t c summary opinion united_states tax_court manuel r chavez petitioner v commissioner of internal revenue respondent docket no 20682-04s filed date manuel r chavez pro_se daniel price for respondent wherry judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and 1unless otherwise indicated all section references are to the internal_revenue_code_of_1986 as in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure this opinion shall not be treated as precedent for any other case this case is before the court on a petition for judicial review of a notice_of_deficiency respondent determined a dollar_figure deficiency for petitioner’s taxable_year the issues for decision are whether petitioner is entitled to the following two dependency_exemption deductions head_of_household filing_status a child_tax_credit and the earned_income_credit background some of the facts have been stipulated by the parties the stipulations with accompanying exhibits are incorporated herein by this reference at the time the petition was filed petitioner resided in el paso texas petitioner lived with his mother juana martinez in petitioner’s sister patricia chavez and her two daughters rjm and cgm also resided with petitioner’s mother petitioner’s mother was listed as the responsible_party on the lease and all household bills during petitioner’s sister received state_aid including food stamps for herself and rjm and cgm rjm and cgm did not receive any support from their father 2the court will refer to the minor children by their initials petitioner worked for the department of defense and received wages totaling dollar_figure in on his form 1040a u s individual_income_tax_return which was prepared by h_r block petitioner listed rjm and cgm his nieces as dependents petitioner filed his federal tax_return as head_of_household and claimed a standard_deduction in the amount of dollar_figure petitioner claimed three exemptions one for himself and dependency_exemptions for rjm and cgm totaling dollar_figure petitioner also claimed an earned_income_credit in the amount of dollar_figure and a child_tax_credit in the amount of dollar_figure according to petitioner and h_r block’s calculations petitioner was entitled to a dollar_figure refund the notice_of_deficiency was sent to petitioner on date in the notice_of_deficiency respondent disallowed the dependency_exemptions for petitioner’s nieces changed petitioner’s filing_status from head_of_household to single and adjusted the standard_deduction accordingly disallowed the child_tax_credit and disallowed the earned_income_credit as a result respondent determined a deficiency of dollar_figure petitioner timely petitioned this court and a trial was held on date in el paso texas 3the standard_deduction for single or married_filing_separately for the taxable_year was dollar_figure discussion deductions are a matter of legislative grace and the taxpayer must maintain adequate_records to substantiate the amounts of any deductions or credits claimed sec_6001 503_us_79 sec_1_6001-1 income_tax regs as a general_rule the commissioner’s determination of a taxpayer’s liability in the notice_of_deficiency is presumed correct and the taxpayer bears the burden of proving that the determination is improper see rule a 290_us_111 however pursuant to sec_7491 the burden_of_proof on factual issues that affect the taxpayer’s tax_liability may be shifted to the commissioner where the taxpayer introduces credible_evidence with respect to such issue the burden will shift only if the taxpayer has inter alia complied with substantiation requirements pursuant to the internal_revenue_code and cooperated with reasonable requests by the secretary for witnesses information documents meetings and interviews sec_7491 in the instant case petitioner did not comply with the substantiation requirements and failed to introduce credible_evidence at trial accordingly the burden remains on petitioner i dependency_exemption deductions sec_151 allows a taxpayer to deduct a personal_exemption as well as dependency_exemptions for the taxpayer’s dependents see sec_151 c sec_152 defines dependent in pertinent part to include a son or daughter of a brother or sister of the taxpayer sec_152 the claimed individuals rjm and cgm satisfy the definitional requirement of dependent within the meaning of sec_152 because they are the daughters of petitioner’s sister to qualify as a dependent under sec_152 the individual must have received over half of his or her support for the taxable_year from the taxpayer for this purpose support is defined as including food shelter clothing medical and dental care education and the like sec_1_152-1 income_tax regs sec_1_152-1 income_tax regs further provides for purposes of determining whether or not an individual received for a given calendar_year over half of his support from the taxpayer there shall be taken into account the amount of support received from the taxpayer as compared to the entire amount of support which the individual received from all sources including support which the individual himself supplied in other words the support_test requires the taxpayer to establish the total support costs for the claimed individual and that the taxpayer provided over half of that amount 73_tc_963 see cotton v commissioner tcmemo_2000_333 thus a taxpayer who cannot establish the total amount of support costs for the claimed individual generally may not claim that individual as a dependent 56_tc_512 cotton v commissioner supra petitioner petitioner’s sister and petitioner’s nieces all lived with petitioner’s mother in petitioner testified that he was responsible for paying the rent and all household bills even though the lease and bills were in his mother’s name petitioner explained that he gave his mother cash so that she could pay the rent and bills however petitioner did not present any evidence regarding the dollar amount of money he contributed to the household rjm and cgm received state_aid which included food stamps during with respect to amounts petitioner provided for rjm and cgm’s support petitioner testified that he gave his sister cash on a regular basis specifically petitioner testified that he gave his sister at least dollar_figure per month and that if his financial situation permitted he contributed up to dollar_figure or dollar_figure a month petitioner did not present any independent evidence to corroborate his testimony the court finds petitioner’s testimony to be credible as to the fact that he provided some support for his nieces and contributed towards household bills however the record is devoid of any reference to the dollar amount of total support that rjm and cgm received in state_aid and the dollar amount of support that petitioner provided for his nieces thus petitioner has failed to provide the court with any evidence establishing the total amount of support that his nieces received or that he provided over half of his nieces’ support during the tax_year accordingly the court is constrained to conclude that petitioner is not entitled to dependency_exemptions for his nieces ii head_of_household filing_status sec_1 imposes a special tax_rate on an individual filing his federal tax_return as head_of_household sec_2 defines a head_of_household as an individual taxpayer who is unmarried at the close of the taxable_year and maintains as his home a household which constitutes for more than one-half of the taxable_year the principal_place_of_abode of a dependent of the taxpayer with respect to whom the taxpayer is allowed a deduction under sec_151 sec_2 and ii this court has already concluded that petitioner is not entitled to dependency_exemptions under sec_151 for rjm and cgm accordingly a fortiori petitioner is not entitled to head_of_household filing_status iii child tax_credits sec_24 authorizes a child_tax_credit with respect to each qualifying_child of the taxpayer as relevant to these particular facts a qualifying_child means among other things an individual with respect to whom the taxpayer is allowed a deduction under sec_151 sec_24 this court has already concluded that petitioner is not entitled to dependency_exemptions under sec_151 for rjm and cgm accordingly rjm and cgm do not fit within the meaning of qualifying_child as defined by sec_24 the court concludes that petitioner is not entitled to a child_tax_credit for his nieces iv earned_income_credit sec_32 allows an eligible_individual an earned_income_credit against the individual’s income_tax_liability sec_32 limits the credit allowed through a phaseout and sec_32 prescribes different percentages and amounts used to calculate the credit the limitation amount is based on the amount of the taxpayer’s earned_income and whether the taxpayer has no children one qualifying_child or two or more qualifying children to be eligible to claim an earned_income_credit with respect to a child the taxpayer must establish that the child satisfies a relationship_test a residency test and an age_test sec_32 in order for a niece to meet the relationship requirement under sec_32 the taxpayer must show that he cared for the niece as his own child sec_32 petitioner has not claimed or offered any evidence to show that he cared for rjm and cgm as if they were his own daughters although petitioner did provide financial support for his nieces that fact is insufficient to show that he cared for his nieces as his own children for see mares v commissioner tcmemo_2001_216 although petitioner is not eligible to claim an earned_income_credit under sec_32 for one or more qualifying children he may be an eligible_individual under sec_32 for a taxpayer is eligible under this subsection only if his adjusted_gross_income was less than dollar_figure revproc_2002_70 2002_2_cb_845 petitioner’s adjusted_gross_income for was dollar_figure accordingly petitioner is not eligible for an earned_income_credit the court has considered all of petitioner’s contentions arguments requests and statements to the extent not discussed herein we conclude that they are meritless moot or irrelevant to reflect the foregoing decision will be entered for respondent


t c memo united_states tax_court nathan e lang petitioner v commissioner of internal revenue respondent docket no filed date nathan e lang pro_se michelle maniscalco for respondent memorandum findings_of_fact and opinion wells judge respondent determined a deficiency in petitioner’s federal_income_tax of dollar_figure for a failure_to_file addition_to_tax pursuant to sec_6651 of dollar_figure and an accuracy-related_penalty pursuant to sec_6662 of dollar_figure the issues remaining to be decided relate to petitioner’s entitlement to deductions that he claimed on schedule a itemized_deductions and schedule c profit or loss from business of his return for the year in issue and whether he is liable for the failure_to_file addition_to_tax pursuant to sec_6651 and the accuracy-related_penalty pursuant to sec_6662 findings_of_fact some of the facts and certain exhibits have been stipulated the stipulations of fact are incorporated in this opinion by reference and are found accordingly at the time the petition was filed petitioner lived in woodside new york on his federal_income_tax return petitioner listed his occupation as graphics additionally petitioner is a performing artist who engages in voice-over and on-camera work 1unless otherwise indicated all rule references are to the tax_court rules_of_practice and procedure and all section references are to the internal_revenue_code code in effect for the year in issue all amounts are rounded to the nearest whole dollar 2respondent determined that petitioner is liable for self- employment_tax and allowed a corresponding self-employment_tax deduction in the notice_of_deficiency the self-employment_tax and its corresponding deduction are computational and will depend on the court’s resolution of the issues discussed herein 3on petitioner’s schedule c he listed his business as theater we interpret theater to include petitioner’s voice- continued petitioner finds his voice-over and on-camera work through talent agencies nationwide normally petitioner auditions for the voice-over work by recording the proposed job on his home studio equipment and then emailing the talent agency the digital files on schedule a of his federal_income_tax return petitioner claimed unreimbursed employee_expenses of dollar_figure as miscellaneous_itemized_deductions petitioner also claimed as miscellaneous_itemized_deductions expenses for union dues of dollar_figure and tax preparation fees of dollar_figure petitioner claimed a total of dollar_figure in miscellaneous_itemized_deductions on schedule a however the total amount of petitioner’s itemized_deductions was reduced to dollar_figure by the 2-percent-of-adjusted-gross-income limitation pursuant to sec_67 in the notice_of_deficiency respondent disallowed petitioner’s claimed miscellaneous_itemized_deductions of dollar_figure on schedule c of his return petitioner claimed a deduction for meals and entertainment of dollar_figure additionally continued over and on-camera work 4on form_5278 statement - income_tax changes attached to the notice_of_deficiency respondent disallowed dollar_figure of itemized_deductions however on form 886-a explanation of items attached to the notice_of_deficiency respondent specifically disallowed the unreimbursed employee_expenses of dollar_figure 5on his return petitioner failed to apply to this amount the 50-percent limitation of sec_274 petitioner claimed on schedule c a deduction for other expenses of dollar_figure respondent denied all of petitioner’s deductions for meals and entertainment_expenses and other expenses petitioner timely filed a petition with this court opinion generally the commissioner’s determination_of_a_deficiency is presumed correct and the taxpayer has the burden of proving it incorrect rule a 290_us_111 deductions are a matter of legislative grace and generally taxpayers bear the burden of proving their entitlement to the deductions claimed sec_6001 503_us_79 sec_162 permits as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business to be deductible ordinary and necessary expenses must be directly connected with or pertaining to the taxpayer’s trade_or_business sec_1_162-1 income_tax regs additionally sec_212 generally allows deduction of ordinary and necessary expenses paid_or_incurred during the tax_year for the production_or_collection_of_income sec_1_212-1 income_tax regs the deduction for trade_or_business_expenses must be reasonable in amount and bear a reasonable_and_proximate_relationship to the production or collection of taxable_income id however a taxpayer may not deduct personal expenses sec_262 generally a taxpayer must keep records sufficient to establish the amounts of the items reported on his federal_income_tax return sec_6001 sec_1_6001-1 e income_tax regs in the event that a taxpayer establishes that a deductible expense has been paid but is unable to substantiate the precise amount we generally may estimate the amount of the deductible expense bearing heavily against the taxpayer whose inexactitude in substantiating the amount of the expense is of his own making 39_f2d_540 2d cir we generally will not estimate a deductible expense however unless the taxpayer presents sufficient evidence to provide some basis upon which an estimate may be made 85_tc_731 sec_274 supersedes the cohan doctrine for certain categories of expenses 50_tc_823 affd per curiam 412_f2d_201 2d cir generally a deduction is disallowed for travel_expenses meals and entertainment and 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 sec_280f includes cellular telephones as listed_property generally deductions for expenses subject_to the strict substantiation requirements of sec_274 must be disallowed in full unless the taxpayer satisfies every element of those requirements sanford v commissioner supra pincite larson v commissioner tcmemo_2008_187 sec_1_274-5t temporary income_tax regs fed reg date deductions for listed_property that is used both personally and in the taxpayer’s business are disallowed unless a taxpayer establishes the amount of business use of the property kinney v commissioner tcmemo_2008_287 olsen v commissioner tcmemo_2002_42 affd 54_fedappx_479 9th cir sec_1_274-5t temporary income_tax regs fed reg date taxpayers may substantiate their deductions by either adequate_records or sufficient evidence that corroborates the taxpayer’s own statement sec_274 to satisfy the adequate_records requirement a taxpayer must maintain records and documentary_evidence that in combination are sufficient to establish each element of an expenditure or use larson v commissioner supra sec_1_274-5t temporary income_tax regs fed reg date a contemporaneous log is not required but corroborative evidence used to support a taxpayer’s reconstruction of the expenditure ‘must have a high degree of probative value to elevate such statement’ to the level of credibility of a contemporaneous record larson v commissioner supra quoting sec_1_274-5t temporary income_tax regs fed reg date in the absence of adequate_records a taxpayer may alternatively establish an element of an expenditure by his own statement whether written or oral containing specific information in detail as to such element and by other corroborative evidence sufficient to establish such element larson v commissioner supra sec_1_274-5t temporary income_tax regs fed reg date however we do not estimate under the cohan doctrine expenses that are subject_to the requirements of sec_274 sanford v commissioner supra pincite larson v commissioner supra petitioner contends that the burden_of_proof regarding the substantiation of his expenses should be placed on respondent pursuant to sec_7491 sec_7491 does not alter the taxpayer’s burden_of_proof where the taxpayer has not complied with all substantiation requirements including those of sec_274 and where the taxpayer has not maintained all records required by the code sec_7491 and b see also 116_tc_438 additionally the burden_of_proof is determinative only when there is an evidentiary tie 131_tc_185 when there is an evidentiary tie we consider whether petitioner introduced credible_evidence on that issue in order to shift the burden_of_proof however most of the issues can be decided on the basis of the record in the instant case petitioner claimed deductions on schedule a for union dues of dollar_figure unreimbursed employee business_expenses of dollar_figure and tax preparation fees of dollar_figure for a total miscellaneous itemized_deduction expense of dollar_figure after the 2-percent-of-adjusted- gross-income limitation was applied pursuant to sec_67 the amount deducted was dollar_figure the total amount of dollar_figure was disallowed by respondent in the form_5278 statement - income_tax changes attached to the notice_of_deficiency however the form 886-a explanation of items attached to the notice_of_deficiency mentions only unreimbursed employee_expenses additionally at trial respondent did not dispute the deductibility of the union dues or the tax preparation fees accordingly we deem the deductibility of the union dues and the tax preparation fees conceded by respondent 6petitioner’s claimed deduction for cellular telephone expenses is subject_to the heightened substantiation requirements of sec_274 petitioner has offered limited substantiation but it does not meet the requirements of sec_274 accordingly sec_7491 does not apply to petitioner’s claim to this deduction see sec_7491 7to the extent that petitioner claimed additional tax preparation fees at trial petitioner failed to substantiate any amount above the dollar_figure that we deem conceded by respondent continued as to petitioner’s claimed unreimbursed employee business_expenses they include expenses for uniforms of dollar_figure shoes of dollar_figure uniform cleaning of dollar_figure emergency cab fares of dollar_figure professional books and catalogs of dollar_figure tuition of dollar_figure educational books and supplies of dollar_figure supplies and equipment of dollar_figure and telephone service of dollar_figure petitioner testified that the receipts he offered were for his schedule c business_expenses petitioner failed to offer testimony or documentary_evidence specifically relating to his unreimbursed employee business_expenses that he claimed on schedule a accordingly we sustain respondent’s determination denying petitioner’s deduction for unreimbursed employee business_expenses claimed on schedule a on schedule c petitioner claimed a deduction for meals of dollar_figure petitioner testified that he claimed meals expenses of continued petitioner provided a receipt for tax preparation fees from and claimed that his tax preparation fees for must have been higher however such speculative evidence is inadequate for us to make an estimate of additional tax preparation expenses beyond those conceded by respondent for tax_year see 85_tc_731 8as noted above petitioner listed his occupation on his form_1040 u s individual_income_tax_return as graphics additionally petitioner is a performing artist who engages in voice-over and on-camera work the record does not establish that petitioner was employed for purposes of the claimed expenses however even if those expenses should have been classified as schedule c expenses petitioner has failed to show that he is entitled to any deduction for them dollar_figure a day relating to a play for which he volunteered his services petitioner testified that his involvement was for the days that the play was performed december and and for hour every tuesday from september through date for rehearsals generally expenses for meals away from home must meet the heightened substantiation requirements of sec_274 however unreimbursed expenditures including expenses for meals while away from home made incident to the rendition of services to a charitable_organization may constitute a charitable_contribution_deduction sec_1_170a-1 income_tax regs petitioner failed to offer any documentary_evidence or testimony adequate to substantiate his meals expenses that relate to the play under either sec_274 or sec_1_170a-1 income_tax regs petitioner’s testimony does not prove that the expenses for meals were incurred while he was away from home or prove that his volunteer work was in service to a qualifying donee of tax-deductible contributions see sec_274 sec_1_170a-1 income_tax regs additionally petitioner failed to offer any testimony or documentary_evidence for meals expenses greater than those relating to the play accordingly we sustain 9petitioner provided an advertisement for the play in which he was involved on the advertisement the organization the 52nd street project claims to be a non-profit organization petitioner failed to prove that the 52nd street project meets the requirements of sec_170 respondent’s denial of a deduction for meals claimed on petitioner’s schedule c on schedule c petitioner also claimed a deduction for other expenses of dollar_figure expenses included in that amount are for postage of dollar_figure books and stationery of dollar_figure supplies of dollar_figure actor’s miscellaneous items of dollar_figure telephone and cellular telephones of dollar_figure studio expenses of dollar_figure and training workshops of dollar_figure petitioner contends that we can use his limited substantiation to make an estimation of his schedule c expenses pursuant to the cohan doctrine however petitioner failed to specify which of the receipts that he offered substantiate the particular expenses claimed on schedule c some of his substantiation fits neatly into the categories claimed on schedule c such as cellular telephone expenses that fit into his claimed deduction for telephone and cellular telephones while others such as expenses for trade newspapers do not fit into a specific category but could belong in multiple categories such as claimed deductions for books and stationery supplies actor’s miscellaneous expenses or studio expenses accordingly we will analyze petitioner’s substantiation by individual receipts and then determine whether any further estimation pursuant to the cohan doctrine is warranted according to petitioner’s testimony he purchased weekly and monthly trade newspapers that contained detailed industry information as well as casting calls petitioner testified that he purchased ross reports monthly for dollar_figure per issue and backstage weekly for dollar_figure per issue petitioner offered two receipts for ross reports which show a cost of dollar_figure per issue during tax_year on the basis of the foregoing we conclude that petitioner may deduct dollar_figure for ross reports magazine which we conclude is an ordinary and necessary business_expense see cohan v commissioner f 2d pincite however petitioner failed to provide evidence substantiating any payments for issues of backstage and we therefore sustain respondent’s disallowance of a deduction for that publication petitioner offered a receipt for dollar_figure for the transfer of a recorded audition from video tape to a digital video disc dvd according to petitioner’s testimony he transferred the audition to a dvd so that it could be easily viewed by producers and casting directorsdollar_figure on the basis of the foregoing we conclude that petitioner’s expenses for the video-to-dvd transfer are ordinary and necessary expenses of petitioner’s voice-over business consequently we hold that petitioner may deduct dollar_figure for the media transfer 10petitioner offered the original tape and a copy of the dvd petitioner also claimed dollar_figure per day for local transportation_expenses for the play discussed above for which he volunteered his services generally commuting expenses between the taxpayer’s residence and place of business are personal expenses and therefore are nondeductible sec_262 sec_1 b income_tax regs however taxpayers are allowed a deduction for unreimbursed transportation_expenses incident to the performance of charitable services as long as there is not a significant_element_of_personal_pleasure_recreation_or_vacation in such travel sec_170 cavalaris v commissioner tcmemo_1996_308 sec_1_170a-1 income_tax regs as proof of his eligibility for the transportation_expenses petitioner offered solely his testimony as noted above petitioner failed to prove that his services were performed for a qualified donee of tax-deductible contributions we therefore sustain respondent’s disallowance of petitioner’s transportation_expenses petitioner testified that he spent dollar_figure on the design of his internet web site petitioner offered printouts of his web site as proof of the design expenses however petitioner failed to provide any documentary_evidence showing the amount_paid or if it was paid when it was paid see vanicek v commissioner t c pincite additionally given petitioner’s overall lack of substantiation we give little credence to his testimony regarding the cost of his internet web site we therefore sustain respondent’s disallowance of petitioner’s claimed expense for internet web site design as to petitioner’s claimed expenses for cellular telephone such expenses are subject_to heightened substantiation requirements see sec_274 sec_280f petitioner’s bank statements reveal monthly charges from at t wireless and he testified that percent of his cellular telephone use was for business purposes for a total of dollar_figure however petitioner failed to provide adequate_records or other_sufficient_evidence to corroborate his claimed 40-percent business use see sec_274 sec_1_274-5t temporary income_tax regs fed reg date we conclude that petitioner has failed to meet the heightened substantiation requirements for his cellular telephone expenses and therefore sustain respondent’s determination as to those expenses as to petitioner’s landline telephone and internet service provider expenses according to petitioner’s testimony the claimed expenses were to for business purposes additionally petitioner testified that the total_amounts of landline telephone expenses and internet service provider expenses were documented through his bank statements however a review of petitioner’s bank statements reveals two separate charges from rcn listed as being for cable internet and phone services for a total of dollar_figure petitioner failed to offer any evidence of the cost of cable which would be a nondeductible personal_expense pursuant to sec_262 as opposed to his internet and telephone costs which would if anything be mixed personal and business_expenses we will not estimate a deductible expense unless the taxpayer presents sufficient evidence to provide some basis upon which an estimate may be made vanicek v commissioner supra pincite additionally any expense for basic local_telephone_service with respect to the first telephone line to a residence is treated as a nondeductible personal_expense sec_262 on the basis of the foregoing we sustain respondent’s denial of petitioner’s deduction for landline telephone expenses and internet service expenses petitioner offered pictures of his audio equipment used in his voice-over business however petitioner failed to provide testimony or documentation regarding the costs of the audio equipment accordingly we sustain respondent’s denial of a 11on date petitioner paid rcn dollar_figure and on date petitioner paid rcn dollar_figure the court has characterized internet service provider expenses as utility expenses verma v commissioner tcmemo_2001_132 strict substantiation therefore does not apply and the court may estimate a taxpayer’s deductible expenses provided that the court has a reasonable basis for making an estimate vanicek v commissioner t c pincite deduction for his audio equipmentdollar_figure see vanicek v commissioner supra pincite petitioner also claimed deductions for various classesdollar_figure according to petitioner’s testimony he attended saturday morning voice-over copy reading classes with jennifer duckworth and kevin taylor from a m to noon and saturday afternoon skill study and technique concentration classes at hb studios from p m until p m expenditures made by a taxpayer for education are deductible with certain exceptions not relevant here if the education either maintains or improves skills required by the individual in his employment or other trade_or_business or meets the express requirements of the individual’s employer or the requirements of applicable law or regulations imposed as a condition to the retention by the individual of an established employment relationship status or rate of compensation 12petitioner’s audio equipment appears to include computers and computer peripheral equipment see sec_280f such property would be listed_property subject_to the heightened substantiation requirements of sec_274 however because petitioner’s expenses for audio equipment fail to meet general substantiation requirements we need not address whether they would have met the requirements of sec_274 13petitioner testified that these receipts substantiated his expenses for performing classes and expenses however this category does not appear on petitioner’s return 14the classes do not qualify petitioner for a new trade_or_business thus deductions associated with the classes are not prohibited under sec_1_162-5 income_tax regs sec_1_162-5 income_tax regs whether education maintains or improves skills required by the taxpayer in his business is a question of fact 77_tc_1124 affd without published opinion 9th cir date joseph v commissioner tcmemo_2005_169 the fact that a taxpayer’s education is helpful to him in the performance of his duties does not establish that its cost is a deductible business_expense joseph v commissioner supra taxpayers must show that there is a direct and proximate relationship between the education expenses and the skills required in their business however a precise correlation is not necessary boser v commissioner supra pincite petitioner testified that the classes are essential to continued improvement of skills required in his business as a performing artist according to petitioner one of the requirements for artists for continuing employment is steady work with auditioning performing training and self- improvement accordingly we conclude that petitioner’s participation in the classes maintained or improved his skills additionally petitioner testified that the classes occurred weekly and that they were helpful see boser v commissioner supra pincite3 56_tc_1300 affd per curiam 487_f2d_1025 9th cir sec_1_262-1 income_tax regs expenditures are not deductible unless they qualify under sec_162 and sec_1_162-5 income_tax regs on the basis of the foregoing we conclude that petitioner’s expenses for the classes are ordinary and necessary business_expenses and petitioner should be allowed a deduction for those expenses to the extent that he has substantiated them petitioner offered receipts for the voice-over classes bearing dates from calendar_year however petitioner failed to offer any documentation that corroborates his testimony regarding the cost of the voice-over classes for the year in issue we will not estimate deductible expenses unless the taxpayer offers sufficient evidence to provide some basis upon which an estimate may be made vanicek v commissioner t c pincite accordingly we sustain respondent’s determination regarding the voice-over classes as to the classes at hb studios petitioner provided receipts totaling dollar_figure for the year in issue we conclude that these receipts and petitioner’s testimony are sufficient to substantiate a deduction of dollar_figure however the record contains no evidence of the costs of individual classes petitioner testified that he occasionally prepaid for the classes so that he would not have to pay for them in cash we will not estimate deductible expenses unless the taxpayer offers sufficient evidence to provide some basis upon which an estimate may be made id accordingly on the basis of the foregoing receipts we conclude that petitioner may deduct dollar_figure for classes at hb studios petitioner also offered receipts for various acting books purchased at drama books according to petitioner’s testimony the books were used in the voice-over classes discussed above accordingly we conclude that petitioner should be allowed to deduct dollar_figure for books purchased at drama books used in his voice- over classes as to the remaining expenses not specifically discussed above petitioner contends that we may use the limited substantiation he offered to estimate his expenses under the cohan doctrine however as discussed above petitioner failed to specify which of the receipts that he offered substantiate the particular expenses claimed on schedule c indeed petitioner failed to provide the court with any evidence as to how he arrived at the numbers he claimed as deductions on schedule c we will not estimate deductible expenses unless the taxpayer offers sufficient evidence to provide some basis upon which an estimate may be made vanicek v commissioner supra pincite accordingly we sustain respondent’s denial of deductions for other expenses claimed on schedule c beyond those specifically allowed above as to the failure_to_file addition_to_tax sec_6651 imposes an addition_to_tax for failure_to_file a return by the date prescribed determined with regard to any extension of time for filing the addition_to_tax i sec_5 percent of the ultimately determined tax if the failure_to_file does not exceed month with an additional percent per month for each month the failure continues up to a maximum of percent id however the failure_to_file addition_to_tax is not imposed if the taxpayer can establish that such failure is due to reasonable_cause and not due to willful neglect id to prove reasonable_cause the taxpayer must show that he exercised ordinary business care and prudence but nevertheless could not file the return when it was due see 92_tc_899 respondent bears the burden of production pursuant to sec_7491 and petitioner bears the burden_of_proof see higbee v commissioner t c pincite petitioner admitted failing to file a timely return accordingly respondent has met his burden of production petitioner testified that he relied on his tax_return_preparer to timely file his return or request an extension however petitioner’s reliance on his tax_return_preparer to timely file his return is not reasonable no particular expertise is necessary to know that returns are due at prescribed times see 469_us_241 consequently we hold that petitioner is liable for the failure_to_file addition_to_tax pursuant to sec_6651 as to the substantial_understatement_penalty sec_6662 and b imposes a penalty of percent on the portion of an underpayment_of_tax attributable to a substantial_understatement of income taxdollar_figure a substantial_understatement_of_income_tax is defined as an understatement_of_tax that exceeds the greater of percent of the tax required to be shown on the tax_return or dollar_figure sec_6662 the understatement is reduced to the extent that the taxpayer has adequately disclosed his or her position and has a reasonable basis for such position or has substantial_authority for the tax treatment of the item sec_6662 the accuracy-related_penalty is not imposed with respect to any portion of the underpayment as to which the taxpayer acted with reasonable_cause and in good_faith sec_6664 the decision as to whether the taxpayer acted with reasonable_cause and in good_faith depends upon all of the pertinent facts and circumstances sec_1_6664-4 income_tax regs relevant factors include the taxpayer’s efforts to assess his proper tax_liability including the taxpayer’s reasonable and good_faith understatement means the excess of the amount of the tax required to be shown on the return over the amount of the tax imposed which is shown on the return reduced by any rebate sec_6662 reliance on the advice of a professional such as an accountant id furthermore an honest misunderstanding of fact or law that is reasonable in the light of the experience knowledge and education of the taxpayer may indicate reasonable_cause and good_faith see remy v commissioner tcmemo_1997_72 on his return petitioner reported total_tax due of dollar_figure the record establishes that the total amount of tax due from petitioner exceeds the dollar_figure reported given the deductions conceded by respondent and allowed in the instant proceeding the understatement may or may not be greater than dollar_figure if the understatement is greater than dollar_figure as determined given our holdings above respondent will have met his burden of production and petitioner will be liable for the understatement penalty unless he can show reasonable_cause reasonable basis or substantial_authority petitioner testified that he relied on the advice of his tax_return_preparer as to his claimed deductions and that his lack of substantiation was due to the loss of many of his receipts through no fault of his own while a taxpayer’s reliance on the specific advice of a tax_return_preparer may constitute reasonable_cause petitioner has failed to offer testimony or evidence regarding the qualifications of his tax_return_preparer 16we therefore order below that the decision will be entered under rule or the specific advice he relied upon see sec_1_6664-4 example income_tax regs petitioner’s general statements that he relied on his tax_return_preparer are not sufficient to prove a reasonable basis substantial_authority or reasonable_cause for his disallowed deductions sec_6662 sec_6664 petitioner testified that he lost a portion of his receipts for his claimed deductions during date however petitioner provided limited substantiation of expenses_incurred after date additionally his efforts at re-creating his expenses_incurred before date were inadequate consequently we hold that petitioner is liable for the accuracy- related penalty pursuant to sec_6662 for taxable_year if the understatement of his income_tax exceeds dollar_figure the court has considered all other arguments made by the parties and to the extent we have not addressed them herein we consider them moot irrelevant or without merit on the basis of the foregoing decision will be entered under rule


internal_revenue_service number release date index number ------------------------- ------------------ ---------------------------------- ------------------------------------------ ----------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------------- id no ------------- telephone number -------------------- refer reply to cc ita b04 plr-116190-08 date october legend property city sellers date buyer buyer --- dear ------------- ------------------------------------ --------------------- ----------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------- --------------- ----------------- ----------------------------- ---------------------------------- ----------------------- this letter responds to a request for a private_letter_ruling concerning certain federal_income_tax consequences to buyer of its purchase of a remainder_interest in the property facts property is improved real_property consisting of residential apartments commercial retail_space and parking facilities located in city sellers are three limited_partnerships plr-116190-08 as part of the sale of property on date sellers entered into purchase and sale agreements for property with buyer and buyer the agreements with buyer provide for the purchase of a 50-year estate_for_years in property the lead_interest the agreements with buyer provide for the purchase of a remainder_interest in property the remainder_interest it is represented that buyer 2’s purchase will neither directly nor indirectly be funded by sellers or buyer the agreements provide that buyer has the unrestricted right to sell assign encumber or otherwise dispose_of all its rights in the remainder_interest buyer plans to hold the remainder_interest as a long-term investment it is represented that each direct and indirect owner of sellers is unrelated within the meaning of sec_267 of the internal_revenue_code to each direct and indirect owner of buyer and buyer further each direct and indirect owner of buyer is unrelated within the meaning of sec_267 to each direct and indirect owner of buyer buyer has requested the following rulings rulings requested buyer will not recognize income gain_or_loss either prior to or at the time when the remainder_interest vests in possession upon the expiration of the lead_interest and buyer 2’s holding_period with respect to the property will begin on the day after buyer purchases the remainder_interest from sellers law and analysis sec_61 provides in general that gross_income means all income from whatever source derived including gains derived from dealings in property sec_1001 provides in part that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized therefrom over the adjusted_basis determined under sec_1011 sec_1001 provides in part that the amount_realized from the sale_or_other_disposition of property shall be the sum of any money received plus the fair_market_value of the property other than money received sec_1222 provides that the term long-term_capital_gain means gain from the sale_or_exchange of a capital_asset held for more than year if and to the extent such plr-116190-08 gain is taken into account in computing gross_income sec_1222 provides that the term long-term_capital_loss means loss from the sale_or_exchange of a capital_asset held for more than year if and to the extent such loss is taken into account in computing gross_income upon buyer 2’s purchase of the remainder_interest buyer obtained a fee ownership_interest in property under which it has an unrestricted right to sell assign encumber or otherwise dispose_of all of its rights in the remainder_interest upon expiration of the lead_interest buyer will continue to own a fee ownership_interest except that the interest will change from non-possessory to possessory that buyer 2’s ownership_interest ripens into exclusive ownership and possession by the passage of time is of no consequence under sec_61 sec_1001 and sec_1222 cf 313_us_11 1941_1_cb_364 the phrase property held by the taxpayer under a prior_law holding_period rule relating to capital_gains_and_losses includes not only full ownership but also any interest owned whether vested contingent or conditional thus the holding_period of property that the taxpayer received as a remainderman under a_trust established by his grandmother’s will dated from his grandmother’s death rather than the date that the taxpayer’s remainder_interest ripened into possession kruesel v united_states no 3-62-civ d minn taxpayer is not treated as selling his entire_interest in property where the taxpayer reserved an estate that had the essentials of a life_estate and revrul_77_413 1977_2_cb_298 taxpayer is not treated not selling his entire_interest in property where he reserved a 20-year term_interest in the property and had all the benefits an burdens of ownership of the interest during that term revrul_70_598 1970_2_cb_168 holds that in determining the holding_period for a capital_asset the day the asset is purchased is excluded and the day the asset is sold is included conclusion based on the information submitted and the representations made we conclude as follows buyer will not recognize income gain_or_loss either prior to or at the time when the remainder_interest vests in possession upon the expiration of the lead_interest and buyer 2’s holding_period with respect to the property will begin on the day after buyer purchases the remainder_interest from sellers plr-116190-08 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 enclosed is a copy of the letter_ruling showing the deletions proposed to be made when it is disclosed under sec_6110 the taxpayer must attach a copy of this letter to any return to which it is relevant a taxpayer that files its returns electronically may satisfy this requirement by attaching a statement to its return that provides that the date and control number of this letter_ruling see dollar_figure of revproc_2008_1 2008_1_irb_1 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative the rulings contained in this letter are based upon information and representations submitted by buyer 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 sincerely michael j montemurro branch chief branch office of associate chief_counsel income_tax accounting cc


tax_exempt_and_government_entities_division department of the treasury internal_revenue_service washington d c uil numbers sec_12 date so ones contact person id number telephone number employer_identification_number t ‘2 legends foundation w o i m m m m a t r - e n o i w o m m c c i g x i k i n year year n n n n n e n e n o t n n n r n r n n r n n r n n n r dear sir or madam this letter responds to the request of counsel for foundation dated date as supplemented and modified by letters dated february and date for rulings regarding the issue of self-dealing under sec_4941 of the internal_revenue_code code ee facts foundation is exempt from federal_income_tax under sec_501 of the code and is classified as a private_foundation within the meaning of sec_509 initially foundation's directors included b c and d d is b's and was years ago c died on appointed as a director over than a year later and the remaining directors appointed e as a director to serve with b and d f a friend of b and e was appointed a director over several director g had served for current directors are d e f and g later the remaining directors appointed g to fill b’s place and serve as a years ago b died on accordingly the b married e less years as b’s year year c was married to b at the time of her death in c’s last will and testament she bequeathed all of her property to b if he survived otherwise to foundation b signed and timely filed a qualified_disclaimer in which he disclaimed his wife’s interest in certain community_property of their marriage consequently c’s interest in the community_property of the marriage passed to foundation b thereafter married e and he was married to her at the time of his death d and e b's will provides specific bequests to certain named individuals and were appointed independent co-executors co-executors of b’s estate estate in accordance with b’s will charities the will provides that his remaining applicable_exclusion_amount shall pass to a family bypass_trust the family bypass_trust was never funded however because there was no applicable_exclusion_amount remaining the remainder and bulk of the estate passes to a_trust which qualifies for the unlimited_marital_deduction under sec_2056 of the code ‘qtip trust b's will directs the trustees of the qtip_trust to distribute the trust's net_income to e during her lifetime and so much of the principal of the qtip_trust as is necessary to provide for e’s health support and maintenance the qtip_trust terminates upon e’s death upon its termination the trustees of the qtip_trust are directed to distribute the remaining trust property after payment of administrative expenses and taxes if any to foundation b's will names d and e as co-trustees of the qtip_trust foundation now owns c’s share of the community estate from over twenty years ago such share being comprised of an undivided one-half interest in the community assets from b’s marriage to c the estate of b owns the other one-half undivided_interest these assets include numerous real_estate holdings and notes receivable these undivided interests have produced many administrative complications for foundation moreover it would be difficult for foundation to sell its undivided_interest in such assets to any unrelated third party without suffering significant discounts the qtip_trust would now be entitled to receive b's undivided one-half interest in such properties interest valued at n as well as b's undivided one-half community share of the assets created with the community of b and e interest valued pincite these assets have been recorded at their fair_market_value on b's date of death and a strict trust accounting would o have to be established to properly determine net_income after depreciation repairs capita improvements and other items available to e as the income_beneficiary foundation states that this would produce many administrative complexities for the qtip_trust lastly e owns her undivided community one-half interest in the estate of b with respect to all of the community assets created during their marriage foundation states that her interest would likewise produce tremendous administrative complexities and contribute to the economic burden on foundation and the qtip_trust caused by ownership of assets in undivided interests property interests will pass to her heirs her children from a prior marriage foundation represents that it is unlikely that e’s heirs would be willing to enter into the proposed exchange as described below considering the substantial economic benefit inuring to foundation if the exchange set forth herein is not completed e’s undivided ownership b’s will authorizes the co-executors to sell or exchange estate property to enter into transactions with certain individuais or entities and to make distributions of estate property as follows power to sell or exchange b’s will allows the co-executors to exchange sell or lease for cash property or credit or to partition from time to time publicly or privately at such prices on such terms times and conditions and by instruments of such character as the executor or trustee may deem proper all or any part of the assets of the estate and of each trust power to enter into transactions with certain individuals entities b’s will allows the co-executors to enter into any transaction on behalf of the estate or of any trust despite the fact that another party to any such transaction may be i a_trust of which any executor or trustee under the will is also a trustee including any trust established by the will ii an estate of which any executor or trustee under the will is also an executor or administrator including the estate iii a business or trust controlled by any executor or trustee under the will or of which any such executor or trustee or any director officer_or_employee of any such corporate executor or trustee is also a director officer_or_employee iv any affiliate or business_associate of any beneficiary executor or trustee or v any beneficiary executor or trustee under the will acting individually or any relative of such person power to make distributions b’s will allows the co-executors to make divisions or distributions in money or in_kind or partly in each whenever required or permitted to divide or distribute all or any part of the estate or of any trust to allocate particular assets or portions thereof to any one or more of the beneficiaries of the estate or the trusts as the executor or trustee shall deem to be for the best interests of the beneficiaries of the estate and of the trusts without any obligation to make proportionate distributions or to distribute to all beneficiaries property having an equivalent federal_income_tax basis foundation states that the ultimate goal of the proposed transaction is to improve the economic benefits inuring to foundation and to eliminate the economic burdens of ownership of assets in undivided interests the benefits include the consolidation of title in the properties thereby greatly increasing the liquidity of such properties in the hands of the foundation at a favorable price and the elimination of the preceding interest of the qtip_trust the burdens include the related complications of administration and management of jointly owned assets and the determination of trust accounting_income required to be distributed by the qtip_trust that would otherwise result from the distributions under the terms of b’s will and the continued - co-ownership of former community_property in undivided interests to obtain these economic benefits and eliminate these burdens foundation proposes that the estate transfer to e a non- recourse note the note in the amount of p the note would be non-recourse collateralized only by the properties transferred by e to foundation in exchange for the note e wiil release her community_property interest in the assets co-owned with the estate and her life_estate interest in the qtip_trust valued at q the exchange’ in conjunction with the exchange e would be making a gift to foundation in the amount of r or the amount by which the value of her combined equitable interests exceeds the value of the non-recourse note she would receive it is represented as modified that the term of the note shail be h years payable in monthly installments with a reasonable rate of interest and with a balloon payment upon maturity moreover foundation will have the ability to prepay the note in its entirety at any time without penalty the estate owns numerous parcels of rental property mostly churches and residential properties and holds several hundred notes receivable from properties sold the rental properties and the notes receivable are collectively referred to as the properties currently the estate administers these properties collecting the receivables and rents none of the leases involve payments based upon profits of the occupying tenants all property maintenance functions such as lawn maintenance cleaning services repairs and refurbishments are carried out on a contract basis using unrelated independent contractors the estate performs other related collection activities with regard to the properties including writing demand letters for delinquent accounts and if necessary instituting eviction or foreclosure proceedings foundation represents that effectively all and certainly more than ninety-five percent of the gross_income from these properties constitutes rents interest or other passive_income so that administration of these properties by foundation would not constitute operating a business_enterprise within the meaning of sec_4943 of the code the proposed transaction involves the transfer of the fractional interests in the it expects to conduct a plan of orderly liquidation of all these real_estate properties from the estate to foundation following the proposed transaction foundation represents that assets it will not actively engage in the operation of rental properties as an active trade_or_business it will not acquire any new properties for resale and it will not engage in making any new loans other than installment_sales related to the sale of real_property currently owned or real_property repossessed on foreclosure foundation will continue to collect rents and current payments on notes receivable and invest the money and any proceeds from the sale of real_property in a broad-based marketable_securities portfolio foundation also represents that it will continue to use unrelated independent contractors for all property maintenance after obtaining the probate court's approval of this transaction and the conclusion of the administration of the estate the remaining properties of the estate subject_to the liability created by the note would be distributed and conveyed to foundation foundation would not assume the note in summary the total value of all assets passing to foundation pursuant to the proposed transaction is approximately s ruling_request the schedule shows the total value of the assets of the residuary_estate passing to the qtip_trust is approximately t the exchange of e’s combined interests valued at over u for the p note would produce an economic advantage gift of approximately v to foundation appraisals were included in the private_letter_ruling request a schedule of the assets was attached to the private letter- as a matter of liquidity foundation states that the exchange should not cause a burden to foundation because the p non-recourse note will be collateralized only by the properties transferred by e to the foundation approximately w of the assets passing outright to the foundation pursuant to the exchange are installment notes receivable the monthly proceeds from which will adequately cover the monthly payments due to e under the p non-recourse note the consolidation of title to the properties will eliminate the difficulty of dealing with undivided interests and the discounts thereby increasing the liquidity to foundation also foundation states that the elimination of the economic burden of ownership in undivided interests will also reduce the administrative expenses otherwise incurred thereby increasing the income available and thereby improving the liquidity to foundation the transaction just consolidates the title and management of the properties in foundation foundation states that increased capabilities of selling or mortgaging and managing the properties increases the liquidity of foundation with respect to its overall investment in the properties ruling requests you have requested the following rulings the transfer of the note from the estate to e in exchange for all her interests in the estate and in commutation of her interests in the qtip_trust and the subsequent conveyance of such properties in the estate to foundation with foundation taking subject_to the liability created by the note and secured_by the installment notes receivable and real_property foundation receives will satisfy the requirements of sec_53 d -1 b and d -2 c of the foundation and similar excise_taxes regulations regulations and thus will not be acts of self-dealing as defined in sec_4941 of the code under sec_53 d -2 c of the regulations the payment of both interest and principal under the terms of the note by the estate and later by foundation to e will not constitute acts of self-dealing either as direct or indirect acts as defined by sec_4941 of the code law chapter of the code subjects private_foundations described in sec_509 and disqualified persons described in sec_4946 to certain excise_tax provisions including sec_4941 sec_4941 of the code imposes an excise_tax on each act of self-dealing between a disqualified_person and a private_foundation sec_4941 of the code provides in part that the term self-dealing means any direct or indirect a sale_or_exchange or leasing of property between a private_foundation and a disqualified_person b iending of money or other extension of credit between a private_foundation and a disqualified_person e transfer to or use by or for the benefit of a disqualified_person of the assets of a private_foundation sec_4946 of the code provides in part that the term disqualified_person means with respect to a private_foundation a person who is - a a substantial_contributor to the foundation b a foundation_manager or d a member_of_the_family of any individual described in subparagraphs a b or c sec_507 of the code provides that a substantial contributor’ is defined as a person who contributed or bequeathed an aggregate amount of more than dollar_figure to the private_foundation if such amount is more than two percent of the total contributions and bequests received by the foundation before the close of the taxable_year of the foundation in which the contribution or bequest is received by the foundation from such person sec_511 of the code imposes a tax on the unrelated_business_taxable_income of organizations otherwise exempt from federal_income_tax under sec_501 of the code sec_512 of the code provides that the term unrelated_business_taxable_income means with certain modifications the gross_income derived by an organization from any unrelated_trade_or_business regularly carried on by it less allowable deductions sec_512 of the code requires a taxpayer to include in gross_income from an unrelated_trade_or_business the rental income and the gain_or_loss from the sale of debt- financed property sec_514 of the code defines the term debt-financed_property as any property which is held to produce income and with respect to which there is an acquisition_indebtedness at any time during the taxable_year sec_514 of the code provides that where property is acquired subject_to a mortgage or other similar lien the amount of the indebtedness secured_by such mortgage or lien shall be considered as an indebtedness of the organization incurred in acquiring such property even though the organization did not assume or agree to pay such indebtedness sec_514 of the code provides an exception to the above rule and provides that if where property subject_to a mortgage is acquired by an organization by bequest or devise the indebtedness secured_by the mortgage shall not be treated as acquisition_indebtedness during a period of years following the date of the acquisition bequest exception this subparagraph shall not apply if the organization in order to acquire the equity in the property by bequest devise or gift assumes and agrees to pay the indebtedness secured_by the mortgage or if the organization makes any payment for the equity in the property owned by the decedent or the donor sec_1_641_b_-3 of the regulations provides that an estate generally terminates when all the assets have been distributed except for a reasonable amount which is set_aside in good_faith for the payment of contingent or unascertained liabilities sec_53_4941_d_-1 of the foundation and similar excise_taxes regulations excepts certain transactions carried out during the administration of an estate the estate administration exception from the definition of self-dealing specifically sec_53 d - b provides that the term indirect self-dealing shall not include a transaction with respect to a private foundation’s interest or expectancy in property whether or not encumbered held by an estate or revocable_trust including a_trust which has become irrevocable on a grantor’s death regardless of when title to the property vests under local law if i the administrator or executor of an estate or trustee of a revocable_trust either - a possesses a power of sale with respect to the property b has the power to reallocate the property to another beneficiary or ii iii iv c is required to sell the property under the terms of any option subject_to which the property was acquired by the estate or revocable_trust such transaction is approved by the probate_court having jurisdiction over the estate or by another court having jurisdiction over the estate_or_trust or over the private_foundation such transaction occurs before the estate is considered terminated for federal_income_tax purposes pursuant to paragraph a of sec_1_641_b_-3 of the regulations or in the case of a revocable_trust before it is considered subject_to sec_4947 of the code the estate_or_trust receives an amount which equais or exceeds the fair_market_value of the foundation's interest or expectancy in such property at the time of the transaction taking into account the terms of any option subject_to which the property was acquired by the estate_or_trust and v with respect to transactions occurring after date the transaction either- a results in the foundation receiving an interest or expectancy at least as liquid as the one it gave up b results in the foundation receiving an asset related to the active carrying out of its exempt purposes or c ls required under the terms of any option which is binding on the estate_or_trust sec_53 d -2 c of the regulations provides that the lending of money or other extension of credit between a private_foundation and a disqualified_person shall constitute an act of self-dealing further sec_53_4941_d_-2 provides that except in the case of the receipt and holding of a note pursuant to a transaction described in sec_53_4941_d_-1 ‘the estate administration note exception an act of self-dealing occurs where a note the obligor of which is a disqualified_person is transferred by a third party to a private_foundation which becomes the creditor of the note for purposes of the percent passive gross_income exception from the term business_enterprise under sec_4943 of the code sec_53_4943-10 of the regulations provides in part that gross_income from passive sources includes certain passive modification items under sec_512 including rents under sec_512 any income classified as passive under this exception does not lose its character merely because sec_514 relating to debt-financed_income applies to such income analysis e is considered a disqualified_person since she is the surviving widow of b a substantial_contributor to the foundation and thus a disqualified_person under sec_4946 of the code also as e currently serves as a director of foundation she will be considered a foundation_manager and thus a disqualified_person foundation represents that i ii iii iv the co-executors of the estate possess a power of sale with respect to the interests at issue to exchange all assets and the power to reallocate the property to another beneficiary under b’s will the transaction will be consummated prior to the termination of the estate’s administration for federal_income_tax purposes as provided by paragraph a of sec_1_641 b - of the regulations a petition seeking approval of the transaction by the probate_court having jurisdiction over this transaction will be filed and the transaction will not be consummated without prior approval of such court the estate shall receive an amount which equals or exceeds the fair_market_value of the property to be sold such fair_market_value to be determined pursuant to the provisions of sec_53 d - b of the regulations specifically foundation’s expectancy including the actuarial value of the remainder_interest in the qtip assets foundation would receive from the estate without the proposed transaction would be x net of e’s interest if the proposed transaction the exchange receives a favorable determination the foundation will receive outright ownership of properties valued at y for a net value of z after -9- deducting e’s p interest in the note and v the foundation will receive an interest or expectancy interest at least as liquid as the one it surrenders the non-recourse note would be collateralized only by the property interests passing to foundation from the estate and not foundation’s unrelated liquid_assets foundation also represents that the proposed transaction would cause the interests in the real_property and installment notes receivable to be transformed from partial undivided ownership to total ownership this consolidation of ownership will increase the assets’ desirability for sale more quickly and without discounts and thus cause the assets to be more liquid in the hands of the estate and later the foundation in addition to the divided title problem the undivided ownership creates administrative complications and additional expense including but not limited to detailed fiduciary accounting_records on a property by property basis to distinguish income and expenses from principal receipts and disbursements in order to account for the economic interests of foundation and the qtip_trust the various problems associated with joint management such as the allocation of sales_price and proceeds from the sales of multiple properties to common buyers during the process of liquidating the underlying properties and the additional expenses associated therewith would also be eliminated under the proposed transaction this expense reduction further adds to the increased liquidity achieved by foundation as a result of the exchange foundation represents that the undivided joint_interests e possesses in the properties with the foundation require a certain level of cooperation among the parties for the management and ultimate disposition of such properties if the proposed transaction is not pursued the foundation may be required ultimately to deal not with e who is elderly but the beneficiaries of e’s estate her children from a prior marriage in the future the potential for even further undivided ownership would most likely decrease the liquidity of the underlying assets the proposed transaction will not only cure present divided title issues and administrative complications for foundation but also protect against even greater divided title issues and administrative complications and the accompanying decreases in liquidity in the future the installment notes receivable account for approximately percent approximately w of the total assets passing to the foundation in the exchange approximately y therefore the non-recourse p note to e may be completely satisfied through collection of installment notes receivable transferred to foundation in the exchange thus the distribution to e of a single note which consolidates her interest and retains essentially the same collateral is economically similar to a distribution to her of a consolidated interest in these installment notes the single note greatly simplifies the estate’s and foundation’s administration and management of these properties and it improves the ultimate value realized by eliminating the undivided interests at a minimum the estate’s assets will become no less liquid by virtue of the consolidation of the undivided interests and the distribution of the note foundation represents that as a result of the proposed transaction foundation would obtain a projected economic benefit of r from e and the estate this would represent an immediate increase of approximately j percent over the x calculated value of its expected benefit from the estate also the distribution of the note to e in exchange for her community interest in the assets and in commutation of her actuarial interest in the qtip_trust will stil be eligible for favorable treatment under the estate administration exception and will not be detrimentally affected by the commutation of the qtip_trust sec_53 d -2 c of the regulations provides that in general the lending of money or other extension of credit between a private_foundation and a disqualified_person shall constitute an act of self-dealing that section further provides that except in the case of the receipt and holding of a note pursuant to a transaction described in sec_53 d -1 b an act of self-dealing occurs where a note the obligor of which is a disqualified_person is transferred by a third party to a private_foundation which becomes the creditor except under the estate administration note exception thus the regulations provide that if the estate administration note exception applies to a transaction the transfer and holding of the note will not be an act of self-dealing under the facts and circumstances represented herein it does not matter that foundation will be the obligor rather than the obligee because the estate administration note exception applies to the lending of money between a private_foundation and a disqualified_person rather than to or from one party or the other also it is of significance the note in this instance has a maximum term of short duration and the foundation has the ability to terminate that short time period by having the ability to prepay the note in its entirety without penalty rulings accordingly based on the information and representations submitted we are ruling as follows the transfer of the note from the estate to e in exchange for all her interests in the estate and in commutation of her interests in the qtip_trust and the subsequent conveyance of such properties in the estate to foundation with foundation taking subject_to the liability created by the note and secured_by the installment notes receivable and real_property foundation receives will satisfy the requirements of sec_53 d -1 b and d -2 c of the regulations and thus will not be acts of self-dealing as defined in sec_4941 of the code under sec_53_4941_d_-2 of the regulations the payment of both interest and principal under the terms of the note by the estate and later by foundation to e will not constitute acts of self-dealing either as direct or indirect acts as defined by sec_4941 of the code this ruling is directed only to the parties that requested it foundation the estate d e f and g sec_6110 of the code provides that this ruling may not be used or cited by others as precedent this ruling is limited to the applicability of the provisions of sec_4941 and sec_4946 of the code and does not purport to rule on any facts that were not represented in the ruling_request as supplemented or on any changes of those facts also in this ruling we have not determined whether the methodology you or your independent appraisers are using to tt determine fair market values including interest rates is proper we merely have accepted your representations the ruling does not purport to address any issue under other provisions of the internal_revenue_code including issues involving the unrelated_trade_or_business provisions under sec_511 through if you have any questions about this ruling please contact the person whose name and’ telephone number are shown in the heading of this letter sincerely tah wt c herp ss robert c harper jr manager exempt_organizations technical group


internal_revenue_service number release date index number ------------------------ ------------------------------------------------------- ------------------ -------------------------------------------- ------------------------------------------------------------- department of the treasury washington dc person to contact -------------------- id no ------------ telephone number -------------------- refer reply to cc fip b03 plr-121487-07 date date legend trust fund a fund b fund c fund d fund e fund f fund g fund h fund i ---------------- ----------------------- ----------------------- plr-121487-07 ------------------------------------------ ----------------------- plr-121488-07 ------------------------------- ----------------------- plr-121489-07 --------------------------------- ----------------------- plr-121490-07 ------------------------- ----------------------- plr-121491-07 ------------------------------------ ----------------------- plr-121493-07 ------------------------- ----------------------- plr-121494-07 ---------------------------- ----------------------- plr-121495-07 ------------------------------ plr-121487-07 fund j fund k fund l fund m ----------------------- plr-121496-07 ----------------------------- ----------------------- plr-121497-07 ----------------------------------------- ----------------------- plr-121498-07 ------------------------------ ----------------------- plr-121499-07 ---------------------------- ----------------------- plr-121500-07 fund n ------------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------- ----------------------- plr-121503-07 state x company administrator auditors calendar_year taxable_year taxable_year date date date date date date -------------------- -------------------------- ------------------------------------------ ---------------------------------------- ------- ------------------------------------------------- ------------------------------------------------- ---------------- ------------------------ ------------------------ -------------------------- -------------------------- ------------------- plr-121487-07 dear -------------- this responds to a letter and subsequent correspondence submitted on behalf of fund a fund b fund c fund d fund e fund f fund g fund h fund i fund j fund k fund l fund m and fund n collectively the funds each fund requests that its election under sec_855 of the internal_revenue_code code to treat certain dividends distributed after the close of a taxable_year as having been paid during that taxable_year be treated as having been timely made pursuant to sec_301_9100-3 of the procedure and administration regulations facts trust is organized as a state x trust and is registered under the investment_company act of as amended trust consists of separate segregated portfolios of assets including funds each fund had elected to be a regulated_investment_company ric under sec_851 of the code company is responsible for overall management and administration of all funds ever since date and continuously through the present trust has engaged administrator to provide fund accounting and sub-administration services the services that administrator was engaged by trust to provide during calendar_year and earlier years included federal tax-compliance services among the tax-compliance services that administrator was engaged by trust to provide throughout calendar_year were the preparation and filing of funds’ federal_income_tax returns forms 1120-ric for taxable_year and the preparation and filing of all extension requests related to those returns administrator had been engaged by the funds to provide similar tax- compliance services in the year preceding calendar_year and had performed those services in a correct and timely manner for them the due_date for a fund to file form_7004 application_for automatic 6-month extension of time to file certain business income_tax information and other returns for taxable_year was date trust decided consistent with the practice for prior taxable years that each fund would file a form_7004 for taxable_year and so informed administrator before date all the forms required for taxable_year for the funds were prepared under the direction of a tax supervisor in administrator’s tax department by a tax analyst on date on that same date administrator’s vice president -- tax services personally reviewed all of such forms prepared the u s postal service certified mail green card and corresponding envelope sticker and prepared and signed a transmittal letter dated date the transmittal letter green card and envelope sticker were addressed to the appropriate internal_revenue_service center after making electronic copies of all the documents administrator’s vice president -- tax services left the completed forms the signed transmittal letter and the completed certified mail documents with a second tax analyst she had the express responsibility for timely plr-121487-07 mailing all the forms pursuant to the pre-existing written procedures of administrator’s tax department administrator’s vice president -- tax services verified that no estimated_tax was required to be paid to qualify for extension under the forms on the morning of date administrator’s vice president -- tax services discussed these extensions with the second tax analyst to verify that she would mail them that day he then forwarded scanned copies of the documents by email to trust’s vice president and chief financial officer and to a tax manager at auditors in that email administrator’s vice president -- tax services stated his understanding that the forms had been properly filed ie timely mailed to the internal_revenue_service center on date a third tax analyst in administrator’s tax department picked up from the second tax analyst the forms that had been set_aside for filing in administrator’s client files the third analyst noticed that she had what appeared to be the originals of the transmittal letter forms and certified mail documents she immediately brought this to administrator’s vice president -- tax services’ attention after investigation they determined that the forms had not been mailed to the internal_revenue_service center as required and expected by trust on date each fund represents that in accordance with sec_855 of the code it has satisfied the requirement of sec_855 that it declared the dividends with respect to which it seeks to make the sec_855 election involved in this request by the time prescribed by law for the filing of its form 1120-ric for taxable_year each fund’s form 1120-ric for taxable_year was filed on date and included the election under sec_855 to treat certain dividends_paid in taxable_year as having been paid during taxable_year the elections however were not timely because their forms 1120-ric were filed after the due_date therefor and no extensions of time to file such returns had been timely filed or granted each fund makes the following additional representations the request for relief was filed by fund before the failure to make the regulatory election was discovered by the internal_revenue_service granting the requested relief will not result in fund’s having a lower tax_liability in the aggregate for all taxable years affected by the election than fund would have had if the election had been timely made taking into account the time_value_of_money fund did not seek to alter a return position for which an accuracy- related penalty has been or could have been imposed under sec_6662 of the code at the time fund requested relief and the new position requires or permits a regulatory election for which relief is requested plr-121487-07 being fully informed of the required regulatory election and related tax consequences fund did not choose to not file the election law and analysis sec_855 of the code provides that if a ric declares a dividend prior to the time prescribed by law for the filing of its return for a taxable_year including the period for any extension of time granted for filing such return and distributes the amount of such dividend to shareholders in the 12-month_period following the close of such taxable_year and not later than the date of the first regular dividend payment made after such declaration the amount so declared and distributed shall to the extent the company elects in such return in accordance with regulations prescribed by the secretary be considered as having been paid during such taxable_year except as provided in subsections b c and d sec_1_855-1 of the income_tax regulations sets forth the method of making the election and provides that the election must be made in the return filed by the ric for the taxable_year sec_301_9100-1 of the procedure and administration regulations provides in part that the commissioner has discretion to grant a reasonable extension of time to make a regulatory election defined in sec_301_9100-1 as an election whose due_date is prescribed by regulations or by a revenue_ruling a revenue_procedure a notice or an announcement published in the internal_revenue_bulletin 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 through c i set forth rules that the internal_revenue_service generally will use to determine whether under the facts and circumstances of each situation the commissioner will grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that subject_to paragraphs b i through iii of sec_301_9100-3 when a taxpayer applies for relief under this section before the failure to make the regulatory election is discovered by the service the taxpayer will be deemed to have acted reasonably and in good_faith and sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all years to which the regulatory election applies than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money plr-121487-07 holding based upon the facts presented and representations made by funds we hold that the funds have demonstrated good cause for the granting of relief under sec_301_9100-3 accordingly each fund’s election under sec_855 on its federal_income_tax return filed on date for taxable_year will be treated as having been timely made no opinion is expressed as to whether each fund's tax_liability is not lower in the aggregate for the year to which the election applies than that fund's tax_liability would have been if the election had been timely made taking into account the time_value_of_money upon audit of the federal_income_tax returns involved the director will determine the fund's tax_liabilities for the year involved if the director determines that a fund's liability is lower that office will determine the federal_income_tax effect this ruling is limited to the timeliness of each fund’s election under sec_855 of the code this ruling does not relieve a fund from any penalty that it may owe as a result of its failure_to_file its federal_income_tax return on time except as specifically ruled upon above no opinion is expressed or implied as to any federal excise or income_tax consequences regarding fund in particular no opinion is expressed or implied whether any fund qualifies as a ric that is taxable under subchapter_m part of the code this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the powers of attorney on file with this office copies of this letter are being sent to your authorized representatives sincerely alice m bennett chief branch associate chief_counsel financial institutions products enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number release date index number ---------------- -------------------------- -------------------------------------------------- -------------- -------------------------------- ------------------------------------- department of the treasury washington dc person to contact ------------------ id------------------ telephone number -------------------- refer reply to cc fip b02 plr-103982-09 date date legend fund a -------------------------------------------------------------------- ------------------------------------------------------ fund b -------------------------------------------------------------------- ---------------------------------------------------- fund c -------------------------------------------------------------------- --------------------------------------------------- fund d -------------------------------------------------------------------- ------------------------------------------------------- serie sec_1 serie sec_2 company state a state b country dear -------------- --------------------------------------------------- --------------------------------------- ----------------------------------- ------------ ------------ --------------------- plr-103982-09 this is in response to a letter dated date requesting a ruling that income earned by each fund from an investment in its respective wholly-owned subsidiary that qualifies as a controlled_foreign_corporation cfc constitutes qualifying_income under sec_851 of the internal_revenue_code facts fund a is a corporation incorporated under the laws of state a fund b is a series of serie sec_1 a corporation that is also incorporated under the laws of state a fund c is a series of serie sec_2 another corporation that is incorporated under the laws of state a fund d is a statutory trust organized under the laws of state b funds a and d are registered with the securities_and_exchange_commission as open-end management investment companies under the investment_company act of u s c 80a-1 et seq as amended the act funds b and c are series of open-end management investment companies under the act funds a b c and d the funds have each filed an election to be treated as a regulated_investment_company ric under sec_851 of the code each fund intends to form a wholly-owned subsidiary under the laws of country a non-united states jurisdiction under country’s laws each subsidiary will be formed as a company a company provides limited_liability for its shareholders each company will file an election on form to be taxed as a corporation pursuant to sec_301_7701-3 of the procedure and administration regulations the funds represent that although each company will not be registered as an investment_company under the act each company will comply with the requirements of section f of the act investment_company act release no and related sec guidance pertaining to asset coverage with respect to transactions in commodity futures and other transactions in derivatives each fund will invest a portion of its assets in its respective subsidiary company subject_to the asset diversification limitations set forth in sec_851 of the code each company is expected to invest in commodities commodity futures and notional_principal_contracts but may also invest in securities or debt or hold cash each company will be wholly-owned by its respective fund the funds represent that each company will qualify as a controlled_foreign_corporation cfc each fund will include its respective company’s subpart_f_income for the taxable_year in accordance with sec_951 of the code plr-103982-09 law sec_851 of the code provides that a corporation is not considered a ric for any taxable_year unless it meets an income test under this test at least percent of its gross_income must be derived from certain sources under sec_851 qualifying_income includes dividends interest payments_with_respect_to_securities_loans as defined in sec_512 and gains from the sale_or_other_disposition of stock_or_securities as defined in sec_2 of the act or foreign_currencies or other income including but not limited to gains from options futures or forward contracts derived with respect to its business of investing in such stock securities or currencies sec_2 of the act defines the term security as any note stock treasury_stock security future bond debenture evidence_of_indebtedness certificate of interest or participation in any profit-sharing agreement collateral-trust certificate preorganization certificate or subscription transferable share investment contract voting-trust certificate certificate of deposit for a security fractional undivided_interest in oil gas or other mineral rights any put call straddle option or privilege on any security including a certificate of deposit or on any group or index of securities including any interest therein or based on the value thereof or any put call straddle option or privilege entered into on a national securities exchange relating to foreign_currency or in general any interest or instrument commonly known as a security or any certificate of interest or participation in temporary or interim certificate for receipt for guarantee of or warrant or right to subscribe to or purchase any of the foregoing sec_851 of the code provides that for purposes of sec_851 the term dividends includes amounts included in gross_income under sec_951 or sec_1293 for the taxable_year to the extent that under sec_959 or sec_1293 there is a distribution out of the earnings_and_profits of the taxable_year which are attributable to the amounts so included sec_957 of the code defines a cfc as any foreign_corporation in which more than percent of the total combined voting power of all classes of stock entitled to vote or the total value of the stock is owned by united_states_shareholders on any day during the corporation’s taxable_year a united_states_shareholder is defined in sec_951 as a united_states_person who owns percent or more of the total voting power of a foreign_corporation plr-103982-09 sec_951 of the code provides that if a foreign_corporation is a cfc for an uninterrupted period of days or more during any taxable_year every person who is a united_states_shareholder of the corporation and who owns stock in it on the last day of the taxable_year in which the corporation is a cfc shall include in gross_income the sum of the shareholder’s pro_rata share of the cfc’s subpart_f_income for the taxable_year sec_952 defines subpart_f_income to include foreign_base_company_income determined under sec_954 under sec_954 foreign_base_company_income includes foreign_personal_holding_company_income determined under sec_954 sec_954 defines foreign_personal_holding_company_income to include dividends interest royalties rents and annuities companies’ investments may generate foreign_personal_holding_company_income under sec_954 which is subpart_f_income funds would therefore include in income their respective company’s subpart_f_income for the taxable_year in accordance with sec_951 analysis and conclusion each fund has represented that it will own percent of the voting power of the stock of its respective subsidiary company the funds are united_states persons based upon the funds’ representations each of the respective companies will qualify as cfcs under these provisions based on the facts as represented we rule that subpart_f_income of the companies that is attributable to the funds is income derived with respect to the funds’ business of investing in the stock of companies and thus constitutes qualifying_income under sec_851 this ruling is directed only to the taxpayers who requested it and is limited to the facts as represented by the taxpayers sec_6110 provides that this letter may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely david b silber____________ david b silber chief branch office of associate chief_counsel financial institutions and products