t c summary opinion united_states tax_court anietra y hamper petitioner v commissioner of internal revenue respondent docket no 22375-09s filed date anietra y hamper pro_se anita a gill for respondent dean special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated subsequent section references are to the internal_revenue_code and all rule references are to the tax_court rules_of_practice and procedure respondent determined the following deficiencies in petitioner’s federal income taxes and accuracy-related_penalties year deficiency sec_6662 accuracy-related_penalty 2005¹ dollar_figure big_number big_number big_number dollar_figure dollar_figure dollar_figure dollar_figure ¹petitioner signed form_872 consent to extend the time to assess tax for but alleged she was pressured and tricked into signing the document she did not explain or otherwise provide evidence that she did not understand form_872 and its contents the issues for decision are whether petitioner is entitled to deduct unreimbursed employee business_expenses claimed on schedules a itemized_deductions and whether she is liable for the sec_6662 accuracy-related_penalties for the years at issue background some of the facts have been stipulated and are so found the stipulation of facts and supplemental stipulation of facts and the exhibits received into evidence are incorporated herein 1respondent determined that petitioner failed to report interest_income of dollar_figure and dollar_figure for and respectively petitioner did not present any credible_evidence or otherwise allege that she did not receive interest_income in and as respondent determined the issue is deemed conceded see rule b by reference at the time petitioner filed her petition she resided in ohio on schedules a of her federal_income_tax returns for the years at issue petitioner claimed deductions for unreimbursed employee business_expenses of dollar_figure dollar_figure dollar_figure and dollar_figure for and respectively these deductions for unreimbursed employee business_expenses included expenses for clothing a cell phone mileage expenses professional expenses subscriptions union dues supplies promotional products legal expenses hair nail and makeup expenses office expenses dry cleaning costs educational and self-defense class costs and internet expenses during the years at issue petitioner was employed as a morning and noon television news anchor as a television news anchor petitioner is required to maintain a specified professional appearance as described in the women’s wardrobe guidelines guidelines the guidelines provide that the ideal in selecting an outfit for on-air use should be the selection of ‘standard business wear’ typical of that which one might wear on any business_day in a normal office setting anywhere in the usa the guidelines point out that there is no correlation between the cost of an outfit and its appropriateness for use and generally a conservative outfit purchased off the rack at a local department store is more acceptable than excessively stylish items purchased at a designer boutique the guidelines also recommend avoiding certain clothing such as those with flamboyant or loud patterns which may be distracting on camera heavy tweed suits and outfits with buttons or accessories that are overly large as television tends to make them look even larger the general guideline is that petitioner maintain a professional and conservative appearance she must maintain her hair in a neat and conservative cut and maintain her fingernails at a reasonable length finished with conservatively colored nail polish in addition to her duties as a news anchor which include writing selecting and preparing news stories for broadcast petitioner is required to attend promotional appearances throughout the year because she is an ambassador of her station she must maintain a professional image and demeanor at all times she is also required to have an overnight bag ready at all times in the event she is called out of town in which she maintains several changes of clothing consistent with the requirement that petitioner maintain a neat professional and conservative appearance and as a part of her community appearances she incurred considerable expenses for clothing and for maintaining her appearance during the years at issue on date respondent issued to petitioner a notice_of_deficiency disallowing a portion of her business_expense deduction sec_2 asserting that they are nondeductible personal expenses or do not otherwise satisfy the strict substantiation requirements of sec_274 discussion i burden_of_proof generally the commissioner’s determinations are presumed correct and the taxpayer bears the burden of proving that those determinations are erroneous rule a see 503_us_79 290_us_111 sec_7491 provides that subject_to certain limitations where a taxpayer introduces credible_evidence with respect to a factual issue relevant to ascertaining the taxpayer’s tax_liability the burden_of_proof shifts to the commissioner with respect to that issue petitioner maintains that she has satisfied the requirements of sec_7491 and therefore the burden_of_proof should shift 2respondent stipulated that although petitioner did not enter into evidence receipts for and she did in fact substantiate a portion of her expenses as provided in the stipulations to respondent she alleges that she fully cooperated with all reasonable requests by respondent and provided all documentation and information relating to her expense deductions respondent stipulated most of the factual issues relating to petitioner’s claimed expense deductions in this case the determination of whether an expense is an unreimbursed employee_business_expense is a question of law therefore sec_7491 is inapplicable to the extent respondent has not stipulated the remaining factual determinations the court resolves those issues on a preponderance_of_the_evidence without regard to the burden_of_proof ii claimed business_expense deductions deductions are strictly a matter of legislative grace and taxpayers must satisfy the specific requirements for any deduction claimed see indopco inc v commissioner supra pincite 292_us_435 taxpayers bear the burden of substantiating the amount and purpose of any claimed deduction see 65_tc_87 affd per curiam 540_f2d_821 5th cir sec_262 expressly denies a deduction for personal living or family_expenses on the other hand sec_162 allows a deduction for all ordinary and necessary expenses paid_or_incurred in carrying on any trade_or_business generally the performance of services as an employee constitutes a trade_or_business 54_tc_374 whether expenditures are for ordinary and necessary business_expenses is a question of fact and the taxpayer must demonstrate that the purpose of the expenditure was primarily business rather than personal and that the business in which the taxpayer is engaged benefited or was intended to be benefited by the expenditure 74_tc_1266 48_tc_358 a clothing and accessory costs although a business wardrobe is a necessary condition_of_employment the cost of the wardrobe has generally been considered a nondeductible personal_expense pursuant to sec_262 see kennedy v commissioner tcmemo_1970_58 affd 451_f2d_1023 3d cir the general_rule is that where business clothes are suitable for general wear a deduction for them is not allowable see 262_f2d_411 2d cir affg 28_tc_1278 hynes v commissioner supra pincite roth v commissioner 17_tc_1450 such costs are not deductible even when it has been shown that the particular clothes would not have been purchased but for the employment 524_f2d_640 10th cir donnelly v commissioner supra there are recognized exceptions to the general_rule where for example the clothing was useful only in the business environment in which the taxpayer worked see eg 44_tc_208 2_tc_484 2_tc_458 the rules for determining whether the cost of clothing is deductible as an ordinary and necessary business_expense are the clothing is required or essential in the taxpayer’s employment the clothing is not suitable for general or personal wear and the clothing is not so worn 30_tc_757 when the cost of acquiring clothing is deductible then the cost of maintaining such clothing is likewise deductible as an ordinary and necessary business_expense mortrud v commissioner supra during the years at issue petitioner purchased clothing for her position as a news anchor she wears her business clothing only at work and maintains her business clothing separately from her personal clothing she explained that the requirement to wear conservative clothing makes her business clothing unsuitable for everyday wear petitioner purchased most of her business clothing and accessories from typical clothing stores such as nordstrom’s kohl’s victoria’s secret macy’s old navy jcpenney sportmart casual corner dsw ann taylor loft dick’s sporting goods marshall’s charlotte russe and other local clothing stores petitioner’s clothing purchases for work consisted of such items as traditional business suits lounge wear a robe sportswear active wear lingerie cotton bikini and cotton thong underwear and evening wear she also deducted expenses for an ohio state jersey jewelry bedding running and walking shoes and dry cleaning costs petitioner used a self-described criterion for determining whether a clothing expense was deductible she would ask herself would i be buying this if i didn’t have to wear this to work and if the answer is no then i know that i am buying it specifically for work and therefore it is a deductible business_expense hynes v commissioner supra involved a taxpayer in circumstances very similar to petitioner’s the taxpayer in hynes worked as a television news anchor and deducted business_expenses for wardrobe laundry and dry cleaning haircuts and makeup hotels and meals and car expenses and depreciation the taxpayer purchased a particular wardrobe that was restricted in terms of color and pattern that he was able to wear on the air the court reasoned that the restriction on the taxpayer’s selection of business attire however was not significantly different from that applicable to other business professionals who must also limit their selection of clothing to conservative styles and fashions the court further reasoned that the fact that the taxpayer chose not to wear the business clothing while away from the station did not signal that the clothing was not suitable for private and personal wear in fact as the court noted most professionals typically do not wear their business clothes for private or personal wear similarly petitioner does not satisfy the requirement that her clothing not be suitable for everyday personal wear although she is required to purchase conservative business attire it is not of a fashion that is outrageous or otherwise unsuitable for everyday personal wear given the nature of her expenditures it is evident that petitioner’s clothing is in fact suitable for everyday wear even if it is not so worn consequently the court upholds respondent’s determination that petitioner is not entitled to deduct expenses related to clothing shoes and accessory costs as these are inherently_personal expenses additionally because the costs associated with the purchase of clothing are a nondeductible personal_expense costs for the maintenance of the clothing such as dry cleaning costs are also nondeductible personal expenses b contact lenses makeup and grooming expenses petitioner incurred expenses for the purchase of contact lenses in the years at issue and testified that she wears for work a different contact lens prescription that enables her to read the teleprompter in addition to the cost of prescription contact lenses she also deducted the costs for contact lens solution and softsoap morning mist pump soap there is no indication beyond her own testimony and she presented no credible_evidence that she was required to and did obtain an additional prescription for work petitioner also purchased makeup and testified that the makeup was designed for on-the-air appearances and provided significantly more coverage than ordinary makeup petitioner typically purchased her makeup from nordstrom’s and drugstores that sell ordinary cosmetics the receipts offered into evidence do not indicate purchases for special makeup designed for on-camera use but simply indicate purchases for ordinary makeup suitable for everyday wear the court is unable to determine whether the makeup she purchased was primarily for business use petitioner also obtained regular haircuts and manicures other maintenance expenditures included teeth whitening and skin care product purchases petitioner’s expenditures_for manicures grooming teeth whitening and skin care are inherently_personal expenditures although these expenses may be related to her job expenses that are inherently_personal are nondeductible personal expenses a sec_3petitioner’s contract with nbc provided that nbc would provide the makeup necessary for on-the-air performances she testified that her employer did not purchase on-the-air makeup in hynes v commissioner t c pincite the fact that petitioner’s employment contract with the station required her to maintain a neat appearance does not elevate these personal expenses to a deductible business_expense c self-defense class expenses petitioner deducted as a business_expense expenses she incurred for self-defense classes in the form of gym membership fees petitioner’s position as a news anchor made her a public figure in her local area petitioner was one of the unfortunate public figures affected by stalking and was advised by the local police to undertake self-defense classes as a protective measure although petitioner testified that she enrolled in self- defense classes with a private instructor the only substantiation relating to self-defense classes for the years at issue was her gym membership dues at lifetime fitness furthermore petitioner’s daily log for which provided a detailed account of her weekly schedule does not indicate that she attended self-defense classes on an almost-daily basis petitioner noted her workout for each day which included kickboxing yoga running walking weights and cardio but any reference to self-defense classes was notably missing from the log generally costs incurred in maintaining good health are inherently_personal expenditures and to be entitled to a deduction the taxpayer must demonstrate that the expenses were different from or in excess of what he would have spent for personal purposes see eg 55_tc_320 some expenses are so inherently_personal that they simply cannot qualify for sec_162 treatment irrespective of the role played by such expenditures in the overall scheme of the taxpayers’ trade_or_business affd 454_f2d_399 7th cir 21_tc_170 the court recognizes that petitioner may have been the target of stalkers unfortunately petitioner has not shown how her gym membership fees were related to her business or that they were otherwise an ordinary and necessary business_expenses for her position as a news anchor d professional associations and dues and legal fees respondent stipulated that petitioner incurred and substantiated legal fees of dollar_figure and professional dues of dollar_figure in respondent further stipulated that petitioner substantiated expenses of dollar_figure to the national academy of television arts and sciences in both and and dollar_figure for legal fees in finally respondent stipulated that petitioner incurred and substantiated expenses of dollar_figure paid for professional dues in petitioner argues that these expenses are associated with her business activities and her performance review which affects her contract position pay and career the court is satisfied that the foregoing expenses during the years at issue were substantiated ordinary and necessary business_expenses to the extent petitioner was unable to substantiate her legal expenses for a deduction for the unsubstantiated expense is denied e subscriptions petitioner testified that she is expected to have constant access to news accordingly she subscribes to cable television and internet newspapers magazines such as cosmopolitan glamour newsweek and nickelodeon and satellite radio subscribing to periodicals of general interest does not generate an ordinary and necessary business_expense within the meaning of sec_162 specifically the purchase of general circulation newspapers is a personal_expense that taxpayers may not deduct 690_f2d_40 2d cir affg in part and revg in part 76_tc_252 subscription expenses with respect to trade and professional magazines relating to a taxpayer’s trade_or_business may be deductible under sec_162 see 54_tc_1642 affd 457_f2d_369 9th cir although the foregoing news sources keep petitioner abreast of relevant breaking news expenses for access to these news sources are inherently_personal and petitioner has not shown how these expenses are ordinary and necessary business_expenses see sec_262 basic cable television similar to daily newspapers contains a significant amount of information which is inherently_personal as with the purchase of a television or television repair cable television access is not deductible and petitioner has failed to show that her use of the cable television satellite radio and newspaper subscriptions were ordinary and necessary business_expenses in addition petitioner failed to demonstrate that her magazine subscriptions for glamour cosmopolitan newsweek and nickelodeon served a valid business_purpose for her position as a news anchor accordingly we hold that petitioner is not entitled to deduct the foregoing expenses f sec_274 expenses sec_274 imposes heightened substantiation requirements for certain types of deductions including deductions for car and truck expenses meals and entertainment cellular phones and gifts sec_274 sec_280f to claim deductions for these expenses a taxpayer must keep adequate contemporaneous_records showing the amount business_purpose and business relationship of the expense sec_274 cell phone expense petitioner testified that she used her cell phone when she was not at work in order to set up stories and solicit feedback from viewers petitioner did not present credible_evidence however sufficient to satisfy the strict substantiation requirements of sec_274 see sec_1_274-5t temporary income_tax regs fed reg date accordingly petitioner’s claimed deductions for the years at issue are disallowed vehicle expenses pursuant to sec_274 any deduction claimed with respect to the use of a passenger_automobile will be disallowed unless the taxpayer substantiates specified elements of the use by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement see sec_1_274-5t temporary income_tax regs fed reg date to meet the adequate_records requirements of sec_274 a taxpayer must maintain some form of records and documentary_evidence that in combination are sufficient to establish each element of an expenditure or use see sec_1_274-5t temporary income_tax regs fed reg date a contemporaneous log is not required but corroborative evidence to support a taxpayer’s reconstruction of the elements of an expenditure or use must have a high degree of probative value to elevate such statement to the level of credibility of a contemporaneous record sec_1_274-5t temporary income_tax regs supra the elements that must be substantiated to deduct expenses for the business use of an automobile are the amount of the expenditure the mileage for each business use of the automobile and the total mileage for all use of the automobile during the taxable_period the date of the business use and the business_purpose of the use of the automobile see sec_1_274-5t temporary income_tax regs supra for petitioner presented a mileage log detailing her business mileage in addition petitioner provided a maintenance vehicle report in corroboration of her mileage log the mileage log and odometer readings however conflict with the maintenance vehicle report given that petitioner’s mileage log for substantially conflicts with her vehicle history report the court is unable to conclude that the mileage log is credible in determining her business mileage for as for the remaining years at issue petitioner has not presented credible_evidence or documentation in support of her claimed business mileage accordingly respondent’s determination is sustained in full business_gifts the heightened substantiation requirements of sec_274 also apply to business_gifts sec_274 petitioner has introduced receipts as evidence in support of her claimed deductions for business_gifts for however petitioner did not explain the business_purpose of the gifts and the business relationship with the persons to whom the gifts were given see sec_1_274-5t temporary income_tax regs fed reg date accordingly the court sustains respondent’s determination with regard to the business_gifts meals and entertainment the elements required to prove a business_expense for entertainment include the amount of the expenditure the time and place of the entertainment the business_purpose for the entertainment and the taxpayer’s business relationship with the persons entertained sec_1_274-5t temporary income_tax regs fed reg date for petitioner offered into evidence a detailed day planner documenting her activities throughout in corroboration of her events in her day planner petitioner offered a limited number of receipts documenting meal expenditures_for although petitioner incurred meal expenses in the years at issue as stipulated by respondent she failed to present any credible_evidence as to the business_purpose for those meal expenditures and the business relationship with the person s entertained accordingly the court must deny petitioner’s claimed deductions for meal and entertainment_expenses in the years at issue g remaining expenses petitioner claimed expense deductions for other expenses which included professional expenses promotional products and supplies for and items for speaking engagements for other expenses for and miscellaneous and office expenses for petitioner did not testify or otherwise provide substantiating documentation for the foregoing expenses accordingly respondent’s determination regarding the foregoing expenses is sustained iii accuracy-related_penalty respondent determined that petitioner is liable for an accuracy-related_penalty under sec_6662 for each year sec_6662 and b imposes a 20-percent penalty on the portion of an underpayment attributable to any one of various factors including negligence or disregard of rules or regulations negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code including any failure to keep adequate books_and_records or to substantiate items properly see sec_6662 sec_1_6662-3 income_tax regs under sec_7491 respondent has the burden of production with respect to the accuracy-related_penalties see 116_tc_438 sec_6664 provides an exception to the sec_6662 penalty if it is shown that there was reasonable_cause for any portion of the underpayment and the taxpayer acted in good_faith with respect to such portion the determination of whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all the pertinent facts and circumstances sec_1_6664-4 income_tax regs the most important factor is the extent of the taxpayer’s effort to assess his proper tax_liability id circumstances that may indicate reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in view of the taxpayer’s experience knowledge and education id petitioner alleges that she acted in good_faith and with reasonable_cause in deducting her business_expenses because the tax law says that all business_expenses that are ordinary and necessary are deductible and that her deductions are specific to the job she performs as a news anchor the law is well settled that expenditures that are inherently_personal are nondeductible despite the seeming relation to a taxpayer’s business petitioner has presented no other credible_evidence that she should not be subject_to the accuracy-related_penalties for the years at issue therefore the court sustains respondent’s determination as to the accuracy- related penalties the court has considered the other arguments of the parties and they are either without merit or not necessary in view of our resolution of the issues in this case to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number -------------------- ------------------------------ --------------------------- ------------------------------------------------- --------------------------------- ------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------------- id no ------------------ telephone number ---------------------- refer reply to cc ita b02 plr-126735-16 date date ty -------- legend -------------------------------------------------------------- --------------------------------------------------------------- ----------------------- -------- ------- ------------------------------------------------------------------ taxpayer taxpayer’s subsidiary equity firm city country holding_company sellers’ representative ------------------------------------------------- merger subsidiary state secretary spreadsheet president and ceo senior director ----------------------------- -------------------------------------- ---------------------------------------------------- ------------------------------------------------------------- --------------------------------------------------------------------------------- ----------------------------------------- ---------------------------- ----------------------------------------------------------------- ------------------------------------------ --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- -------------------------------------------------------------- financial advisor cpa tax advisor firm agreement plr-126735-16 date1 date2 date3 date4 date5 date6 date7 date8 month year dollar_figurea dollar_figureb taxable_year dear ------------- ----------------------- ---------------------------- ---------------------- --------------------------- ---------------------------- -------------------- --------------------------- ----------------------- --------------- ------- -------------- -------------- --------------------------------------------------------- this responds to the letter of date1 filed on your behalf by your authorized representative in the letter you requested an extension to time to a make a safe_harbor election under revproc_2011_29 2011_18_irb_746 to allocate success- based fees between facilitative and non-facilitative amounts for a covered transaction for taxpayer’s taxable_year the request is made in accordance with sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations facts and representations taxpayer represents the following statement of taxpayer’s business operations and ownership structure --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------------------------------ taxpayer wholly owns taxpayer subsidiary located in city country prior to the transaction described below the shares of taxpayer were primarily held by equity firm facts relating to the request for relief a the transaction on date2 the agreement was executed by taxpayer certain of its stockholders and option-holders holding corporation merger subsidiary and sellers’ representative plr-126735-16 pursuant to the terms of the agreement holding corporation remitted the merger consideration to the sellers’ representative in exchange for the extinguishment of all of taxpayer’s outstanding shares and options buyer also remitted separate funds to pay the taxpayer’s outstanding liabilities including taxpayer’s transaction costs taxpayer’s transaction costs were not considered part of the merger consideration and were not remitted to the sellers’ representative the sellers’ representative deducted all of the shareholders’ and option holders’ transaction costs from the merger consideration and distributed the remainder to the taxpayer’s shareholders and option holders pro_rata to effect the transaction holding_company formed merger subsidiary into which taxpayer merged the transaction closed on date3 and on that date the certificate of merger of taxpayer and merger subsidiary was filed with the state secretary pursuant to an engagement letter of date4 taxpayer engaged financial advisor to provide financial advisory services in conjunction with a potential sale of taxpayer the engagement letter set forth a schedule of fees to be paid to financial advisor contingent upon a successful sale of taxpayer as set forth in the engagement letter the success-based fees to be paid to financial advisor were in no case to be lower than dollar_figurea in fact the fee paid to financial advisor at the time of closing was dollar_figureb the amount of the fee paid to financial advisor was included in the spreadsheet dated date5 this document reflected the amount of consideration paid with respect to the transaction as well as associated expenses b preparation of form_1120 for taxpayer and discovery of the missed election taxpayer did not have its own internal tax department so it hired outside advisor cpa taxpayer relied on cpa for tax_return preparation pursuant to their engagement cpa would prepare taxpayer’s forms u s_corporation income_tax return and following review president and ceo would sign the returns consistent with this arrangement a final stand-alone form_1120 was prepared by cpa for taxpayer’s short taxable_year ending on date3 the terms of the merger agreement provided that drafts of all pre-closing period tax returns were to be delivered to holding_company for its review and approval at least thirty days prior to the due_date of any of the returns the final taxpayer’s return would be filed only after it had been reviewed by holding_company however taxpayer’s form_1120 for taxable_year was filed on date6 without being reviewed by holding_company while preparing the form_1120 for holding_company for its taxable_year ending date7 the year in which the transaction occurred the senior director at holding_company requested information from cpa regarding the taxable_year return for taxpayer on date8 the president and ceo of taxpayer responded by forwarding certain correspondence from cpa regarding the transaction plr-126735-16 costs and merger consideration with respect to the merger consideration document cpa identified the success-based fees paid to financial advisor but noted that he deemed the safe_harbor success- based fee deduction under revproc_2011_29 not applicable because the fees were remitted out of the closing proceeds cpa did not provide any additional advice with respect to making the safe_harbor election to allocate success-based fees taxpayer relied on cpa and the success-based fees were not accounted for on taxpayer’s final form_1120 the success-based fees paid to financial advisor were an obligation of taxpayer as reflected in the engagement letter taxpayer executed with financial advisor the costs were recorded as a liability on the books of taxpayer and the agreement provided that the success-based fees would not be considered part of the merger consideration paid to taxpayer’s shareholders and option holders in exchange for the extinguishment of all of the outstanding shares and options after reviewing all the documents cpa sent to senior director senior director believed that taxpayer was eligible to make the safe_harbor election under revproc_2011_29 in that regard senior director consulted with tax advisor firm in month and year to consider whether relief was available to make the safe_harbor election out of time upon being advised that such relief was available taxpayer submitted this relief request in accordance with sec_301_9100-1 and sec_301 of the procedure and administration regulations taxpayer’s form_1120 for taxable_year ending date3 was electronically filed pursuant to extension on date6 the form_1120 for that year is not currently under examination by the internal_revenue_service accordingly taxpayer is requesting an extension of time to make a safe_harbor election under revproc_2011_29 to allocate success-based fees between facilitative and non- facilitative amounts for taxpayer’s transaction law sec_263 of the internal_revenue_code and sec_1_263_a_-2 of the income_tax regulations generally provide that no deduction shall be allowed for any amount_paid out for property having a useful_life substantially beyond the taxable_year in the case of an acquisition or reorganization of a business_entity costs that are incurred in the process of acquisition and that produce significant long-term benefits must be capitalized 503_us_79 397_us_572 under sec_1_263_a_-5 a taxpayer must capitalize an amount_paid to facilitate a business acquisition or reorganization transaction described in sec_1_263_a_-5 an amount is paid to facilitate a transaction described in sec_1_263_a_-5 if the amount is paid in the process of investigating or otherwise pursuing the transaction whether an amount is plr-126735-16 paid in the process of investigating or otherwise pursuing the transaction is determined based on all of the facts and circumstances see sec_1_263_a_-5 sec_1 a - f provides that an amount that is contingent on the successful closing of a transaction described in sec_1_263_a_-5 success-based_fee is presumed to facilitate the transaction and thus must be capitalized a taxpayer may rebut the presumption by maintaining sufficient documentation to establish that a portion of the fee is allocable to activities that do not facilitate the transaction and thus may be deductible a taxpayer's method for determining the portion of a success-based_fee that facilitates a transaction and the portion that does not facilitate the transaction is a method_of_accounting under sec_446 because the treatment of success-based fees was a continuing subject of controversy between taxpayers and the service the service published revproc_2011_29 revproc_2011_29 provides a safe_harbor method of allocating success-based fees paid in business_acquisitions or reorganizations described in sec_1_263_a_-5 in lieu of maintaining the documentation required by sec_1_263_a_-5 this safe_harbor permits electing taxpayers to treat percent of the success-based_fee as an amount that does not facilitate the transaction ie an amount that can be deducted the remaining portion of the fee must be capitalized as an amount that facilitates the transaction section dollar_figure of revproc_2011_29 allows a taxpayer to make a safe_harbor election with respect to success-based fees section dollar_figure provides that the service will not challenge a taxpayer's allocation of success-based fees between activities that facilitate a transaction described in sec_1_263_a_-5 costs that must be capitalized and activities that do not facilitate the transaction costs that may be deductible if the taxpayer does three things first the taxpayer must treat percent of the amount of the success-based_fee as an amount that does not facilitate the transaction and thus may be deducted second the taxpayer must capitalize the remaining amount of the success-based_fee as an amount which does facilitate the transaction third the taxpayer must attach a statement to its original federal_income_tax return for the taxable_year the success-based_fee is paid_or_incurred stating that the taxpayer is electing the safe_harbor identifying the transaction and stating the success-based_fee amounts that are deducted treated as not facilitating the transaction and capitalized treated as facilitating the transaction sec_301_9100-1 through of the procedure and administration regulations provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 plr-126735-16 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make certain regulatory elections sec_301_9100-1 defines a regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that 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 taxable years affected by the election than the taxpayer would have had if the election had been timely made the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment sec_301_9100-3 provides special rules for accounting_method regulatory elections sec_301_9100-3 provides that the interests of the government are deemed prejudiced except in unusual or compelling circumstances if the accounting_method regulatory election for which relief is requested is subject_to the advance consent procedures for method changes requires a sec_481 adjustment would permit a change from an impermissible method_of_accounting that is an issue under consideration by examination or any other setting or provides a more favorable method_of_accounting if the election is made by a certain date or taxable_year in the present situation taxpayer has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations the information and representations made by taxpayer establish that it acted reasonably and in good_faith the affidavits presented show that taxpayer reasonably relied on qualified_tax professionals for the proper filing of taxpayer’s federal return including the safe_harbor election for success-based fees under revproc_2011_29 taxpayer represents that cpa‘s failure to make the safe_harbor election on behalf of taxpayer on taxpayer’s return was a legal error upon discovery of the error taxpayer filed for relief before the government discovered the failure to properly make the regulatory election the information and representations presented establish that taxpayer is not seeking to alter a return position for which an accuracy-related_penalty had been or could be imposed under sec_6662 at the time relief was requested taxpayer reasonably relied on plr-126735-16 cpa to file its income_tax return properly but cpa did not think taxpayer was entitled to use revproc_2011_29 to account for the success-based fees senior director however believes that taxpayer is eligible for the safe_harbor election in revproc_2011_29 furthermore taxpayer is not using hindsight in requesting relief and no facts have changed since the time of the original filing deadline finally granting an extension will not prejudice the interests of the government it is represented that taxpayer would not have a lower tax_liability in the aggregate for all taxable years affected by the safe_harbor election under revproc_2011_29 if given permission to make the election at this time than taxpayer would have had if the safe_harbor election had been properly made by the original deadline for making the election taxpayer has represented that the taxable years that would have been affected by the election had it been timely made are not closed by the period of limitations on assessment finally the taxpayer was not under audit by the irs before taxpayer filed for relief therefore the granting of relief will not prejudice the government conclusion based upon our analysis of the facts as represented taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government therefore the requirements of sec_301_9100-1 and sec_301_9100-3 have been met taxpayer is granted an extension of days from the date of this ruling to file an amended_return electing safe_harbor treatment for its success-based fees under revproc_2011_29 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular no opinion is expressed as to whether taxpayer properly included the correct costs as its success-based fees subject_to the retroactive election or whether taxpayer’s transaction was within the scope of revproc_2011_29 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 power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives enclosed is a copy of the letter_ruling showing the deletions proposed to be made in the letter when it is disclosed under sec_6110 of the code a copy of this ruling should be attached to any income_tax return to which it is relevant alternatively taxpayers filing returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling plr-126735-16 this ruling is based upon information and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by appropriate parties 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 bridget e tombul ______________________________ bridget e tombul chief branch office of associate chief_counsel income_tax accounting enc copy for sec_6110 purposes


internal_revenue_service number release date index number 2032a ------------------------------- ---------------------------------------------- ---------------------- ----------------------------------------- ------------------------- in re department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b04 plr-116103-04 date july - - - - - -------------------------------------------------- ------------------------ ----------------------- ------------------------- --------------------------------------------------------------------------------- ------------------------------------ ------------------------------------------ -------------------------- ----------------------- ----------------------- legend decedent child child child gst_trust --------------------------------------------------------------- partnership date date dollar_figures dollar_figuret x y z dear ------------------ this is in response to your date letter and other correspondence requesting a ruling concerning the valuation for generation-skipping_transfer gst tax purposes of certain interests over which an election for alternate_valuation under sec_2032a of the internal_revenue_code was made according to the submitted information decedent died testate on date survived by children child child and child and other descendants child is the executor of decedent’s estate included in decedent’s estate are x general and y limited_partnership units in partnership which is an operating farm business partnership has a total of z general and limited_partnership units assets of partnership include farmland among other assets ----------------------------------------------------- ------------------- -------------------- ------------------- ------------------- --------------- --------------- --------------- - - - - - - - - plr-116103-04 section iii of decedent’s will divides into three equal shares property disposed of under decedent’s will that exceeds a sum equal to the largest amount if any that can pass free of the gst tax on the date of my death and after taking account of any gst charged to me for transfers made during my lifetime and after taking account of property disposed of by previous sections of this will and property passing outside of this will which is includable in my estate for gst tax purposes and after taking account of charges to principal that are not allowed as deductions in computing my gst tax the three shares are to be distributed to child and child and child or if any of them predecease decedent to that child’s living descendants either outright or in trust in satisfying this bequest decedent’s will directs the executor to the extent possible to distribute personal_property other than general or limited units in partnership section iv a of decedent’s will provides that the residue of decedent’s estate shall pass in trust known as the gst_trust child is the trustee of gst_trust under its terms upon decedent’s death the net_income is distributed in equal shares to child child and child if any child should die before the gst_trust terminates that child’s share of the net_income is to be distributed among decedent’s descendants and the parents of the descendants of the deceased child other than the deceased child as appointed by that child either by testamentary or inter_vivos appointment if the child fails to appoint the net_income it will pass to that child’s descendants per stirpes or if none to the surviving children of decedent and their descendants per stirpes the gst_trust will terminate upon the death of the last to die of child child and child section iv f of gst_trust provides that child child and child while they are all alive may divide the trust into three separate and equal trusts the separate trusts will be for the primary benefit of child child and child respectively and will have the same dispositive provisions as set forth in section iv of decedent’s will described above except section iv e section iv d provides that upon termination of the gst_trust if the trust contains any general_partnership units of partnership the trustee shall distribute the units pursuant to a power in child to appoint such units except that such power is not exercisable in favor of child child 1’s estate or the creditors of either section iv e provides that except as provided in section iv d above upon termination of gst_trust if the corpus has not been divided among child child and child as described in section iv f each child will have the testamentary power to appoint an undivided one-third interest in the corpus and accrued and undistributed_net_income to descendants of decedent other than that respective child that child’s estate or the creditors of either any share not appointed will be distributed to the respective child’s descendants per stirpes or if none to the appointees or descendants of decedent’s other children per stirpes plr-116103-04 you represent that decedent’s estate timely filed a united_states estate and generation-skipping_transfer_tax return form_706 on or near date on the estate_tax_return decedent’s estate elected to value the qualifying farm property in partnership at its special use value as described under sec_2032a decedent’s estate included the x general and y limited_partnership units in partnership on the estate_tax_return the information submitted indicates that decedent’s estate attached to the estate_tax_return the agreements signed by the interested parties consenting to personal liability under sec_2032a for additional estate_tax and gst taxes by that subsection in valuing decedent’s general and limited_partnership interests in partnership decedent’s estate computed the fair_market_value of the partnership units by separately valuing decedent’s general and limited_partnership units and applying discounts for lack of marketability and minority interests to the limited_partnership units pursuant to this computation decedent’s estate concluded that the fair_market_value of decedent’s interest in partnership on decedent’s date of death was dollar_figures decedent’s estate computed both the fair_market_value of decedent’s interest in partnership assets that qualified for valuation under sec_2032a and the value of those assets as determined under sec_2032a decedent’s estate concluded that the difference exceeded dollar_figure and thus reduced the fair_market_value arrived at by applying the discounts for minority interests and lack of marketability of decedent’s general and limited_partnership interests in partnership by dollar_figure the maximum reduction then allowed under sec_2032a this computation resulted in decedent’s estate including dollar_figuret in decedent’s gross_estate as the fair_market_value of decedent’s general and limited_partnership_interest in partnership valued under sec_2032a this amount was included on decedent’s estate_tax_return based on section iii of decedent’s will which directs the executor to the extent possible to fund the section iii bequest with assets other than partnership units much of decedent’s interests in partnership will pass pursuant to the residuary bequest to gst_trust decedent’s estate has represented that dollar_figure-------------- the amount allowable in the year of decedent’s death of decedent’s gst_exemption was allocated to the gst_trust on decedent’s estate_tax_return you request a ruling that the proper method for purposes of funding the gst_trust is the method used by decedent’s estate in determining the fair_market_value of decedent’s interests in partnership and reducing that value by the allowable reduction under sec_2032a sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a resident_of_the_united_states sec_2031 provides that the value of the gross_estate of the decedent will be determined by including the value at the time of the decedent’s death all property real or personal tangible or intangible wherever situated sec_20_2031-1 of the estate_tax regulations states that the value of property includible in the decedent’s gross_estate is its fair_market_value at the time of the plr-116103-04 decedent’s death the fair_market_value is defined as the price at which the property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts however sec_2032a provides that if the executor elects the application of sec_2032a and files the agreement described in sec_2032a the value of the qualified_real_property included in the decedent's gross_estate that is devoted to farming shall be valued on the basis of its use as a farm rather than at its highest_and_best_use ie fair_market_value sec_2032a provides that the aggregate reduction in the value of the property taken into account for purposes of sec_2032a cannot exceed dollar_figure adjusted for inflation under sec_2032a sec_2032a generally provides recapture provisions for additional estate_tax in the event that the specially valued property is disposed of or no longer used in a qualified_use under sec_2032a within the ten year period following the decedent’s death sec_2032a provides that the election to specially value real_property shall be made on the return of the tax imposed by sec_2001 sec_2032a provides that each person who has an interest in the property to be specially valued must sign an agreement consenting to the application of the recapture provisions set forth in sec_2032a such election and written_agreement is to be made in such manner as the secretary prescribes by regulations see sec_20_2032a-8 of the estate_tax regulations sec_2601 imposes a tax on every generation-skipping_transfer a generation- skipping transfer gst is defined under ' a as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the gst tax is determined by multiplying the taxable_amount by the applicable_rate sec_2641 provides that the term aapplicable rate means with respect to any gst transfer the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer under sec_2642 the inclusion_ratio with respect to any property transferred in a generation-skipping_transfer is generally defined as the excess of over the aapplicable fraction the applicable_fraction as defined in sec_2642 is a fraction the numerator of which is the amount of gst_exemption under sec_2631 allocated to the trust or to property transferred in a direct_skip and the denominator of which is the value of the property transferred to the trust or involved in the direct_skip sec_26_2642-2 of the generation-skipping_transfer_tax regulations provides that in general in determining the denominator of the applicable_fraction the value of property included in the decedent’s gross_estate is its value for estate_tax purposes in the case of qualified_real_property with respect to which the election under sec_2032a is made the value of the property is the value determined under sec_2032a provided the recapture agreement described in sec_2032a filed with the irs specifically provides plr-116103-04 for the signatories’ consent to the imposition of and personal liability for additional gst tax in the event an additional estate_tax is imposed under sec_2032a if the recapture agreement does not contain these provisions the value of qualified_real_property as to which the election under sec_2032a is made is the fair_market_value of the property determined without regard to the provisions of sec_2032a sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under ' c that may be allocated by the individual or his executor to any property with respect to which the individual is the transferor sec_2631 provides that any allocation under ' a once made is irrevocable sec_2632 provides that an allocation by an individual of his gst_exemption may be made at any time on or before the date prescribed for filing the individual’s estate_tax_return including extensions in a manner prescribed by regulations sec_26_2632-1 provides that an allocation of decedent’s unused gst_exemption by the executor of the decedent’s estate is made on form_706 filed on or before the date prescribed for filing the return an allocation of gst_exemption to a_trust whether or not funded at the time the form_706 or form 706na is filed is effective if the notice of allocation clearly identifies the trust and the amount of the decedent’s gst_exemption allocated to the trust in 69_f3d_1044 10th cir acq 1998_2_cb_254 1999_1_cb_5 the taxpayer elected special_use_valuation and valued the decedent' sec_26 percent interest in a family limited_partnership at dollar_figure the limited_partnership was engaged in the business of operating a cattle ranch the dollar_figure represented decedent’s share of the limited_partnership assets that qualified for special_use_valuation under sec_2032a dollar_figure reduced by discounts totaling percent for minority interests and lack of marketability and further reduced by dollar_figure the then maximum reduction under sec_2032a when added to the decedent’ sec_26 percent interest in other assets of the limited_partnership also reduced by discounts totaling percent the total value of decedent’s interest in the family limited_partnership was reported on the decedent’s estate_tax_return at dollar_figure the court concluded that the decedent’s estate applied the proper methodology in valuing the decedent’s interest in the limited_partnership the court stated that p roper application of sec_2032a must involve an accurate determination of fair_market_value which necessarily incorporates the minority interest discount the court concluded that the fair_market_value of the interest must first be determined and such determination under sec_20_2031-1 would include the application of discounts upon election and qualification under sec_2032a the fair_market_value is then reduced to reflect its special use value that reduction is limited to dollar_figure adjusted for inflation and is a reduction from the value that would otherwise have been reported if no sec_2032a election was made plr-116103-04 the facts in estate of hoover supra are distinguishable from those in 93_tc_228 where the estate first computed the special use value of the decedent’s interest and then attempted to reduce that value by a discount for a minority interest the tax_court concluded that an otherwise available minority discount for stock cannot further reduce the value of shares of stock in an incorporated farm where the corporate stock is valued under sec_2032a the tenth circuit in estate of hoover pincite stated that the tax_court properly held that the estate could not take advantage of such a double reduction as noted above in this case as in estate of hoover the decedent’s estate computed the fair_market_value of the decedent’s interest in the partnership incorporating the discounts for lack of marketability and minority interests and then applied the sec_2032a valuation reduction to that fair_market_value in arriving at that reduction the estate computed the difference between the fair_market_value of the decedent’s interest in the property interest that qualified for special_use_valuation under sec_2032a incorporating the discounts for minority interests and lack of marketability and the decedent’s interest in the property valued at its special use under sec_2032a without any discount in decedent’s estate that difference exceeded the maximum allowable sec_2032a reduction which at that time was dollar_figure consistent with the methodology set forth in estate of hoover the decedent’s estate reduced the fair_market_value incorporating discounts of decedent’s interest in partnership by dollar_figure in determining the amount includible in decedent’s gross_estate we have acquiesced with the decision in estate of hoover regarding the methodology used in determining the special use value under sec_2032a of an interest in property where discounts for a minority interest or lack of marketability are incorporated in determining the fair_market_value of that property thus we conclude that a discount for a minority interest or lack of marketability is permitted in determining the fair_market_value of a property interest that is specially valued under sec_2032a and that for estate_tax purposes this method is the proper method for determining the value of decedent’s interest in partnership that has been valued under sec_2032a because the interested parties of the specially valued property interest have consented in the written_agreement to the imposition of and personal liability for additional gst tax in the event an additional estate_tax is imposed under sec_2032a the value of the property for gst allocation purposes is the value determined under sec_2032a see sec_26_2642-2 accordingly we rule that for purposes of funding the gst_trust created under section iv of decedent’s will and allocating the decedent’s unused gst_exemption to that trust the value of the property interests in the trust will be its value for estate_tax purposes in this case the proper method is the method used by decedent’s estate in determining the fair_market_value of decedent’s interests in partnership incorporating appropriate discounts and reducing that value by the allowable reduction under sec_2032a the rulings contained in this letter are based upon information submitted and representations made by the taxpayer and accompanied by a penalty of perjury plr-116103-04 statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter we are specifically not ruling on the values of any property interest that has been reported on decedent’s estate_tax_return this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer enclosures sincerely associate chief_counsel passthroughs and special industries _______________________ by lorraine e gardner senior counsel branch copy for sec_6110 purposes copy of this letter