department of the treasury internal_revenue_service washington d c date number release date uilc tl-n-2628-98 cc dom fs proc internal_revenue_service national_office significant service_center advice memorandum for associate district_counsel rocky mountain associate district cc wr rmd slc from assistant chief_counsel field service cc dom fs subject reversal of erroneous abatement this significant service_center advice responds to your memorandum dated date in connection with a question concerning the reversal of an abatement after the statute_of_limitations on assessment has expired this document is not to be used or cited as precedent issue under what circumstances may the service reverse an abatement of tax after the statute_of_limitations for assessment has expired conclusion the service_center may not reverse abatements after the statute_of_limitations for assessment has expired unless the abatement was made as a result of a clerical_error as described in 311_fsupp_1184 s d n y facts your office has been advised that persons working at the service_center often receive requests to reverse abatements after the statute_of_limitations on assessment has expired these requests do not always appear to meet the requirements of being corrections of mere clerical errors nor does it appear that persons requesting reversal of abatements tl-n-2628-98 give adequate_consideration of the prejudice to taxpayers concern has been expressed that sec_3 of the irm revised which was based on crompton- richmond is now obsolete in light of matter of 99_f3d_740 5th cir in light of bugge the standards for making reversals of abatements are unclear and you have requested clarification law and analysis generally the service must assess taxes within three years after the tax_return is filed sec_6501 sec_6404 empowers the service to abate the unpaid portion of an assessment that is excessive in amount assessed after the expiration of the applicable_period of limitations or erroneously or illegally assessed generally for a tax abatement to be effective it must be made pursuant to one of these three subsections see matter of bugge supra sec_6404 of the code which is titled small tax balances authorizes the service to write off accounts_receivable by abating assessments if the collection costs do not warrant pursuing collection of the assessed amounts sec_6404 does not authorize reversals of such abatements the statute merely authorizes the commissioner to formulate uniform instructions for writing off balances at the present time there are no regulations for writing off balances although the statute distinguishes a sec_6404 abatement from a sec_6404 abatement neither may be reversed unless crompton- richmond applies in crompton-richmond supra the district_court determined that if the taxpayer will not be harmed the service can reinstate a liability that has been abated or reduced without having been assessed as a result of a mistake of fact or clerical_error not going to the determination of the tax imposed in crompton-richmond an assessment against one party was mistakenly abated due to the failure of a service employee to notice that a pending refund_suit of another party precluded that abatement there the court distinguished clerical errors and mistakes of fact from those cases in which the service abates an assessment after a substantive reconsideration of the taxpayer’s liability the court stated as follows a distinction must be drawn between a substantive reconsideration of the taxpayer’s liability by the irs and a clerical_error committed by the irs that has the same effect whenever an abatement is issued because of a mistake of fact or bookkeeping error the assessment can be reinstated at least so long as this does not prejudice the taxpayer crompton-richmond f_supp pincite based on crompton-richmond case the service issued irm which states as follows tl-n-2628-98 general-this section provides instructions for processing non-rebate erroneous abatement cases in which master_file computer programming prevents the reversal of abatement transactions after the statute_of_limitations for assessment has expired these cases are limited to situations in which an erroneous abatement occurred due to a clerical_error that served to reduce the tax_liability of that account or another account the service will treat the account as any other account where the original tax_liability has never been paid a b c court cases generally support the position that whenever an abatement is issued because of a mistake of fact or bookkeeping error the assessment can be reinstated so long as this does not prejudice the taxpayer any abatement based on a clerical_error mistake will be treated as a nullity thereby allowing the assessment to survive and taking the position that by such actions the original assessment including any supplemental assessment is collectible provided the statute for collection after assessment has not expired at the time of the reversal any penalties and interest that were erroneously abated can be assessed as if the erroneous abatement had never occurred penalties and interest should also continue to accrue as if the erroneous abatement had not occurred d additional instructions are found in irm statute_of_limitations in matter of bugge a valid assessment was mistakenly abated when a collections manager ordered the abatement of what he believed to be a duplicate assessment which when processed by the service_center resulted in the abatement of the entire tax_liability in that case the court rejected the crompton-richmond theory that in the case of a clerical_error the erroneously abated assessment may be reinstated and instead reasoned that an erroneous abatement resulting from a clerical_error is not a valid abatement as a consequence the court held that the original assessment stands in reaching this conclusion the court examined whether the collections manager intended to abate the taxpayer’s entire liability finding that the collections manager intended to abate a duplicate assessment not the entire liability the court concluded that the abatement was outside the scope of the service’s authority under the code and hence was ineffectual in bugge the fifth circuit cautioned that the irs should not view this opinion as providing it any special shield from responsibility for its errors the pertinent wording of the court is as follows a number of courts including the united_states supreme court have recognized the authority of a government agency to correct inadvertent ministerial errors see eg 358_us_133 884_f2d_556 fed cir in no way should this opinion however be interpreted as granting the irs a special shield from responsibility for its errors inadvertent or otherwise that prejudice the taxpayer bugge v united_states f 3d pincite n because the fifth circuit‘s reasoning in bugge leaves the service with a vague standard regarding what sorts of abatements would be considered unauthorized we decline to advise a revision of the internal_revenue_manual based on bugge instead we believe a clarification of the standards for making abatements and reversing them would be useful in crompton-richmond the court distinguished clerical errors and mistakes of fact from those cases in which the service abates an assessment after a reconsideration of the taxpayer’s liability only inadvertent clerical or ministerial errors qualify for reinstatement of an original assessment there are a myriad of different errors that can be classified as clerical or ministerial and that result in erroneous abatements credits or refunds for example clerical errors can occur when a credit is posted to the wrong tin a designated payment is posted to the wrong module or a typographical error is made when imputing information each case must be evaluated in light of its particular circumstances it should be noted that if a clerical or ministerial error results in a refund the service cannot simply collect on that liability where the liability has already been satisfied by the taxpayer see 86_f3d_1067 11th cir remanded sub nom steffan v united_states 952_fsupp_779 m d fl acq in result only aod lexis and 63_f3d_83 1st cir the service now agrees that an erroneous refund of an amount_paid by the taxpayer in satisfaction of an assessment does not revive that assessment to the extent of the refund consequently if a taxpayer fully pays the assessment in the case of a clerical_error the service may no longer rely on the original assessment and must reassess the tax within the 3-year limitations_period the service’s position for determining whether a reversible clerical_error has occurred focuses not on the issue of the authority of the actor but on whether the abatement is based on a substantive redetermination of the liability namely whether there was a deliberate intentional abatement of a tax_liability for example if the service overrides an examination hold code entered on the account in response to a blown assessment report such action is deliberate and intentional and is done in response to a substantive redetermination of liability likewise an abatement which arises out of a discharge_in_bankruptcy is a substantive redetermination of liability we recognized that the service position presents problems of administration at the present time the position is under study tl-n-2628-98 if you have any questions concerning the above please call by deborah a butler assistant chief_counsel field service blaise m dusenberry assistant to the branch chief procedural branch field service division cc regional_counsel cc wr assistant regional_counsel tl cc wr


department of the treasury washington dc person to contact --------------------- id no ------------- telephone number --------------------- refer reply to cc psi b04 - plr-130597-05 date august internal_revenue_service number release date index number r ----------------------------- -------------------------------------------------- ----------------- --------------------------- ------------- ---------------------------------------- in re ----------------------------- -------------------------- - legend date ----------------- decedent ---------------- country ---------- spouse -------------- partnership --------------------------------- state ------------- company ------------------------------ cpa firm --------------------------------------- date ---------------------- date ---------------------- dear ------------- this is in response to your letter dated date and subsequent submissions requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to make an election under sec_2057 of the internal_revenue_code the facts submitted and representations made are summarized as follows decedent died on date date is prior to date at her death decedent was a united_states citizen and a resident of country decedent’s surviving_spouse spouse was a citizen and resident of country at her death decedent held a plr-130597-05 one-third interest in partnership a state general_partnership and a interest in company a state corporation the other owners of each business were decedent’s brother two sisters and in the case of partnership a_trust for the benefit of one sister under decedent’s will decedent’s interests in partnership and company are to be held for the benefit of spouse in a separate trust governed by the laws of state with spouse and individual a citizen_of_the_united_states acting as trustees the executor of decedent's_estate engaged cpa firm to handle tax matters including the preparation of decedent's form_706 united_states estate and generation-skipping_transfer_tax return cpa firm failed to advise the administrator of decedent's_estate of the applicability of the sec_2057 election decedent's_estate tax_return was filed on date however no deduction under sec_2057 was claimed on the return upon review of decedent's_estate tax_return cpa firm determined that an election should have been made under sec_2057 on date a supplemental estate_tax_return was filed for decedent's_estate making the sec_2057 election and claiming a deduction under sec_2057 with respect to decedent’s interests in partnership and company decedent's_estate requests an extension of time under sec_301_9100-1 and sec_301_9100-3 to make an election under sec_2057 to deduct the value of decedent's qualified family-owned business interests sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2057 provides that for purposes of the tax imposed by sec_2001 in the case of an estate of a decedent to which this section applies the value of the taxable_estate shall be determined by deducting from the value of the gross_estate the adjusted_value of the qualified family-owned business interests of the decedent sec_2057 provides that the deduction allowed by sec_2057 shall not exceed dollar_figure sec_2057 provides generally that sec_2057 shall apply to an estate if a the decedent was at the date of the decedent's death a citizen or resident_of_the_united_states b the executor elects the application of this section and files the agreement referred to in sec_2057 c the sum of the adjusted_value of the qualified family-owned business interests described in sec_2057 plus the amount of the gifts of such interests determined under sec_2057 exceed sec_50 percent of the adjusted_gross_estate and d during the 8-year period ending on the date of the decedent's death there have been periods aggregating years or more during which such interests were owned by the decedent or a member of the decedent's family and there was material_participation within the meaning of sec_2032a by the decedent or a plr-130597-05 member of the decedent's family in the operation of the business to which such interests relate sec_2057 provides that for purposes of making the election and filing the agreement under sec_2057 rules similar to the rules under sec_2032a and regarding the election of special_use_valuation of farm and other qualified_real_property shall apply sec_2057 provides that sec_2057 shall not apply to the estates of decedents dying after date under sec_301_9100-1 the commissioner may grant a reasonable extension of time 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 internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute requests for relief under 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 taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government therefore an extension of time is granted until days from the date of this letter for making an election under sec_2057 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as specifically ruled herein we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code specifically we express no opinion on whether the transaction satisfies the requirements under sec_2057 and sec_2032a plr-130597-05 this ruling is directed only to the taxpayers requesting it sec_6110 provides that it may not be used or cited as precedent the election should be made on a supplemental form_706 united_states estate and generation-skipping_transfer_tax return and filed with the internal_revenue_service center cincinnati oh a copy of this letter should be attached to the supplemental form_706 a copy is enclosed for this purpose sincerely heather c maloy associate chief_counsel passthroughs and special industries enclosures cc copy for sec_6110 purposes copy of this letter


internal_revenue_service number release date index number ---------------------------- ------------------------------------ --------------------------------- ------------------------- ----------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-134717-04 date date ------------------------------------------------- ------------ ---------------- -------------------------- legend x ------------------------------------------------- country entity date dear ---------------------- requesting a ruling that x be granted an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts this letter responds to a letter dated date written on behalf of x according to the information submitted x is a country entity x intended to elect to be treated as a disregarded_entity for federal tax purposes effective date however the form_8832 entity classification election inadvertently was not timely filed x represents that it is an entity that is eligible to elect under sec_301_7701-3 to be a disregarded_entity for federal_income_tax purposes sec_301_7701-3 provides in part that a business_entity that is not law and analysis classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 plr-134717-04 sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise if a foreign eligible_entity has one owner it may elect to be treated as a disregarded_entity pursuant to the rules in sec_301_7701-3 if a foreign eligible_entity has more than one owner it may elect to be treated as a partnership pursuant to the rules in sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date on which the form is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose deadline is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file form_8832 with the appropriate service_center and elect to be treated as a disregarded_entity for federal tax purposes effective date a copy of this letter should be attached to the election except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transactions described above under any other provision of the code plr-134717-04 this ruling is directed only to the taxpayer on whose behalf it was requested sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to the first representative listed sincerely s heather c maloy heather c maloy associate chief_counsel passthroughs and special industries enclosures cc ------------------------ copy of this letter copy for sec_6110 purposes -------------------------------- ---------------------------------------- ---------------------------------- ---------------------------------- -------------------------------------------------------------------------------------------- -------------------------------------------- ----------------------------------


t c memo united_states tax_court henricus c and pamela van der lee petitioners v commissioner of internal revenue respondent docket no filed date leon j greenspan for petitioners frederick c mutter for respondent memorandum findings_of_fact and opinion marvel judge respondent determined a deficiency of dollar_figure in petitioners’ federal_income_tax and an accuracy- related penalty under sec_6662 a of dollar_figure for after 1unless otherwise indicated all section references are to the internal_revenue_code code as amended and in effect for the year at issue and all rule references are to the tax_court continued concessions the issues for decision are whether petitioner husband henricus c van der lee mr van der lee was a trader in securities during whether losses attributable to mr van der lee’s purchases and sales of securities are deductible against petitioners’ ordinary_income whether petitioners are entitled to deduct certain charitable_contributions and whether petitioners are liable for the accuracy-related_penalty under sec_6662 for findings_of_fact some of the facts have been stipulated we incorporate the stipulated facts into our findings by this reference petitioners resided in new york when they filed their petition i securities transactions mr van der lee holds an undergraduate degree from rollins college and a master of business administration degree from duke university by mr van der lee had acquired substantial continued rules_of_practice and procedure all amounts have been rounded to the nearest dollar 2petitioners concede that the dollar_figure of tuition paid to the tuxedo park school an independent school is not deductible as a charitable_contribution the parties stipulated that petitioners are entitled to deduct investment_interest of dollar_figure rather than dollar_figure because respondent allowed the additional interest_deduction in the notice_of_deficiency we do not construe this stipulation as respondent’s further concession trading experience during his career3 as a trader at investment banks morgan stanley goldman sachs and merrill lynch he traded mostly mortgage-backed_securities u s treasury bonds interest rate swaps and commodities and also was involved in credit and foreign exchange trading because of industry regulations before mr van der lee was prohibited from trading securities for his own account in the first quarter of mr van der lee’s career at merrill lynch was coming to an end and later in he formally left his employer starting with the second quarter of he stopped spending a significant amount of time at merrill lynch and after the first quarter of many of the trading restrictions were lifted after date mr van der lee decided to start trading for his own account mr van der lee conducted most of his trading activities from home using an account with merrill lynch through which he traded stocks and options between april and december 3petitioners state in the petition that mr van der lee had been employed as a securities trader for over years but mr van der lee testified that he had worked as a securities trader for years by 4before starting the trading mr van der lee asked petitioners’ return preparer jerome camiola mr camiola to look into rules regarding trading mr camiola researched the rules and in late date conveyed the results of his research to mr van der lee his trading activity in the merrill lynch account was as follows month no of transactions april may june july august september october november december total of the transactions mr van der lee executed sales and purchases of stock pursuant to options that he had written or acquired mr van der lee never sold any stock on the day he acquired it mr van der lee also had an account with prudential bache prudential through which he traded options and futures between april and date mr van der lee executed trades through the prudential account mr van der lee’s trading activity in the prudential account was as follows 5the table does not include the option transactions because their dates are unclear see infra pp note month trading days no of transactions april may june july august september october november december total at the end of mr van der lee realized that even with sophisticated communication devices that allowed him to monitor securities prices he did not have sufficient information to trade successfully consequently he decided to concentrate on purchasing and selling securities as an investor ii charitable_contributions during in addition to her employment petitioner wife pamela van der lee mrs van der lee became a consultant pro bono to nonprofit_organizations she was a board member for the rollins college alumni association alumni association the national down syndrome society ndss and the tuxedo park school she provided her expertise in marketing and strategic planning for example by making presentations on soliciting donors to carry out her charitable work in mrs van der lee established a home_office with a computer with telephones with fax machines with copiers all of that she also incurred expenses for taxicabs copying office supplies travel and courting donors mrs van der lee traveled extensively for the charities and her travel was either expected or required she traveled to attend national conferences for ndss and quarterly meetings dinners and other fundraising events for the alumni association mrs van der lee also traveled to washington d c for meetings on strategic planning for the alumni association and the ndss she did not seek reimbursement of her expenses from the charitable organizations during petitioners owned a 3-week timeshare interest in a residence at the ritz carlton in st thomas caribbean residence in they donated a 1-week use of the caribbean residence to ndss which raised money by auctioning a vacation at the caribbean residence at a fundraising gala around petitioners renovated the kitchen in their home in they donated their used range to the tuxedo park school and other used kitchen appliances cabinets faucets and similar items to hudson valley materials exchange hudson valley materials exchange is an environmental sec_501 organization that focuses on waste management and distributes collected items to school districts iii procedural history a return positions mr camiola has prepared petitioners’ returns since the late 1980s including the federal_income_tax return mr camiola received a degree in history in and after working as an accountant in he started his own business as a return preparer mr camiola gives his clients guidelines but does not examine receipts mr van der lee provided mr camiola with totals by category of all receipts petitioners signed the return and filed it as married taxpayers filing jointly the taxable_year was the first and only year for which mr van der lee claimed to be a trader petitioners attached a schedule c profit or loss from business to the return on the schedule c petitioners reported gross_receipts from the securities trading activity of dollar_figure to calculate this amount mr camiola totaled all gross_proceeds using petitioners’ brokerage statements petitioners reported dollar_figure as the cost_of_goods_sold which equaled their total bases in those securities according to the schedule c petitioners’ loss was dollar_figure on the schedule c petitioners also reported expenses totaling dollar_figure as follows expense amount legal and professional services dollar_figure office expense big_number travel big_number meals and entertainment big_number utilities big_number total big_number petitioners offset the net_loss on schedule c of dollar_figure against their wages petitioners did not attach to their or return a statement making the mark-to-market_election or a form_3115 application_for change in accounting_method petitioners did not report on their return any unrealized profit or loss from securities held at the close of with respect to the reporting of charitable_contributions mr camiola did not explain to petitioners that cash and noncash contributions must be reported separately petitioners reported their charitable_contributions of dollar_figure as gifts by cash or check b respondent’s determinations in the notice_of_deficiency respondent determined that mr van der lee did not qualify as a trader in securities under sec_475 during the tax_year and that he was not eligible to elect the use of the mark-to-market accounting_method for the securities activity respondent also determined that petitioners failed to make a timely and effective mark-to- market election under sec_475 as a result respondent determined that the dollar_figure loss on the sale of securities should be reported as a capital_loss on schedule d capital_gains_and_losses that is deductible only to the extent of dollar_figure under sec_165 and sec_1211 respondent also disallowed all schedule c expenses respondent disallowed dollar_figure of the charitable_contribution_deduction and determined that a 20-percent accuracy-related_penalty under sec_6662 applied opinion i burden_of_proof generally the commissioner’s determinations are presumed correct and the taxpayer bears the burden of proving them erroneous rule a 290_us_111 also deductions are a matter of legislative grace and the taxpayer has the burden of showing entitlement to any deduction claimed see rule a 503_us_79 petitioners contend that the burden_of_proof shifts to respondent pursuant to sec_7491 sec_7491 may shift the burden to the commissioner with respect to factual issues affecting liability for tax where the taxpayer introduces credible_evidence with respect to any factual issue relevant to ascertaining tax_liability however the taxpayer must establish that he or she has complied under sec_7491 with all substantiation requirements has maintained all required records and has cooperated with reasonable requests for witnesses information documents meetings and interviews sec_7491 the record does not establish that the requirements for shifting the burden_of_proof to respondent are met in any case we base our conclusions on the preponderance_of_the_evidence and not on the allocation of the burden_of_proof see 131_tc_185 ii purchases and sales of securities a trader or investor sec_165 generally allows a deduction for any loss sustained during the taxable_year and not compensated by insurance or otherwise however sec_165 provides that losses from sales or exchanges of capital assets are allowed only to the extent allowed under sec_1211 and sec_1212 sec_1211 limits the allowance of such losses to the extent of gains from such sales or exchanges plus the lower_of dollar_figure dollar_figure in the case of a married individual filing a separate_return or the excess of such losses over such gains sec_1221 defines capital assets as any property held by the taxpayer whether or not connected with his trade_or_business sec_1221 creates an exception to the definition of the capital_asset stock_in_trade of the taxpayer or other_property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable_year or property held by the taxpayer primarily_for_sale_to_customers in the ordinary_course_of_his_trade_or_business accordingly taxpayers who are not dealers generally recognize capital_gain or loss upon the sale_or_exchange of their stock rather than ordinary gains or losses however if a taxpayer who is not a dealer is engaged in business as a securities trader sec_475 allows such taxpayer to elect the mark-to-market method_of_accounting for securities held in his business under the mark-to-market method_of_accounting a trader generally recognizes at the end of the year ordinary gain_or_loss on all securities held in the business as if the securities were sold at the end of the year for fair_market_value sec_475 f a i knish v 6a securities trader electing under sec_475 to use the mark-to-market method_of_accounting for securities held in his business is required to file with the commissioner a statement making the election identifying the first taxable_year for which the election is effective and describing the business see knish v commissioner tcmemo_2006_268 revproc_99_17 sec_5 1999_1_cb_503 the taxpayer must file the statement no later than the due_date of the trader’s original federal_income_tax return for the year immediately preceding the election_year and if the election entails a change in the accounting_method the trader must also attach a form_3115 application_for change in accounting_method to the original return for the election_year revproc_99_17 sec_5 c b pincite for a trader’s first year of business the trader may make the sec_475 election by placing in the books_and_records of the business no later than months and days after the first day of the year a written_statement making the mark-to-market_election identifying the first taxable_year for which the election is effective and describing the business to which the election relates revproc_99_17 sec_5 c b pincite the trader must attach a copy of the statement to the trader’s federal_income_tax return for the election_year id commissioner tcmemo_2006_268 lehrer v commissioner tcmemo_2005_167 affd 279_fedappx_549 9th cir where the trader has not made a proper election the losses are treated as capital losses and are deductible only to the extent of capital_gains plus dollar_figure sec_165 c f b knish v commissioner supra as follows from the foregoing the proper taxation of gains and losses from the taxpayer’s securities activity depends on whether he is a dealer a trader or an investor see 889_f2d_29 2d cir affg in part revg in part on another issue and remanding tcmemo_1988_264 89_tc_445 petitioners contend that mr van der lee was a trader in and respondent contends he was an investor generally traders are engaged in the trade_or_business of selling securities for their own account see king v commissioner supra pincite although investors also buy and sell securities for their own account they are not considered to be in the trade_or_business of selling securities see kay v commissioner tcmemo_2011_159 arberg v commissioner tcmemo_2007_244 unlike an investor’s expenses a trader’s expenses are deducted in determining adjusted_gross_income rather than as itemized expenses see eg kay v commissioner supra whether a taxpayer’s activities constitute a trade_or_business is a question of fact see 312_us_212 in distinguishing a trader from an investor courts consider the following nonexclusive factors the taxpayer’s intent the nature of the income to be derived from the activity and the frequency extent and regularity of the taxpayer’s securities transactions see estate of yaeger v commissioner supra pincite quoting 721_f2d_810 fed cir see also 530_f2d_1332 9th cir affg tcmemo_1974_164 the court_of_appeals for the second circuit where the appeal in this case would lie absent a stipulation to the contrary see sec_7482 has held that the length of the holding_period and the source of profit are the two fundamental distinguishing criteria see estate of yaeger v commissioner supra pincite investors derive profit from interest payments dividends and capital appreciation of securities id traders buy and sell securities with reasonable frequency with the purpose of catching the swings in the daily market movements and profiting on a short-term basis id the length of time mr van der lee held stocks before selling suggests that in he was an investor rather than a trader he never sold stocks on the day of their acquisition of the sales of stocks between april and date involved shares that mr van der lee had acquired before his potential source of profit if any was asset appreciation rather than short-term price variation mr van der lee did not seek to profit from the swings in the daily market movements and instead intended to profit from the longer term holding of investments mr van der lee also did not trade with sufficient frequency to qualify as a trader the brokerage statements show that between april and date mr van der lee executed trades through the merrill lynch account and trades through the prudential account of the trades were executed pursuant to options that mr van der lee had written or acquired mr van der lee’s total number of trades was 7the parties stipulated that in there were a total of purchases and sales in the merrill lynch account however mr van der lee testified that from april through date he executed trades mr van der lee commenced his securities activity after date but the parties’ stipulations are unclear as to whether they cover the full calendar_year in addition the parties’s stipulations are unclear regarding the extent if any to which they include options pursuant to which the parties sold or acquired stocks the record contains the yearend statement and the date statement issued by merrill lynch for our findings_of_fact we employed the following methodology first we ignored certain transactions involving shares of viacom until date mrs van der lee had worked for viacom for years she received viacom stock_options and exercised them acquiring big_number viacom shares on date petitioners sold the viacom stock in three transactions these transactions namely the purchase of the shares pursuant to the options and the sales of the shares did not relate to mr van der lee’s trading activity continued therefore in april july august and september almost one-half of the time he engaged in the securities activity mr van der lee placed between four and eight trades in date he executed trades but on only days in addition mr van der lee traded on only days in the prudential account averaging or trading days per month mr van der lee had a spurt of trading activity in the merrill lynch account in december but overall his activity was sporadic mr van der lee’s number of trades also does not support a conclusion that in he was a trader see kay v commissioner supra trades held insubstantial holsinger v commissioner tcmemo_2008_191 trades with aggregate continued second we identified all transactions pursuant to which mr van der lee purchased or sold shares including the purchases of shares that he held at yearend on the basis of the date statement we also identified all options that mr van der lee purchased or wrote that were held open as of date we then identified all options that mr van der lee wrote or acquired that expired and included the original option transaction as a trade we did so using the date and the yearend statements which together show that on the yearend statement under short-term_capital_gains merrill lynch reported gains and losses with respect to expired options with respect to options that mr van der lee wrote or acquired between apr and date that were exercised we relied on the yearend statement if the yearend statement shows the basis and or the sale price of the underlying stock includes an option premium we counted the option itself as a trade in addition to the trade of the underlying stock the yearend statement does not identify the date on which mr van der lee acquired or wrote the options that were exercised and we therefore are unable to find his monthly number of trades with precision sales of dollar_figure in year held insubstantial we conclude that mr van der lee was not a trader in and petitioners are limited to a dollar_figure deduction of losses arising from the purchase and sale of securities under sec_1211 b respondent’s motion for summary_judgment respondent filed a motion for partial summary_judgment on the issue of whether petitioners were permitted to use the mark- to-market method_of_accounting for respondent contends that regardless of whether mr van der lee was a trader in petitioners failed to make the mark-to-market_election and therefore are not entitled to claim ordinary losses respondent also contends that petitioners are not entitled to administrative relief for failing to make a valid election under sec_301_9100-3 proced admin regs petitioners argue that 8we note however that in any case the court_of_appeals for the second circuit does not consider a large number of trades determinative of whether the taxpayer was a trader or an investor see 889_f2d_29 2d cir holding the taxpayer was an investor when he executed over big_number trades in and but held most stocks for over year affg in part revg in part on another issue and remanding tcmemo_1988_264 9under sec_301_9100-3 proced admin regs the commissioner may grant administrative relief to a securities trader with regard to an improper mark-to-market_election if the trader among other things requests sec relief and demonstrates that he acted reasonably and in good_faith in failing to make a timely election under sec_475 a trader has not acted reasonably and in good_faith if the trader uses hindsight in requesting relief by attempting to make a sec_475 mark-to-market_election after the election was due continued because in mr van der lee was a new trader rather than a continuing trader the rules on filing the mark-to-market_election do not apply petitioners also contend that the failure to elect the mark-to-market method_of_accounting does not preclude mr van der lee from using the ordinary accounting_method of deducting losses according to petitioners sec_475 if elected creates a rebuttable_presumption that the taxpayer is a trader but if the taxpayer made no such election he bears the burden of proving his trader status we held a hearing on the motion and announced an intention to grant respondent’s motion partially in that the election under sec_301_9100-3 proced admin regs does not apply thereafter a trial was held in new york in the light of our conclusion that mr van der lee was not a trader we will deny respondent’s motion as moot for the same reason we do not address petitioners’ arguments c expenses related to the activity in general sec_162 generally allows as a deduction all ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business as discussed above in continued kantor v commissioner tcmemo_2008_297 mr van der lee was not a trader and therefore he is not entitled to the deductions under sec_162 nevertheless under sec_212 individuals are allowed to deduct ordinary and necessary expenses paid_or_incurred during the taxable_year for the production_or_collection_of_income or for the management conservation or maintenance of property held for the production income to be deductible under sec_212 expenses must be ordinary and necessary see sec_1_212-1 income_tax regs sec_1_212-1 income_tax regs provides that expenses are deductible under sec_212 only if they are reasonable in amount and bear a reasonable and proximate relation to the production_or_collection_of_income or to the management_conservation_or_maintenance_of_property_held_for_the_production_of_income no deduction is allowed for personal expenditures sec_262 expenses under sec_212 are allowed as miscellaneous_itemized_deductions only to the extent that in the aggregate itemized_deductions exceed percent of adjusted_gross_income sec_67 we now consider petitioners’ specific expenses legal and professional services expenses respondent disallowed a deduction for legal and professional services expenses of dollar_figure the record contains two bills totaling dollar_figure issued by the law firm of norton christensendollar_figure however the record contains no credible_evidence establishing that the legal advice pertained to mr van der lee’s activity of purchasing and selling stocks as opposed to personal matters we sustain respondent’s determination disallowing legal and professional services expenses travel and meals and entertainment_expenses generally a deduction is not allowed for travel_expenses meals and entertainment_expenses and any expenses for gifts or listed_property unless the taxpayer properly substantiates the amount of such expense the time and place of the expense the business_purpose and in the case of meals and entertainment the business relationship between the taxpayer and the persons being entertained sec_274 deductions for expenses that are subject_to the strict substantiation requirements of sec_274 must be disallowed in full unless the taxpayer satisfies every element 50_tc_823 affd per curiam 412_f2d_201 2d cir a taxpayer may substantiate his deductions by either adequate_records or sufficient evidence corroborating the taxpayer’s statement sec_274 to satisfy this requirement 10petitioners explain that they deducted these expenses under the category of office expenses a taxpayer must maintain records and documentary_evidence that in combination are sufficient to establish each element of an expenditure or use sec_1_274-5t temporary income_tax regs fed reg date in the absence of adequate_records a taxpayer may establish an element of an expenditure by his or her statement written or oral containing specific information as to such element larson v commissioner tcmemo_2008_187 sec_1_274-5t temporary income_tax regs fed reg date to substantiate this category of deductions petitioners submitted credit card statements and summaries on which they circled purportedly deductible items however these documents substantiate only the amounts of the expenses but not the other elements of sec_274 such as the business_purpose or the business relationship between mr van der lee and persons being entertained the record is devoid of any details of mr van der lee’s travel or the business_purpose of each tripdollar_figure we sustain respondent’s determination disregarding this category of expenses office and utilities expenses to substantiate the deductions for office and utilities expenses petitioners submitted bank and credit card statements 11mr van der lee stated at trial that he provided to the irs the list of contacts showing with whom he met the list was not organized by date and is not part of the record invoices payment confirmations and receiptsdollar_figure with respect to the charges for utilities and security house cleaning and exterminator services generally under sec_280a13 no deduction is allowable for use of a home in connection with an activity which is merely for the production_of_income within the meaning of sec_212 but is not a trade_or_business under sec_162 73_tc_766 with respect to the charges for pc warehouse radio shack palmnet gateway compusa and best buy petitioners failed to present credible_evidence establishing what mr van der lee purchased and that the items he purchased were not for personal_use although mr van der lee testified that when he decided to start trading he researched the technology side of the 12the expenses were direct tv dollar_figure cottage care cleaning services dollar_figure s b total home dollar_figure land surveyor services dollar_figure payments to bruce mckinnon and mr tammaro dollar_figure new york post subscription dollar_figure radio shack and palmnet dollar_figure gateway dollar_figure cable dollar_figure cablevision dollar_figure pc warehouse dollar_figure staples compusa and best buy dollar_figure chubb insurance dollar_figure security services dollar_figure shipping dollar_figure bug runner exterminator dollar_figure water dollar_figure brazilian american dollar_figure house and garden and renovation style magazines dollar_figure suburban propane dollar_figure rockland electric dollar_figure and communications charges such as at t services palmnet service gte airfone and others dollar_figure sec_280a generally disallows deductions for expenses with respect to a dwelling_unit used by a taxpayer as a residence unless an exception applies sec_280a exempts from the general disallowance rule expenses attributable to a dwelling_unit which is exclusively used on a regular basis as a principal_place_of_business for any trade_or_business of the taxpayer operations and set up a trading floor such general testimony is insufficient to substantiate the claimed deductions with respect to the payments to mr mckinnon and mr tammaro and the payments for the land surveyor services new york post house and garden and renovation style magazines shipping and various communications_services the record contains no credible_evidence regarding the ordinary and necessary and nonpersonal nature of the expenses we sustain respondent’s determinations disallowing the deductions for these expenses see sec_262 iii charitable_contribution_deduction the following charitable_contributions remain at issue description amount underage dollar_figure percentage of home used for charity big_number partial interest in the caribbean residence big_number charitable use of the caribbean residence big_number ndss expenses big_number bug runners rockland occupational therapy for kids big_number hudson valley materials exchange and tuxedo park school fridge and freezer big_number cabinets and granite countertops big_number sink faucet dishwasher toilet sink and vanity range big_number total big_number generally sec_170 allows a deduction for any charitable_contribution made by the taxpayer a charitable_contribution is defined as a contribution or gift to or for_the_use_of a charitable_organization sec_170 because the recordkeeping requirements under the code and the regulations vary depending on the amount and nature of the contribution we address each category separately a ndss expenses mrs van der lee testified about her pro bono work for the charitable organizations we find her testimony credible on this point and we find that she rendered services to ndss no deduction is allowable under sec_170 for a contribution of services but unreimbursed expenditures made incident to the rendition of services to an organization contributions to which are deductible may constitute a deductible contribution sec_1_170a-1 income_tax regs recently in van dusen v commissioner t c ___ we have addressed the deductibility of expenses incident to the rendition of services to a charitable_organization and the recordkeeping requirements to be deductible unreimbursed expenses must be directly connected with and solely attributable to the rendition of services to a charitable_organization see id at ___ slip op pincite 54_tc_722 charitable_contributions are subject_to the recordkeeping requirements of sec_1_170a-13 income_tax regs for monetary contributions or sec_1_170a-13 income_tax regs for contributions of property other than money in van dusen v commissioner supra at ___ slip op pincite we held that contributions through the payment of unreimbursed volunteer expenses of less than dollar_figure are subject_to the requirements for contribution of money set forth in sec_1_170a-13 income_tax regs sec_1_170a-13 income_tax regs requires the taxpayer to maintain a canceled check or a receipt from the donee organization in the absence of a canceled check or a receipt from the donee organization the taxpayer must maintain other reliable written records showing the name of the donee and the date and the amount of the contribution id to claim a charitable_contribution_deduction of dollar_figure or more the taxpayer must substantiate the contribution with a contemporaneous written acknowledgment from the donee organization sec_170 sec_1_170a-13 and income_tax regs a taxpayer who incurs unreimbursed expenses incident to the rendition of services is deemed to have obtained such acknowledgment if the taxpayer has adequate_records to substantiate the amount of the expenditures and obtains by a prescribed date a statement prepared by the donee organization containing specified information see sec_1 170a- f income_tax regs see also van dusen v commissioner supra at ___ slip op pincite contributions of less than dollar_figure to the same donee are not subject_to these additional requirements even if the aggregate donations to the donee exceed dollar_figure within the same taxable_year see van dusen v commissioner supra at ___ ndollar_figure slip op pincite n sec_1_170a-13 income_tax regs even if we assume that mrs van der lee’s expenditures were directly connected with and solely attributable to her services to ndss petitioners failed to satisfy the substantiation requirements the record contains no list of expenses or receipts there is no trip log or written acknowledgment from ndss describing mrs van der lee’s services and other information as required by sec_1_170a-13 income_tax regs mrs van der lee testified that the credit card statements in the record show some of these expenses however petitioners submitted those credit card statements with circled items to substantiate mr van der lee’s deductions for expenses related to his securities activity because the record contains only the total amount of expenses_incurred for ndss it is not clear whether any of the expenses were more than dollar_figure even if we erred on petitioners’ side and concluded that the less stringent substantiation requirements of sec_1_170a-13 income_tax regs applied we would nevertheless conclude that petitioners fail even those requirements in the absence of receipts the taxpayer must provide reliable written records showing the names of the donees and the dates and amounts of the contributions or in this case expenses sec_1_170a-13 income_tax regs the record contains no such reliable written records we sustain respondent’s determination regarding a deduction for contributions to ndss b charitable use of the caribbean residence with respect to the charitable use of the caribbean residence petitioners deducted the rental value of the residence for the length of the charitable use they also deducted a portion of the maintenance_expenses they paid mr van der lee explained at trial that because petitioners own a 3-week share of the caribbean residence and they donated week to ndss they claimed percent of applicable maintenance fees as a charitable contributiondollar_figure mr van der lee testified that they received a document from ndss acknowledging the donation of the use of the caribbean residence but petitioners introduced no credible documentary_evidence regarding this deduction at trial generally subject_to certain exceptions sec_170 disallows a charitable_contribution_deduction for a gift of a partial interest in property not in trust petitioners do not argue that any of the exceptions under section 14mrs van der lee testified that they donated the use of the caribbean residence to two different organizations in the record contains no other reference to a second donee organization because mrs van der lee’s testimony on the point was vague on the basis of mr van der lee’s testimony we find that the donated use wa sec_1 week f b apply and we conclude none are applicable accordingly we sustain respondent’s determination regarding the deduction for the charitable use of the caribbean residence c hudson valley materials exchange as described above for a charitable_contribution_deduction of dollar_figure or more the taxpayer must substantiate the contribution with a contemporaneous written acknowledgment from the donee organization sec_170 sec_1_170a-13 income_tax regs for contributions of property other than money the written acknowledgment must provide among other information a description of the property and a statement of whether the donee organization provided any goods or services in consideration for the property see sec_1_170a-13 income_tax regs besides the written acknowledgment requirement the regulations establish an additional three-tier recordkeeping system for contributions of property other than money in the case of a deduction of less than dollar_figure for a contribution of property other than money the taxpayer must maintain a receipt from the donee showing the name of the donee the date and 15the exceptions are a contribution of a remainder_interest in a personal_residence or farm a contribution of an undivided portion of the taxpayer’s entire_interest in property and a qualified_conservation_contribution sec_170 the second exception does not apply because an undivided portion must consist of a fraction or percentage or each substantial right and must extend over the entire term of the donor’s interest in such property sec_1_170a-7 income_tax regs location of the contribution and a detailed description of the property see sec_1_170a-13 income_tax regs a letter or other written communication from the donee acknowledging receipt of the contribution constitutes such receipt id a receipt is not required if it is impractical to obtain for example when the taxpayer deposits property at a charity’s unattended drop site id in such a case the taxpayer must maintain reliable written records with respect to each item of donated property id if a taxpayer makes a charitable_contribution of property other than money and claims a deduction in excess of dollar_figure the taxpayer must maintain written records showing the manner of acquisition of the item and the approximate date of the acquisition see sec_1_170a-13 income_tax regs lastly if the deduction exceeds dollar_figure the taxpayer must obtain a qualified_appraisal for the contributed_property attach a fully completed appraisal_summary ie form_8283 noncash charitable_contributions to the tax_return on which the deduction is claimed and maintain records pertaining to the claimed deduction in accordance with sec_1_170a-13 income_tax regs see sec_1_170a-13 income_tax regs a qualified_appraisal must include among other things a detailed description of the property its physical condition the valuation method used to determine the fair_market_value and the specific basis for the valuation see sec_1_170a-13 income_tax regs a qualified_appraisal must be performed by a qualified_appraiser no earlier than days before the date of the contribution and no later than the due_date of the return sec_1_170a-13 and b income_tax regs generally the amount reported as a deduction for contributions of property is an aggregate amount for all similar items of property see sec_1_170a-13 income_tax regs we find the donated kitchen items were similar items of property accordingly we aggregate all items in this category and consider the deduction to exceed dollar_figure petitioners therefore need to establish that they met the substantiation requirements applicable to deductions over dollar_figure petitioners failed to attach a form_8283 to their return they obtained an appraisal by masterwork kitchens dated july dollar_figure the appraisal was not a qualified_appraisal because it was untimely see friedman v commissioner tcmemo_2010_45 petitioners did not present written acknowledgments of the contributions by the donees and receipts from the donees they therefore failed to establish that they met the requirements of the three-tier recordkeeping system described supra pp 16the appraisal did not include the refrigerator the freezer the toilet and the vanity the values of which petitioners also deducted as charitable_contributions however petitioners met the general recordkeeping requirements for a charitable_contribution_deduction of less than dollar_figure because no written acknowledgment from the donee organization is required for contributions of property valued at dollar_figure or less see sec_1_170a-13 income_tax regs petitioners’ records for the contribution of the kitchen items meet the requirements for substantiating contributions of dollar_figure or less we allow petitioners a dollar_figure deduction for their contribution of the kitchen items and sustain respondent’s determination disallowing the deduction of the remaining amount d percentage of home used for charity mrs van der lee testified that she calculated this deduction on the basis of various expenses to establish a home_office such as the cost of a computer telephones fax machines and copiers for her charitable work petitioners did not introduce any credible documentary_evidence substantiating these expenses and are not entitled to the claimed deduction e underage rockland occupational therapy for kids and bug runners mrs van der lee testified that she did not know what the contribution identified as underage was she testified that bug runners is an exterminator and that she did not know why that expense was reported as a charitable_contribution other than the fact that she performed her charitable work from homedollar_figure with respect to the contribution to rockland occupational therapy for kids mrs van der lee did not recall the details petitioners presented no credible_evidence to substantiate these contributions because each of these contributions is over dollar_figure and the record contains neither written acknowledgment of the contributions by the donees nor petitioners’ reliable written records we sustain respondent’s disallowance of these deductions iv the accuracy-related_penalty under sec_6662 respondent determined that the portion of the underpayment resulting from improper reporting of charitable_contributions is attributable to negligence and imposed the accuracy-related_penalty under sec_6662 and b generally sec_6662 and b authorizes the commissioner to impose a 20-percent penalty on the portion of an underpayment of income_tax attributable to negligence or disregard of rules or regulations the term negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws and the term disregard includes any careless reckless or intentional 17the record contains a credit card statement showing a charge for bug runner exterminator however petitioners attempted to use this receipt to substantiate mr van der lee’s office expense deduction disregard sec_6662 sec_1_6662-3 and income_tax regs disregard of rules or regulations is careless if the taxpayer does not exercise reasonable diligence to determine the correctness of a return position and is reckless if the taxpayer makes little or no effort to determine whether a rule_or_regulation exists under circumstances which demonstrate a substantial deviation from the standard of conduct that a reasonable person would observe sec_1_6662-3 income_tax regs see also 85_tc_934 the commissioner bears the burden of production with respect to the taxpayer’s liability for the sec_6662 penalty and must produce sufficient evidence indicating that it is appropriate to impose the penalty see sec_7491 once the commissioner meets his burden of production the taxpayer must come forward with persuasive evidence that the commissioner’s determination is incorrect or that the taxpayer had reasonable_cause or substantial_authority for the position see 116_tc_438 respondent met his burden of production he introduced evidence that petitioners failed the substantiation requirements of sec_170 and regulations thereunder accordingly petitioners had the burden of producing sufficient evidence to prove that respondent’s penalty determination is incorrect see higbee v commissioner supra pincite petitioners did not carry that burden the failure to properly substantiate their claimed deductions evidences negligence and careless disregard of the rules and regulations petitioners contend that they should not be liable for the sec_6662 penalty because they relied on mr camiola to properly report the deductions generally sec_6664 provides an exception to the sec_6662 accuracy-related_penalty with respect to any portion of an underpayment if the taxpayer shows that there was reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to such portion reliance on the advice of a tax professional may establish reasonable_cause and good_faith see 469_us_241 a taxpayer claiming reliance on professional advice must show that 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 affd 299_f3d_221 3d cir petitioners failed to provide mr camiola with all relevant information they gave him only the total of the charitable_contributions and did not tell him that a large portion of the contributions was not gifts by cash or check petitioners have failed to carry their burden of proving that there was reasonable_cause for and that they acted in good_faith with respect to any portion of the underpayment in tax in addition we disallow the charitable_contribution_deduction on the ground of the lack of credible_evidence in the record we sustain respondent’s determination of the accuracy-related_penalty we have considered the remaining arguments the parties made and to the extent not discussed above conclude those arguments are irrelevant moot or without merit to reflect the foregoing an appropriate order and decision under rule will be entered


internal_revenue_service number release date index number ------------------- ------------------------------- ----------------------------------- ---------------------------------------- ------------------------------ legend 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 corp b06 plr-117213-15 date june p ---------------------------------------------------------- ------------------------------------------------- ------------------------------------- holdings ---------------------------------------------------------- ------------------------------------------------- ----------------------------------- s -------------------------------------------------------------------------------- ---------------------- b1 b2 b3 date year dollar_figurea x y ------------------------------------------------------------------- -------------------------------------------- --------------------------------------------------------- --------------------- ------ ---------------- --- --- plr-117213-15 dear ------------- this letter responds to your date request for a ruling under sec_355 of the internal_revenue_code the code the information provided in that request is summarized below the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination summary of facts p is a publicly-held corporation that is the common parent of an affiliated_group_of_corporations filing a consolidated federal_income_tax return the p group p owns all of the stock of a newly-formed subsidiary holdings p will own all of the common and all of the series b nonvoting preferred_stock of s a corporation soon to be formed an unrelated corporation will own all of the series a nonvoting preferred_stock of s the series a preferred_stock will rank senior to the series b preferred_stock with respect to liquidation preference and receipt of dividends holdings is a member of the p group when formed s will also be a member of the p group the p group conducts three businesses b1 b2 and b3 s through a wholly-owned limited_liability_company that is treated as a disregarded_entity for federal_income_tax purposes owns all of the assets related to the b1 business p directly and through other wholly-owned subsidiaries owns all of the assets related to the b2 and b3 businesses the b1 business has the potential for sustained and significant growth while the b2 and b3 businesses only have the potential for no or slow growth accordingly p proposes to separate the b1 business from both the b2 and b3 businesses specifically p will contribute all of its s stock common plus series b preferred plus cash in an amount sufficient to meet the capital needs of the b1 business to holdings and p will distribute of the holdings stock proportionately to its shareholders step and step will be collectively referred to as the transaction on date p issued debentures in the amount of dollar_figurea for valid business reasons p will not be able to cause holdings to assume any portion of this debt ie the portion of the debentures attributable to the b1 business and p expects a material percentage of debenture holders to require p to redeem their portion of the debentures in year accordingly to raise the capital necessary to achieve these two objectives p will retain of the holding stock the retained shares however p expects to plr-117213-15 dispose_of the retained shares within x months but in no event later than y months following the transaction representation sec_1 the business_purpose for the retention of the retained shares is to allow p to satisfy the capital needs of establishing holdings as a separate public company while maintaining the financial viability of the businesses retained by p p and holdings will operate as independent companies having separate boards of directors the separate boards of directors will have no overlapping membership p will attempt to dispose_of the retained stock through a sale of such stock in the open market within the x month period following the distribution but in no event will the disposition occur later than y months following the distribution p will vote the retained stock in proportion to the votes cast by the other stockholders of holdings and will grant holdings a proxy with respect to the retained stock requiring such manner of voting ruling the retention by p of the retained shares will not be in pursuance of a plan having as one of its principal purposes the avoidance of federal_income_tax within the meaning of sec_355 caveat 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 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 temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted therefore this ruling will be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in the letter_ruling see section dollar_figure of revproc_2015_1 2015_1_irb_1 however when the criteria in section dollar_figure of revproc_2015_1 2015_1_irb_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances plr-117213-15 procedural information in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to two of your authorized representatives a copy of this letter must be attached to any 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 sincerely isaac w zimbalist senior technical reviewer corporate


t c summary opinion united_states tax_court shannon b and rita l byrd petitioners v commissioner of internal revenue respondent docket no 24201-05s filed date shannon b byrd and rita l byrd pro sese beth a nunnink for respondent carluzzo special_trial_judge this case for the redetermination of deficiencies was heard pursuant to the provisions of sec_7463 pursuant to sec_7463 the 1unless otherwise indicated section references are to the internal_revenue_code_of_1986 as amended in effect for the relevant period rule references are to the tax_court rules_of_practice and procedure decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case in a notice_of_deficiency dated date respondent determined deficiencies in petitioners’ federal income taxes and penalties as follows year deficiency penalty sec_6662 dollar_figure dollar_figure dollar_figure -0- big_number big_number the issues for decision are whether for petitioners are entitled to a home mortgage interest_deduction in excess of the amount respondent allowed whether for petitioners are entitled to a depreciation deduction in excess of the amount respondent allowed for a certain automobile awarded to and used by mrs byrd in connection with her trade_or_business whether for petitioners are liable for the sec_72 additional tax with respect to a distribution from a qualified_retirement_plan whether for each year in issue petitioners properly computed amounts shown for cost_of_goods_sold and gross_income on a schedule c profit or loss from business included with their joint federal_income_tax return and whether for and or petitioners are liable for a sec_6662 accuracy-related_penalty background some of the facts have been stipulated and are so found petitioners are and were at all times relevant married to each other they filed a joint federal_income_tax return for each year in issue at the time the petition was filed they resided in tennessee mr byrd suffered a serious heart attack during after recovering he resumed his full-time employment but for health reasons terminated his part-time job before the close of he requested and received a dollar_figure distribution from a qualified_retirement_plan the pension distribution he wa sec_51 years old when he received the pension distribution in following mr byrd’s heart attack mrs byrd concerned about the family’s loss of income and seeing an opportunity to make some extra income became an independent sales consultant for beauticontrol cosmetics beauticontrol as a beauticontrol consultant she purchased various cosmetic products from the company for resale to her customers and engaged in activities designed to encourage other individuals to become beauticontrol sales consultants in a distribution network headed by her for the most part her activities in connection with her position with beauticontrol were conducted from her residence at some point between and there were beauticontrol consultants within her distribution network as a result of her sales levels beauticontrol awarded her a red ford mustang convertible she used the mustang adorned with logos identified with beauticontrol for transportation to meet with prospective or existing customers to attend meetings and presentations and to deliver products all in connection with her beauticontrol activities beauticontrol issued mrs byrd a form 1099-misc miscellaneous income for reporting the value of the mustang for each year in issue petitioners reported the income and expenses attributable to mrs byrd’s beauticontrol activities on a schedule c included with their joint federal_income_tax return the amounts shown for gross_receipts cost_of_goods_sold and gross_income on each schedule c are as follows year gross_receipts cost_of_goods_sold gross_income dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure big_number big_number the amounts shown as cost_of_goods_sold were computed with reference only to the total annual cost of the beauticontrol products that she purchased for resale or promotional purposes petitioners included the pension distribution in the income reported on their joint federal_income_tax return but the tax shown on that return does not include the sec_72 additional tax imposed on early distributions from qualified_retirement_plans on the schedule a itemized_deductions attached to their return petitioners claimed a home mortgage interest_deduction of dollar_figure respondent received information from petitioners’ mortgagee that indicated they paid dollar_figure of mortgage interest during petitioners included the value of the mustang as shown on the form 1099-misc in the income reported on their joint federal_income_tax return on the schedule c attached to that return they claimed a dollar_figure depreciation deduction attributable to that car the depreciation deduction is computed as though the car was used percent in mrs byrd’s beauticontrol activity and eligible for a special depreciation allowance discussed infra in the above-referenced notice_of_deficiency respondent disallowed dollar_figure of the mortgage interest_deduction claimed on the schedule a included with petitioners’ return disallowed a portion of the depreciation deduction claimed on the schedule c included with petitioners’ return increased petitioners’ tax_liability by imposing the sec_72 additional tax on the pension distribution adjusted the amounts shown for cost_of_goods_sold and gross_income shown on the schedule c included with petitioners’ return for each year in issue and imposed a sec_6662 accuracy-related_penalty on various grounds for and discussion i disallowed deductions two of the issues listed above involve deductions portions of which have been disallowed and we turn our attention first to those issues respondent’s determinations having been made in a notice_of_deficiency are presumed correct and petitioners bear the burden of proving those determinations to be erroneous see rule a 290_us_111 their burden_of_proof includes establishing both the right to and the amount of any deduction claimed see rule a 503_us_79 292_us_435 welch v helvering supra this includes the burden of substantiation see 65_tc_87 affd per curiam 540_f2d_821 5th cir a home mortgage interest_deduction in general a taxpayer is entitled to a deduction for qualified_residence_interest referred to on the schedule a as home mortgage interest sec_163 h d taxpayers must be able to substantiate the amount claimed see sec_6001 sec_1_6001-1 income_tax regs respondent disallowed dollar_figure of the dollar_figure home mortgage interest_deduction petitioners claimed on their return for lack of substantiation petitioners have failed to establish that they are entitled to a deduction for home mortgage interest in excess of the amount respondent allowed b depreciation of mustang sec_168 provides for an additional_depreciation deduction bonus_depreciation of percent of the adjusted_basis of qualified_property qualified_property is defined as property that meets the following requirements the property was macrs_property with an applicable_recovery_period of years or less unless it was certain computer_software water_utility_property or qualified_leasehold_improvement_property the original_use of the property commenced with the taxpayer after date the taxpayer acquired the property after date and before date and the taxpayer placed the property in service before date sec_168 on the form_4562 depreciation and amortization attached to their tax_return petitioners claimed a dollar_figure special depreciation allowance and an macrs bonus_depreciation deduction of dollar_figure for a total of dollar_figure the entire amount of the depreciation deduction reported on the schedule c is attributable to the ford mustang respondent contends that petitioners are not entitled to a sec_168 bonus_depreciation deduction because the mustang fails to meet the definition of qualified_property under sec_168 furthermore respondent argues that the mustang is listed_property within the meaning of sec_280f and therefore does not qualify for the bonus_depreciation afforded by sec_168 if any listed_property is not predominantly_used in a qualified_business the alternative_depreciation_system under sec_168 must be used to calculate the depreciation deduction sec_280f property is treated as predominantly_used in a qualified_business if the business use exceed sec_50 percent sec_280f sec_168 excepts from the bonus_depreciation allowance any property to which the alternative_depreciation_system under sec_168 applies unless the taxpayer elected to use the alternative_depreciation_system the mustang is macrs_property with an applicable_recovery_period of years and was acquired and placed_in_service during the applicable periods petitioners allege that the mustang was used almost exclusively for business purposes and we agree although the mustang is listed_property under sec_280f it was used predominantly for business purposes and therefore it is not subject_to sec_168 accordingly petitioners’ mustang satisfies the definition of qualified_property within the meaning of sec_168 petitioners have satisfied the requirements of sec_168 and therefore are entitled to the bonus_depreciation afforded by sec_168 limited only by sec_280f ii early distribution pursuant to sec_72 generally amounts distributed from a qualified_retirement_plan as defined in sec_4974 are includable in gross_income as provided in sec_72 sec_408 a 10-percent additional tax is imposed under sec_72 on any distribution that fails to satisfy one of the exceptions for premature distributions as provided in sec_72 this court has consistently held that it is bound by the list of statutory exceptions see eg 111_tc_250 110_tc_1 101_tc_215 petitioners agree that the pension distribution was made from sources contemplated by sec_72 they argue that the additional tax does not apply because they used the distribution to supplement the income from mr byrd’s second job that he no longer was able to do because of illness the illness to which petitioners refer is the heart attack referenced above sec_72 provides an exception for distributions to disabled taxpayers within the meaning of sec_72 to which the 10-percent additional tax does not apply sec_72 provides that an individual is considered disabled if he is unable to engage in any substantial_gainful_activity by reason of any medically determinable physical or mental impairment and the disability can be expected to result in death or to be of long- continued and indefinite duration see 106_tc_337 under sec_72 the taxpayer must furnish proof of the aforementioned elements sec_1 17a f income_tax regs provides that the determination is to be made on the basis of all the facts and includes a list of nonexclusive examples of impairments that would ordinarily be considered as preventing substantial_gainful_activity petitioners have failed to substantiate mr byrd’s condition with a physician’s note or other evidence detailing his disability he was able to return to his full-time employment after recovering from his heart attack therefore we conclude that any disability mr byrd suffered as a result of his heart attack in did not render him disabled within the meaning of sec_72 accordingly petitioners are liable for the 10-percent additional tax on an early distribution pursuant to sec_72 in iii schedule c items--gross receipts and cost_of_goods_sold respondent determined deficiencies in petitioners’ federal income taxes for and due to understatements of gross_receipts from mrs byrd’s schedule c business and miscalculations of cost_of_goods_sold in general petitioners argue that no such understatements and miscalculations exist a cost_of_goods_sold petitioners reported cost_of_goods_sold on their schedules c of dollar_figure dollar_figure and dollar_figure on their and returns respectively in the notice_of_deficiency respondent determined that petitioners overstated cost_of_goods_sold in and and understated cost_of_goods_sold in petitioners acknowledge that they failed to take inventories into account in the calculation of cost_of_goods_sold shown on the schedule c for each year in issue according to petitioners the amounts shown on the schedules c consist merely of the total of the purchases made during each year the parties now agree that the amounts shown for cost_of_goods_sold on the schedules c as well as the adjustments made to these items in the notice_of_deficiency are incorrect they further agree that the purchases total dollar_figure dollar_figure and dollar_figure for and respectively the record leaves us no choice but to assume that all items purchased during 2in the case of businesses that sell a large number of essentially similar or fungible items the cost_of_goods_sold is computed in steps using inventories and an accrual_method of accounting as follows beginning_inventory purchases - ending inventory cost_of_goods_sold see gertzman federal tax_accounting par pincite to 2d ed any year were sold before the close of that year at least nothing in the record suggests otherwise that being so the total purchase amounts would in effect reflect the cost_of_goods_sold for each year therefore we find that the schedules c cost_of_goods_sold for and should be dollar_figure dollar_figure and dollar_figure respectively b understatements of income sec_446 allows respondent to recompute petitioners’ income under such method as in the opinion of the secretary does clearly reflect income if petitioners’ method does not clearly reflect income the percentage or markup approach is an acceptable method under sec_446 to recompute income in certain businesses including petitioners’ merchandising business 394_f2d_366 5th cir affg tcmemo_1966_81 267_f2d_879 5th cir affg tcmemo_1956_260 in the notice_of_deficiency respondent adjusted gross_receipts for each of the taxable years in issue to reflect the average 50-percent markup for beauticontrol in the notice_of_deficiency respondent calculated gross_receipts by increasing the determination of cost_of_goods_sold by percent according to petitioners respondent’s calculation of gross_receipts does not accurately reflect the amount of unreported income for the years in issue because it fails to consider gifts and promotional materials given away theoretically their point is well made but their failure to keep or produce any records that quantify such gifts and giveaways compels us to ignore their generalized claim gross_receipts attributable to mrs byrd’s schedule c business shall be determined as computed by the method advanced by respondent but only after taking into account the above-found amounts for cost_of_goods_sold iv sec_6662 accuracy-related_penalty for each of the year sec_2002 and respondent determined that petitioners are liable for a sec_6662 accuracy- related penalty various grounds for the imposition of that penalty are set forth in the notice_of_deficiency the commissioner has the burden of production to show imposition of the penalty is appropriate but if it is shown that the taxpayer acted in good_faith and there is reasonable_cause for the deficiency then the sec_6662 accuracy-related_penalty is not applicable sec_6664 sec_7491 116_tc_438 petitioners relied upon a paid income_tax_return_preparer to compute their federal_income_tax liability shown on their joint_return for each year in issue given their backgrounds we are satisfied that their reliance on their return preparer was reasonable we are further satisfied that petitioners had reasonable_cause and acted in good_faith with respect to whatever deficiency remains after respondent’s concessions and the foregoing determinations for each year in issue are taken into account they are not liable for the sec_6662 accuracy- related penalty for any year in issue to reflect the foregoing decision will be entered under rule


office_of_chief_counsel department of the treasury internal_revenue_service washington d c date number release date cc el d br4 gl-505675-99 uilc internal_revenue_service national_office chief_counsel_advice memorandum for edward d fickess acting district_counsel upstate new york district cc ner uny buf from chief branch disclosure litigation cc el d david l fish subject proposed internal revenue service-new york state department of taxation and finance joint installment agreements memorandum of understanding this office has reviewed the proposed internal revenue service-new york state department of taxation and finance joint installment agreements memorandum of understanding mou our comments follow federal tax returns and return_information protected under sec_6103 may be disclosed to state tax officials upon written request by the head of the state taxing authority for purposes of and only to the extent necessary in the administration of state tax laws such written request must be made by the head of the state tax agency and designate individuals who are the representatives of the state taxing authority to receive the information the representatives named in the written request may not be the chief_executive_officer of the state nor any person who is not an employee or legal_representative or contractor of the state taxing authority 106_f3d_833 8th cir the agreement on coordination of tax_administration between the internal_revenue_service service and the new york state department of taxation and finance the basic agreement meets the written request requirements of sec_6103 taylor v united_states supra 964_f2d_630 7th cir our comments are confined to sec_6103 disclosure issues and do not incorporate the comments of any other counsel function gl-505675-99 cert_denied 506_us_1067 however we strongly recommend that you ensure that the information to be disclosed by the mou comes within the terms of the service’s implementing agreement with the new york department of taxation and finance state moreover we recommend that you structure the mou so that it meets the requirements of a written request under sec_6103 independent of the basic agreement we have incorporated the necessary changes in our comments below it is important that the mou set forth with clarity exactly what is going on and the procedures to be followed this will avoid misunderstandings between the parties in this regard we recommend that the disclosure and confidentiality provisions not be placed first in the mou the mou is about entering into joint installment agreements not disclosure accordingly we recommend that the mou be restructured in the following manner general understanding text remains the same type of tax any_tax subject_to irs and state installment_agreement procedures may be included in joint installment agreements under this mou forms text remains the same general procedures a financial analysis based on liability amount analysis of the taxpayer’s circumstances and financial situation will indicate whether an installment_agreement is appropriate that analysis may be performed by either agency provided however irs collection financial analysis standards must be used if the taxpayer’s liability to irs or state or both agencies -- this needs to be clarified exceeds dollar_figure when analysis of the taxpayer’s circumstances and financial situation indicates that an installment_agreement is appropriate a taxpayer expressing a desire for a payment arrangement to an employee of one agency will be queried as to whether an outstanding liability also is owed to the other agency when liabilities are owed to both agencies the taxpayer will be apprized of the potential for a joint installment_agreement and asked whether they wish to enter into an agreement that will apply to the tax debts owed to both agencies if so form 433-d and dtf-980 will be completed at this time an implementing agreement supplements a basic agreement and outlines the types of sec_6103 protected information available for sharing and procedures for requesting transmitting and using the information see irm handbook because the information to be disclosed under a specific mou may not come within the terms of an implementing agreement it is important that the mou meet sec_6103 requirements gl-505675-99 b completion of joint installment agreements representatives of either agency are authorized to complete the appropriate installment_agreement forms for both agencies in so doing each agency’s representatives will endeavor to contact the other agency’s representative’s to obtain a correct balance due amount which will be used to determine the actual monthly payment amount allotted to each agency if current balance due amounts are not available the taxpayer will be advised of the total monthly payment and that such amount will be subject_to a ratio of payment calculation that will determine the precise amount_paid to each agency the taxpayer will be advised that confirmation from the other agency that such other agency has received a copy of the taxpayer’s joint installment_agreement may be obtained by contacting the other agency the taxpayer will be instructed as to the proper method of making payments and will be notified that the joint installment_agreement requires approval by both agencies before it is effective with respect to both agencies approval by one agency only means that the installment_agreement is effective only with respect to that one agency fees currently charged to the taxpayer by each agency for utilizing installment_agreement privileges will continue to be charged by each agency when joint installment_agreement procedures are utilized c calculation of payment amounts payment amounts shall be calculated based on the current outstanding balance owed to each agency at the time of the joint installment_agreement as follows i insert text of current item a ii insert text of current item b current filing insert text of current item non-qualifying debts insert text of current item period of joint installment_agreement insert text of current item except that the reference to the installment_agreement in the first sentence should be changed to the joint installment_agreement review and approval insert text of current item method of payment the taxpayer will remit separate payments to each agency in accordance with the terms of the joint installment_agreement liens insert text of current item defaulted joint installment agreements insert text of current item except that the reference to the installment_agreement in the first sentence should be changed to the joint installment_agreement gl-505675-99 jeopardy situations insert text of current item authorized recipients irs and state employees authorized to request and receive federal and state tax information respectively pursuant to this mou are set forth on the attached appendix accounting for disclosures all irs employees disclosing federal return_information to the state pursuant to this mou will complete form 5466-b multiple record of disclosure and forward the completed copy to the upstate new york district disclosure_office confidentiality the state will comply with the requirements of sec_6103 with respect to the federal return_information disclosed pursuant to this mou following the procedures prescribed in section insert of the basic agreement the irs will safeguard information provided to it by the state consistent with section insert of the basic agreement fraud insert text of current item training insert text of current item monitoring for success insert text of current item disclosure authority the basic agreement and or this mou shall constitute the written request required for the disclosure of federal return_information to the state pursuant to sec_6103 cooperation insert text of current item liability insert text of current item termination alteration or modification of joint installment agreements insert text of current item except that the reference to an installment_payment agreement in the first sentence should be changed to a joint installment_agreement term of agreement insert text of current item