department of the treasury internal_revenue_service washington d c a covennuententines division significant index numbers date may 200i contact person id number contact telephone reference t eo ra t legend q r s t oor dear sir or madam this is in response to m's request for certain rulings as supplemented and amended under sec_501 sec_4941 and sec_4945 of the internal_revenue_code submitted by m's legal_representative m has requested certain rulings that the terms of a settlement agreement between m and certain interested parties will not constitute acts of self-dealing as described in sec_4941 of the code and result in taxable_expenditures under sec_4945 facts m has been recognized as exempt under sec_501 of the code and classified as a private_foundation under sec_509 p died with a will and in addition to the assets in his probate_estate p also left assets owned by an irrevocable_trust and by a revocable_trust o which became irrevocable at p’s death all of the assets of both trusts are includable in p’s estate for federal estate_tax purposes p and his late wife were the sole contributors to m therefore p is a substantial contributor’ with respect to m within the meaning of sec_507 and sec_4946 a a of the code a serves as the administrator of p’s estate a is unrelated to p and q a has the power to reallocate property in p’s estate on behalf of m and q q are the grandchildren of p therefore q as the grandchildren of p are disqualified persons with respect to m pursuant to sec_4946 of the code s t and u serve as the trustees of o o22 m states that p’s objective in creating m was to provide with the opportunity to enhance their education thus better enabling them to make a contribution to the reports ' as stated in one of m's recent annual from each of the m's principal grant program is offered each year to three competitively selected the grants are educational grants for two years of graduate study and otner educational experiences in a foreign_country the grant recipients are nominated by m makes the final selection of scholars and approves their foreign universities m's board_of directors consists of who are of m's grant program b serves as m’s secretary and treasurer members which includes s t and r who were grant recipients approximately of p’s total gross_estate consist of the value of o of that amount about is comprised of two assets shares of stock in v a publicly traded corporation and of the common_stock of w substantially_all of the assets of which consisted of additional shares of v the beneficiaries of the assets in o are m and q m represents that the current value of these assets is currently approximately higher than it was on the date of p’s death m states that the activities conducted by w were always limited to hoiding stock of other corporations and other non-business assets m states that w never conducted any active business and has filed income_tax returns as a personal_holding_company according to v’s annual report the stock owned by w and the stock owned directly by o comprise about v percent of the total v stock outstand ing substantially_all of the income of w consists of dividends received with respect to the v stock upon p's death o provided in part that all shares of v held directly by o were to be contributed to w all class b shares of w were to pass to q in equal shares and all of the class a shares of w as well as all other assets of o were to pass to m m states that prior to date the class b common shares held sole voting rights in w in december p executed documents which purported to change the voting rights of w by giving one vote to each share of class a stock and two votes to each share of class b stock following p’s death q challenged the ofl validity of one of the documents p signed in the prior year and the change in the voting rights of the class a shares of w q contended that the document is invalid due to legal deficiencies q took the position that due to the invalidity of this document voting control of w never changed and continued to reside with the class b shares m’s position was that the documents in question were valid and effective and as a result m’s that the claims submitted by q are barred for other reasons as well class a shares possessed of the voting power and thus control of w q subsequently filed suit against m w and o in the court with jurisdiction over p’s estate located in the county where p resided at the time of his death seeking a declaratory_judgment that the change in voting rights is null and void and of no force or effect and an injunction to prevent the revocable_trust and m from voting the class a shares q later amended the lawsuit to name s t and u the individual trustees of the revocable_trust as defendants q filed another lawsuit against s who is also a director of m in his capacity as trustee of o in his capacity as a director of w and in his individual capacity in this lawsuit q claimed that s breached his fiduciary duties and intentionally interfered with the q's expectancy of inheritance the revocable_trust provides for indemnification of a trustee who is sued under these circumstances against ‘legal fees cost of settlement and or any other expenses relating to said lawsuit however there are exceptions to the coverage of these indemnification provisions including an exception for willful misconduct m states that since it is the beneficiary of a large percentage of the assets in indemnification would be borne predominantly by m the revocable_trust costs of any such the m states that after taking into account the costs of pursuing and defending the lawsuits filed by q the time and energy that is consumed by the litigation process and the other risks and wishing to avoid the uncertainties inherent in judicial resolution the parties have entered into m states that the settlement agreement is the result of extensive and intensive negotiations which occurred over a period of approximately four months and it reflects significant compromises made by each of the parties to the agreement the settlement agreement has been approved by a court with jurisdiction over the administration of p’s estate a settlement agreement m states that the net effect of the settlement assuming the parties projections are correct will have the result of dividing the assets of o approximately in value to m and in value to q excluding for this purpose the amounts required to be paid for taxes and other expenses the principal terms of the settlement agreement which have been approved by the court having jurisdiction over the estate include the following sale of w_stock the parties authorized the trustees to sell all of the shares of w to an unrelated purchaser the agreement required that none of the parties nor any of their respective officers directors or trustees might receive any compensation or fee- in connection with the sale private_letter_ruling and court approval of settlement the parties agreed that they would seek a private_letter_ruling from the service and would cooperate in the preparation of the ruling_request the parties also authorized the personal representative to seek approval of the settlement agreement by the court with jurisdiction over the administration of the estate the parties agreed upon a procedure under which the personal representative can terminate the agreement if he becomes convinced that i the service will not issue the requested ruling ii the court will not approve the settlement iii the court having jurisdiction over either court preceding will not approve the dismissal of that action to the extent that such approval is necessary or iv an objective condition upon which the requested ruling is expressly made contingent by the irs will not be satisfied stock owned by o the trustees of o will retain the w stock owned directly by o rather than contributing such stock to w as called for by the terms of the o trustees will retain that stock unless authorized to dispose_of it by q and m except that if substantially_all the stock of w is acquired by a third party o may dispose_of its stock in that transaction segregation of certain v stock for grandchildren and other purposes upon the execution of the agreement the trustees were required to and did segregate internally within o certain shares of v stock owned directly by o the number of shares so segregated was the number determined to be adequate i to pay the generation- skipping transfer_tax and any and all state and federal estate and inheritance taxes and interest related thereto and ii to provide x shares of such v stock after the payment of such taxes for the benefit of q dividends on either portion of these segregated shares follow the respective segregated shares proceeds from the sale of the segregated shares were also segregated distributions to q prior to issuance of requested ruling pursuant to the settlement agreement the following distributions were made to q the grandchildren out of the x shares prior to the issuance of the private_letter_ruling a y shares of v stock to each of the grandchildren immediately after the signing of the settlement agreement and b z shares of v stock to each of the grandchildren immediately upon the closing of the sale of the w stack and the receipt by o of the full payment on that sale to guard against any possibility of q receiving more than they are entitled to the settlement agreement provides that if it is terminated and the appropriate court determines that q the grandchildren of p are entitled to receive less than the value as of the date of p's death of the property distributed to them under a and b above q shall be required to refund to o any amount that exceeds the amount to which they were determined to be entitled distribution to m prior to issuance of private_letter_ruling upon the closing of the sale of the w stock and the receipt by o of the full payment on that sale a distribution in cash marketable_securities or any combination thereof was to be made to m this distribution requirement has been fulfilled by a distribution of cash litigation stayed in order to permit the sale of w stock and the delivery of clear title to its purchaser w was dismissed from the first court_proceeding and the claims against s in his capacity as a w officer and director in the second court preceding have been dismissed the other pending litigation is being held in suspense until the ruling is issued or the settlement agreement is terminated a dismissal of litigation and delivery of releases if the ruling is issued and the court approves the settlement agreement the lawsuits filed by q will be dismissed with prejudice by consent orders also effective upon the final dismissal of both of these actions s will resign from his positions as an officer and director of m and will agree not to serve in any further capacity with m the parties also agree to execute general releases of one another including releases of the trustees the officers and directors of m and the personal representative b distribution to grandchildren after both lawsuits filed by q have been dismissed and the general releases delivered the escrow agent will distribute the remaining balance of the x shares or the sale proceeds of those shares if sold and the net_income from such shares to q the grandchildren c preparation of amended estate_tax_return a as the personal representative shall file amended federal and state estate_tax returns consistent with the settlement agreement and shall pay from the funds segregated for such purpose the resulting generation-skipping_transfer_tax and estate_taxes m has obtained an opinion from an independent expert with regards to the value of m's interest in o m represents that taking into account the facts including the risks of litigation and the legal fees that would likely be incurred over the period of time required for litigation m is receiving an amount which equals or exceeds the fair_market_value of its interest before the execution of the settlement agreement ea m states that it believes this settlement will greatly advance its ability to perform its charitable purposes as it will provide m with liquid funds in place of an illiquid interest in a privately-held corporation co-owned by disqualified persons further the settlement would end the costly drain of legal fees and other expenses that will otherwise be required to continue this protracted litigation to its ultimate conclusion m also states that the settlement would eliminate m's risk of an adverse judicial decision on the issues in litigation that could cost m far more than the cost of the settlement applicable law sec_501 of the code provides for the exemption from federal_income_tax of organizations organized and operated for religious charitable or educational_purposes sec_4941 of the code provides for the imposition of tax on each act of self-dealing between a disqualified_person and a private_foundation sec_4941 d a of the code provides that the term self-dealing means any direct or indirect sale_or_exchange or leasing of property between a private_foundation and disqualified_person sec_4941 d e of the code states that the term self dealing means any direct or indirect transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private_foundation sec_4945 of the code provides that the term taxable_expenditure does not include amounts paid_or_incurred by a private_foundation as a grant to another organization for purposes specified in sec_170 sec_4946 of the code provides that the term disqualified_person means with respect to a private_foundation a person who is a substantial_contributor to the foundation sec_4946 of the code provides that the term disqualified_person means with respect to a private_foundation a person who is a foundation_manager to the foundation sec_4946 of the code provides that for purposes of subsection a the family of any individual shail include only his spouse ancestors children grandchildren great grandchildren and the spouses of children grandchildren and great grandchildren sec_53 d -1 b of the regulations 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 revocabie 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 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 ii 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 iii 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 this chapter or in the case of a revocable_trust before it is considered subject_to sec_4947 iv the estate_or_trust receives an amount which equals or exceeds the fair market vaiue 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 is required under the terms of any option which is binding on the estate or qol trust sec_53 d -2 f of the foundation and excise_tax regulations provides that except as provided in sec_53_4941_d_-3 sec_4941 d shall not apply to the indemnification by a private_foundation of a foundation_manager with respect to his defense in a judicial or administrative_proceeding involving chapter or state laws relating to mismanagement of funds of charitable organizations against all expenses other than taxes penalties or expenses of correction including attorneys’ fees if- i such expenses are reasonably incurred by him in connection with such proceeding and ii he is successful in such defense or such proceeding is terminated by settlement and he has not acted willfully and without reasonable_cause with respect to the act or failure to act which led to liability for tax under chapter similarly except as provided in sec_53_4941_d_-3 sec_4941 shall not apply to premiums for insurance to reimburse a foundation for an indemnification payment allowed pursuant to this subparagraph sec_53_4945-6 of the regulations provides that generally expenditures and reasonable expenses incidental thereto to acquire investments entered into for the purpose of obtaining income or funds to be used in furtherance of purposes described in sec_170 ordinarily will not be treated as taxable_expenditures under sec_4945 analysis m represents that the settlement agreement will advance its ability to perform its charitable purposes under sec_501 of the code since it will provide m with liquid funds rather than a stock interest in a privately-held corporation co-owned by q disqualified persons described in sec_4946 m and q are the beneficiaries named in p's will prior to the execution of the settlement agreement m's interest in the assets of p’s estate included assets held in o m has obtained the opinion of an independent expert with regards to the value of its p’s estate which includes assets held in o under the settlement agreement m will receive of the assets held in o m represents that considering all of the relevant facts and circumstances including the risks and duration of litigation the fair_market_value of its expectancy in p's estate prior to the agreement equals or exceeds the fair_market_value of the assets it will receive pursuant to the settlement agreement pursuant 2b2 to sec_53 b of the regulations a settiement agreement has been entered into involving property allocation changes among p’s estate beneficiaries including foundation m and q disqualified persons within the meaning of sec_4946 of the code under the terms of p's will m and q are entitled to receive certain investment interests held by o which is part of p’s estate a as administrator of p’s estate has the power to reallocate the property held by p’s estate on behalf of m and q pursuant to sec_53 d -1 b i of the regulations further the probate_court with jurisdiction over the administration of p's estate has approved the settlement agreement between the parties including m and q pursuant to sec_53 d -1 b ii of the regulations p's estate has not been terminated for federal_income_tax purposes pursuant to sec_53 d -1 b iii finally under the facts represented the fair_market_value and liquidity requirements will be satisfied pursuant to sec_53 d -1 b iv and v reasonable and necessary expenditures incurred by m relating to the negotiations preparation and execution of the settlement will not be treated as taxable_expenditures pursuant to section b of the regulations holdings based on the particular facts and circumstances above we rule as follows the settlement agreement will not give rise to acts of self-dealing under sec_4941 of the code the settlement agreement will not adversely affect m’s tax-exempt status as an organization described in sec_501 of the code the settlement agreement will not give rise to taxable_expenditures under sec_4945 of the code this ruling does not purport to rule on any other provisions of the code this ruling is directed only to the organization and the disqualified persons that requested it sec_6110 of the code provides that it may not be used or cited as precedent this ruling is limited to the applicability of the provisions of sec_501 sec_4941 and sec_4945 of the code and does not purport to rule on any facts that were not presented in the ruling_request as supplemented also in this ruling we have not determined whether the methodology you or your independent appraisers are using to determine fair market values is proper we merely have accepted your representation sec_2a that the transactions will reflect fair_market_value and that you will incur reasonable and necessary expenses sincerely yours reber c harpo pr- robert c harper jr manager exempt_organizations technical group


department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-134281-08 date november internal_revenue_service number release date index number ----------------------------------- ---------------------------------- --------------------------- ------------------------- legend x ------------------------------------------ ---------------------------------- d -------------------------- state --------- dear --------------- this responds to a letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts according to the information submitted x was incorporated on d under the laws of state x intended to be treated as an s_corporation for federal tax purposes effective d but the proper election was not timely filed law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides that if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made if the election is made after the first two and one-half months of a corporation's taxable_year then the corporation will plr-134281-08 not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if no election is made pursuant to sec_1362 or if made the election is made after the date prescribed for making such an election and the secretary determines there was reasonable_cause for the failure to timely make the election then the secretary may treat such election as timely made for such taxable_year and effective as of the first day of that year x did not file a timely election to be treated as an s_corporation under sec_1362 effective d x has however established reasonable_cause for not making a timely election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective d if within days from the date of this letter x submits a properly completed form_2553 effective d with a copy of this letter attached to the appropriate service_center except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed or implied concerning whether x otherwise qualifies as an s_corporation for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely faith p colson faith p colson senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes cc


internal_revenue_service number release date index number ---------------------------- ----------------------------- ---------------------------------------------- ------------------------------------------ ------------------------ - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc psi b06 plr-143748-06 date date re request for extension of time to file request for revised schedule of ruling amounts under 468a taxpayer plant location commission order method fund dear ------------ ------------------------------------------------ ----------------------- ------------------------------- ---------------- ----------------------------------------- --------------------------------- ----------------------- ------------------------------------------- this letter responds to a letter submitted date requesting an extension of time pursuant to ' of the procedure and administration regulations for taxpayer to file a request for a revised schedule of ruling amounts for purposes of sec_468a of the internal_revenue_code according to the information submitted taxpayer is the owner of plant taxpayer is primarily engaged in the generation and sale of electricity at wholesale taxpayer owns a ----- percent interest in the plant taxpayer has established a qualified_fund with respect to the unit as allowed by sec_468a of the internal_revenue_code the commission determined the amount of decommissioning costs to be included in the cost of service for ratemaking purposes plr-143748-06 for taxable years beginning ------- taxable_year using a formula in order the taxpayer requested by letter dated date a revised schedule of ruling amounts from the service for tax years ---------------as a result of order the service issued the revised schedule of ruling amounts by letter dated ----------------------- for tax years ------ --------------- the amount of decommissioning costs to be included in the cost of service was to be determined by reference to the amount of energy produced by the unit and purchased by -------------------------------------------------------- - on ------------------------- commission issued a modification of order clarifying the formula to be used to determine the amount of decommissioning costs to be included in the cost of service for ratemaking purposes this clarification resulted in a substantial variation as defined in sec_1_468a-3 in the ruling_amount determined under the formula approved originally by letter dated --------------------- and again by letter dated --- ------------------------for tax years -------------- as required by sec_1_468a-3 of the income_tax regulations the taxpayer requested by letter dated date a revised schedule of ruling amounts for the ------- and ------- tax years the revised schedule was issued by the service by letter dated ---------------------- in connection with the review of the total decommissioning cost_recovery for the unit for the ------- tax_year the taxpayer became aware that a revised schedule of ruling amounts should have also been sought for the ------- tax_year under sec_1_468a-3 the request for a revised schedule of ruling amounts should have been submitted to the service no later than the deemed payment deadline for the first taxable_year that begins after a taxable_year in which there is a substantial variation in the ruling_amount determined under the most recent formula or method the amount of decommissioning costs actually included in the cost of service for ------- was dollar_figure--------------- under the revised formula provided by the commission the amount that would have been included in the cost of service for purposes of sec_468a under a timely-filed request for a revised schedule of ruling amounts would have been dollar_figure--------------- taxpayer paid the lesser amount into the qualified_fund for ------- taxpayer represents that during -------------- it experienced changes in personnel in its tax department that resulted in the accidental failure to timely request a revised schedule of ruling amounts as required law and analysis sec_468a provides that a taxpayer may elect to deduct the amount of payments made to a qualified decommissioning fund however former ' 468a b limits the amount_paid into such fund for any taxable_year to the lesser_of the amount of nuclear decommissioning costs allocable to this fund which is included in the taxpayer's cost of service for ratemaking purposes for the tax_year or the ruling_amount applicable to this year plr-143748-06 sec_468a provides that a taxpayer shall be deemed to have made a payment to the nuclear decommissioning fund on the last day of a taxable_year if the payment is made on account of such taxable_year and is made within months after the close of the tax_year sec_1_468a-3 provides that in general a schedule of ruling amounts for a nuclear decommissioning fund is a ruling specifying annual payments that over the tax years remaining in the funding_period as of the date the schedule first applies will result in a projected balance of the nuclear decommissioning fund as of the last day of the funding_period equal to and in no event more than the amount of decommissioning costs allocable to the fund sec_1_468a-3 provides that any taxpayer that has obtained a formula or method for determining a schedule of ruling amounts for any taxable_year must file a request for a revised schedule on or before the earlier of the deemed payment deadline for the fifth taxable_year that begins after its taxable_year in which the most recent formula or method was approved or the deemed payment deadline for the first taxable_year that begins after a taxable_year in which there is a substantial variation in the ruling_amount determined under the most recent formula or method there is a substantial variation if the ruling_amount for the year and the ruling_amount for any earlier year since the most recent formula or method was approved differ by more than percent of the smaller amount sec_1_468a-3 provides that any taxpayer that has previously obtained a schedule of ruling amounts can request a revised schedule of ruling amounts such a request must be made in accordance with the rules of ' 468a-3 h the internal_revenue_service shall not provide a revised schedule of ruling amounts applicable to a taxable_year in response to a request for a schedule of ruling amounts that is filed after the deemed payment deadline date for such taxable_year sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in and to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that the term election includes an application_for relief in respect of tax sec_301_9100-2 and sec_301_9100-3 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 ' a request for relief under ' will be granted plr-143748-06 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 conclusions based solely on the facts and representations submitted we conclude that the requirements of and have been satisfied accordingly taxpayer's request for a revised schedule of ruling amounts will be considered timely filed for purposes of sec_1_468a-3 this relief is intended only to address the technical violation under sec_1_468a-3 since the statutory deemed payment deadline for the ------- tax_year has passed taxpayer will not be permitted to make any further contributions for the ------- tax_year except as specifically set forth above we express no opinion concerning the federal_income_tax consequences of the facts described above under any other provisions of the code we are sending a copy of this letter to the director this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely william p o’shea associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes --------------------------- ---------------------


t c no united_states tax_court estate of robert w quick deceased esther p quick personal representative and esther p quick petitioners v commissioner of internal revenue respondent docket no filed date ps filed a motion for reconsideration of our opinion reported as 110_tc_172 among other things ps argue that our failure therein to order refunds for overpayments of tax for ps' and tax years stemming from the proper computational adjustments which r should have made for those years as well as refunds for overpayments for their and tax years attributable to nol carrybacks from and was erroneous held ps' motion for reconsideration is denied this court has jurisdiction to determine overpayments of tax if any attributable to affected items as part of a decision of this case sec_6512 i r c 95_tc_193 followed this court lacks this opinion supplements our previously filed opinion in 110_tc_172 jurisdiction to order credits or refunds of overpayments except with respect to overpayments determined by final_decision as authorized by sec_6512 i r c kevin m bagley and mitchell b dubick for petitioners gretchen a kindel for respondent supplemental opinion nims judge in a timely filed motion for reconsideration motion pursuant to rule petitioners request the court to reconsider its opinion reported as 110_tc_172 the opinion is incorporated herein by this reference except where otherwise noted all rule references are to the tax_court rules_of_practice and procedure all section references are to sections of the internal_revenue_code in effect for the years in issue in our opinion we held among other things that respondent's recharacterization of petitioners' distributive_share of partnership losses for and as passive for purposes of sec_469 the sec_469 issue constituted an affected_item within the meaning of sec_6231 and was thereby subject_to the tax equity and fiscal responsibility act of tefra publaw_97_248 96_stat_324 codified at sec_6221 through estate of quick v commissioner supra pincite in their motion petitioners allege that our conclusion that the sec_469 issue is an affected_item within the meaning of sec_6231 and accompanying regulations is incorrect as a matter of law petitioner's motion further alleges that even if the sec_469 issue is an affected_item the court nevertheless should have ordered respondent to refund overpayments of taxes paid for and as well as overpayments for and based on the proper computational adjustments to petitioners' returns which respondent should have made after the conclusion of the partnership level proceeding lastly petitioners' motion alleges that we inconsistently decided that the sec_469 issue constitutes an affected_item for and but is not an affected_item for and respondent has filed an objection to petitioners' motion together with a supporting memorandum of law reconsideration under rule serves the limited purpose of correcting substantial errors of fact or law and allows the introduction of newly discovered evidence that the moving party could not have introduced by the exercise of due diligence in the prior proceeding 68_f3d_868 5th cir affg per curiam tcmemo_1993_634 see lucky stores inc v commissioner tcmemo_1997_70 estate of scanlan v commissioner tcmemo_1996_414 the granting of a motion for reconsideration rests with the discretion of the court and we usually do not exercise our discretion absent a showing of unusual circumstances or substantial error 79_tc_1054 affd 755_f2d_790 11th cir reconsideration is not the appropriate forum for rehashing previously rejected legal arguments or tendering new legal theories to reach the end result desired by the moving party 67_tc_643 estate of scanlan v commissioner supra petitioners' argument that the sec_469 issue cannot be an affected_item for purposes of the applicability of tefra's audit and litigation provisions was raised previously and received thorough consideration by this court estate of quick v commissioner supra petitioners' motion does not evince any unusual circumstances or substantial error with respect to this issue we therefore decline to reconsider this issue or to elaborate on it any further see stoody v commissioner supra pincite petitioners next contend that even if the sec_469 issue is an affected_item requiring partner level factual determinations the court erred in failing to order refunds for overpayments of taxes paid for and as well as refunds for overpayments for and resulting from net_operating_loss carrybacks from and in petitioners' view respondent simply should have increased the amount of petitioners' distributive_share of partnership losses flowing from the favorable adjustments at the partnership level for and instead respondent recharacterized petitioners' distributive_share of the adjusted partnership losses as well as petitioners' share of partnership losses previously reported on their returns for those years as passive in notices of computational adjustment issued for and resulting in deficiencies however as an affected_item requiring partner level factual determinations the recharacterization of such losses was not properly subject_to computational adjustment sec a a i see estate of quick v commissioner supra respondent argues that this court correctly declined to order refunds for overpayments of tax in our opinion we agree but for the sake of clarity we deem it necessary to discuss our rationale in greater detail than we did previously the tax_court is a court of limited jurisdiction and we may exercise our jurisdiction only to the extent authorized by congress see sec_7442 88_tc_1175 85_tc_527 we have jurisdiction to decide whether we have jurisdiction 83_tc_626 our jurisdiction to determine overpayments of tax is provided by sec_6512 judge v commissioner supra pincite sec_6512 provides b overpayment determined by tax_court -- jurisdiction to determine --except as provided by paragraph and by sec_7463 if the tax_court finds that there is no deficiency and further finds that the taxpayer has made an overpayment of income_tax for the same taxable_year in respect of which the secretary determined the deficiency or finds that there is a deficiency but that the taxpayer has made an overpayment of such tax the tax_court shall have jurisdiction to determine the amount of such overpayment and such amount shall when the decision of the tax_court has become final be credited or refunded to the taxpayer sec_6512 confers jurisdiction to order refunds of overpayments determined by this court after days after a decision has become final respondent by virtue of having challenged petitioners' characterization of their distributive_share of adjusted partnership losses for and has effectively transmuted what otherwise would have been unquestionably a partnership_item ie the amount of losses in petitioners' hands into an affected_item requiring partner level factual determinations sec_6231 sec_301_6231_a_3_-1 proced admin regs having concluded that the sec_469 issue is an affected_item subject_to deficiency proceedings under section a a i it follows that we have jurisdiction to determine any overpayments attributable thereto in this partner level proceeding see eg 95_tc_193 however the determination of any overpayments must be included as part of the decision in this case after a trial on the merits see sec_6512 estate of quick v commissioner supra pincite pursuant to sec_6512 petitioners would be entitled to a credit or refund of any overpayment that we may determine only when the decision becomes final further pursuant to sec_6512 we may order the refund of any overpayment included in a decision only if the refund remains unpaid for days after the date the decision becomes final in response to petitioners' argument even if the adjustments to the amounts of their distributive_share of partnership losses for and were somehow separable from respondent's challenge to the characterization of those losses under sec_469 and were therefore subject_to computational adjustment which they are not we lack jurisdiction under sec_6512 to determine any overpayments of tax attributable to computational items at any stage of this proceeding woody v commissioner supra pincite it follows that we also lack the authority to order the credit or refund of overpayments attributable to such computational items lastly petitioners' argument that the court failed to treat the sec_469 issue consistently for all years before the court is unavailing we did not conclude that the characterization of petitioners' share of losses is an affected_item for and but is not an affected_item for and nor did we state that whether or not an item is an affected_item depends solely on whether respondent elects to challenge it through an affected items deficiency proceeding we simply held that the characterization of losses as either passive or nonpassive in the hands of a partner is an affected_item under sec_469 estate of quick v commissioner supra pincite respondent did not challenge petitioners' characterization of their proportionate share of partnership losses for and and thus the affected items deficiency procedures were not required to be followed for those years rather adjustments to the amounts of petitioners' distributive_share of partnership losses in those years were properly made by respondent pursuant to notices of computational adjustment upon the conclusion of the partnership level proceeding sec a it is only because respondent challenged the characterization of losses for and necessitating partner level factual determinations that affected items deficiency procedures apply to those years sec a a i in sum respondent cannot as petitioners contend arbitrarily elect to make the sec_469 issue an affected_item for certain years but not for others however respondent is free to challenge a taxpayer's characterization of his share of partnership losses via the affected items deficiency proceedings in any year for which the period of limitations is open we have considered each of the remaining arguments of the parties and to the extent that they are not discussed herein find them to be either not germane or unconvincing for the above reasons an appropriate order denying petitioners' motion for reconsideration will be issued


internal_revenue_service department of the treasury washington dc person to contact telephone number refer reply to cc dom p si plr-113238-98 date date index nos number release date legend trustees grantor_trust date company charity charity statute1 state daughter son spouse date court date dear we received the letter dated and later submissions on behalf of trustees requesting rulings concerning the income and generation-skipping_transfer gst tax consequences of the proposed creation and funding of a revocable charitable subtrust this letter responds to that request the facts and representations submitted are as follows grantor created trust on date for the benefit of his family and charities trust was irrevocable on date and it is represented that there have been no actual or constructive additions since that date any increase in value of the corpus of trust since date has been the result of accumulation of income and appreciation of corpus the assets of trust consist primarily of a minority interest block of stock in company a privately-held corporation the remaining assets of trust consist of a cash reserve and cash_equivalent investments section dollar_figure of trust provides that the trust created under the trust agreement is in all respects irrevocable and neither grantor nor any other contributor to the trust estate nor any other person is to have any power to modify amend or revoke the trust in any respect section dollar_figure of trust provides that the payment of any benefits whether of income principal or otherwise shall be vested in the sole discretion of the trustees from time to time amounts of net_income capital_gains or other proceeds or amounts of principal not paid out to a beneficiary shall be accumulated and added to principal section dollar_figure of trust further provides that payments among the members of a class of individual beneficiaries and charitable beneficiaries need not be equal either at the time of payment or at any future time and may be to one to all or to any number of members of any class with no right vested or otherwise on the part of any individual beneficiary or charitable_beneficiary to claim any benefit at any time against the trustees or the trust estate all as determined by the trustees in their sole discretion section dollar_figure of trust provides that payments of income principal or otherwise at any time may be made to any one or more members of the lowest numbered of the classes of individual beneficiaries described in sec_3 which has one or more representative members then living and or to any one or more members of the class of charitable beneficiaries described in sec_3 sec_3 of trust provides the classes of potential individual beneficiaries of trust the individual beneficiaries of trust include the living issue of grantor all spouses of such issue all spouses of any deceased issue of grantor provided in the case of any such spouse that such spouse was living with and married to such deceased issue at the time of such issue’s death and certain collateral relatives of grantor sec_3 of trust provides the potential charitable beneficiaries of trust the potential charitable beneficiaries shall be charity and charity in addition sec_3 of trust includes as potential charitable beneficiaries such of a group consisting only of corporations associations and institutions which are organized and operated exclusively for religious charitable literary and educational_purposes and projects and which are described both sec_501 of the internal_revenue_code as the same exists at the execution of trust or as it or a successor section may be amended from time to time and in statute1 as the same exists at the execution of trust or as it or a successor section may be amended from time to time as may be selected by the trustees in their sole discretion from time to time provided that no charitable_beneficiary shall acquire any enforceable rights to receive income or principal or any vested interest therein against the trustees by virtue of sec_3 or otherwise in the event charity or charity shall cease to be organized and operated exclusively for the purposes described in said sections of the internal_revenue_code and state statutes they shall cease to be potential charitable beneficiaries hereunder sec_3 of trust provides that the beneficiaries potentially eligible subject_to the trustees’ determination for any payments of income principal or otherwise shall include at any time all charitable beneficiaries as defined in sec_3 hereof and all members of the class of individual beneficiaries then eligible under sec_3 sec_3 of trust provides that the discretionary powers of distribution of principal and income hereunder shall be broad enough to permit complete distribution of all trust assets at any time and in the event final distribution should be determined on by the trustees or legally required under paragraph dollar_figure relating to the potential duration of trust or otherwise distribution shall be made by the trustees to any or all members of the class of individual beneficiaries and charitable beneficiaries then eligible under the other provisions of section as determined by the trustees in their sole discretion section dollar_figure of trust provides that the trust hereunder if not sooner terminated pursuant to complete distribution or the appreciation of any of the foregoing provisions hereof shall terminate twenty-one years after the death of the survivor of all persons described as potential individual beneficiaries in all of classes one to three inclusive sec_3 as such persons would be determined at the date of the execution of this agreement any trust assets governed by a statute or rule_of law under which termination at the date above prescribed would render the trust invalid shall be distributed on the last date on which said assets can validly remain in trust and in the event such governing statute or rule depends upon specified lives in being those of all persons described as potential individual beneficiaries in classes one to three inclusive sec_3 as they would be determined at the date of the execution of trust shall be used as such lives in order of least age taking the youngest first section dollar_figure of trust provides that the individual trustees have the power to appoint one or more individual trustees or a corporate trustee or one or more individual trustees and a corporate trustee as the case may be to act with the trustee or trustees then acting sec_5 of trust provides that the trustees have the power to divide trust determining values and designating particular assets for grantor’s beneficiaries to assign like or unlike properties to different beneficiaries or trusts to create or hold undivided interests in any property of trust and to make distributions and payments in cash or in_kind or both sec_5 of trust provides that the trustees have the power to merge the assets of trust with those of any other trust by whomsoever created maintained for the same potential beneficiaries upon the same terms it is represented that grantor has two living children daughter and son daughter is married to spouse and has five children son is unmarried and has no children it is further represented that since the creation of trust the trustees have made no distributions to daughter or her children the trustees have made discretionary distributions of nominal amounts to spouse and more substantial distributions to son and to various charitable beneficiaries the trustees propose to create a revocable charitable subtrust to be administered exclusively for the benefit of potential charitable beneficiaries and to transfer a portion of stock held by trust to the charitable subtrust the trustees represent that the dispositive provisions of the charitable subtrust are the same in all material respects as the dispositive provisions of trust with two exceptions individual beneficiaries are excluded from the class of beneficiaries eligible to receive distributions from the charitable subtrust and the class of charitable organizations eligible to receive distributions from the charitable subtrust is more narrowly defined than the class of organizations included within the definition of charitable beneficiaries under trust the trustees represent that the administrative provisions of the charitable subtrust differ in numerous respects from the administrative provisions of trust by reason of the different nature and purpose of the charitable subtrust the differences are as follows the charitable subtrust may be amended with the written consent of the trustees of trust and the charitable subtrust may be revoked in whole or in part by the trustees of trust the charitable subtrust permits additional contributions by the trustees of trust but does not permit additional contributions by any other person or entity and the trustees of the charitable subtrust are authorized to create organizations which are exempt from taxation under sec_501 of the internal_revenue_code to which distributions may be made from the charitable subtrust the original trustees of the charitable subtrust are the same as the current trustees of trust the charitable subtrust provides that co-trustees and successor trustees of the charitable subtrust shall be appointed by the trustees of trust in addition the trustees of trust have the power to remove any trustee of the charitable subtrust on date trustees commenced a proceeding in court for an order authorizing trustees to create and fund the charitable subtrust on date court issued the order which is subject_to the trustees’ receipt of a favorable private_letter_ruling concerning the funding of the charitable subtrust the following rulings are requested trust shall be treated as the owner of the charitable subtrust under subchapter_j of chapter of subtitle a of the code the creation and funding of the charitable subtrust shall not cause trust the charitable subtrust or any assets of trust or the charitable subtrust to be subject_to the generation-skipping_transfer_tax under chapter of subtitle b of the internal_revenue_code sec_2601 et seq and if the charitable subtrust is revoked or otherwise terminated in such a manner that the assets of the charitable subtrust are restored to trust that event shall not be treated as an addition to trust income_tax ruling - ruling_request based on the information provided and the representations made we conclude that the funding of the charitable subtrust by trust will not result in any federal_income_tax consequences to trust and all items of income deductions and credits against tax of the charitable subtrust funded by trust will be included in computing taxable_income and credits of trust generation-skipping_transfer_tax rulings ruling_request sec_2 sec_2601 of the code imposes a tax on every generation-skipping_transfer made by the transferor to a skip_person sec_26_2601-1 of the generation-skipping_transfer_tax regulations provides that the tax does not apply to any generation-skipping_transfer under a_trust as defined in sec_2652 that was irrevocable on date the rule_of the preceding sentence does not apply to a pro_rata portion of any generation-skipping_transfer under an irrevocable_trust if additions are made to the trust after date sec_26_2601-1 provides that except as provided in sec_26 b ii b or c any trust in existence on date is considered an irrevocable_trust sec_2611 defines the term generation-skipping_transfer as a taxable_distribution a taxable_termination and a direct_skip sec_26_2611-1 provides that a generation-skipping_transfer is an event that is either a direct_skip a taxable_distribution or a taxable_termination the determination as to whether an event is a generation-skipping_transfer is made by reference to the most recent transfer subject_to the estate and gift_tax sec_2612 defines the term direct_skip to mean a transfer subject_to a tax imposed by chapter or of an interest in property to a skip_person sec_2613 defines the term skip_person to mean - - a natural_person assigned to a generation that is two or more generations below the generation assignment of the transferor or a a_trust - - if all interests in the trust are held by skip persons or b if - - i there is no person holding an interest in the trust and ii at no time after the transfer may a distribution including distributions on termination be made from the trust to a non-skip_person trust is a generation-skipping_trust because it provides for distributions to more than one generation of beneficiaries below grantor’s generation because however the trust was irrevocable on date and there have been no additions to it since that date it is exempt from the gst tax pursuant to sec_26_2601-1 an amendment to a_trust which was irrevocable on date and thus is exempt from the gst tax will cause the trust to lose its exemption if the amendment modifies or otherwise changes the quality value or timing of any of the powers beneficial interests rights or expectancies originally provided under the terms of the trust based on the information submitted and the representations made we conclude that the proposed modification of trust will not modify or otherwise change the quality value or timing of any of the powers beneficial interests rights or expectancies originally provided under the terms of trust thus the proposed modification will not affect the exempt status of trust for purposes of chapter accordingly the creation and funding of the charitable subtrust shall not cause trust the charitable subtrust or any assets of trust or the charitable subtrust to be subject_to the gst tax under chapter of subtitle b of the code in addition we conclude that if the charitable subtrust is revoked or otherwise terminated in such a manner that the assets of the charitable subtrust are restored to trust that event will not constitute a post-date addition to trust for purposes of the gst tax imposed by sec_2601 except as specifically ruled above we express or imply no opinion concerning the federal tax consequences of the transactions described above under the cited provisions or under any other provision of the code further whether trust is entitled to a deduction under sec_642 for charitable payments made by the charitable subtrust is to be determined by the original terms of trust concerning payments to charitable organizations this ruling is based on the facts and applicable law in effect on the date of this letter if there is a change in material fact or law local or federal before the transactions considered in this ruling take effect the ruling will have no force or effect if the taxpayer is in doubt whether there has been a change in material fact or law a request for reconsideration of this ruling should be submitted to this office this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited as precedent sincerely christine e ellison christine e ellison chief branch office of assistant chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes


t c summary opinion united_states tax_court abdul med bangura petitioner v commissioner of internal revenue respondent docket no 28777-09s filed date abdul med bangura pro_se r jeffrey knight for respondent jacobs 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 this opinion shall not be treated as precedent for any other case respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax an addition_to_tax under sec_6651 of dollar_figure and an accuracy-related_penalty under sec_6662 of dollar_figure for after concessions the issues remaining for decision are whether petitioner is entitled to deduct certain business_expenses as reported on schedule c profit or loss from business whether petitioner underreported schedule c gross_receipts by dollar_figure whether petitioner is liable for an addition_to_tax pursuant to sec_6651 and whether petitioner is liable for the sec_6662 accuracy-related_penalty all section references are to the internal_revenue_code in effect for and all rule references are to the tax_court rules_of_practice and procedure background some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioner resided in maryland when the petition was filed petitioner received a master’s degree in accounting and taxation from southeastern university in washington d c and is a certified_public_accountant c p a in he was licensed in maryland during petitioner was the owner and sole_proprietor of amb cpa services which provided tax preparation services for to clients petitioner is currently pursuing a law degree petitioner filed his form_1040 u s individual_income_tax_return on date almost months after it was due computing his tax using a filing_status of married_filing_separately he did not file form_4868 application_for automatic_extension of time to file u s individual_income_tax_return and the record does not indicate that he otherwise requested an extension of time to file his income_tax return on his income_tax return petitioner reported net business income of dollar_figure the difference between the reported schedule c gross_receipts of dollar_figure and the claimed schedule c business_expenses of dollar_figure the claimed business_expenses consisted of dollar_figure for business supplies dollar_figure for other expenses and dollar_figure for car and truck expenses on schedule a itemized_deductions petitioner deducted dollar_figure consisting of dollar_figure for state and local_taxes paid and dollar_figure for mortgage interest_paid in the notice_of_deficiency respondent disallowed the claimed schedule a deductions on the 1petitioner’s wife timely filed a form_1040 for the return which petitioner prepared applied head_of_household filing_status and zero taxable_income was reported thereon on the return petitioner’s wife claimed entitlement to an earned_income_credit of dollar_figure and a child_tax_credit of dollar_figure basis of petitioner’s failure to substantiate that he incurred and or paid such expenditures respondent acting through revenue_agent james c brown the examining agent began an examination of petitioner’s income_tax return in date as a compliance check at the conclusion of the audit of petitioner’s and income_tax returns in doing so the examining agent noticed that the relatively small amount of income petitioner reported on his income_tax return did not support the itemized_deductions and the schedule c expenses as stated on the tax_return on date after completing a financial status analysis for the examining agent notified petitioner that his income_tax return was under examination the examining agent set up an initial appointment to discuss petitioner’s tax_return and sent an information_document_request idr to him the idr requested that petitioner provide books_and_records for his tax_return preparation business including documents to substantiate his claimed business_expenses the examining agent wanted to discuss the idr with petitioner at a manager’s conference which petitioner requested relating to the closing of the audit of his and tax returns 2respondent concedes that petitioner is entitled to a deduction of dollar_figure for real_estate_taxes paid and a mortgage interest_deduction of dollar_figure for a total of dollar_figure the manager’s conference was scheduled for date but at petitioner’s request it was rescheduled to july that manager’s conference was canceled by petitioner after petitioner canceled the manager’s conference the examining agent closed the audit of petitioner’s and tax returns leaving open for examination the tax_year in connection with the audit of his and tax returns petitioner told the examining agent that he was not required to provide the internal_revenue_service with any records or documentation other than those which had been submitted with his income_tax returns indeed petitioner never provided the examining agent with documents of any kind with respect to years and during the audit for those years nor did petitioner respond to the idr for on date the examining agent mailed petitioner a second idr for and issued bank summonses to obtain information with respect to two bank accounts known to be held by petitioner petitioner filed a motion in federal court the record does not reveal which federal court to quash the summonses that motion was denied thereafter the bank complied with respondent’s summonses the information the bank provided was insufficient to show that petitioner received any material amount of income during of the two accounts summoned one showed that it had been closed and the other showed deposits of approximately dollar_figure inasmuch as petitioner did not respond to the second idr and because the bank records were not illuminating in date the examining agent mailed a third idr for to petitioner petitioner did not provide any information or documentation in response to this idr the examining agent then used the source_and_application_of_funds_method to reconstruct petitioner’s income for applying the guidelines set forth in the internal_revenue_manual irm the examining agent used this method to determine petitioner’s income indirectly because the schedule c business_expenses and claimed schedule a itemized_deductions exceeded the income reported on petitioner’s income_tax return the source_and_application_of_funds_method reconstructs the estimated amount of the taxpayer’s income by determining the excess of the taxpayer’s expenditures_for the year over his known sources of income the examining agent calculated petitioner’s expenditures to be dollar_figure by adding petitioner’s schedule a deductions of mortgage interest and real_estate_taxes paid totaling dollar_figure petitioner’s schedule a state and local 3as mentioned supra note respondent conceded that petitioner is entitled to schedule a deductions totaling dollar_figure which is greater than the dollar_figure claimed on petitioner’s tax_return the examining agent used this greater amount in continued tax deduction of dollar_figure petitioner’s schedule c expenses for business supplies and what petitioner listed as other expenses totaling dollar_figure and an estimate of petitioner’s personal living_expenses for of dollar_figure from the dollar_figure the examining agent subtracted dollar_figure the amount petitioner reported as schedule c gross_receipts thus the examining agent determined petitioner had an excess application of funds ie unreported income for totaling dollar_figure dollar_figure - dollar_figure in estimating petitioner’s personal living_expenses eg food housing transportation etc the examining agent used the bureau of labor statistics bls consumer expenditure survey the survey for the south region which is the region for maryland the estimate for personal living_expenses includes mortgage interest_expense property taxes and state and local_taxes because the examining agent used petitioner’s actual expenses with respect to the mortgage interest property taxes and state and local_taxes he subtracted the survey’s estimates for these items from his calculation continued reconstructing petitioner’s income 4the examining agent did not include petitioner’s claimed schedule c car and truck expenses of dollar_figure in his reconstruction of petitioner’s income because there was a possibility that depreciation a noncash item was included in those expenses although the examining agent used the business_expenses set forth on schedule c in reconstructing petitioner’s income he determined that deductions for these expenses should be disallowed for lack of substantiation the examining agent also determined that for petitioner was liable for an addition_to_tax pursuant to sec_6651 for failure_to_file a timely return and an accuracy-related_penalty pursuant to sec_6662 i disallowed deductions discussion deductions are a matter of legislative grace and taxpayers bear the burden of proving that they are entitled to all deductions claimed rule a 503_us_79 292_us_435 moreover taxpayers must substantiate the amount and purpose of the item deducted 65_tc_87 affd per curiam 540_f2d_821 5th cir taxpayers are required to maintain records that are sufficient to enable the commissioner to determine their correct_tax liability see sec_6001 43_tc_824 sec_1_6001-1 income_tax regs under certain circumstances if a taxpayer establishes entitlement to a deduction but not the amount of the deduction the court may estimate the amount allowable 39_f2d_540 2d cir if the taxpayer provides some rational basis on which an estimate may be made 85_tc_731 a business supplies petitioner deducted schedule c business supply expenses of dollar_figure on his income_tax return at trial petitioner admitted he did not provide the examining agent with any documentation that would substantiate any of the claimed expenses nor did petitioner submit any substantiating documents at trial petitioner asserts that he was frantically busy learning how to establish and carry on a cpa practice but had little time to document the expenses and that his failure in this regard was an honest belief that the petitioner was not doing anything wrong we do not find petitioner’s assertion credible petitioner was a c p a operating a tax preparation business he knew or should have known that a taxpayer is required to substantiate all claimed deductions because petitioner failed to provide any documentary_evidence to substantiate the claimed schedule c business_expenses we have no reasonable basis on which to estimate the amount of expenses he incurred consequently we sustain respondent’s disallowance of a deduction for these expenses b other expenses petitioner deducted other expenses of dollar_figure on schedule c with respect to these expenses petitioner stated other expenses of dollar_figure may have been my i think that has to do with my enhanced educational sic petitioner was unable to recall the exact nature of the educational expenses but felt they probably were for classes taken in pursuit of a law degree petitioner failed to substantiate these expenses again we have no reasonable basis on which to estimate the amount of expenses petitioner incurred moreover even had petitioner substantiated these expenses educational expenses are not deductible if they are part of a course of study that will qualify the taxpayer in a new trade_or_business sec_1 b income_tax regs consequently we sustain respondent’s disallowance of the deduction for these expenses c car and truck expenses cars and trucks are listed_property pursuant to sec_280f l isted property is subjected to the heightened substantiation requirements of sec_274 again petitioner provided no substantiation with respect to these expenses indeed petitioner was unclear as to whether he used his vehicle for both business and personal_use consequently we sustain respondent’s disallowance of a deduction for these expenses ii unreported income in determining the tax_deficiency for the examining agent reconstructed petitioner’s income using the source_and_application_of_funds_method sec_6001 requires all taxpayers to maintain sufficient records to determine their correct_tax liabilities where a taxpayer fails to keep the required books_and_records or if the records the taxpayer maintains do not clearly reflect income the commissioner is authorized by sec_446 to reconstruct the taxpayer’s income in accordance with a method that clearly reflects the full amount of income received 92_tc_661 meneguzzo v commissioner supra pincite the income reconstruction method used need only be reasonable in light of all the surrounding facts and circumstances petzoldt v commissioner supra pincite the source_and_application_of_funds_method is well accepted as an appropriate method of reconstructing a taxpayer’s income 319_us_503 this income reconstruction method is based upon the assumption that the amount by which a taxpayer’s cash expenditures during the year exceed the taxpayer’s known sources of income is income unless the taxpayer can show that the expenditures were made from a nontaxable source of funds a deficiency determined by the use of this income reconstruction method is presumptively correct and the burden_of_proof is upon the taxpayer to demonstrate otherwise 85_tc_927 to meet his burden the taxpayer must prove either that someone else made the expenditures or that the funds used were obtained from a nontaxable source such as a loan an inheritance or assets on hand at the beginning of the year id pincite in 348_us_121 the supreme court limited the commissioner’s use of the net_worth_method of reconstructing income by requiring the commissioner to track down relevant leads furnished by the taxpayer which are reasonably susceptible of being checked and by requiring the commissioner to show that increases in net_worth are attributable to currently taxable_income this court has held this limitation to be applicable in cases involving the source_and_application_of_funds_method devenney v commissioner supra pincite however in 91_tc_273 we stated before the safeguards in holland are triggered the taxpayer must either explain the source of or provide alternative nontaxable sources for the discrepancy in his expenditures and his reported income this explanation commences respondent’s investigative requirements under holland petitioner testified that his wife helped pay the family_expenses yet a review of her tax_return shows that she did not have sufficient income to pay petitioner’s expenses moreover 5petitioner’s wife’s tax_return shows total income of continued even though petitioner’s wife was present in the courtroom she did not testify because she did not testify we assume her testimony would not have corroborated her husband’s testimony see 6_tc_1158 affd 162_f2d_513 10th cir petitioner presented no other source_of_income or explanation instead he argued that he was able to get money by hustling and bustling and he testified if i stand here right now to tell you exactly how i came through with all of those monies i would be i am under oath cautious of it but certainly lots of people helped on the record before us we conclude that the examining agent’s use of the source_and_application_of_funds_method was reasonable petitioner objects to the examining agent’s use of the survey to estimate his personal living_expenses asserting his actual living_expenses were less than the survey estimates and therefore use of the survey is inappropriate petitioner refused to provide the examining agent with documentation of his expenses which is the very reason the examining agent was forced to rely on the survey to estimate petitioner’s personal living_expenses continued dollar_figure tuition expenses of dollar_figure state and local income_tax of dollar_figure and unreimbursed employee_expenses of dollar_figure thus petitioner’s wife had but dollar_figure of disposable income for we have previously held that the commissioner has great latitude in determining a taxpayer’s tax_liability particularly where the taxpayer refuses to cooperate see 54_tc_1530 with no other option available use of the survey to estimate petitioner’s personal living_expenses provides a reasonable estimate of his income petitioner next asserts respondent has not carried their sic burden of proving that petitioner actually received the dollar_figure because respondent used a modified statistical method mixing average amounts sic for actual amounts in his use of the indirect method which sic has never been used in history of the treasury regulations thus petitioner objects to the examining agent’s use of petitioner’s actual expenses where available ie his mortgage interest_expense his real_estate tax expense and his state and local_tax expense as opposed to estimates used in the survey we find petitioner’s assertion unpersuasive the irm states that bls data ie the survey may be used to reconstruct income and that this statistical data may be used in conjunction with other available information including information from a taxpayer’s tax_return irm pt date the irm provides that statistical data should be used as the sole source of information only when all three of the following conditions are met a the taxpayer produces income other than as an employee b the taxpayer is a nonfiler and c the taxpayer is uncooperative id condition b is not herein present thus the examining agent was obliged by the irm to use petitioner’s known actual expenses in reconstructing his income we find respondent’s use of both the personal living expense estimates as set forth in the survey and petitioner’s actual expenses reasonable under the circumstances however the examining agent erred to an extent in calculating petitioner’s cash expenditures ie the application of funds the examining agent disallowed the amounts petitioner claimed on schedule c for business supplies and other expenses dollar_figure and dollar_figure respectively a total of dollar_figure because petitioner failed to substantiate these expenses but the examining agent used these disallowed unsubstantiated amounts in determining petitioner’s cash expenditures we believe it was not reasonable for the examining agent to disallow expenses for lack of substantiation on the one hand and then on the other hand claim that those unsubstantiated amounts reflect petitioner’s expenditures see cheesman v commissioner tcmemo_1994_509 consequently we hold that the examining agent may not use petitioner’s disallowed schedule c expenses to 6as noted supra note the examining agent did not include petitioner’s claimed car and truck expenses in his reconstruction of petitioner’s income 7in cherry v commissioner tcmemo_1998_360 the commissioner conceded at trial that a proper reconstruction of the taxpayer’s income using the source_and_application_of_funds_method would not include any deductions claimed by the taxpayer but disallowed by the commissioner reconstruct his income because of this error respondent must recalculate petitioner’s unreported income this can be done in the rule computation iii addition_to_tax under sec_6651 sec_6651 imposes an addition_to_tax for a taxpayer’s failure to timely file an income_tax return unless the failure_to_file is due to reasonable_cause and not willful neglect this addition_to_tax consists of adding to the amount_required_to_be_shown_as_tax on the return percent of the amount of such tax for each complete or partial month in which the failure_to_file continues up to a maximum of percent in the aggregate id respondent has the burden of production pursuant to sec_7491 to satisfy that burden respondent must produce sufficient evidence demonstrating that it is appropriate to impose the addition_to_tax see 116_tc_438 once respondent has met his burden of production petitioner must come forward with evidence sufficient to persuade the court that respondent’s determination is incorrect id pincite respondent has satisfied his burden of production the record clearly reflects that petitioner did not timely file his income_tax return and petitioner has not demonstrated that his failure to timely file his income_tax return was due to reasonable cause8 and not due to willful neglect petitioner asserts that he filed late because respondent was auditing his and tax returns and in my view if these people were going hunting or fishing towards me or whatever is motivating them i’ll wait until there is a resolution on those audits before i file my tax_return for petitioner’s assertion that he delayed filing until the examining agent completed auditing his and tax returns even if relevant does not constitute reasonable_cause see 25_tc_934 affd 243_f2d_635 d c cir petitioner is therefore liable for the sec_6651 addition_to_tax however respondent must recompute the amount of the addition_to_tax to reflect the recalculation of petitioner’s unreported income this can be done in the rule computation iv sec_6662 accuracy-related_penalty sec_6662 imposes a 20-percent penalty on the portion of an underpayment_of_tax attributable to inter alia negligence or disregard of rules or regulations as provided in sec_6662 or a substantial_understatement_of_income_tax as 8reasonable cause requires a taxpayer to demonstrate that he exercised ordinary business care and prudence but nonetheless was unable to file a return within the prescribed time 469_us_241 bruner v commissioner tcmemo_1998_246 provided in sec_6662 negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code sec_6662 negligence also includes any failure by the taxpayer to keep adequate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs the term disregard includes any careless reckless or intentional disregard sec_6662 the sec_6662 accuracy-related_penalty does not apply where the taxpayer shows that there was reasonable_cause for the underpayment and that he acted in good_faith sec_6664 such a showing depends on the facts and circumstances of each case and includes the knowledge and experience of the taxpayer and the reliance on the advice of a professional such as an accountant sec_1_6664-4 income_tax regs respondent has the burden of production pursuant to sec_7491 to satisfy that burden respondent must produce sufficient evidence showing that it is appropriate to impose the penalty see higbee v commissioner supra pincite on the record before us respondent has satisfied his burden by producing evidence that petitioner failed to keep books_and_records and failed to substantiate his claimed deductions petitioner has not demonstrated that there was reasonable_cause for the underpayment and that he acted in good_faith petitioner is a c p a and holds a master’s degree in accounting and taxation yet when asked by the examining agent to provide documentation to substantiate his claimed business_expenses he failed to do so petitioner asserted that this was not negligence rather it’s more or less when you’re starting out doing something like a medical doctor doing operations or maybe a lawyer representing somebody in the courtroom you have a lot to learn you do make mistakes here and there we find petitioner’s cavalier attitude unacceptable this is not what a reasonable person would do particularly a c p a we hold petitioner liable for the sec_6662 accuracy- related penalty however respondent must recompute the penalty according to our holding that there must be a recalculation of petitioner’s unreported income again this can be done in the rule computation we have considered all of petitioner’s contentions that are not discussed herein and we conclude they are without merit irrelevant and or moot to reflect the foregoing and respondent’s concessions decision will be entered under rule


internal_revenue_service number release date index number --------------------- --------------------------------- ------------------------------- ------------------------------------------ ------------------------ department of the treasury washington dc third party contact none person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc ita b04 plr-123223-11 date date legend taxpayer --------------------------------------------------- ----------------------------------------------------------------- ---------------------------------- agency ranch parcel ---------------------------------------------------- ------------------------------------------------------------------ ----------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- --------------- dear --------------------- this is in response to your private_letter_ruling request dated date and supplemental correspondence submitted on behalf of taxpayer you have requested a ruling that the conveyance of a perpetual conservation_easement on parcel in exchange for mitigation credits should be treated as a sale_or_exchange of property under sec_1001 for federal_income_tax purposes facts taxpayer has owned ranch for five years for the purpose of development but has not developed any of ranch ranch contains a habitat for two federally listed endangered species taxpayer has negotiated a mitigation bank agreement agreement with plr-123223-11 agency in which taxpayer will grant perpetual conservation easements to agency and will receive mitigation banking credits in exchange a mitigation bank is an area of land containing wetlands natural habitats or other ecological value that has been restored established enhanced or preserved and which is then set_aside to compensate for future conversions of other lands of similar ecological value for development purposes the owner of the restored or preserved property either transfers property in fee to a governmental_unit or conservation organization or as in the proposed transaction places a conservation_easement on the property the transferor then becomes entitled to receive mitigation banking credits in an amount and type determined by the governmental agency approving the mitigation bank the transferor may retain the credits and use the credits to mitigate development activity in other nearby natural habitats or can sell the credits to other persons who may use the credits to satisfy compensatory mitigation requirements taxpayer intends to sell the mitigation credits that it receives in the proposed transaction taxpayer represents that it intends to grant a conservation_easement on parcel a portion of ranch simultaneously with or promptly after signing the agreement with agency taxpayer will retain the fee interest and limited use of parcel after the grant of the conservation_easement taxpayer may grant conservation easements on all of ranch through subsequent grants law sec_61 of the internal_revenue_code provides that gross_income includes gain derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property is the excess of the amount_realized over the adjusted_basis provided in sec_1011 for determining gain and the loss is the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized under sec_1001 the entire amount of gain_or_loss must be recognized except as otherwise provided sec_1_1001-1 of the income_tax regulations provides that the gain_or_loss realized from the exchange of property for other_property differing either in_kind or in extent is treated as income or as loss sustained sec_1_1002-1 provides that ordinarily to constitute an exchange the transaction must be a reciprocal transfer of property conclusion based on the stated facts and representations made we conclude that the conveyance of the perpetual conservation_easement on parcel in exchange for mitigation credits is a sale_or_exchange of property under sec_1001 for federal_income_tax purposes plr-123223-11 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent 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 ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for a ruling it is subject_to verification on examination a copy of this ruling should be attached to taxpayer's federal_income_tax returns for the tax years affected sincerely susan j kassell senior counsel branch income_tax accounting cc


number release date id office uilc cca_2010101813502937 cc pa from heard william a sent monday date pm to collins deborah j cc ransick mark n tefra subject re statute extension a member-manager can be designated as tmp sec_301_6231_a_7_-2 defines a member- manager as a member who alone or together with others is vested with the continuing exclusive authority to make management decisions necessary to conduct the business the operating_agreement vests in the designated tax matters member the authority to oversee or handle all matters relating to taxation of the company this appears to make the member a member-manager eligible to be designated as tmp on the partnership return