michael h stough and barbara m stough petitioners v commissioner of internal revenue respondent docket no filed date lessor ps constructed a commercial building and entered into a 10-year lease with lessee l the lease requires l to pay monthly rent to ps and the monthly rent is based on the amount of project costs ps incurred in acquiring and devel- oping the leased property the lease provides l with the uni- stough v commissioner lateral option to make a one-time payment to ps to reduce project costs to be used in the calculation of rent and thus reduce the amount of rent otherwise owed by l under the lease in l elected to make a dollar_figure million payment to ps pursuant to the terms of the lease r argues that the dollar_figure mil- lion payment is rental income to ps and is reportable for the year of receipt ie ps argue that the dollar_figure million pay- ment is not rental income alternatively ps argue that pursu- ant to sec_467 the dollar_figure million payment received from l is reportable as rental income ratably over the 10-year life of the lease held the dollar_figure million payment is rental income to ps held further sec_467 provides that the amount of rent under any sec_467 agreement shall be deter- mined by allocating rents in accordance with the agreement sec_1_467-1 income_tax regs provides that i f a rental agreement does not provide a specific allocation of fixed rent the amount of fixed rent allocated to a rental period is the amount of fixed rent payable during that rental period the lease entered into between ps and l states only when rent is payable and does not specifically allocate rent the dollar_figure million payment was due and payable in there- fore ps must report the entire dollar_figure million payment as rental income for the year of receipt held further under sec_1 d i and ii income_tax regs the constant rental accrual and proportional rental accrual methods are inappli- cable to the lease at issue stanley l ruby and david m meranus for petitioners richard j hassebrock for respondent ruwe judge respondent determined a dollar_figure defi- ciency in petitioners’ federal_income_tax and a dollar_figure accuracy-related_penalty under sec_6662 on one of their schedules e supplemental income and loss petitioners reported as rents received a dollar_figure million pay- ment from talecris plasma resources inc talecris peti- tioners then claimed an offsetting dollar_figure million schedule e contribution to construct deduction schedule e deduction upon examination respondent disallowed the dollar_figure million schedule e deduction but increased petitioners’ basis in the subject rental property and allowed petitioners dollar_figure in additional_depreciation petitioners no longer contend that unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure the parties agree that if we sustain respondent’s determination as to continued united_states tax_court reports they are entitled to the dollar_figure million schedule e deduction but instead argue that they improperly reported as rents received the dollar_figure million payment after concessions by the parties the issues remaining for decision are whether the dollar_figure million lump-sum payment made by talecris during the taxable_year is rental income to petitioners if the dollar_figure million payment is rental income whether petitioners may allocate the dollar_figure million pay- ment proportionately over the life of the lease pursuant to sec_467 and whether petitioners are liable for an accuracy-related_penalty under sec_6662 findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incor- porated herein by this reference at the time the petition was filed michael h stough peti- tioner resided in wyoming and barbara m stough resided in ohio petitioner is the sole shareholder of an ohio corporation named stough development corp sdc sdc was incor- porated in date and for the taxable_year at issue operated as a subchapter_s_corporation sdc is a real_estate development company primarily in the business of acquiring and developing real_estate for use as plasma collection cen- ters talecris a delaware corporation and wholly owned sub- sidiary of talecris biotherapeutics holdings corp talecris holdings also a delaware corporation operates plasma the dollar_figure million in rental income and disallowance of the dollar_figure million sched- ule e deduction then the dollar_figure in additional_depreciation is allowable petitioners concede dollar_figure in ordinary dividend income dollar_figure in qualified_dividend_income dollar_figure in interest_income and dollar_figure in schedule e income as set forth in the notice_of_deficiency peti- tioners further concede a dollar_figure utility expense deduction petitioners agree that respondent properly adjusted the total amount_of_deductions peti- tioners claimed on schedule a itemized_deductions for by increasing the deductions by dollar_figure the parties stipulate that petitioners maintained a mailing address in ohio at the time they filed their petition on date grifols therapeutics inc a spanish corporation headquartered in barcelona spain acquired talecris holdings and all of its subsidiaries including talecris stough v commissioner collection centers in various locations throughout the conti- nental united_states for the purpose of manufacturing and selling plasma protein therapeutics on date sdc and talecris entered into a development agreement and related guaranty agreement wherein sdc agreed to acquire real_property in a location acceptable to talecris and to construct a plasma collection center pursuant to talecris’ specifications attached as an exhibit to the development agreement was a proposed lease to be entered into by sdc and talecris once the plasma collection center project was complete the proposed lease required talecris to lease the plasma collection center from sdc for an initial term of years petitioner negotiated the terms of both the development agreement and the proposed lease on behalf of sdc while james h moose acted as the lead negotiator for talecris on date pursuant to the terms of the development agreement sdc acquired title via general war- ranty deed to a parcel of real_property in north carolina nc property in order to fund the acquisition of the nc property and to facilitate the subsequent construction of the plasma collection center sdc took out a commercial loan with pnc bank petitioner was personally liable for the commercial loan talecris was not liable on or obligated to make pay- ments under the commercial loan on date sdc transferred to wintermans llc wintermans title to the nc property via general war- ranty deed wintermans is an ohio limited_liability_company wholly owned by petitioner and is treated as a disregarded_entity for purposes of federal_income_tax for the taxable_year on date sdc received a certificate of occu- pancy for the newly constructed plasma collection center talecris moved into the plasma collection center sometime in date although the proposed lease between talecris and sdc had not yet been executed when talecris moved into the plasma collection center talecris began paying rent on date mr moose was an executive at talecris from to when mr moose retired from talecris in his title was senior vice president united_states tax_court reports on date wintermans and talecris executed the proposed lease whereby talecris agreed to lease the plasma collection center from wintermans for years there is no indication and the parties do not argue that the terms of the proposed lease and the final lease differ the lease required talecris to pay monthly rent to wintermans and the rent would be determined by a mathematical formula based on project costs that sdc incurred in acquiring and developing the plasma collection center article of the lease defines project costs as the sum of a the acquisition costs b the hard construction costs c the soft construction costs and d the financing costs the calculation of monthly rent to be paid_by talecris to wintermans involves a two-step process project costs are multiplied by to arrive at base rent and base rent is multiplied by and then divided by to arrive at monthly rent sec_4 a v of the lease allows talecris on or before the commencement_date to provide written notice to wintermans to elect to pay or reimburse wintermans in a lump sum for any portion of the project costs sec_4 a v of the lease provides v notwithstanding any other provisions of this lease to the contrary tenant may by written notice given by tenant to landlord on or prior to the commencement_date elect to pay or reimburse landlord in a lump sum for any portion of the project costs as tenant may specify in such notice if tenant makes such an election tenant shall on or prior to the commencement_date make a lump sum payment to landlord in respect of project costs in the amount specified in tenant’s notice of election and for purposes of determining the assumed term_loan prin- cipal amount the assumed term_loan amortization amount and the base rent the project costs and the maximum project costs shall be reduced by the amount of such payment because rent is a function of project costs a lump-sum pay- ment under sec_4 a v of the lease would reduce project costs and consequently reduce the amount of rent that talecris owed under the lease it was within the sole discre- talecris and sdc executed the date development agree- ment with a related guaranty and proposed lease the final lease of the plasma collection center executed on date involved talecris and wintermans in years of the lease talecris’ base rent increases to of the base rent in effect for the immediately preceding lease year stough v commissioner tion of talecris to make an election under sec_4 a v of the lease and to determine the amount of such lump-sum payment as of date there was an outstanding balance of dollar_figure owed by sdc on the commercial loan on date talecris made a dollar_figure million lump-sum payment to wintermans pursuant to sec_4 a v of the lease peti- tioners applied the dollar_figure million lump-sum payment to the out- standing balance of the pnc bank commercial loan talecris issued to wintermans a form 1099-misc mis- cellaneous income original form 1099-misc reporting rents of dollar_figure for this amount represents dollar_figure in monthly rent for the plasma collection center along with the dollar_figure million lump-sum payment pursuant to sec_4 a v of the lease petitioners jointly filed a form_1040 u s individual_income_tax_return for on one of the schedules e attached to the return petitioners reported rents received of dollar_figure in connection with the plasma collection center rental among the deductions that petitioners claimed on this schedule e was a dollar_figure million contribution to construct expense certified_public_accountant c p a thomas d heldman prepared petitioners’ form_1040 for on date respondent began an examination of petitioners’ tax_return in a letter dated date michael v paul chief operating officer of sdc wrote to staci baranchak talecris’ accounts_payable manager requesting inter alia that talecris amend the original form 1099-misc issued to wintermans to treat the dollar_figure million lump-sum payment as a buy-down reimbursement of construction cost at a date not specified in the record talecris issued to wintermans a corrected form 1099-misc corrected form 1099-misc reporting rents of dollar_figure for on date respondent issued to petitioners a notice_of_deficiency for disallowing the claimed dollar_figure mil- lion schedule e deduction but increasing petitioners’ basis in although the lease was not executed until date the parties agree that the dollar_figure million lump-sum payment was made pursuant to sec_4 a v the terms of which are identical in both the proposed lease and the final lease it is unclear from the record whether talecris provided written notice of its election to wintermans united_states tax_court reports the plasma collection center and allowing petitioners dollar_figure in additional_depreciation petitioners timely filed a peti- tion disputing the determinations in the notice_of_deficiency opinion as a general_rule the commissioner’s determinations in the notice_of_deficiency are presumed correct and the tax- payers bear the burden of proving that the determinations are in error rule a 290_us_111 pursuant to sec_7491 the burden_of_proof with respect to relevant factual issues may shift to the commissioner specifically sec_7491 provides if in any court_proceeding a taxpayer introduces credible_evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer for any_tax imposed by subtitle a or b the secretary shall have the burden_of_proof with respect to such issue sec_7491 further provides that the burden_of_proof shifts to the commissioner only when the taxpayer has complied with the requirements under this title to substantiate any item and maintained all records required under this title and has cooperated with reasonable requests by the secretary for witnesses informa- tion documents meetings and interviews ‘credible evi- dence is the quality of evidence which after critical analysis the court would find sufficient upon which to base a decision on the issue if no contrary evidence were submitted’ 116_tc_438 quoting h_r conf rept no pincite 1998_3_cb_747 because we decide this case on the preponder- ance of the evidence the allocation of the burden_of_proof does not affect the outcome and need not be decided see 131_tc_185 rental income the first issue for decision is whether the dollar_figure million lump- sum payment made by talecris to wintermans pursuant to the basis increase is allocated as follows dollar_figure to the land dollar_figure to the plasma collection center building and dollar_figure to fixtures this results in additional_depreciation for of dollar_figure for the plasma collection center building and dollar_figure for the fix- tures stough v commissioner sec_4 a v of the lease constitutes rental income to peti- tioners for although petitioners initially reported this amount as rental income on one of their schedules e they now argue that this reporting was in error and that the dollar_figure million lump-sum payment does not constitute rental income for specifically petitioners argue that the dollar_figure million lump-sum payment was not intended as rent by the parties to the lease but rather was meant to reimburse petitioners for leasehold improvements to the plasma collection center respondent argues that the dollar_figure payment received by the petitioners from talecris is considered addi- tional rental income to the petitioners pursuant to sec_1_61-8 and was properly reported as such on petitioners’ form_1040 sec_61 defines gross_income to mean all income from whatever source derived including rental payments received or accrued during the taxable_year sec_61 sec_1 a income_tax regs sec_1_61-8 income_tax regs provides in pertinent part c expenditures by lessee -as a general_rule if a lessee pays any of the expenses of his lessor such payments are additional rental income of the lessor if a lessee places improvements on real_estate which con- stitute in whole or in part a substitute for rent such improvements constitute rental income to the lessor whether or not improvements made by a lessee result in rental income to the lessor in a particular case depends upon the intention of the parties which may be indicated either by the terms of the lease or by the surrounding circumstances when a lessee pays an expense or obligation incurred by the lessor in bringing the leased property into existence there is a direct economic benefit to the lessor to the extent that the lessor is relieved of his or her financial obligations under these circumstances there is no ambiguity regarding the financial benefit that the lessor receives that being the case there need be no inquiry into the intent of the lessor and lessee unless the lessee’s payments were unrelated to the lease in the instant case there is no question that the dollar_figure million lump-sum payment was made pursuant to the terms of the lease was optional at the election of the lessee was to reimburse the lessor for project costs incurred the lease clearly defines project costs as the sum of acquisition costs continued united_states tax_court reports and paid_by the lessor in bringing the property into exist- ence and reduced the lessee’s future rents otherwise due given these facts the dollar_figure million lump-sum payment falls within the purview of sec_1_61-8 income_tax regs as the lessee’s payment of the lessor’s expenses and therefore constitutes rent without the need to inquire into the subjec- tive intent of the parties see satterfield v commissioner tcmemo_1975_203 tax ct memo lexi sec_170 petitioners nevertheless argue that the subjective intent of the parties should control we disagree because this is not a case of improvements made by a lessee a lessee’s payment for leasehold improvements may or may not result in rental income to the lessor depending on the intent of the parties which may be indicated by the terms of the lease or by the surrounding circumstances id see 305_us_267 there may be situations where an improvement made by a lessee is not intended to com- pensate a lessor indeed an improvement by a lessee might be worthless or even provide a detriment to the lessor for example the useful_life of such an improvement by the les- see may not extend beyond the term of the lease in which case it has no value to the lessor and in fact may impose a financial detriment if the lessor is responsible for its removal upon termination of the lease here the lessee made no leasehold improvements rather the lessee exercised its option to pay dollar_figure million to petitioners in order to reduce the amount of project costs for purposes of calculating annual rent even if we were to look into the parties’ intentions the terms of the lease and the surrounding circumstances con- vince us that the dollar_figure million lump-sum payment was intended as payment for_the_use_of the leased property first the operative provision allowing for the lessee’s election of a lump-sum payment- sec_4 a v -is included within article iv of the lease entitled rent second mr moose testified that the purpose of lease sec_4 a v was to provide talecris flexibility in the amount of rental payments hard construction costs soft construction costs and financing costs at a minimum acquisition and financing costs do not constitute a reimburse- ment for leasehold improvements to the plasma collection center stough v commissioner that they would be liable for in the future third both parties to the lease treated the dollar_figure million lump-sum payment as rent before respondent’s examination of petitioners’ tax_return talecris reported the dollar_figure million payment as rent on the original form 1099-misc and petitioners reported the dollar_figure million payment as rents received on one of their schedules e although the intention of the parties is not determinative in the instant matter we find that the terms of the lease and the surrounding circumstances indicate that the lessor and the lessee intended the dollar_figure mil- lion lump-sum payment to be rent sec_467 petitioners argue alternatively that if we determine the dollar_figure million lump-sum payment to be rental income they are entitled to report the payment ratably over the 10-year life of the lease pursuant to sec_467 in other words peti- tioners argue that only a portion of the dollar_figure million lump-sum payment is includible as income for respondent argues that petitioners are required to include the entire dollar_figure million payment they received from talecris in gross_income for the year of receipt ie under sec_467 both parties base their respective arguments on sec_467 and the regu- lations thereunder neither party cites any caselaw to sup- port those arguments and the issue is one of first impression in this court congress enacted sec_467 to prevent lessors and lessees from mismatching the reporting of rental income and expenses h_r rept no 1984_3_cb_1 staff of j comm on taxation general explanation of the revenue provisions of the deficit_reduction_act_of_1984 pincite j comm print sec_467 pro- vides accrual methods for allocating rents pursuant to a sec_467 rental agreement in order to qualify as a sec_467 rental agreement an agreement must have increasing decreasing rents or deferred prepaid rents and aggregate rental payments exceeding dollar_figure sec_467 sec_1_467-1 income_tax regs both partie sec_12 that mr moose and petitioner testified that they did not consider the lump-sum payment to be rent is completely at odds with the terms of the dollar_figure million option and the effect of its exercise united_states tax_court reports agree that the lease in this case qualifies as a sec_467 rental agreement a allocation the accrual methods applicable to a sec_467 rental agreement are set forth in sec_467 which provides in part sec_467 accrual of rental payments - allocation follows agreement -except as provided in para- graph the determination of the amount of the rent under any sec_467 rental agreement which accrues during any taxable_year shall be made- a by allocating rents in accordance with the agreement and b by taking into account any rent to be paid after the close of the period in an amount determined under regulations which shall be based on present_value concepts sec_467 is inapplicable in the instant case and the parties do not argue otherwise therefore except as pro- vided in sec_467 the rent determination for any rental period under sec_467 is made by allo- cating rents in accordance with the agreement sec_467 provides for_the_use_of the constant rental accrual_method in certain situations as we explain infra the con- stant rental accrual_method is inapplicable in the situation before us sec_467 directs the secretary to prescribe such regulations as may be appropriate to carry out the purposes of this section the first case to apply sec_467 was pic- cadilly cafeterias inc v united_states 36_fedclaims_330 which was decided before the promulgation of any temporary or final regulations there the parties’ dispute revolved around whether a lease that specified a rent pay- ment schedule could be construed to be an allocation within the meaning of sec_467 id pincite in the absence of regulations the court of federal claims held that a rent payment schedule could act as an allocation within the meaning of sec_467 and required the taxpayer to report rent in accordance with the rent payment schedule id pincite the lease qualifies as a sec_467 rental agreement because the rental payments increase in lease years and the lease has aggregate rental payments exceeding dollar_figure stough v commissioner subsequently on date the internal_revenue_service issued final regulations under sec_467 that apply to the case before us t d 1999_1_cb_1209 in gen- eral these regulations require a lessor and lessee to treat rents consistently and in certain cases involving tax avoid- ance require the parties to account for rent and interest under a prescribed method sec_1_467-1 income_tax regs sets forth rules for allocating rent to a rental period when a sec_467 rental agreement contains a specific allocation schedule and also in the absence of such specific allocation schedule sec_1_467-1 income_tax regs provides ii fixed rent allocated to a rental period - a specific allocation - in general -if a rental agreement provides a specific allocation of fixed rent as described in paragraph c ii a of this section the amount of fixed rent allocated to each rental period during the lease_term is the amount of fixed rent allocated to that period by the rental agreement rental agreements specifically allocating fixed rent -a rental agreement specifically allocates fixed rent if the rental agreement unambiguously specifies for periods no longer than a year a fixed amount of rent for which the lessee becomes liable on account of the use of the property during that period and the total amount of fixed rent specified is equal to the total amount of fixed rent payable under the lease for example a rental agreement providing that rent is dollar_figure per calendar_year and providing for total payments of fixed rent equal to the total amount specified specifically allocates rent a rental agree- ment stating only when rent is payable does not specifically allocate rent b no specific allocation -if a rental agreement does not provide a specific allocation of fixed rent for example because the total amount of fixed rent specified is not equal to the total amount of fixed rent pay- able under the lease the amount of fixed rent allocated to a rental period is the amount of fixed rent payable during that rental period if an amount of fixed rent is payable before the beginning of the lease_term it is allocated to the first rental period in the lease_term if an amount of fixed rent is payable after the end of the lease_term it is allo- cated to the last rental period in the lease_term emphasis added in applying this regulation to the facts of this case we first find that the lease in question does not specifically allocate fixed rent to any rental period within the meaning of sec_1_467-1 income_tax regs however the lease does provide for a fixed amount of rent payable during the rental period ie rent payable pursuant to the terms of the lease accordingly in the absence of a specific allocation in united_states tax_court reports the rental agreement the amount of rent payable in must be allocated to petitioners’ rental period pursuant to sec_1_467-1 income_tax regs which pro- vides that the amount of fixed rent allocated to a rental period is the amount of fixed rent payable during that rental period therefore petitioners are required to include as gross_income the entire dollar_figure million lump-sum payment made pursuant to the terms of the lease for the year of receipt b constant rental accrual petitioners argue that they should be permitted to use the constant rental accrual_method provided in sec_467 in order to spread their rental income to other years how- ever this method is inapplicable because it was intended to allow the commissioner to rectify tax_avoidance situations and the regulations provide that this method may not be used in the absence of a determination by the commis- sioner sec_1_467-3 income_tax regs no determination was made by respondent concerning tax_avoidance in addi- tion the constant rental accrual_method applies to disquali- fied leasebacks and long-term agreements sec_1_467-3 income_tax regs the lease sub judice is neither finally any argument that sec_467 which provides for use of the constant rental accrual_method if such agreement does not provide for the allocation referred to in paragraph a does not apply since we have already held that there was an allocation pursuant to the agreement within the pur- view of paragraph a of sec_467 and sec_1 sec_1_467-3 and income_tax regs provides leaseback -a sec_467 rental agreement is a leaseback if the lessee or a related_person had any interest other than a de_minimis interest in the property at any time during the two-year period ending on the agreement date for this purpose interests in property include options and agreements to purchase the property whether or not the lessee or related_person was considered the owner of the property for federal_income_tax purposes and in the case of subleased property any interest as a sublessor long-term_agreement - i in general -a sec_467 rental agree- ment is a long-term_agreement if the lease_term exceed sec_75 percent of the property’s statutory_recovery_period stough v commissioner c ii b income_tax regs therefore the constant rental accrual_method does not apply to this matter c proportional rental accrual with respect to sec_467 rental agreements that do not provide for adequate interest on prepaid or deferred rent the fixed rent for any rental period is the proportional rental amount sec_1_467-1 income_tax regs sec_1_467-2 income_tax regs describes sec_467 rental agreements to which the proportional rental method applies a sec_467 rental agreements for which proportional rental accrual is required -under sec_1_467-1 the fixed rent for each rental period is the proportional rental amount computed under para- graph c of this section if- the sec_467 rental agreement is not a disqualified_leaseback_or_long-term_agreement under sec_1_467-3 and the sec_467 rental agreement does not provide adequate interest on fixed rent under paragraph b of this section as discussed above the lease before us is neither a disquali- fied leaseback nor a long-term rental agreement and the parties make no argument to the contrary therefore the proportional rental accrual_method will apply if the sec_467 rental agreement at issue does not provide adequate interest on fixed rent under paragraph b of this section sec_1_467-2 income_tax regs emphasis added con- cerning adequate interest on fixed rent sec_1_467-2 income_tax regs provides b adequate interest on fixed rent - in general -a sec_467 rental agreement provides adequate interest on fixed rent if dis- regarding any contingent rent- i the rental agreement has no deferred or prepaid rent as described in sec_1_467-1 emphasis added petitioner argues that the dollar_figure million lump-sum payment is prepaid rent sec_1_467-1 income_tax regs defines prepaid rent as follows ii prepaid rent -a rental agreement has prepaid rent under this paragraph c if the cumulative amount of rent payable as of the close of a calendar_year exceeds the cumulative amount of rent allocated as of the close of the succeeding calendar_year determined under paragraph c iii of this section emphasis added united_states tax_court reports sec_1_467-1 example income_tax regs pro- vides the following example which is instructive in com- paring the cumulative amount of rent payable as of the close of a calendar_year to the cumulative amount of rent allo- cated as of the close of the succeeding calendar_year emphasis added example i a and b enter into a rental agreement that provides for a 10-year lease of personal_property beginning on date and ending on date the rental agreement provides for accruals of rent of dollar_figure during each month of the lease_term under paragraph c iii of this section dollar_figure is allocated to each calendar_year the rental agreement provides for a dollar_figure payment on date ii the rental agreement does not have increasing or decreasing rent as described in paragraph c i of this section the rental agreement however provides prepaid rent under paragraph c ii of this section because the cumulative amount of rent payable as of the close of a cal- endar year exceeds the cumulative amount of rent allocated as of the close of the succeeding calendar_year for example the cumulative amount of rent payable as of the close of dollar_figure is payable on date exceeds the cumulative amount of rent allocated as of the close of the succeeding calendar_year dollar_figure accordingly the rental agreement is a sec_467 agreement emphasis added totaling dollar_figure the lease entered into between talecris and wintermans does not provide for prepaid rent first it is necessary to determine the cumulative amount of rent payable as of the close of the calendar_year in talecris paid rent to wintermans dollar_figure of monthly rent for the plasma collection center and a dollar_figure mil- lion lump-sum payment pursuant to sec_4 a v of the lease therefore the cumulative amount of rent payable by talecris as of the close of the calendar_year is dollar_figure second it is necessary to ascertain the cumu- lative amount of rent allocated as of the close of the suc- ceeding calendar_year ie as previously held the lease at issue does not specifically allocate fixed rent to any rental period within the meaning of sec_1 c ii a income_tax regs in the absence of a specific allocation the amount allocated to each year is the amount payable for each rental period sec_1_467-1 income_tax regs although the record before us does not include the exact amount of rent payable by talecris for the stough v commissioner calendar_year talecris did have rent payable during based on the mathematical formula contained in the lease it follows logically that the cumulative amount of rent payable as of the close of dollar_figure will not exceed the cumulative amount of rent allocated as of the close of dollar_figure plus rent payable during accord- ingly the sec_467 rental agreement does not have pre- paid rent pursuant to sec_1_467-1 income_tax regs because the sec_467 rental agreement has no prepaid rent it is deemed to have adequate interest on fixed rent under sec_1_467-2 income_tax regs as discussed above one requirement for the application of the proportional rental accrual_method is that t he sec_467 rental agree- ment does not provide adequate interest on fixed rent sec_1_467-2 income_tax regs pursuant to sec_1 b income_tax regs the lease between talecris and wintermans does provide for adequate interest on fixed rent we hold that the proportional rental accrual_method does not apply and therefore petitioners must report the dollar_figure million lump-sum payment for sec_6662 accuracy-related_penalty respondent determined that petitioners were liable for a sec_6662 accuracy-related_penalty of dollar_figure for sec_6662 and b imposes a accuracy- related penalty on any portion of an underpayment attrib- utable to a substantial_understatement_of_income_tax sec_7491 provides that the commissioner bears the burden of production with regard to penalties and must come forward with sufficient evidence indicating that it is appropriate to impose the penalty see 116_tc_438 however once the commissioner meets his burden of production the burden_of_proof remains with the taxpayers including the burden of proving that the penalty sec_1_467-2 income_tax regs provides in pertinent part b adequate interest on fixed rent - in general -a sec_467 rental agreement provides adequate interest on fixed rent if dis- regarding any contingent rent- i the rental agreement has no deferred or prepaid rent as described in sec_1_467-1 united_states tax_court reports is inappropriate because of reasonable_cause under sec_6664 see rule a higbee v commissioner t c pincite there is a substantial_understatement_of_income_tax for any taxable_year if the amount of the understatement for the taxable_year exceeds the greater of of the tax required to be shown on the return for the taxable_year or dollar_figure sec_6662 petitioners’ understatement of income_tax exceeds the greater of of the tax required to be shown on their return or dollar_figure respondent has met his burden of production in that he has shown that petitioners improperly offset the dollar_figure million lump-sum payment through a schedule e deduction and that the understatement is substantial see longoria v commis- sioner tcmemo_2009_162 tax ct memo lexi sec_162 at petitioners argue that they had reasonable_cause because they relied on the advice of their c p a mr heldman sec_6664 provides that the penalty under sec_6662 shall not apply to any portion of an underpayment if it is shown that there was reasonable_cause for the tax- payers’ position and that the taxpayers acted in good_faith with respect to that portion see higbee v commissioner t c pincite reasonable_cause requires that the taxpayer have exer- cised ordinary business care and prudence as to the disputed item 115_tc_43 aff ’d 299_f3d_221 3d cir the good- faith reliance on the advice of an independent competent professional as to the tax treatment of an item may meet this requirement id citing 469_us_241 sec_1_6664-4 income_tax regs whether a tax- payer relies on the advice and whether such reliance is reasonable hinge on the facts and circumstances of the case and the law that applies to those facts and circumstances neonatology assocs p a v commissioner t c pincite sec_1_6664-4 income_tax regs for the reliance to be petitioners reported a dollar_figure tax_liability on their return the correct liability to be shown was over twice that amount petitioners concede that the accuracy-related_penalty applies to por- tions of the underpayment attributable to all adjustments in the notice_of_deficiency which they previously conceded stough v commissioner reasonable the taxpayer must prove by a preponderance_of_the_evidence that the taxpayer meets each requirement of the following three-prong test the adviser was a com- petent professional who had sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment neonatology assocs p a v commissioner t c pincite we are satisfied that petitioners’ tax_return was pre- pared by a competent professional with sufficient expertise however at trial petitioner testified that he b riefly reviewed the tax_return before signing it and did not review the schedule e at issue mr heldman testified that he did not sit down with petitioners to discuss the prepared tax_return before petitioners signed the return uncondi- tional reliance on a tax_return_preparer or c p a does not by itself constitute reasonable reliance in good_faith tax- payers must also exercise d iligence and prudence estate of stiel v commissioner tcmemo_2009_278 tax ct memo lexi sec_273 at quoting 92_tc_958 aff ’d without published opinion 921_f2d_280 9th cir taxpayers have a duty to read their returns reliance on a preparer with complete informa- tion regarding a taxpayer’s business activities does not con- stitute reasonable_cause if the taxpayer’s cursory review of the return would have revealed errors id citing 88_tc_654 petitioner was a successful businessman who should have recognized that the dollar_figure million schedule e deduction for con- tribution to construct was money that even had it been related to the acquisition and construction of the plasma collection center would not have been deductible in total in in fact the deduction was intended to cancel out the dollar_figure million in rental income that petitioner now claims was improperly reported claiming reliance on mr heldman and choosing to not adequately review the contents of a tax_return is not reasonable reliance in good_faith and we will not permit petitioners to avoid an accuracy-related_penalty for substantially understating their income_tax_liability accordingly we hold that petitioners are liable for the accuracy-related_penalty under sec_6662 united_states tax_court reports in reaching our decision we have considered all arguments made by the parties and to the extent not mentioned or addressed they are irrelevant or without merit to reflect the foregoing decision will be entered under rule f


internal_revenue_service national_office technical_advice_memorandum tam-121876-98 - ebed os sep index uil no case mis no district_director taxpayer's name taxpayer's address taxpayer's identification no years involved date of conference legend employer aes insurance_company issue whether under the facts of this technical_advice request the cost of life_insurance coverage provided by an employer to its employees under a group life carve-out program’ is includible in the employees’ gross_income pursuant to the provisions of sec_79 of the internal_revenue_code conclusion for the years involved the rules of sec_79 of the code apply in this case to determine the taxation of the life_insurance benefits provided to employees under employer's group life carve-out program facts employer maintains a basic group-term_life_insurance plan for its employees for which employer pays all premiums insurance coverage in an amount equal to two times compensation in addition employer sponsors what it calls a group life carve-out program under this program any employee who has a minimum of five years_of_service and has a salary of at least under this plan employees are entitled to term life ono tam-121876-98 dollar_figure can waive coverage above dollar_figure for which he or she is entitled under the basic plan and replace such excess coverage under the carve-out program when an employee becomes eligible to participate in the group life carve-out program the employee completes a waiver form for amounts above dollar_figure under the employer's basic plan the employee then applies for an individual permanent life_insurance_policy from insurance_company participant age or under when the face value of the policy is dollar_figure or less the employee's waiver of coverage above dollar_figure under the basic plan takes effect once the new individual policy is issued from insurance_company and the first premium is paid no medical exam is required for an eligible the parties also agree that the employee will as part of the group life carve-out program the employee must enter into a split-dollar_life_insurance agreement with employer whereby the parties agree that the employee shall be the sole owner of the individual policy and that annual premiums due under the policy shall be paid_by employer execute a collateral_assignment of the life_insurance_policy to the extent of premium amounts paid_by employer the agreement states that subject_to the assignment the employee has full ownership rights in the policy including but not limited to the right to designate and change the beneficiary and the right to sell assign transfer borrow against surrender or cancel the policy upon any sale assignment or transfer of the policy all of the employee's interest in the policy and rights and obligations under the split-dollar agreement are vested in the assignee or transferee transfer or assign any interest in the policy or any of its rights or obligations under the agreement to anyone else employer may not the agreement terminates upon the earlier of mutual consent of the parties the date the employee attains a specified age termination of employment with employer for reasons other than total disability death of the employee or reimbursement by the employee of the lesser_of the total premiums_paid by employer or the cash_surrender_value of the policy on the date of termination in general if the agreement is terminated for reasons other than the death of the employee or reimbursement by the employee of the lesser_of premiums_paid or cash_surrender_value employer has the right to receive an amount equal to the lesser_of total premiums_paid by employer or the policy's cash_surrender_value on the date of termination the employee has days after termination to elect to make such payments within days after termination or installment payments over two years plus interest or any other manner mutually agreed upon if the employee makes no election within days employer may enforce its rights to reimbursement from the policy’s cash_surrender_value provided that in the event the cash_surrender_value of the policy exceeds the amount payable to employer any excess shall be repaid to the employee upon receipt of the amounts due employer is required to release all of its rights under the collateral_assignment if the p32 tam-121876-98 agreement terminates because of the death of the employee employer is entitled to receive a portion of the death_benefits payable under the policy equal to the total amount of premiums_paid by employer the information provided indicates that for the years involved no policy had a cash_surrender_value that exceeded the total premiums_paid by employer on that policy for the years involved employer paid the premiums due on the individual policies involved in the group life carve-out program employer reported on each employee's w-2 an amount determined by using so-called substitute p s rates supplied to it by insurance_company for purposes of valuing the term protection provided to the employees under that program 2's are at least four to six times lower than the cost of group-term_life_insurance as determined under sec_79 of the internal_revenue_code for the years involved for most age groups the amounts reported on the w- law and analysis sec_61 of the code provides that gross_income means all income from whatever source derived including compensation_for services including fees commissions fringe_benefits and similar items the definition of gross_income is broad enough to include in taxable_income any economic or financial benefit conferred on the employee as compensation whatever the form or mode by which it is effected 324_us_177 sec_1_61-2 b ii a of the income_tax regulations states the general_rule that life_insurance premiums_paid by an employer on the life of his employee where the proceeds of such insurance are payable to the beneficiary of such employee are part of the gross_income of the employee sec_79 of the code provides special rules for amounts includible in an employee's gross_income as a result of employer-provided group-term_life_insurance pursuant to sec_79 an employee must include in gross_income an amount equal to the cost of group-term_life_insurance on his life provided under a policy or policies carried directly or indirectly by his employer but only to the extent that such cost exceeds the sum of the cost of dollar_figure of such insurance and the amount if any paid_by the employee for the purchase of the insurance the cost of the group-term_life_insurance is determined on the basis of uniform premiums prescribed by regulations sec_79 insurance does not apply to key empioyees as defined in sec_416 of the code in the case of a discriminatory group-term plan the cost of the insurance includible in a key employee's income is the greater of the cost of the insurance as prescribed by sec_1_79-4t of the regulations or the sec_79 provides that the exclusion for the cost of dollar_figure of in the case of a discriminatory plan r c tam-121876-98 uniform premium cost as prescribed by sec_1_79-3 of the regulations the term discriminatory_group-term_life_insurance_plan means any plan of an employer for providing group-term_life_insurance unless the following requirements are met a the plan does not discriminate in favor of key employees as to eligibility to participate and b the type and amount of benefits available under the plan do not discriminate in favor of participants who are key employees sec_79 sec_1_79-1 of the regulations provides that life_insurance is not group-term_life_insurance for purposes of sec_79 of the code unless it meets the following conditions it provides a general death_benefit that is exciudable from gross_income under sec_101 it is provided to a group_of_employees it is provided under a policy carried_directly_or_indirectly_by_the_employer the amount of insurance provided to each employee is computed under a formula that precludes individual selection this formula must be based on factors such as age years_of_service compensation or position sec_1_79-1 of the regulations provides that no part of the life_insurance provided - under a policy that provides a permanent_benefit is group-term_life_insurance unless - the policy or the employer designates in writing the part of the death_benefit provided to each employee that is group-term_life_insurance and the part of the death_benefit that is provided to an employee and designated as the group-term_life_insurance benefit for any policy year is not less than the difference between the total death_benefit provided under the policy and the employee’s deemed_death_benefit at the end of the year sec_1_79-0 of the regulations define a number of terms relevant here definitions a policy of life_insurance is carried_directly_or_indirectly_by_the_employer if the employer pays any part of the cost of the insurance directly or through another person under those a group_of_employees is all employees of an employer or less than all employees if membership in the group is determined solely on the basis of age marital status or factors related to employment regs sec_1_79-0 as a general_rule a group_of_employees does not include fewer than ten full-time employees regs sec_1_79-1 a permanent benefit’ is defined as an economic value extending beyond one policy year for example a paid-up or cash_surrender_value that is provided under a life_insurance_policy however the following features are not permanent benefits - - a a right to convert or continue life_insurance after group_life_insurance coverage terminates i34 tam-121876-98 b any other feature that provides no economic benefit other than current insurance protection to the employee or c a feature under which term life_insurance is provided at a level premium for a period of five years or less regs sec_1_79-0 the term policy is defined as including two or more obligations of an insurer that are sold in conjunction obligations that are offered or available to members of a group_of_employees are sold in conjunction if they are offered or available because of the employment relationship the actuarial sufficiency of the premium charged for each obligation is not taken into account in determining whether the obligations are sold in conjunction obligations may be sold in conjunction even if they are contained in separate documents each document is filed with and approved by the applicable state insurance commission or each obligation is independent of any other obligation thus a group of individual contracts under which life_insurance is provided to a group_of_employees may be a policy similarly two benefits provided to a group_of_employees one term and the other a permanent_benefit may be a policy regs sec_1_79-0 sec_1_79-3 of the regulations prescribes the rules for determining the cost of group- term life_insurance to be included in an employee’s income prescribes the rules for determining how much an employee receiving permanent benefits must include in income sec_1_79-1 sec_1_79-4t of the regulations provides rules in question and answer format relating to the nondiscrimination requirements for group-term_life_insurance q a-5 of those regulations describes circumstances under which separate policies of group-term_life_insurance of an employer will be considered to be a single_plan in determining whether the employer's plan of group-term_life_insurance is discriminatory all policies providing group-term_life_insurance to a common key_employee or key employees will be considered a single pian for this purpose for example if a key_employee receives dollar_figure of group-term_life_insurance coverage under one policy and the same key_employee receives an additional dollar_figure of coverage under a separate group-term_life_insurance policy the two policies will be treated as a single_plan in determining whether the group-term_life_insurance provided by the employer is discriminatory if it is discriminatory the key employees covered by either policy will not receive the benefit of sec_79 of the code for either policy a policy that provides group-term_life_insurance to a key_employee and a policy under which the same key_employee is eligible to receive group-term_life_insurance upon separation_from_service will be considered to provide group-term_life_insurance to a common key_employee q8 a-9 of sec_1_79-4t provides that a plan of group-term_life_insurance will be considered not to discriminate in favor of participants who are key employees as to the 23s tam-121876-98 amount of benefits available if the plan provides for a fixed amount of insurance which is the same for all covered employees in other circumstances the determination of whether the plan is nondiscriminatory will be based on all the facts and circumstances such plans will be considered not to discriminate in favor of participants who are key employees as to the amount of benefits available if the plan contains no group_of_employees described in the following sentence that if tested separately would fail to satisfy the requirements of sec_79 of the code the group subject_to separate testing under the preceding sentence consists of a key_employee and all other participants including other key employees who receive under the plan an amount of insurance as a multiple of compensation that is equal to or greater than the amount of insurance received by such key_employee q8 a-9 of sec_1_79-4t of the regulations further provides that a plan does not meet the requirements for nondiscrimination as to the type and amount of benefits available under the plan unless all types of benefits including permanent benefits and all terms and conditions with respect to such benefits which are available to any participant who is a key_employee are also available on a nondiscriminatory basis to non-key_employee participants sec_101 of the code provides the general_rule that gross_income does not include amounts received under a life_insurance_contract if such amounts are paid_by reason of the death of the insured revrul_64_328 1964_2_cb_11 considers two major types of so-called split dollar arrangements the endorsement system under which the employer is named as owner on the life_insurance_policy and the collateral_assignment system under which the employee is named as the owner on the policy the service notes therein that the substance of both types of arrangements is that the employer provides the funds representing the investment element in a life_insurance_contract which would in arm's length dealings entitle it to the earnings accruing to that element the effect of the arrangement is that the earnings on the investment element in the contract are applied to provide benefits to the employee under both systems generally the employee is not expected to repay the funds provided by the employer except out of the proceeds of the policy or from funds available to the employee by reason of the surrender or loan value of the policy under the facts of the particular split-dollar arrangement described in revrul_64_328 the employer provides the funds to pay the part of the annual premiums equal to the increase in the policy's cash_surrender_value each year and the employee pays the balance if any of the annual premiums the employer is entitled to receive out of the proceeds of the policy an amount equal to the policy's cash_surrender_value or at least a sufficient part thereof to equal the funds it has provided for premium payments the employee has the right to name the beneficiary of the balance of any proceeds payable by reason of the employee's death according to the ruling tam-121876-98 the effect of the arrangement is that the earnings on the investment element in the contract are used to provide all or a portion of the cost of the employee's insurance protection an economic benefit the value of which must be included in the employee's gross_income revrul_64_328 holds that the value of the benefit received by the employee is an amount equal to the one-year term cost of the life_insurance protection to which the employee is entitled from year to year less the portion if any provided by the employee revrul_64_328 states that the one-year term cost of life_insurance protection provided through a split dollar arrangement is determined by using the p s cost found in revrul_55_747 1955_2_cb_228 revrul_64_328 further concludes that the same income_tax results obtain if the transaction is cast in some other form resulting in a similar benefit to the employee revrul_66_110 1966_1_cb_12 amplified by revrul_67_154 1967_1_cb_11 provides that in the arrangement described in revrul_64_328 current insurance protection is the only economic benefit that the employee receives and consequently only the value of that benefit is referred to as being includible in the employee's income however the employee may receive other_benefits such as cash dividends or additional life_insurance the value of which would likewise be includible in the employee's gross_income published initial issue premium rates charged by the insurer for individual one-year term life_insurance available to all standard risks may be substituted for the p s cost revrul_66_110 also provides that if lower the current we have concluded that the substitute p s rates used by employer do not meet the requirements of revrul_66_110 as amplified however for the reasons discussed below we have also concluded the provisions of sec_79 of the code not the split-dollar revenue rulings apply to determine the taxation of the benefits provided to the employees under employer's carve-out program a discussion of sec_79 of the code is not included in the analysis of the split-dollar_life_insurance arrangement discussed in revrul_64_328 under the facts of that revenue_ruling life_insurance is provided under a split-dollar arrangement involving only one employee whereas a number of employees are provided with life_insurance benefits under employer's group-term and group life carve-out programs consequently an analysis of the split dollar arrangements under the rules of sec_79 is relevant here in order for sec_79 of the code to apply to the life_insurance provided to employees under employer's group life carve-out program the life_insurance must meet the four requirements of sec_1_79-1 of the regulations for group-term_life_insurance and if the insurance provides permanent benefits to employees must additionally meet the a737 tam-121876-98 requirements of sec_1_79-1 of the regulations first the life_insurance provided under employer's group life carve-out program meets the requirement for group-term_life_insurance that it provide a general death_benefit that is excludable from gross_income under sec_101 of the code second the life_insurance provided under the carve-out program is provided to a group_of_employees as that term is defined for purposes of sec_79 of the code the insurance is provided to at least ten employees and the membership in the group being provided the carve-out insurance is based solely on factors related to employment - - namely employees having a minimum of five years_of_service and a salary of at least dollar_figure not disqualify the insurance from being provided to a group_of_employees the regulations state that a group of individual contracts under which life_insurance is provided to a group_of_employees may be a policy as long as they are offered or available because of the employment relationship further the fact that the insurance is provided under individual policies does third the life_insurance provided under that program meets the requirement that it be provided under a policy carried_directly_or_indirectly_by_the_employer since employer pays the premiums on the insurance under the carve-out program fourth the amount of insurance provided to each employee under the carve-out program is computed under a formula that precludes individual selection since the coverage under the program is based on compensation finally for the years involved the life_insurance provided under the group life carve-out program provides no permanent_benefit as that term is defined in sec_1_79-0 of the regulations that would cause it to be subject_to the rules of sec_1_79-1 of the regulations pursuant to the definition of permanent_benefit any feature that provides no economic benefit other than current insurance protection to the employee is not a permanent_benefit for the years involved no individual policy issued pursuant to the group life carve-out program has a cash_surrender_value that exceeds the amounts to which employer is entitled thus an employee has no current right to any of the insurance policy's cash_value also if an employee transfers the insurance_policy to a third party the transfer is subject_to employer's rights under the collateral_assignment and under the split-dollar agreement so that the employee cannot receive an economic benefit from the policy’s current cash_value by transferring the policy further whether an employee will receive any rights in the policy's cash_value in the future will depend on the employee’s continuing employment with employer thus the employee has no vested rights to future cash_value as a result current insurance protection is the only economic benefit that was actually or constructively received by the employees for the years involved tam-121876-98 accordingly the insurance provided under employer’s group life carve-out program is group-term_life_insurance for purposes of sec_79 of the code consequently the rules of that code provision must be used to determine the amount includible in an employees’ income both for the insurance provided under employer's basic group-term plan and under the carve-out plan pursuant to sec_79 if the insurance provided by employer meets the nondiscrimination requirements of sec_79 the rules of sec_79 and sec_79 apply for determining the amount includible in all of the employees’ income if the provision of insurance is discriminatory the exclusion for the cost of dollar_figure of insurance does not apply to key employees and the cost of the insurance includible in a key employee’s income is the greater of the cost of the insurance or the uniform premium cost assuming at least one of employer's key employees is receiving insurance under the carve-out program employer's basic plan and its carve-out program will be considered a single_plan for purposes of testing under sec_79 of the code to determine whether employer maintains a discriminatory_group-term_life_insurance_plan regs sec_1_79-4t q a-5 pursuant to q a-9 of sec_1_79-4t a plan does not meet the requirements for nondiscrimination as to the amount of benefits available unless all terms and conditions with respect to all benefits including permanent benefits that are available to any key_employee are also available to non-key employees under the general_rule of q a-9 the terms and conditions of employer’s plan do not meet the requirements for nondiscrimination as to the amount of benefits available since only employees with a salary of dollar_figure or more are entitled to participate in the group carve-out program and potentially obtain permanent benefits in the future however the regulations include a special rule that a plan will be considered not to discriminate in favor of participants who are key employees as to the amount of benefits available if the group receiving the discriminatory benefits if tested separately satisfies the requirements of sec_79 as to eligibility to participate employer's basic group-term plan and its carve-out program meet the nondiscrimination requirements of sec_79 of the code will depend on whether employer's group life carve-out program when tested separately meets the requirements for a nondiscriminatory eligibility classification as described in sec_79 accordingly whether caveat a copy of this technical_advice_memorandum is to be given to the taxpayer sec_6110 j of the code provides that it may not be used or cited as precedent


date internal_revenue_service cor-119136-00 number info release date uil the honorable united_states senate washington d c dear senator i am responding to your letter to commissioner rossotti dated date on behalf of your constituent is a retired agent of the state farm insurance_companies state farm asked whether the internal_revenue_service irs is correctly interpreting 108_tc_130 enclosed in jackson the tax_court held that termination_payments to retired state farm agents are not subject_to tax under the self-employment contributions act seca he believes that the irs is applying the holding of that case incorrectly by denying retired state farm agents capital_gains_tax treatment on their termination_payments as background information on this issue taxpayers won several cases dealing with the application of seca_tax to certain payments to retired insurance agents 38_f3d_1094 9th cir rev’g t c memo gump v u s ustc cch big_number red cir rev’g ustc cch big_number fed cl and the jackson case effective for payments after date congress amended sec_1402 of the internal_revenue_code the code to provide an exclusion from seca_tax for payments similar to those in the cases code sec_1402 the irs follows jackson and applies its holding to payments made before the effective date of sec_1402 because that section codified the holding in jackson this policy is expressed in an action on decision a published statement of irs policy cc- jackson was a reviewed opinion meaning that all the judges of the tax_court agreed to the holding the holding is stated in the final paragraph of the opinion 108_tc_140 w e hold that the termination_payments petitioner received in and are not subject_to self-employment_tax because we conclude that the termination_payments were not derived from the carrying on of petitioner’s insurance_business we need not decide the precise nature of the payments or specifically characterize them as a particular type of income in other words we need not decide in this case whether the termination_payments are consideration for an agreement not to compete or the purchase of petitioner’s agency including its assets and goodwill the holding is expressed in the underlined sentence stating that termination_payments are not subject_to seca_tax sec_1402 which enacted the holding in jackson also operates only to exclude termination_payments from seca_tax i hope this information is helpful to your constituent if you have any questions please call me or elizabeth edwards of this office at sincerely yours jerry e holmes branch chief employment_tax office of division counsel assistant chief_counsel tax exempt and government entities enclosure 1judge parr wrote a concurring opinion stating she concludes termination_payments are in the nature of a buyout 108_tc_141 a concurrence is the opinion of only one judge it does not represent the opinion of the tax_court


department of the treasury i n t e r n a l r e v e n u e s e r v i c e washington d c cc pa apjp b01 genin-137179-05 office_of_chief_counsel number info release date uil --------------------- ------------------------------------------- ------------------- ------------ ------------------------------------ dear ------------ this letter responds to your request for information dated date you wrote to the internal_revenue_service asking whether nominees are required to make a retur n of information pursuant to sec_6041 or sec_6042 for payments made by nominees of distributions that are received from foreign_partnerships and paid to u s citizens we provide general information concerning the information reporting requirements for such payments a partnership does not pay federal_income_tax rather the income or losses flow through the partners who are taxable on their distributive shares of partnership taxable_income nevertheless a partnership is a tax reporting entity that must file annual information reporting on form_1065 sec_1_6031_a_-1 provides however that a foreign_partnership is not required to file a partnership return form_1065 if the foreign_partnership does not have gross_income that is or treated as effectively connected with the conduct_of_a_trade_or_business within the united_states and does not have gross_income including gains derived from sources within the united_states sec_6041 of the internal_revenue_code requires reporting of payments of dollar_figure or more made by all persons engaged in a trade_or_business and making payments in the course of such trade_or_business to another person of fixed or determinable gains profits and income excluded from this section are any payments with respect to which an information_return may be required by sec_6042 relating to dividends sec_1_6041-3 of the income_tax regulations regulations states that returns of information are not required under sec_6041 and the regulations thereunder for compensation and profits paid or distributed by a partnership to the individual partners but for reporting requirements see sec_1 genin-137179-05 sec_6042 of the code requires reporting by every person a who makes payments of dividends aggregating dollar_figure or more to any other person during any calendar_year or b who receives payments of dividends as a nominee and who makes payments aggregating dollar_figure or more during any calendar_year to any other person with respect to the dividends received sec_6042 defines a dividend as a any distribution by a corporation which is a dividend as defined in sec_316 and b any payment made by a stockbroker to any person as a substitute for a dividend sec_1_6042-3 of the regulations defines a dividend as any distribution made by a corporation to its shareholders which is a dividend as defined in sec_316 or any payment made by a stockbroker to any person as a substitute for a dividend or a distribution from a regulated_investment_company sec_3406 of the code defines a reportable_payment to include any reportable dividend payment required to be shown on a return required under sec_6042 under sec_31_3406_a_-2 a payor includes a person who is required to make an information_return under sec_6041 or sec_6042 however sec_31_3406_a_-2 excepts from the definition of payor a partnership making a payment of a distributive_share a nominee that receives a distribution of a distributive sha re is a payor of a distributive_share sec_1_6031_a_-1 provides that if a united_states_person is a partner in a partnership that is not required to file a partnership return the district_director or director of the relevant service_center may require that person to render statements or provide information necessary to verify the accuracy of the reporting by that person of any items of partnership income gain loss deduction or credit in addition under sec_1_6031_a_-1 certain united_states persons who are partners in a foreign_partnership controlled within the meaning of sec_6038 by united_states persons may be required to provide information with respect to the partnership under sec_6038 of the code under sec_1_6031_c_-1t any person who holds directly or indirectly an interest in a partnership that is required to file a partnership return for a taxable_year as a nominee shall furnish to the partnership a written_statement or statements for that ta xable year a statement with respect to such other person containing the information listed in paragraph a ii of this section genin-137179-05 this letter has called your attention to certain general principles of the law it is intended for informational purposes only and does not constitute a ruling see revproc_2004_1 sec_2 2004_1_irb_7 if you have any additional questions please contact our office at sincerely tiffany p smith assistant to the branch chief branch administrative provisions and judicial practice procedure administration


internal_revenue_service number release date index number ------------------------------------------------------------ ------- --------------------------- ---------------------------------------------------- ----------- ------------------------------------------ department of the treasury washington dc person to contact --------------------------- id no -------------- telephone number ---------------------- refer reply to cc psi b03 - plr-107984-13 date date legend x ---------------------------------------------------- ------------------------------------------------------------------- y ---------------------------------------------------- ------------------------------------------------ z ---------------------------------------------------- ---------------------------------------------------------------------- country d1 -------- ------------------- dear ---------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations that x be granted an extension of time to file an election to be classified as a partnership under sec_301_7701-3 facts the information submitted states that x was formed on d1 as a limitada under the laws of country x’s default classification is an association_taxable_as_a_corporation because all members have limited_liability as of d1 x had more than one member including y z is the general_partner of y x intended to elect to be treated as a plr-107984-13 partnership for federal tax purposes effective d1 however a form_8832 entity classification election electing to be treated as a partnership effective d1 was not timely filed law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 under sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership sec_301_7701-3 provides that unless an entity elects otherwise a foreign eligible_entity is an association if all members have limited_liability sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided in sec_301_7701-3 or to change its classification by filing a form_8832 with the service_center designated on the form_8832 sec_301_7701-3 provides that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no date is specified on the election form the effective date specified on form_8832 cannot be more than days prior to the date on which the election is filed and cannot be more than months after the date on which the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government plr-107984-13 conclusion based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file form_8832 with the appropriate service_center and elect to be classified as a partnership for federal tax purposes effective d1 a copy of this letter should be attached to the form_8832 except as specifically set forth above no opinion is expressed or implied concerning the federal tax consequences of the transaction described above under any other provision of the code specifically no opinion is expressed or implied as to whether x is otherwise eligible to make the election this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to x’s authorized representative sincerely associate chief_counsel passthroughs special industries by ___________________________________ james a quinn senior counsel branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ------------------------ -------------------------------- ------------------------ ------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number ------------------- refer reply to cc ita b03 plr-104128-08 date date ty ------- ty ------- legend taxpayer year year accounting firm year year dear ------------- ------------------------ ------- ------- --------------------------- ------- ------- this is response to a letter dated ----------------------- you requested an extension of time to make an election under sec_163 and sec_163 of the internal_revenue_code to treat capital_gains as investment_income for year the request to make the late election is based on sec_301_9100-1 and -3 of the procedure and administration regulations facts the taxpayer received only passive_income in year from real_estate investment development activities commenced in prior years the taxpayer suffers from severe depression diabetes heart disease and acute bi-polar disorder and has been in and out of mental facilities for lengthy periods of time since year the taxpayer has no one else to take care of his financial affairs the taxpayer failed to file his tax_return for year in year the taxpayer received notice from the service regarding his unfiled tax_return for year the taxpayer immediately contacted accounting firm who began preparing his return for year in year the service filed a notice_of_deficiency for year subsequently a petition was filed with the tax_court the taxpayer filed his plr-104128-08 return for year in year with a form_4592 election to treat capital_gains as investment_income law analysis sec_163 provides that in the case of a taxpayer other than a corporation the amount allowed as a deduction for investment_interest shall not exceed the net_investment_income of the taxpayer for the taxable_year investment_interest expense that is disallowed by sec_163 may be carried to the next taxable_year sec_163 sec_163 provides in part that investment_income is the sum of - i gross_income from property_held_for_investment other than gain taken into account under clause ii i ii the excess if any of i the net gain attributable to the disposition of property_held_for_investment over ii the net_capital_gain determined by only taking into account gains and losses from dispositions of property_held_for_investment plus iii so much of the net_capital_gain referred to in clause ii i as the taxpayer elects to take into account under such clause sec_163 also states that such term shall include qualified_dividend_income as defined in section h ii b only to the extent the taxpayer elects to treat such income as investment_income for purposes of this subsection sec_1_163_d_-1t b of the income_tax regulations provides that the election under sec_163 must be made on or before the due_date including extensions of the income_tax return for the taxable_year in which the qualified_dividend_income is received under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election under all subtitles of the code except subtitles e g h and i provided that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government for this purpose sec_301_9100-1 defines the term ‘regulatory election’ to include an election whose deadline is prescribed by a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-3 provides extensions of time to make a regulatory election under code sections other than those for which sec_301_9100-2 expressly permits automatic extensions requests for extensions of time for regulatory elections will be granted when the taxpayer provides evidence including affidavits described in the regulations to establish to the satisfaction of the commissioner that the taxpayer acted plr-104128-08 reasonably and in good_faith and granting relief will not prejudice the interests of the government sec_301_9100-3 states that a taxpayer will be deemed to have acted reasonably and in good_faith if the taxpayer - i requests relief before the failure to make the regulatory election is discovered by the service beyond the taxpayer’s control ii inadvertently failed to make the election because of intervening events iii failed to make the election because after exercising due diligence the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of the service or v reasonably relied on a qualified_tax professional and the tax professional failed to make or advise the taxpayer to make the election the taxpayer acted reasonably and in good_faith because his failure to make a timely election was due to intervening events that were beyond his control these intervening events include his mental illness and hospitalization at the mental health facilities under sec_301_9100-3 a taxpayer will not be considered to have acted reasonably and in good_faith if the taxpayer - i seeks to alter a return position for which an accuracy related penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief taking into account sec_1 c and the new position requires a regulatory election for which relief is requested ii was informed in all material respects of the required election and related tax consequences but chose not to file the election or iii uses hindsight in requesting relief if specific facts have changed since the original deadline that make the election advantageous to a taxpayer the service will not ordinarily grant relief taxpayer is not seeking to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time relief is requested taxpayer was not informed of all material respects of the election and its tax consequences furthermore taxpayer is not using hindsight in requesting relief taxpayer has represented that specific facts have not changed since the original deadline that made the election advantageous sec_301_9100-3 provides in part 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 taking into account the time_value_of_money sec_301_9100-3 provides in part that the interests of the plr-104128-08 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 under these criteria the interests of the government are not prejudiced in this case the taxpayer has represented that granting relief would not result in 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 taking into account the time_value_of_money furthermore the taxable_year in which the regulatory election should have been made and any taxable years that would have been affected had it been timely made are not closed by the period of assessment ruling accordingly the consent of the commissioner is hereby granted for an extension of time to make the election pursuant to sec_301_9100-1 and -3 for the taxpayer under sec_163 the taxpayer has an extension of days from date of this ruling in which to make this election this ruling is limited to providing an extension of time for making an election under sec_163 it does not provide relief from any liability incurred as a result of filing a late election nor is it a ruling that the taxpayer is otherwise eligible to make the election no opinion is expressed as to the applicability of any other provision of the code or the regulations which may be applicable under these facts 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 a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling plr-104128-08 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely christopher f kane branch chief branch income_tax accounting


internal_revenue_service p o box cincinnati oh release number release date date date department of the treasury employer_identification_number contact person - id number contact telephone number legend uil dollar_figurec dear you asked for advance approval of your educational grant procedures under internal_revenue_code sec_4945 this approval is required because you are a private_foundation that is exempt from federal_income_tax our determination we approved your procedures for awarding educational grants based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding educational grants meet the requirements of code sec_4945 as a result expenditures you make under these procedures will not be taxable description of your request your letter indicates that you will operate an educational grant program called x the purpose of x is to provide selected students accepted into the y with stipends and educational advising and mentoring to enable them to take a z before starting college the recipients of the stipends will be chosen from among those who have been accepted into the y thus your program will provide access for low-income students to existing funded gap-year programs thereby enhancing students’ educational experiences to be eligible students must have been accepted to a college with a z friendly policy- ie a policy that allows the student to defer their acceptance and financial aid package until the following year they also must have applied to other z programs and have been accepted into one or more such programs covering a substantial amount of the total z cost thus your program will provide y participants access to existing z programs which are typically financially out of reach for low-income students the amount of your stipend will vary depending on the amount of aid from other z programs students with less support from other programs would receive the full stipend while students with more support from other programs would receive less than the full stipend the stipends will enable the recipients to achieve a specific educational objective and to improve or enhance their scholarly capacity and academic and professional skills in accordance with sec_4945 the amount of each student’s z stipend will vary depending on the amount of other financial support he or she receives for their z program but no individual stipend will exceed dollar_figurec recipients will be chosen from among students who have been accepted into the y thus recipients will be chosen from a pool of applicants selected under your approved grant making procedures for the y the opportunity to apply for the x will be made available to all students who have completed your b and have been accepted into your x and wish to pursue a z program between the end of high school and the start of college recently about students completing their final year of high school in the b were accepted into the y these students would all be eligible to apply for the x the primary selection criteria for the program shall include but are not limited to e acceptance into the y e acceptance into a college that will accommodate participation in a z program e acceptance into a funded z program likely to enhance the student's educational experience independence motivation academic achievement and financial need the educational advisers and your staff will generally orally make applicants to the y aware of your program and solicit applications directly from those selected to participate in the y you may enter into agreements with independent organizations that will assist you in promoting your program contacting colleges and universities with relevant information on your program designing and processing the applications and evaluating the eligibility of applicants all such consultants will be separate corporate entities that are completely unrelated to you none of the employees officers or directors of consultants will be employees officers or directors of you or disqualified persons with respect to you fixed fees paid to consultants for services provided to you will be set in accordance with standard rates for similar consulting and management services provided to other organizations your consultants will work directly with you on all major policy and program decisions you will be responsible for approving all aspects of program design promotion award selection and allocation letter catalog number 58222y as part of your selection process you may enlist either an independent selection committee composed of individuals with relevant educational expertise or authorize your staff to review and evaluate all eligible applications for recommendation to your board_of directors of award recipients any review and evaluation of applications will be conducted in accordance with the restrictions set forth below in this ruling_request scholarship consultants may identify qualified individuals to serve as panelists on the selection committee of a particular scholarship or fellowship program and may provide training sessions for the panelists in all cases your board_of directors will make the final selection of stipend recipients you will not discriminate on the basis of race religion creed color sex age physical or mental disabilities sexual orientation or national origin all stipends are required to be awarded on an objective and nondiscriminatory basis the exact number and amount of stipends in a given year will depend on a number of factors including the number qualifications and particular needs of the applicants and any unused stipend funds will be transferred back to you you will not award stipends to your founder creator officers board members or staff or their families or to any disqualified_person or for a purpose that is inconsistent with the purposes set forth in sec_170 of the code recipients must meet certain criteria to be eligible for grant renewal including compliance with all reporting requirements as described above you will require each recipient to be in regular contact with an educational adviser appointed by you throughout the duration of the x you will require each recipient to furnish a report of his or her accomplishments the impact of the z on his or her personal and professional development and the use of the funds received if you learn that all or any part of the funds you have awarded are being diverted from their intended purposes you will take all reasonable and appropriate steps to recover the funds and or to ensure restoration of the diverted funds to the purposes of the program this would include legal action if deemed appropriate under the circumstances you will retain complete records with respect to all stipends awarded as required by the applicable treasury regulations these records will include all information obtained by you to evaluate applicants the identification of recipients the completed application of each applicant the amount of each grant progress reports from recipients or their supervisors and any additional information that you or your scholarship consultants have obtained in the course of the grant administration process you will report all stipends awarded on an annual basis on your form_990-pf letter catalog number 58222y basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that meets all of the following requirements of code sec_4945 is not a taxable_expenditure e e e the foundation awards the grant on an objective and nondiscriminatory basis the irs approves in advance the procedure for awarding the grant the grant is - - - ascholarship or fellowship subject_to sec_117 and is to be used for study at an educational_organization described in sec_170 or a prize or award subject_to the provisions of sec_74 if the recipient of the prize or award is selected from the general_public or toachieve a specific objective produce a report or similar product or improve or enhance a literary artistic musical scientific teaching or other similar skill or talent of the recipient to receive approval of its educational grant procedures sec_53_4945-4 requires that a private_foundation show e e e the grant procedure includes an objective and nondiscriminatory selection process the grant procedure results in the recipients performing the activities the grants were intended to finance the foundation plans to obtain reports to determine whether the recipients have performed the activities that the grants were intended to finance other conditions that apply to this determination e e e this determination covers only the grant program described above this approval will apply to succeeding grant programs only if their standards and procedures don't differ significantly from those described in your original request this determination applies only to you it may not be cited as precedent you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you must report any significant changes in your program to the cincinnati office of exempt_organizations at internal_revenue_service exempt_organizations determinations p o box cincinnati oh letter catalog number 58222y e e e you cannot make grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives all funds distributed to individuals must be made on a charitable basis and must further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 b you should keep adequate_records and case histories so that you can substantiate your grant distributions with the irs if necessary we've sent a copy of this letter to your representative as indicated in your power_of_attorney please keep a copy of this letter in your records if you have any questions please contact the person listed at the top of this letter sincerely director exempt_organizations letter catalog number 58222y