provides that any loss of an individual described in sec_165 is allowed only to the extent that sec_165 losses a general_rule --there shall be allowed as a deduction any loss sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise c limitation on losses of individuals --in the case of an individual the deduction under subsection a shall be limited to-- losses_incurred in a trade_or_business losses_incurred in any transaction entered into for profit though not connected with a trade_or_business and except as provided in subsection h losses of property not connected with a trade_or_business or a transaction entered into for profit if such losses arise from fire storm shipwreck or other_casualty or from theft the amount of the loss arising from each casualty exceeds dollar_figure sec_165 provides that if the personal casualty losses for a taxable_year exceed the personal casualty gains for the year the losses are allowable only to the extent of the sum of the personal casualty gains for that taxable_year plus so much of the excess as exceeds percent of adjusted_gross_income for that taxable_year thus where there are no personal casualty gains for a taxable_year personal casualty losses in excess of dollar_figure per casualty are allowable to the extent that they exceed percent of adjusted_gross_income for that taxable_year the method of valuation to be used in determining a casualty_loss is prescribed in sec_1_165-7 income_tax regs which provides as follows i in determining the amount of loss deductible under sec_165 the fair_market_value of the property immediately before and immediately after the casualty shall generally be ascertained by competent appraisal this appraisal must recognize the effects of any general market decline affecting undamaged as well as damaged property which may occur simultaneously with the casualty in order that any deduction under sec_165 shall be limited to the actual loss resulting from damage to the property ii the cost of repairs to the property damaged is acceptable as evidence of the loss of value if the taxpayer shows that a the repairs are necessary to restore the property to its condition immediately before the casualty b the amount spent for such repairs is not excessive c the repairs do not care for more than the damage suffered and d the value of the property after the repairs does not as a result of the repairs exceed the value of the property immediately before the casualty in the case of an item held for personal_use the amount deductible is governed by sec_1_165-7 income_tax regs which provides that the amount of the loss to be taken into account for purposes of sec_165 shall be the lesser_of the amount which is equal to the fair_market_value of the property immediately before the casualty reduced by the fair_market_value of the property immediately after the casualty or the amount of the adjusted_basis for determining the loss from the sale_or_other_disposition of the property involved sec_6001 and the regulations promulgated thereunder require taxpayers to maintain records sufficient to permit verification of income and expenses as a general_rule if the trial record provides sufficient evidence that the taxpayer has incurred a deductible expense but the taxpayer is unable to adequately substantiate the precise amount of the deduction to which she is otherwise entitled the court may estimate the amount of the deductible expense and allow the deduction to that extent bearing heavily against the taxpayer whose inexactitude in substantiating the amount of the expense is of her own making 39_f2d_540 2d cir however in order for the court to estimate the amount of an expense the court must have some basis upon which an estimate may be made 85_tc_731 without such basis any allowance would amount to unguided largesse 245_f2d_559 5th cir although we believe that petitioner sustained a casualty_loss from flooding she still has to substantiate the amount of the losses due to the casualty petitioner testified that the flood which occurred in the chicago area in august of resulted in her basement’s taking on water with the depth of this water being approximately feet in one area of the basement and approximately inches in another area of the basement however respondent claims that joseph ferrick respondent’s counsel visited petitioner’s home on the morning of date and noted water damage no higher than inches above the floor at trial petitioner also testified she had the water pumped out of her basement by mr davis that the walls carpeting and several personal_property items which were kept in the basement were damaged or destroyed she and mr davis made a list of the damaged property as the items were removed from the basement and that the amount of clothing damaged was excessive because she was decorating the first floor of the house and had moved most of her and her grandchild’s clothing into the basement petitioner introduced into evidence an alleged receipt from mr davis indicating a payment of dollar_figure for his services in removing water from petitioner’s basement attached to the receipt is a list of items allegedly removed from petitioner’s basement and hauled away we do not find this receipt to be credible_evidence the receipt does not contain mr davis’s address business or phone number the receipt does not state the date on which mr davis provided his services in fact the receipt is dated date even though petitioner claims that mr davis provided his services on date the inventory list attached to the receipt is also dated date even though petitioner claims mr davis made the inventory list on date the receipt and inventory list appear to have been created for the sole purpose of substantiating petitioner’s claimed losses in anticipation of litigation and neither document has been authenticated by mr davis petitioner had insurance at the time of the casualty however petitioner testified that she did not file a claim with her insurance_company because her policy did not cover flood damage petitioner also testified as to her calculation of her claimed casualty_loss deduction petitioner calculated such casualty_loss deduction by inventorying the damaged and destroyed carpeting and personal_property items as they were hauled away she then found similar items over the internet and used the similar items’ purchase prices as the amount of her cost or other basis in the damaged property items petitioner then totaled the fair market values of the damaged property items by categories clothing tools electronics and appliances as shown above petitioner then depreciated the total amount of the category by a percentage she felt was fair it appears that petitioner had no reasoning for the amount chosen to depreciate each category petitioner then calculated her casualty_loss by using the sum of all the depreciated values and applying the limitations of sec_165 petitioner did not attempt to obtain actual receipts for any of the damaged items petitioner did not call as witnesses to substantiate the casualty_loss mr davis who allegedly helped her pump the water out of her basement and helped her dispose_of the damaged or destroyed items of personal_property or any other individual petitioner has presented no reliable evidence of any repairs made to her single-family home or to the personal_property items that were damaged or destroyed as a result of the flood petitioner has offered as evidence to support that she actually sustained a casualty_loss a receipt issued by mr davis that purports to identify the items lost in the purported flood of her basement and petitioner’s own testimony petitioner has provided as evidence to support the amount of the actual casualty_loss petitioner’s estimate of the cost of each item petitioner’s estimate of the fair_market_value of each item immediately prior to the purported casualty copies of internet catalog and web pages reflecting items petitioner claims to have lost in the purported casualty that were collected by petitioner in anticipation of litigation and petitioner’s self-serving testimony this court is not bound to accept a taxpayer’s unverified and self-serving testimony 394_f3d_1030 8th cir affg tcmemo_2003_212 112_tc_183 because petitioner has failed to corroborate her testimony or provide any substantiation to support her claimed amount of casualty_loss we find that we cannot estimate any amounts of petitioner’s deductions under the cohan_rule and we sustain respondent’s disallowance of petitioner’s claimed casualty_loss deduction in the amount of dollar_figure we have considered all of the other arguments made by the parties and to the extent that we have not specifically addressed them we conclude they are without merit reviewed and adopted as the report of the small_tax_case division decision will be entered for respondent


internal_revenue_service number release date index number ------------------------ --------------------------------------- ----------------------------------- ----------------------- --------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------- id no ------------- telephone number --------------------- refer reply to cc tege eb ec plr-154693-04 date date company us parent acquiror target countries a and b stock exchange form y ----- date c year x year y dear ----------------- --------------------- ----------------------- -------------------------------------- ----------------------- ----------------------- ----------------------------------- -------------------------------- -------------------------- ---------------------------------------- -------------------------------------------------------------------------------- ------------------------------------------------ --------------------------- ------- ------- this is in reply to a letter dated date submitted by your authorized representative requesting rulings under sec_162 of the internal_revenue_code specifically a ruling is requested that the deduction limit of sec_162 does not plr-154693-04 apply to company us parent acquiror or their affiliates the facts as represented are as follows us parent and acquiror are wholly owned subsidiaries through one or more disregarded foreign entities of company a corporation organized under the laws of countries a and b company shares are traded on stock exchange company is a foreign private issuer under cfr section 3b-4 c because it is incorporated under the laws of countries a and b and does not fit the following description more than percent of the issuer’s outstanding voting_securities are directly or indirectly held of record by residents of the united_states and any of the following apply i the majority of the executive officers or directors are united_states citizens or residents ii more than percent of the assets of the issuer are located in the united_states or iii the business of the issuer is administered principally in the united_states company’s shares are registered under sec_12 of the securities and exchange act of exchange act company is required to file form y with the united_states securities_and_exchange_commission sec because there is no summary compensation table requirement for foreign private issuers that sets out the compensation paid to each employee the form y filed by company does not contain a summary compensation table described in item b of regulation s-k under the exchange act us parent is the united_states common parent of an affiliated_group_of_corporations as defined in sec_1504 of the code without regard to sec_1504 none of company’s united_states subsidiaries including us parent has issued any class of equity securities that is required to be registered under sec_12 of the exchange act on date c company acquiror and target entered into a merger agreement pursuant to the terms of the merger agreement target will merge with and into acquiror with acquiror continuing as the surviving corporation and a wholly owned subsidiary through one or more disregarded foreign entities of company there are executives of target who are expected to continue to serve as executives of acquiror the merger will occur in year y target’s final separate consolidated tax_year will be for the short taxable_year ending on the date of the merger plr-154693-04 target currently has outstanding common equity interests that are registered under sec_12 of the exchange act it has been represented that after the merger neither acquiror nor any of its subsidiaries will have any class of equity securities that is registered or required to be registered under sec_12 of the exchange act it has also been represented that the merger will occur prior to the deadline for target’s filing with the sec of a proxy statement or an annual report on form 10-k for year x thus target will not be required to file a proxy statement or an annual report on form 10-k with the sec that discloses executive compensation under item of regulation s-k for year x or for the short taxable_year that ends with the merger sec_162 of the code allows as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business including a reasonable allowance for salaries or other compensation_for_personal_services actually rendered sec_162 provides that in the case of any publicly_held_corporation no deduction shall be allowed for applicable_employee_remuneration with respect to any covered_employee to the extent that the amount of the remuneration for the taxable_year exceeds dollar_figure sec_162 defines publicly_held_corporation as any corporation issuing any class of common equity securities required to be registered under sec_12 of the exchange act under sec_1_162-27 of the income_tax regulations a publicly_held_corporation includes an affiliated_group_of_corporations as defined in sec_1504 determined without regard to sec_1504 sec_162 defines covered_employee as any employee of the taxpayer if as of the close of the taxable_year such employee is the chief_executive_officer of the taxpayer or is an individual acting in such capacity or the total compensation of such employee for the taxable_year is required to be reported to shareholders under the exchange act by reason of such employee being among the highest compensated officers for the taxable_year other than the chief_executive_officer under sec_1_162-27 of the regulations whether an individual is the chief_executive_officer or one of the four highest compensated officers is determined pursuant to the executive compensation disclosure rules under the exchange act sec_162 the preamble contains the following language concerning the identification of covered_employee in the notice of proposed rulemaking containing the proposed_regulations under plr-154693-04 the regulations clarify which employees are covered employees for purposes of sec_162 the legislative_history to sec_162 provides that covered employees are defined by reference to the sec rules governing executive compensation disclosure under the exchange act under the regulations an individual generally is a covered_employee if the individual’s compensation is reported on the summary compensation table under the sec’s executive compensation disclosure rules as set forth in item of regulation s-k cfr under the exchange act however the regulations specifically provide that in order to be a covered_employee for sec_162 purposes an individual must be employed as an executive officer on the last day of the taxable_year thus only those employees who appear on the summary compensation table and who are also employed on the last day of the taxable_year are covered employees therefore based on the facts submitted we rule as follows provided no summary compensation table under item of regulation s-k under the exchange act is required to be filed by company us parent or acquiror with the sec no employees of company us parent acquiror and their subsidiaries are covered employees under sec_162 of the code because their compensation is not required to be reported to shareholders under the exchange act therefore company us parent acquiror and their subsidiaries are not subject_to the disallowance rules of sec_162 of the code no employees of target’s affiliated_group will be covered employees with respect to year x or the short taxable_year ending on the date of the merger provided that no summary compensation table under item of regulation s-k under the exchange act listing target’s officers is included in any target proxy statement that is sent to the shareholders and filed by target with the sec for year x or the short taxable_year ending on the date of the merger therefore target and its subsidiaries are not subject_to the disallowance rules of sec_162 of the code for year x or the short taxable_year ending on the date of the merger except as specifically ruled above no opinion is expressed as to the federal tax consequences of the transaction described above under any other provision of the code plr-154693-04 this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent the taxpayer should attach a copy of this ruling to any income_tax return to which it is relevant in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely yours _______________________________ robert b misner senior technician reviewer executive compensation branch office of the division counsel associate chief_counsel tax exempt and government entities enclosure copy for 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 psi b03 plr-122917-10 date date legend x a ------------------------------------------------------------------------------------------------------ ----------------------- ------------------------------------------------------------------------------------------------------ ------------------------- state ---------------- date ------------------- dear ----------------- this letter responds to a letter dated date submitted on behalf of x by x’s authorized representative requesting a ruling under sec_1362 of the internal_revenue_code facts x was incorporated under the laws of state on date a x’s sole shareholder intended for x to be an s_corporation effective date however x’s form_2553 election by a small_business_corporation was not timely filed x requests a ruling that it be permitted to file a late s_corporation_election effective date law and analysis sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation plr-122917-10 sec_1362 provides that an election under sec_1362 may be made by a small_business_corporation for any taxable_year a at any time during the preceding_taxable_year or b at any time during the taxable_year and on or before the 15th day of the third month of the taxable_year sec_1362 provides that if a a small_business_corporation makes an election under sec_1362 for any taxable_year and b the election is made after the 15th day of the third month of the taxable_year and on or before the 15th day of the third month of the following taxable_year then the election is treated as made for the following taxable_year sec_1362 provides that if a an election under sec_1362 is made for any taxable_year determined without regard to sec_1362 after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make the election the secretary may treat the election as timely made for the taxable_year and sec_1362 shall not apply conclusion based on the facts submitted and representations made we conclude that x has established reasonable_cause for failing to make an s_corporation_election thus we conclude that x is eligible for relief under sec_1362 accordingly if x makes an election to be an s_corporation by filing with the appropriate service_center a completed form_2553 effective date within days following the date of this letter the election shall be treated as timely made a copy of this letter should be attached to the form_2553 filed with the service_center a copy is enclosed for that purpose except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion concerning whether x is otherwise eligible to be an s_corporation for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative plr-122917-10 the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination sincerely s james a quinn senior counsel branch passthroughs special industries enclosures a copy of this letter a copy for sec_6110 purposes cc


department of the treasury internal_revenue_service washington d c t a x e x e m p t a n d g o v e r n m e n t e n t i t i e s d i v i s i o n number release date se t eo ra t date date uniform issue list number contact person identification_number telephone number employer_identification_number dear ------------- we have considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code as an organization described in sec_501 of the code based on the information submitted we have concluded that you do not qualify for exemption under that section the basis for our conclusion is set forth below you are a nonprofit corporation incorporated in on your articles of incorporation state that you are organized for religious and educational_purposes your bylaws provide that you are organized to support the retirement plans and programs of a state convention of churches your bylaws state that you and the religious body are separate and distinct entities your application_for exemption states that your purpose will be to adopt establish maintain and administer one or more employee benefit plans including a b retirement_plan and potentially a medical insurance program for exempt_organizations affiliated with a convention of churches in your state your application states that your organization currently has a three member board_of directors all of whom were appointed by the treasurer of the state convention of churches your application_for exemption states that at the present time your organization is in its organizational stages and has not been activated nor begun doing business your letter of date states that differing opinions on theological political and governance issues have arisen in the relationships between your state’s religious convention’s members and the larger religious convention’s members such that you may need to be prepared to continue necessary employee_benefits to the members of your own state convention who may in the future be compelled by their religious beliefs to withdraw from the existing larger church convention with its long-established system of employee_benefits now serving your members wanting to avoid a religious schism you note that you sincerely hope that this applicant organization will never be activated your letter explains given the importance of this corporation dealing with the retirement_plan assets of potentially thousands of employees it was deemed prudent to ensure that all legal requirements are met before assets are transferred and the corporation begins doing business as a result the organization respectfully requests a favorable determination from the internal_revenue_service of the organization’s tax-exempt status before the corporation begins doing business your letter in appendix lists the nine members of a task force to assess the need for activating this applicant your letter of date states that you have no employees no offices and no assets your form_1023 part iv financial data is submitted with proposed amounts that would be assuming activation of the corporation your application_for exemption also states that you intend to be a publicly supporting_organization under sec_509 because if and when you are activated your bylaws will be amended to provide that two-thirds of your governing body will be appointed by the supported convention of churches in your state however your bylaws as of now before activation reflect merely that your trustees must be members of churches in the supported convention of churches in your state sec_501 of the code provides in pertinent part for the exemption from federal_income_tax of nonprofit_organizations organized and operated exclusively for religious and or charitable purposes provided that no part of the organization's net_earnings inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the income_tax regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 of the code sec_509 of the code provides in part that the term private_foundation does not include an organization which is organized and at all times thereafter is operated exclusively for the benefit of to perform the functions of or to carry out the purposes of one or more specified exempt_organizations described in sec_509 and sec_509 of the code and is operated supervised or controlled by or in connection with one or more organizations described in sec_509 and sec_509 sec_1_509_a_-4 of the regulations provides that a supporting_organization will be regarded as operated exclusively to support one or more specified publicly supported organizations only if it engages solely in activities which support or benefit the specified publicly supported organizations such activities may include making payments to or for_the_use_of or providing services or facilities for individual members of the charitable_class benefited by the specified publicly_supported_organization in general an organization that applies for recognition of exemption has the burden or proving that it clearly meets all the requirements of the particular section of the code under which it has applied see 318_f2d_632 7th cir and 312_f2d_203 8th cir revproc_90_27 1990_1_cb_514 states in sec_5 that exempt status will be recognized in advance of operations if proposed operations can be described in sufficient detail to permit a conclusion that the organization will clearly meet the particular requirements of the section under which exemption is claimed a mere restatement of purposes or a statement that proposed activities will be in furtherance of such purposes will not satisfy this requirement the organization must fully describe the activities in which it expects to engage including the standards criteria procedures or other means adopted or planned for carrying out the activities the anticipated sources of receipts and the nature of contemplated expenditures where the organization cannot demonstrate to the satisfaction of the service that its proposed activities will be exempt a record of actual operations may be required before a ruling or determination_letter will be issued in those cases where an organization is unable to describe fully its purposes and activities a refusal to issue a ruling or determination_letter will be considered an initial adverse determination from which administrative appeal or protest rights will be afforded revproc_2004_4 2004_1_irb_125 provides that in section the service may decline to issue a letter_ruling or a determination_letter whenever warranted by the facts or circumstances of a particular case and that in section that a determination_letter will not be issued on alternative plans of proposed transactions or on hypothetical situations the information you have submitted with your application_for exemption fails to establish that you are or will be operated exclusively for exempt purposes within the meaning of sec_501 of the code because we are not able to make a determination as to when you will if ever meet the operational_test as required by sec_1_501_c_3_-1 of the regulations cited above since no exempt activity will be started until you are activated you will not become operational and you will not perform exempt_activities until the time when and if a possible religious schism or split might occur between you and a national convention of churches the time frame for you to become operational is extremely indeterminate and cannot be ascertained at this time thus we cannot at this time determine that you will clearly meet all the operational requirements under sec_501 as required by revproc_90_27 cited above for the above reasons we conclude that you do not qualify for recognition of exemption under sec_501 of the code because you have failed to establish that you are or will be operated exclusively for exempt purposes c of the code and you must file federal_income_tax returns further the operational_test under sec_509 of the code can only be met if an organization actually engages solely in activities supporting or benefiting the sec_509 or organizations for which it is organized to benefit or support because you are not currently operational and you can not specify or provide evidence of when you expect to become operational you do not meet this operational requirement thus you would be deemed to be a private_foundation rather than an organization described in sec_509 if you were to be recognized as exempt under sec_501 at this time submit a statement of your views to this office with a full explanation of your reasoning this statement signed by one of your officers must be submitted within days from the date of this letter you also have a right to a conference in this office after your statement is submitted you must request the conference if you want one when you file your protest statement if you are to be represented by someone who is not one of your officers that person will need to accordingly you do not qualify for exemption as an organization described in section you have the right to protest this ruling if you believe it is incorrect to protest you should contributions to you are not deductible under sec_170 of the code file a proper power_of_attorney and otherwise qualify under our conference and practices requirements if you do not protest this ruling in a timely manner it will be considered by the internal_revenue_service as a failure to exhaust available administrative remedies sec_7428 of the code provides in part that a declaratory judgement or decree under this section shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted administrative remedies available to it within the internal_revenue_service if we do not hear from you within days this ruling will become final and a copy will be forwarded to the ohio tax exempt and government entities te_ge office thereafter any questions about your federal_income_tax status should be directed to that office either by calling a toll free number or sending correspondence to internal_revenue_service te_ge customer service p o box cincinnati oh the appropriate state officials will be notified of this action in accordance with sec_6104 of the code when sending letters to us with respect to this case you will expedite their receipt by using the following address internal_revenue_service te_ge se t eo ra t ------------------------------------------ constitution avenue nw washington dc shown in the heading of this letter lois g lerner director exempt_organizations rulings and agreements if you have any questions please contact the person whose name and telephone number are sincerely


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 b02 plr-144979-06 date date - x shareholders date date ------------------------------------------------------------------------------ ------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ -------------------------- ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ plr-144979-06 date date date date grantor_trust trust a b ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ----------------------- ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------ ------------------------------------------------------------------------------ -------------------------- ------------------------------------------------------------------------------ -------------------------- ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------- this responds to a letter dated date and subsequent c y1 dear ---------------------- correspondence submitted on behalf of x by its authorized representative requesting a ruling under sec_1362 of the internal_revenue_code corporation effective date on date shares of x were transferred to grantor_trust on date grantor_trust transferred shares of x to trust trust consists of two equal shares one share for the benefit of a a minor and another share for the benefit of b also a minor the trust instrument provides that each share shall be held administered and distributed as a separate trust on date c a and b’s parent filed a late qualified_subchapter_s_trust qsst election under revproc_2003_47 2003_1_cb_998 for the respective separate_share_trusts for a and b to be effective on date the irs accepted the late qsst election by letter dated date the information submitted states that x made an election to be treated as an s it was intended that the respective share trusts for a and b under the trust plr-144979-06 instrument each qualify as a qsst however for taxable_year y1 although the trustees of trust intended to distribute all of the trust income they failed to distribute all trust income to a and b as required by sec_1361 therefore x’s election terminated on date upon discovery of the failure to distribute all trust income the trustees of trust distributed the respective shares of trust income for taxable_year y1 to a and b corporation election were inadvertent and were not motivated by tax_avoidance or retroactive tax planning x and its shareholders consent to make any adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary x represents that the circumstances resulting in the termination of x’s s sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that the term small_business_corporation means a domestic_corporation that is not an ineligible_corporation and does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than class of stock sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under subpart e of part i of subchapter_j of chapter of the code a grantor_trust as owned by an individual who is a citizen or resident_of_the_united_states may be a shareholder of an s_corporation sec_1361 provides that for purposes of sec_1361 in the case of a_trust described in sec_1361 the deemed owner shall be treated as the shareholder sec_1361 provides that in the case of a qsst with respect to which a beneficiary makes an election under sec_1361 the trust is treated as a_trust described in sec_1361 and for purposes of sec_678 the beneficiary of the trust is treated as the owner of that portion of the trust that consists of stock in an s_corporation with respect to which the election under sec_1361 is made under sec_1361 this election will be effective up to days and months before the date of the election plr-144979-06 sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation a termination of an s_corporation_election under sec_1362 shall be effective on and after the date of cessation sec_1361 defines a qsst as a_trust a the terms of which require that i during the life of the current income_beneficiary there shall be only one income_beneficiary of the trust ii any corpus distributed during the life of the current income_beneficiary may be distributed only to such beneficiary iii the income_interest of the current beneficiary in the trust shall terminate on the earlier of the beneficiary’s death or the termination of the trust and iv upon the termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to that beneficiary and b all of the income within the meaning of sec_643 of which is distributed or required to be distributed currently to one individual who is a citizen or resident_of_the_united_states sec_1361 provides that if any qsst ceases to meet any requirement of sec_1361 but continues to meet the requirements of sec_1361 the provisions of sec_1361 shall not apply to such trust as of the first day of the first taxable_year beginning after the first taxable_year for which it failed to meet the requirements sec_1361 sec_1362 provides that if an election under sec_1362 by any corporation was terminated under sec_1362 the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such termination steps were taken so that the corporation is a small_business_corporation 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 any adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to the period then notwithstanding the circumstances resulting in the termination the corporation shall be treated as continuing to be an s_corporation during the period specified by the secretary sec_1_1362-4 provides that the determination of whether a termination was inadvertent is made by the commissioner the corporation has the burden of establishing that under the relevant facts and circumstances the commissioner should determine that the termination was inadvertent the fact that the terminating event was not reasonably within the control of the corporation and was not part of a plan to terminate the election or the fact that the event took place without the knowledge of the corporation notwithstanding its due diligence to safeguard itself against such an event tends to establish that the termination was inadvertent plr-144979-06 sec_1_1362-4 provides that the commissioner may require any adjustments that are appropriate in general the adjustments required should be consistent with the treatment of the corporation as an s_corporation during the period specified by the commissioner in the case of a transfer of stock to an ineligible shareholder that causes an inadvertent termination under sec_1362 the commissioner may require that ineligible shareholder to be treated as a shareholder of an s_corporation during the period the ineligible shareholder actually held stock in the corporation moreover the commissioner may require protective adjustments that prevent any loss of revenue due to a transfer of stock to an ineligible shareholder eg a transfer to a nonresident_alien based solely on the facts submitted and the representations made we conclude that x’s election to be treated as an s_corporation terminated on date we also conclude that the termination was an inadvertent termination within the meaning of sec_1362 accordingly pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from date and thereafter provided x’s s_corporation_election was valid and was not otherwise terminated under sec_1362 additionally from date and thereafter the separate_share_trusts created under the trust instrument for a and b respectively will be treated as qssts described in sec_1361 assuming that they otherwise qualify as qssts and accordingly a and b will be treated as shareholders of x x’s shareholders in determining their respective income_tax liabilities during the termination period and thereafter must include their pro_rata share of the separately_stated items of income or loss of x as provided in sec_1366 make any adjustments to basis as provided in sec_1367 and take into account any distributions made by x as provided in sec_1368 if x or its shareholders fail to treat themselves as described above this ruling is null and void except as specifically provided herein no opinion is expressed or implied as to the federal tax consequences of the facts described above under any other provisions of the code in particular no opinion is expressed as to whether x is otherwise eligible to be an s_corporation or whether the separate_share_trusts for a and b under the trust instrument are eligible qssts under sec_1361 this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file a copy of this letter is being sent to x’s plr-144979-06 authorized representative sincerely james a quinn senior technician reviewer acting branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


sin internal_revenue_service department of the treasury washington dc person to contact telephone number refer reply to op e ep t date i nuy sage kee attn legend state a employer m plan x group b employees ladies and gentlemen this letter is in response to your request for a private_letter_ruling dated march your behalf by your authorized representative regarding the federal_income_tax treatment of certain contributions to plan x under sec_414 of the internal_revenue_code code submitted on the following facts and representations have been submitted pursuant to the law of state a employer m a municipality under the law of state a has established plan x for the benefit of group b employees the law of state a requires group b employees to contribute percent of their salary to plan x plan x satisfies the qualification requirements under sec_401 of the code further it has been represented that on date employer m adopted a resolution effective upon receipt of a favorable ruling by the internal_revenue_service providing that employer m shall pick up group b employees’ contributions to plan x in accordance with the law of state a and that group b employees’ current ad cash salaries shall be reduced by the amount picked up group b employees will not be given the option to receive cash directly in lieu of contributions based on the aforementioned facts and representations you have requested the following rulings the mandatory employee contributions picked up by employer m shall be excluded from the current gross_income of group b employees until distributed or otherwise made available the picked up contributions paid_by employer m are not wages for federal_income_tax withholding purposes and federal income taxes need not be withheld on the picked up contributions sec_414 of the code provides that contributions otherwise designated as employee contributions shall be treated as employer contributions if such contributions are made to a plan described in sec_401 established by a state government or a political_subdivision thereof and are picked up by the employing unit the federal_income_tax treatment to be accorded contributions which are picked up by the employer within the meaning of sec_414 of the code is specified in revrul_77_462 c b in that revenue_ruling the employer school district agreed to assume and pay the amounts employees were required by state law to contribute to a state pension_plan concluded that the school district’s picked-up contributions to the plan are excluded from the employee’s gross_income until such time as they are distributed to the employees the revenue_ruling held further that under the provisions of sec_3401 a contributions to the plan are excluded from wages for purposes of the collection of income_tax at source on wages therefore no withholding is required from the employees’ salaries with respect to such picked-up contributions of the code the school district’s revrul_77_462 the issue of whether contributions have been picked up and revrul_81_36 c b by an employer within the meaning of sec_414 the code is addressed in revrul_81_35 1981_1_cb_255 revenue rulings established that the following two criteria must be met contributions although designated as employee contributions are being paid_by the employer in lieu of contributions by the employee and be given the option of choosing to receive amounts directly the employer must specify that the the employee must not these of 22s furthermore it instead of having them paid_by the employer to the pension_plan is immaterial whether an employer picks up contributions through a reduction‘in salary an offset against future salary increases or a combination of both in revrul_87_10 1987_1_cb_136 the internal_revenue_service considered whether contributions designated as employee contributions to a governmental_plan are excludable from the gross_income of the employee service concluded that to satisfy the criteria set forth in revenue rulings and with respect to particular contributions the required specification of employee contributions must be completed before the period to which such contributions relate the in this case the resolution adopted by employer m the law of state a and the representations made by employer m satisfy the criteria set forth in revrul_81_35 and revrul_81_36 because employer m will assume and pay mandatory employee contributions to plan x contributions by group b employees and group b employees may not elect to receive such contributions directly instead of having such contributions paid_by employer m to plan x furthermore the resolution satisfies the requirement set forth in revrul_87_10 since it takes effect upon receipt of this private_letter_ruling from the internal_revenue_service in lieu of accordingly we conclude that the mandatory employee contributions picked up by employer m shall be excluded from the current gross_income of group b employees until distributed or otherwise made available and the picked up contributions paid_by employer m are not wages for federal_income_tax withholding purposes and federal income taxes need not be withheld on the picked up contributions these rulings apply only to contributions specified in the effective the resolution adopted on february date for the commencement of the pick up of group b employees’ contributions cannot be earlier than the later of the date the resolution is signed or the date it is put into effect these rulings are based on the assumption that plan x meets the requirements for qualification under sec_40l1 a and distributions of the code at the time of the proposed contributions no opinion is expressed as to whether the amounts in question are subject_to tax under the federal_insurance_contributions_act the amounts in question are paid pursuant to a salary reduction agreement within the meaning of sec_3121 no opinion is expressed as to whether v b of the code a copy of this letter is being sent to your authorized representative in accordance with the power_of_attorney on file in this office sincerely yours vet ce mb fe john g riddle jr chief employee_plans technical branch enclosures deleted copy of letter notice cc yw - i io