t c memo united_states tax_court nicolas charles karkabe petitioner v commissioner of internal revenue respondent docket no filed date nicolas charles karkabe pro_se shawna a early for respondent memorandum opinion chiechi judge this case is before the court on respon- dent’s motion for judgment on the pleadings respondent’s mo- tion we shall grant respondent’s motion the record establishes and or the parties do not dispute the background following petitioner resided in hudson new york at the time he filed the petition in this case respondent issued to petitioner a notice_of_deficiency notice for his taxable_year in that notice respondent determined a deficiency of dollar_figure in and an accuracy-related_penalty under sec_6662 a of dollar_figure on petitioner's federal_income_tax tax for that year the petition that petitioner filed commencing the instant proceeding stated the following as grounds for his disagreement with the notice that respondent issued for his taxable_year schulz vs irs no 04-0196-cv clearly demonstrates that lacking a federal court order i have no obliga- tion to surrender documents or comply with any irs correspondence and can not be held in contempt ar- rested detained or otherwise punished i am currently a plaintiff usdc case 04cv01211 we the people v u s government currently under us court_of_appeals in d c case and consider this defi- ciency notice harassment lastly the form in question does not display a valid control assigned by the office of management budget in accordance with the paperwork reduction act pra making it a bootleg form and illegal reproduced literally on date the court issued an order court’s date order directing petitioner to file a response to respondent’s motion in that order the court also found that the petition contained statements contentions and arguments that are frivolous and groundless 1all section references are to the internal_revenue_code in effect for the year at issue all rule references are to the tax_court rules_of_practice and procedure petitioner filed a response to respondent’s motion peti- tioner’s response in which petitioner stated in pertinent part petitioner has moved into negotiations for settle- ment through the irs appeals_office petitioner is currently collecting information and documents to form a settlement and believes that it will be possible to resolve the case without the necessity of a trial petitioner requests the court grant time for the disputing parties to come to an agreement by stay- ing the motion for judgment on the pleadings by an amount of time deemed appropriate by the court respondent filed a reply to petitioner’s response in which respondent stated in pertinent part on date respondent's counsel con- tacted appeals_office to determine the status of this case which is currently under appeals jurisdiction the appeals officer assigned to this case indicated that he spoke with petitioner regarding the issues in this case on date petitioner does not contest that he received wage income in the amount of dollar_figure from california food plan inc however he now alleges that he is entitled to a schedule a deduction for unreimbursed employee_expenses petitioner further indicated that he would provide a memorandum outlining his claimed expenses to respondent’s appeals_office during the week of date on date respondent’s appeals offi- cer informed the undersigned that petitioner has not provided any information and or documentary_evidence to support his alleged schedule a deduction for unreimbursed employee_expenses in taxable_year reproduced literally discussion the court may grant judgment on the pleadings where the pleadings do not raise a genuine issue of material fact and a decision may be rendered as a matter of law rule a 115_tc_523 a judgment on the pleadings is a judgment based solely on the allegations and information contained in the pleadings and not on any outside matters see rule a and b nis family_trust v commissioner supra pincite rule b provides in pertinent part that a petition with respect to a notice_of_deficiency is to contain clear and concise assignments of each and every error which the petitioner alleges to have been committed by the commissioner in the determination of the deficiency any issue not raised in the as- signments of error shall be deemed to be conceded clear and concise lettered statements of the facts on which the petitioner bases the assignments of error the petition in the instant case does not contain a clear and concise statement of the errors allegedly committed by respondent in determining the deficiency in and the accuracy- related penalty under sec_6662 on petitioner’s tax for his taxable_year and a clear and concise statement of the facts that form the basis of petitioner’s assignment of alleged error we find that the petition does not comply with the tax_court rules_of_practice and procedure as to the form and content of a petition we further find that pursuant to rule b petitioner has conceded the determinations that respon- dent made in the notice for his taxable_year we also conclude that the petition and the answer do not raise any genuine issues of material fact we found in the court’s date order that the petition contained statements contentions and arguments that are frivolous and groundless a petition that makes only frivolous and groundless arguments makes no justiciable claim and it is properly subject_to a motion for judgment on the pleadings nis family_trust v commissioner supra pincite cf 123_tc_213 we find that the statements contentions and arguments in the petition state no justiciable basis upon which relief may be granted although respondent does not ask the court to impose a penalty on petitioner under sec_6673 we consider sua sponte whether the court should impose a penalty on petitioner under that section sec_6673 authorizes the court to require a taxpayer to pay a penalty to the united_states in an amount not to exceed dollar_figure whenever it appears that a taxpayer instituted or maintained a proceeding in the court primarily for delay or that a taxpayer’s position in such a proceeding is frivolous or groundless as discussed above we found in the court’s date order that the petition contained statements contentions and arguments that are frivolous and groundless although we shall not impose a penalty under sec_6673 on petitioner in the instant case we caution him that he may be subject_to such a penalty if in the future he institutes or maintains a proceeding in this court primarily for delay and or his position in any such proceeding is frivolous or groundless see 82_tc_403 72_tc_1126 we have considered all of petitioner’s statements conten- tions and arguments that are not discussed herein and to the extent we have not found them to be frivolous and groundless we find them to be without merit and or irrelevant to reflect the foregoing an order granting respondent’s motion and decision for respondent will be entered


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp b2-plr-115947-00 date date legend parent target sub sub sub company official company employee date a date b date c dear this responds to a letter dated date in which your authorized representatives requested an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to file an election additional information regarding your request was submitted in letters dated date and date the extension is being requested for parent as common parent of the consolidated_group to file an election statement under sec_1_1502-13 of the income_tax regulations regarding a transaction described in sec_1_1502-13 the election the material information submitted for consideration is summarized below parent is the common parent of an affiliated_group the group that included sub sub sub and target in addition to other subsidiaries that are not material to this request the group files a consolidated_return on a calendar_year basis and the members use the accrual_method of accounting prior to date a parent owned percent of the stock of sub and sub target was a wholly-owned subsidiary of sub and sub was a wholly-owned subsidiary of sub on date a parent contributed percent of the stock of sub to sub on the same day sub distributed a dividend to sub of percent of the stock of target also on date a sub contributed percent of the stock of target to sub as a result of the transaction described above sub recognized gain on its distribution of the target stock under sec_311 however under sec_1_1502-13 this gain was not currently taken into account on date b sub sold percent of the target stock to a third party with regard to the stock sale the parties to the transaction elected asset sale treatment under sec_338 on date c the group filed its federal_income_tax return for its taxable_year that included date b the election under sec_1_1502-13 was not attached to the return or otherwise filed following date c company official company employee and outside cpa discovered that the election had not been timely filed the statute_of_limitations under sec_6501 has not expired for the group’s taxable_year in which the election should have been made or for any year affected by the election the election was required to be made on the original return filed for group’s tax_year that included date b which was filed on date c for various reasons the election was not filed sec_1_1502-13 provides in part that if an election is made pursuant to paragraph f ii certain transactions are recharacterized to prevent the items of the selling member of the group s from being taken into account or to provide offsets to those items sec_1_1502-13 provides relief to consolidated groups in the case of transactions for which an election is made under sec_338 paragraph f ii c applies to a deemed liquidation of t under sec_332 as a result of an election under sec_338 under paragraph f ii c the buying member of the group b is treated with respect to each share of the stock that it holds in another corporation t as recognizing as a corresponding_item any loss or deduction it would recognize determined after adjusting stock basis under sec_1_1502-32 if sec_331 applied to the deemed liquidation for all other federal_income_tax purposes the deemed liquidation remains subject_to sec_332 the amount of b’s loss or deduction under paragraph f ii c is subject_to limitation under paragraph f ii c sec_1_1502-13 requires that an election to apply paragraph f ii be made in a separate statement and use the specific language provided in the regulations additionally the election must be filed with the group’s income_tax return for the year of t’s liquidation or other transaction a separate election must be made for each application of sec_1_1502-13 under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 through provide the standards that the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case parent as the common parent of the consolidated_group was required by the regulations to file the election on date c however for various reasons the election was not filed subsequently parent filed this request under sec_301_9100-1 and sec_301_9100-3 for an extension of time to file the election because the time for filing the election is fixed by the regulations ie sec_1_1502-13 the commissioner has discretionary authority under sec_301_9100-1 to grant an extension of time for parent to file the election provided that parent shows it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by parent company official company employee outside cpa and authorized representatives explain the circumstances that resulted in the failure to timely file a valid election the information also establishes that tax professionals were responsible for the election that parent relied on them to timely make the election and that the government will not be prejudiced if relief is granted see sec_301_9100-3 based on the facts and information submitted including the representations made we conclude that parent has shown that it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-1 until days from the date_of_issuance of this letter for parent to file the election the above extension of time is conditioned on the taxpayers’ parent and subsidiaries tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the taxpayers’ tax_liability for the years involved a determination thereof will be made by the district director’s office upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayers’ liability is lower sec_301_9100-3 parent as the common parent of the consolidated_group is instructed to amend the group’s federal_income_tax return for the year that included date b and to file the election in accordance with the provisions of the regulations applicable to the election additionally a copy of this letter must be attached to the amended_return the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referred to in this letter specifically no opinion is expressed as to whether the group qualifies to make the election in addition no opinion is expressed as to the tax effects or consequences of filing the election late which are not specifically set forth in the above ruling notwithstanding that an extension is granted under sec_301_9100-1 to file the election penalties and interest that would otherwise be applicable if any shall apply this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely yours associate chief_counsel corporate by ken cohen acting chief branch


george c huff petitioner v commissioner of internal revenue respondent docket no filed date claiming to be a bona_fide_resident of the u s virgin islands at the close of and and claiming he was qualified for the gross_income tax exclusion provided by sec_932 p a u s citizen filed territorial income_tax returns with the virgin islands bureau of internal rev- enue he did not file federal_income_tax returns for those years r determined that p was not a bona_fide_resident of the virgin islands and was not qualified for the gross_income tax exclusion as claimed therefore r issued a notice_of_deficiency determining income_tax deficiencies and penalties for and for protective reasons p filed a petition in this court but asserts that the deficiency relates to a virgin islands tax matter over which this court lacks jurisdiction held although this case involves putative virgin islands transactions the notice_of_deficiency determines deficiencies in federal_income_tax whether p satisfies all the require- ments set forth in sec_932 and thus need not file a federal tax_return or pay federal_income_tax for and is a matter which this court has jurisdiction to decide held further p’s motion to dismiss for lack of juris- diction will be denied verdate 0ct date jkt po frm fmt sfmt v files huff sheila huff v commissioner william m sharp lawrence r kemm joseph a diruzzo iii and marjorie rawls roberts for petitioner daniel n price and ladd christman brown jr for respondent opinion jacobs judge this case is before the court on petitioner’s motion to dismiss for lack of jurisdiction the specific ques- tion to be decided is whether this court has jurisdiction to redetermine federal_income_tax deficiencies and penalties of a u s citizen who claims to be a bona_fide_resident of the u s virgin islands at the close of each of the years at issue ie and and to be exempt from u s tax filing and payment requirements as a consequence of his satisfying all the requirements of sec_932 all section references are to the internal_revenue_code code in effect for the years at issue unless otherwise indicated background petitioner is a u s citizen he resided in florida when he filed his petition in this court on date claiming to be a bona_fide_resident of the u s virgin islands virgin islands at the close of and petitioner filed territorial income_tax returns with the virgin islands bureau of internal revenue bir for and and claimed he was qualified for the sec_932 gross_income exclusion and therefore did not have to file a federal_income_tax return or pay federal_income_tax for those years following an audit of petitioner’ sec_2002 and virgin islands income_tax returns on date respondent issued petitioner a notice_of_deficiency determining the following federal_income_tax deficiencies and additions to tax additions to tax_year deficiency dollar_figure big_number big_number sec_6651 dollar_figure dollar_figure dollar_figure sec_6651 dollar_figure dollar_figure dollar_figure sec_6654 dollar_figure dollar_figure verdate 0ct date jkt po frm fmt sfmt v files huff sheila united_states tax_court reports attached to the notice_of_deficiency was a form 4549-a income_tax discrepancy adjustments which set forth the basis for the income_tax deficiencies and additions to tax involved herein it is determined that during the taxable_year sec_2002 through you were not a bona_fide_resident of the united_states virgin islands usvi it is also determined that you participated in a tax_avoidance scheme which involved improperly claiming to be a resident of the usvi and superficially recasting us-source income as usvi source income in order to inappropri- ately and invalidly claim a tax_credit of under the usvi economic development program it has also been determined that all transactions between nasco corporate finance consultants llc nasco and american benefits institute inc abi employers international inc ei professional advisory group inc pag and george c huff including any entity controlled or owned in whole or in part by george c huff are part of a series of step sham transactions devoid of economic_substance and will not be recognized for us federal_income_tax purposes these step sham transactions were part of a larger tax_avoidance scheme and were entered into solely in an attempt to superficially recharacterize us-source income as usvi-source income in order to inappropriately and invalidly claim a tax_credit of under the usvi economic development program see irs notice_2004_45 on date petitioner filed a petition in this court on date petitioner filed a complaint petition for redetermination of income taxes against the commissioner of internal revenue in the u s district_court district of the virgin islands st thomas and st john division district_court case no 10cv00026 on date petitioner filed in this court the motion in question i the virgin islands discussion the virgin islands are an insular area of the united_states they are a part of neither one of the states nor the district of columbia they are generally treated as a for- eign country for federal_income_tax purposes see sec_7701 in congress made a predecessor of the code part of the internal law of the virgin islands act of date ch sec_1 42_stat_123 codified as amended pincite u s c sec_1397 verdate 0ct date jkt po frm fmt sfmt v files huff sheila huff v commissioner this statute set up the mirror_tax system that remains in use virgin islands is in effect substituted for united_states and vice versa in the internal_revenue_code so that to satisfy virgin islands tax obliga- tions an individual or corporation in the virgin islands pays taxes to the bir equivalent to the taxes an individual or corporation under the same circumstances in the united_states would pay to the internal_revenue_service 820_f2d_618 3d cir as the law developed under the mirror_tax system the provi- sions of the code have been made applicable to the virgin islands so long as the specific section to be applied is ‘not manifestly inapplicable or incompatible’ with a separate territorial income_tax 430_f2d_973 3d cir quoting 395_f2d_407 9th cir the internal_revenue_service irs implemented the mirror_tax system in under the mirror_tax system as implemented some taxpayers both business entities and individuals were required to file two returns for example a corporation considered domestic in the united_states but doing business in the virgin islands was required to submit a return to the bir paying tax on income from sources in the virgin islands and to submit a return to the internal_revenue_service paying tax on worldwide income with a foreign_tax_credit allowed for the tax paid to the virgin islands the mirror system with its two separate taxing jurisdictions operated similarly for citizens of the united_states who resided in the virgin islands danbury inc v olive supra pincite the revised organic act of the virgin islands roa ch sec_28 68_stat_508 modified the administra- tion of the mirror_tax system roa sec_28 provided that the proceeds of any taxes levied by the congress on the inhabitants of the virgin islands shall be covered into the treasury of the virgin islands and shall be available for expenditure as the legislature of the virgin islands may pro- vide the section also provided that the term inhabitants of the virgin islands as used in this section shall include all persons whose permanent residence is in the virgin islands and such persons shall satisfy their income_tax obligations under applicable taxing statutes of the united_states by paying their tax on income derived from all sources both within and outside the virgin islands into the treasury of the virgin islands id in the mirror_tax system was again modified sec_932 enacted as part of the tax_reform_act_of_1986 tra verdate 0ct date jkt po frm fmt sfmt v files huff sheila united_states tax_court reports publaw_99_514 100_stat_2596 and amended in provides the current rules with respect to the taxation and filing_requirements of individuals sec_932 coordination of united_states and virgin islands income taxes c treatment of virgin islands residents - application of sub- section -this subsection shall apply to an individual for the taxable_year if- a such individual is a bona_fide_resident of the virgin islands at the close of the taxable_year or b such individual files a joint_return for the taxable_year with an individual described in subparagraph a filing requirement -each individual to whom this subsection applies for the taxable_year shall file an income_tax return for the tax- able year with the virgin islands residents of the virgin islands -in the case of an individual- a who is a bona_fide_resident of the virgin islands at the close of the taxable_year b who on his return of income_tax to the virgin islands reports income from all sources and identifies the source of each item shown on such return and c who fully pays his tax_liability referred to in sec_934 to the virgin islands with respect to such income for purposes of calculating income_tax_liability to the united_states gross_income shall not include any amount included in gross_income on such return and allocable deductions and credits shall not be taken into account thus an individual who is a bona_fide_resident of the virgin islands and incurs income_tax obligations to both the united_states and the virgin islands may satisfy his reporting and payment requirements by filing only with and paying tax only to the virgin islands if he satisfies each of the three requirements of sec_932 if the individual fails to meet any of these requirements he must file a fed- eral income_tax return with the irs see s rept pincite consequently an individual failing to satisfy all three requirements of sec_932 may be required to file an income_tax return and be liable for taxes in both the united_states and the virgin islands the term bona_fide_resident of the virgin islands is not defined by the code nor is it given any definition by the legislative_history instead congress authorized the sec- verdate 0ct date jkt po frm fmt sfmt v files huff sheila huff v commissioner retary to promulgate regulations for determining virgin islands residency see tra sec_1274 100_stat_2598 a virgin islands taxpayer may petition the district_court to redetermine a virgin islands tax_deficiency determined by the bir in the same manner as a u s taxpayer may petition this court sec_6212 sec_6213 mirror code v i code ann tit sec_943 see 185_fsupp2d_500 d v i the district_court has exclusive jurisdiction over the income_tax laws applicable to the virgin islands except the ancillary laws relating to the income_tax enacted by the legislature of the virgin islands u s c sec a ii the virgin islands economic development program in order to encourage economic development in the virgin islands congress has explicitly permitted the virgin islands government to reduce certain taxes sec_934 pro- vides that the virgin islands may reduce taxes on income derived from sources within the virgin islands or income effectively connected with the conduct_of_a_trade_or_business within the virgin islands pursuant to this grant of authority the virgin islands government enacted several investment incentives including the virgin islands industrial development program referred to by the parties as the economic development program or edp currently codified at v i code ann tit secs supp intended to promote growth and the development and diversification of the virgin islands’ economy the edp granted certain industrial development benefits to companies that do business in the virgin islands see v i code ann tit sec_701 participating companies receive substantial benefits including a 90-per- cent exemption on local_income_taxes a 90-percent exemption on the taxation of dividends and a 100-percent exemption on gross_receipts taxes for the years at issue regulations have not been promulgated defining a bona_fide_resident of the virgin islands however in notice_2004_45 2004_2_cb_33 the commissioner states that the determination turns on the facts and circumstances and the individual’s intentions with respect to the length and nature of his or her stay in the virgin islands citing sec_1_934-1 income_tax regs which in turn cites the principles of sec_1_871-2 through income_tax regs verdate 0ct date jkt po frm fmt sfmt v files huff sheila united_states tax_court reports iii notice_2004_45 in the irs determined that certain tax advisers were encouraging taxpayers to take highly questionable and in most cases meritless positions to claim many of the benefits of the edp to that end the irs issued notice_2004_45 2004_2_cb_33 the notice according to the notice the following is a typical scenario used by the promoters of those plans promoters typically approach a taxpayer taxpayer living and working in the united_states and advise taxpayer to i purport to become a usvi resident by establishing certain contacts with the usvi ii purport to terminate his or her existing employment relationship with his or her employer employer and iii purport to become a partner of a virgin islands limited_liability partnership v i llp that is treated as a partner- ship for u s tax purposes v i llp then purports to enter into a contract with employer to provide employer with substantially the same services that were provided by taxpayer prior to the creation of this arrangement typically after entering into the arrangement taxpayer continues to pro- vide substantially the same services for employer that he or she provided before entering into the arrangement but taxpayer is nominally a partner of v i llp instead of an employee of employer under this arrangement employer makes payments to v i llp for tax- payer’s services and no longer treats the payments as wages paid to tax- payer subject_to the withholding and payment of employment_taxes and reporting on taxpayer’s form_w-2 v i llp in turn makes payments to taxpayer for his or her services to employer v i llp typically treats these payments for tax_accounting purposes either as guaranteed payments for services or as distributions of taxpayer’s allocable share of partnership income under this arrangement the promoter may be a general_partner in v i llp and may retain a percentage of the fees received from employer v i llp either has or secures a reduction up to percent in usvi income_tax_liability under the economic development program edp of the usvi taxpayer takes the position that the edp benefits granted to v i llp provide a corresponding reduction in the income_tax_liability that taxpayer reports on his or her usvi income_tax return with respect to guaranteed payments from the partnership or distributive shares of the partnership’s net_income or both taxpayer pays tax to the usvi in an amount approximately equal to of the u s income_tax_liability that otherwise would be imposed on taxpayer’s income from performing the services taxpayer claims that for purposes of computing his or her u s income_tax_liability gross_income does not include guaranteed payments received from v i llp or taxpayer’s distributive_share if any of the part- nership’s net_income or both id c b pincite the irs stated that the promoters of these plans claim that individuals who participate in the plan can continue to verdate 0ct date jkt po frm fmt sfmt v files huff sheila huff v commissioner work in the united_states and still be a bona_fide_resident of the virgin islands virgin islands source income includes income from services performed in the united_states for purposes of determining the source_of_income the virgin islands includes the united_states and non- virgin islands income can be treated as effectively connected with the conduct_of_a_trade_or_business within the virgin islands even if under equivalent circumstances that type of income would not be considered effectively connected with the conduct of a u s trade_or_business respondent deter- mined that the transactions in which petitioner participated were the type of transactions discussed in the notice iv jurisdiction this court may exercise jurisdiction only to the extent authorized by congress 85_tc_527 however the court has the authority to deter- mine whether it has jurisdiction over a particular case 83_tc_309 we have jurisdiction to redetermine deficiencies in income estate gift and certain excise_taxes when the commissioner makes a determination that a deficiency is due a valid notice_of_deficiency is issued with respect to that determination and a petition is timely filed in response to the notice of defi- ciency see secs kluger v commissioner supra pincite 52_tc_787 petitioner maintains that the deficiencies relate to a virgin islands tax matter over which this court lacks jurisdiction petitioner posits that sec_932 and sec_934 which coordinate united_states and virgin islands income taxes constitute the tax law of the virgin islands and therefore jurisdiction over the underlying matters properly belongs to the district_court pursuant to the provisions of u s c sec a continuing petitioner maintains that inasmuch a sec_48 u s c sec a grants exclusive jurisdiction to the district_court with regard to virgin islands income_tax laws this court lacks jurisdiction because congress was removing all other courts of any district jurisdiction or level from hearing cases ‘with respect to the income_tax laws applicable to the usvi ’ u s c petitioner maintains that even though an individual may have both federal and virgin verdate 0ct date jkt po frm fmt sfmt v files huff sheila united_states tax_court reports islands tax obligations under sec_932 this does not affect the district court’s jurisdiction we do not subscribe to peti- tioner’s position u s citizens are subject_to federal taxation on their world- wide income see 265_us_47 gross_income for the purpose of calculating taxable_income is defined as all income from whatever source derived sec_61 every individual whose gross_income for the taxable_year equals or exceeds a threshold_amount is with enumer- ated exceptions not applicable here required to file a federal_income_tax return sec_6012 as a u s citizen petitioner is required to file a federal_income_tax return and use his worldwide gross_income to cal- culate his federal_income_tax sec_932 affects the determination of gross_income of an individual subject_to u s taxation if the individual in this case petitioner satis- fies all three requirements of sec_932 then the amount of gross_income reported on the individual’s virgin islands tax_return filed under sec_932 is not includable in determining his gross_income for purposes of the federal_income_tax thus if the amount of petitioner’s gross_income was that which was reported on his virgin islands tax_return then petitioner’s gross_income for pur- poses of calculating his income_tax_liability to the united_states would be zero in such a case because petitioner would have no gross_income for federal_income_tax purposes he would not need to file a federal_income_tax return but if petitioner does not satisfy all three requirements as respondent alleges then for each of the years at issue he will be required to file a federal_income_tax return even if he filed a virgin islands tax_return see sec_932 although this case involves putative virgin islands trans- actions the notice_of_deficiency determines deficiencies in petitioner’s federal_income_tax petitioner filed a timely peti- tion for redetermination with this court pursuant to sec_6213 whether petitioner satisfies all the requirements under sec_932 and thus need not file a federal tax_return or pay federal_income_tax for and is in dispute and is a matter which this court has jurisdic- tion to decide because the subject matter herein is within verdate 0ct date jkt po frm fmt sfmt v files huff sheila huff v commissioner the court’s jurisdiction we shall deny petitioner’s motion to dismiss for lack of jurisdiction an appropriate order will be issued f verdate 0ct date jkt po frm fmt sfmt v files huff sheila


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc ita plr-112864-99 date date re legend taxpayer parent qi qi parent division division affiliate property category category 2a category 2b program program cla sec_1 cla sec_2 date a b c d e dear this letter responds to your request for a private_letter_ruling dated date submitted on behalf of taxpayer requesting rulings on issues concerning its establishment of a like-kind_exchange program arising under sec_1031 of the internal_revenue_code facts taxpayer is an subsidiary of taxpayer and its subsidiaries provide a to and also purchase b from taxpayer also to the majority of which are affiliated with in addition taxpayer to and taxpayer is a calendar_year taxpayer and is a member of the parent affiliated_group that files a consolidated_income_tax_return for financial and tax reporting purposes taxpayer has adopted the accrual_method of accounting most of the new properties financed by taxpayer and its subsidiaries are taxpayer also provides division is a division of taxpayer division acts as taxpayer in and for properties division also services division has agreements with a to provide for properties under all of division 1’s the properties and related are from to although the properties are division is a division of taxpayer it performs the same function as division an affiliate of parent the properties are from to taxpayer but the properties are division the division are by division taxpayer’s operations in the course of its business taxpayer regularly purchases properties that are from its of are typically unrelated to parent taxpayer or their affiliates terms typically range from c to d taxpayer has the properties and depreciates them under sec_168 of the code taxpayer regularly disposes of these properties when the taxpayer’s acquisition of properties while individual transactions may vary the process by which taxpayer purchases a property from begins when the rather than a property from the the submits the to taxpayer either by entering the appropriate information in a if the taxpayer thereafter if the and agree to enter into a taxpayer is executed by both the and the the executes the as the by signing the the also the property to taxpayer the then submits a of related documents to taxpayer this contains the documentation relating to and the property upon receipt and approval of the taxpayer the for the property payment is normally made by occasionally a will not submit a to taxpayer for with such a typically occurs when the believes that the the established by taxpayer the and will execute the the will take the property and the will then submit the to taxpayer upon receiving the taxpayer will perform its normal process on the prior to accepting the property from the division acquires properties from a number of with whom it has contractual relationships these are or other that deal directly with the originating the the contractual agreement between division and each provides that the will properties from eligible and sell them to division if they meet division 1’s eligibility criteria the assigns its rights in the properties and its rights under its contract with the to division each property is division division services these and the has no continuing involvement with them these properties are treated like any other division and are from the to taxpayer taxpayer’s disposition of properties taxpayer disposes of properties either after they are if the is or after they are returned at generally at unless the is taxpayer disposes of these properties in one of two ways the property is either sold directly to a usually the who the with the or the property is sold at typically the buyer is such sales are very unusual all of taxpayer's provide the with a at when a the acquires the property from taxpayer at that is the the purchases the property from the if the chooses not to the has the the property for the in the situation in either case taxpayer sells the property the may pay for the property by if the uses the this purchase into the the with taxpayer the then sends the necessary paperwork e and other forms to taxpayer if the pays by the the in the of paperwork upon receipt of payment and approval of the paperwork taxpayer releases the property to the who then transfers it to if the purchases the property the can add the to taxpayer this is known as a program the are wholly separate to purchase the property the transmits the the property to taxpayer and in a separate transaction taxpayer the property by and transferring the to the typically by in the typically negotiates with the to determine pay the pays this amount to the who is required to the pays by if the property is or if neither the nor the chooses to the property the property is at the the property is and the property is sold the then remits the to taxpayer in some cases a purchasing who is part may from taxpayer simply by taxpayer a for the amount of the purchase for property purchases under this plan program the funds from the and funds to taxpayer taxpayer’s like-kind_exchange program taxpayer has established a program of like-kind_exchanges of property these exchanges are intended to qualify as deferred like-kind_exchanges under sec_1031 of the code and the regulations thereunder to facilitate these exchanges taxpayer has entered into a written master exchange_agreement agreement with qi to which taxpayer has assigned its rights with respect to a the disposition of property relinquished_property and b the acquisition of property replacement_property qi is intended to be a qualified_intermediary within the meaning of sec_1_1031_k_-1 of the income_tax regulations by assigning these rights to qi and giving notice to all parties to the agreements establishing such rights taxpayer intends that qi be treated as a having acquired the relinquished_property from taxpayer and transferred it to the ultimate_purchaser and b having acquired the replacement_property from its seller and transferred it to taxpayer acquisitions of properties from and dispositions of properties to are excluded from taxpayer’s like-kind_exchange program taxpayer has appointed qi to receive the proceeds from the disposition of relinquished properties and disburse such proceeds along with other funds supplied by taxpayer as may be necessary to acquire replacement properties qi functions as an intermediary to facilitate exchanges of all acquisitions and dispositions of property by taxpayer taxpayer’s written_agreement with qi limits taxpayer’s rights to receive pledge borrow or otherwise obtain the benefits of money or other_property held by qi as required by sec_1_1031_k_-1 and g of the regulations the qualified_intermediary qi is a qi parent qi parent is a financial_institution in the two preceding years qi parent and its affiliates have provided the following routine financial services to taxpayer and its affiliates funds processing lines of credit lockbox services counterparties in foreign exchange swaps and purchases of taxpayer-issued debt obligations qi is an independent third-party financial_institution that has not previously performed services other than routine financial services for taxpayer in the two preceding years thus qi is not a disqualified_person under sec_1_1031_k_-1 of the regulations assignment and notice taxpayer has structured its program to meet the requirements of the qualified_intermediary safe_harbor under sec_1_1031_k_-1 of the regulations pursuant to this regulation qi must acquire relinquished_property from taxpayer and transfer it to a purchaser and acquire replacement_property from a seller and transfer it to taxpayer sec_1_1031_k_-1 one way that an intermediary is treated as acquiring and transferring property is if the intermediary enters into an agreement with the purchaser of relinquished_property or the seller of replacement_property and the property is transferred pursuant to that agreement sec_1_1031_k_-1 and c the regulations further provide that the intermediary is treated as entering into an agreement if the rights of a party to the agreement are assigned to the intermediary and all parties to that agreement are notified in writing of the assignment on or before the date of the relevant transfer of property sec_1_1031_k_-1 taxpayer and qi have chosen to utilize this assignment and notice method of having qi acquire and transfer both the relinquished_property and the replacement_property purchasers of relinquished_property and sellers of replacement_property will be notified in several ways that taxpayer’s rights to sell the relinquished_property and acquire the replacement_property have been assigned to qi in the agreement taxpayer has assigned to qi taxpayer’s rights but not its obligations with respect to the sale of relinquished_property this assignment applies to rights with respect to the sale of property taxpayer held on the date the agreement was signed as well as to property acquired by taxpayer in the future similarly taxpayer has assigned to qi taxpayer’s rights but not its obligations with respect to the purchase of replacement_property in the agreement this assignment applies to the rights with respect to the purchase of property acquired after the date the agreement was assigned in addition taxpayer will notify qi of individual transactions by sending qi a report containing a listing of the daily acquisitions and dispositions of property these reports provide qi with a list of each transaction with respect to which qi has been assigned taxpayer’s rights taxpayer provides with written notification of the assignment in two different ways first taxpayer sent a blanket notice to every prior to the start of the like-kind_exchange program second taxpayer provides a purchasing or selling with a written notice in connection with each disposition of relinquished_property and each acquisition of replacement_property on or before the date of the transaction the transactions at issue here began with an exchange of the first relinquished_property disposed of on or after date with the first replacement_property acquired after such date but no more than days after such date and the cost of which was equal to or greater than the proceeds from the sale of the relinquished_property matching of relinquished and replacement properties every proceeds from the sale of relinquished_property will flow through the and will be used to acquire replacement_property relinquished properties and replacement properties are divided into three categories category category 2a and category 2b category properties are described in general asset cla sec_1 and category 2a and 2b properties are described in general asset cla sec_2 see sec_1_1031_a_-2 information about the relinquished_property and replacement_property will be analyzed in taxpayer’s like-kind_exchange matching system and relinquished_property will be matched with the replacement_property for which it was exchanged according to certain parameters relinquished_property will only be matched with replacement_property acquired within days after the date the relinquished_property was transferred to its purchaser furthermore to the extent possible relinquished_property will always be matched with replacement_property whose cost equals or exceeds the proceeds from the sale of the relinquished_property in those cases where it is not possible to acquire replacement_property equal to or in excess of the cost of the relinquished_property the matching system is designed to group property so that the excess of proceeds of relinquished_property over the cost of replacement_property is minimized in such cases taxpayer will recognize gain to the extent of the lesser_of gain realized or the amount of such excess sec_1_1031_j_-1 also in the event that it is not possible to match all relinquished properties with replacement properties in the same asset class taxpayer may match properties between categorie sec_1 and 2b finally taxpayer’s matching system is designed to accommodate these requirements as well taxpayer purchases of relinquished_property taxpayer in the course of its business taxpayer provides to of property and to of such some of relinquished_property by use of program or program provided by taxpayer in such a case taxpayer a purchaser of relinquished_property the the relinquished_property a contemporaneously with the sale of the relinquished_property in a separate and distinct arm’s-length transaction at market rate terms the purchaser is not required to but is free a purchaser’s is not part of the for the transfer of the relinquished_property like-kind_exchange cash flows taxpayer’s pre-like-kind-exchange business practice was to use to for almost all purchases of properties and from and for most sales of properties most of taxpayer’s to and from and were made also all collections and disbursements for transactions flowed through the in addition most transactions with and others was such party this eliminates it is also preferred by the and others who must taxpayer represents that its business is a highly competitive business and in order to avoid causing disruption or confusion with the and others taxpayer has adopted a for the like-kind_exchange program that will enable it to collections payment for each relinquished_property is made by to qi by in the case of the payment the system the and the relinquished_property proceeds are in the case of the the to taxpayer processed and either thus result in proceeds from the sale of relinquished_property being used by qi as provided in the agreement solely to purchase replacement_property on taxpayer’s behalf at no time will the proceeds from the sale of relinquished_property be placed in an account over which taxpayer will have the power to obtain the funds directly or indirectly without the qi’s assent a report is generated by that lists when these transfers have been authorized by qi and taxpayer thus in the event of a taxpayer is to to the some through program or program in such a case the relinquished_property proceeds is disbursements replacement_property will be purchased by qi with the proceeds from the sale of relinquished_property each replacement_property will be acquired no sooner than one day after and no later than days after the transfer of the related relinquished_property will receive payment for the replacement_property the by taxpayer’s system based on these payments for replacement_property will be funded with relinquished_property proceeds if the proceeds from the sale of relinquished_property held by qi are insufficient to cover the pu rchase price of the replacement_property taxpayer will transfer additional funds to fund the shortfall the same report discussed above with respect to collections is also used to the report specifies how much is needed for purchases of replacement_property the amount of additional funds if any needed from taxpayer for purchases of replacement_property investment of unspent proceeds if there are any unspent proceeds from dispositions of relinquished_property remaining in these funds are invested by qi in accordance with taxpayer’s instructions and any income earned is reported by taxpayer for tax purposes sec_1_1031_k_-1 these earnings on the unspent proceeds are used by the qi to acquire replacement_property in the future and taxpayer’s rights with respect to this income is limited in accordance with sec_1_1031_k_-1 of the regulations when a wishes to a property taxpayer generally that the from the at the time of this is by the in to simplify the taxpayer typically receives the by the for the property the of the is simply an administrative convenience taxpayer the to the purchase_price of the property and the amount on its books to the and is purchase_price -- taxpayer has expended the full cost of the property in money paid to the because the is part of the acquisition of replacement_property it does not involve or affect and therefore does not have an adverse impact on the overall like-kind_exchange program or any one or more distinct exchanges under the program the manner in which the depends upon whether the property is or whether the if the property is taxpayer for the if the acquires the property however the to the the pays qi the purchase_price and the has thus qi also receives the full purchase_price for the property since the qi receives the full purchase_price this situation leaves the parties in the exact same position as if the non-like-kind exchange transaction processing funds that are not proceeds of relinquished_property or acquisitions of replacement_property for example payments from include payments for dispositions of however non-like-kind exchange taxpayer and non-like-kind exchange qi’s involvement with non-like-kind exchange these legal agreements governing cash flows the agreement addresses cash flows in taxpayer’s like-kind_exchange program and provides that taxpayer has no right to receive pledge borrow or otherwise obtain the benefit of money or other_property held by qi before the end of the relevant period described in sec_1_1031_k_-1 of the regulations taxpayer identifies replacement_property by receiving the replacement_property before the end of the identification period as provided in sec_1_1031_k_-1 of the regulations thus if no replacement_property were to be received with respect to a particular relinquished_property within the identification period the agreement would permit taxpayer to receive the related relinquished_property proceeds after the end of the identification period in such a case taxpayer would recognize all realized gain on the disposition of the associated relinquished_property the bank account agreement provides that i the qi ii qi approval is required for each transfer of funds iii qi funds the full purchase_price of disbursements for replacement_property to the extent of the funds held by qi and taxpayer funds any shortfall in disbursements for replacement_property iv taxpayer has no right to receive pledge borrow or otherwise obtain the benefits of proceeds of sales of relinquished_property before the end of the relevant period described in sec_1_1031_k_-1 of the regulations each has entered into that authorizes taxpayer to each with a has been amended to provide that i settlements due from the to qi may be paid ii settlements due to the from qi may be paid iii the directs that the obligation to qi iv the directs that any amounts each has been amended in a manner similar to that of with a except that provisions related to have been omitted since rulings requested under these facts taxpayer requests that the service issue the following rulings property in category is of like_kind with property in category 2b within the meaning of sec_1031 taxpayer’s transfer of each relinquished_property or group of relinquished properties and the corresponding receipt of each related replacement_property or group of replacement properties in accordance with the agreement and as represented in this request for rulings will be treated as a separate and distinct like- kind exchange that qualifies for nonrecognition_of_gain_or_loss for federal_income_tax purposes under sec_1031 each exchange pursuant to the agreement of one or more relinquished properties for one or more replacement properties will qualify for nonrecognition_of_gain_or_loss provided no money or other non-like-kind property is received by taxpayer if taxpayer does receive money or other non-like-kind property in an exchange the gain with respect to the relinquished_property involved in the exchange will be recognized in an amount not in excess of the sum of such money and the fair_market_value of such other_property qi acting in accordance with the agreement will be treated as a qualified_intermediary as defined in sec_1_1031_k_-1 of the regulations and will be treated as acquiring and transferring each relinquished_property and each replacement_property for purposes of sec_1031 pursuant to sec_1_1031_k_-1 and g of the regulations taxpayer will not be in actual or constructive receipt of any of the proceeds from the sale of relinquished_property or any money or other_property held by qi unless and until such amounts or items are actually received by taxpayer ie if replacement_property is not acquired during the identification period and the related sale proceeds are transferred to taxpayer neither nor from the sale of relinquished_property including results in actual or constructive receipt of any portion of the proceeds by taxpayer where qi receives the full amount of proceeds from the sale of relinquished_property with respect to relinquished_property the purchaser of the relinquished_property is not part of the transfer of the relinquished_property by taxpayer and therefore taxpayer does not actually or constructively receive money or other_property on account of before taxpayer actually receives like-kind replacement_property law and analysis sec_1031 provides that no gain_or_loss shall be recognized on the exchange of property held for productive use in a trade_or_business or for investment if such property is exchanged solely for property of like_kind which is to be held for productive use in a trade_or_business or for investment sec_1031 adds that this subsection does not apply to any exchange of stock_in_trade or other_property held primarily for sale there are three general requirements for nonrecognition treatment under sec_1031 both the property surrendered and the property received must be held either for productive use in a trade_or_business or for investment the property surrendered and the property received must be of like-kind and there must be an exchange as distinguished from a sale and a purchase held for requirement the relevant qualified_use of the property owned by taxpayer and subsequently being exchanged in the transaction is thus the relinquished_property that taxpayer and the replacement_property that taxpayer will be upon acquisition is considered property held for productive use in a trade_or_business in taxpayer’s hands like-kind requirement the requirement that the exchanged properties be of like_kind has reference to the nature or character of the property and not to its grade or quality sec_1_1031_a_-1 to qualify for like-kind_exchange treatment one kind or class of property may not be exchanged for property of a different kind or class depreciable tangible personal properties are of a like_class if they are either within the same general asset class as defined in sec_1_1031_a_-2 of the regulations or within the same product_class as defined in sec_1_1031_a_-2 of the regulations if a property is classified within any general asset class it may not be classified within a product_class sec_1 a - b sec_1_1031_a_-2 of the regulations describes the various general asset classes the relinquished properties and replacement properties are divided into three categories category category 2a and category 2b category properties are described in cla sec_1 and category 2a and 2b properties are described in cla sec_2 see also revproc_87_56 1987_2_cb_674 to the extent that each exchange consists of one or more relinquished properties and one or more replacement properties in the same class these exchanges fit within the general asset class safe_harbor described above in the event that it is not possible to match all relinquished properties with replacement properties in the same asset class taxpayer may match properties between categorie sec_1 and 2b the general asset class safe_harbor does not apply to these exchanges the general asset class and product_class safe harbors in the regulations simplify the determination of whether depreciable tangible_personal_property is of a like_kind but they are not the exclusive method for making this determination for depreciable tangible_personal_property to be considered of like_kind for purposes of sec_1031 the property can be either like_kind or like_class sec_1_1031_a_-2 of the regulations provides that an exchange of properties of a like_kind may qualify under sec_1031 regardless of whether the properties are also of like_class in determining whether exchanged properties are of a like_kind no inference is to be drawn from the fact that the properties are not of a like_class thus two properties can be in different general asset classes and thus not be of a like_class and yet be of like_kind the like-kind standard has been interpreted more narrowly in the case of exchanges of personal_property as compared to exchanges of real_property see 680_f2d_85 9th cir tax_court did not err in refusing to apply the lenient treatment of real_estate exchanges to an exchange of personal_property involving u s double eagle dollar_figure gold coins and swiss francs even within the more restrictive parameters of the like-kind standard as applied to personal_property the differences between property in category and property in category 2b do not rise to the level of a difference in nature or character but are merely a difference in grade or quality when an exchange transaction is deferred rather than simultaneous even if the taxpayer trades property for like-kind_property the exchanged properties will not be of like_kind if the replacement_property is not timely identified and timely received sec_1031 states that any property received by the taxpayer shall be treated as property that is not like-kind_property if a such property is not identified as property to be received in the exchange on or before the day that i sec_45 days after the date on which the taxpayer transfers the property relinquished in the exchange or b such property is received after the earlier of i the day that i sec_180 days after the date on which the taxpayer transfers the property relinquished in the exchange or ii the due_date determined with regard to extension for transferor’s return of the tax imposed by this chapter for the taxable_year in which the transfer of the relinquished_property occurs sec_1_1031_k_-1 provides that any replacement_property that is received by the taxpayer before the end of the identification period will in all events be treated as identified before the end of the identification period in the instant case taxpayer has represented that it will receive all replacement_property within days of the sale of the relinquished_property thereby satisfying both the identification and receipt requirements of sec_1031 accordingly category property is of like_kind with category 2b property exchange requirement for purposes of sec_1031 and sec_1_1031_k_-1 a deferred_exchange is defined as an exchange in which pursuant to an agreement the taxpayer transfers property held for productive use in a trade_or_business or for investment the relinquished_property and subsequently receives property to be held either for productive use in a trade_or_business or for investment the replacement_property in order to constitute a deferred_exchange the transaction must be an exchange ie a transfer of property for property as distinguished from a transfer of property for money sec_1_1031_k_-1 in the case of a transfer of relinquished_property in a deferred_exchange gain_or_loss may be recognized if the taxpayer actually or constructively receives money or other_property before the taxpayer actually receives like-kind replacement_property if the taxpayer actually or constructively receives money or other_property in the full amount of the consideration for the relinquished_property before the taxpayer actually receives like-kind replacement_property the transaction will constitute a sale and repurchase and not a deferred_exchange even though the taxpayer may ultimately receive like-kind replacement_property sec_1_1031_k_-1 according to sec_1_1031_k_-1 actual or constructive receipt of money or other_property by an agent of the taxpayer determined without regard to paragraph k of this section is actual or constructive receipt by the taxpayer qi as qualified_intermediary sec_1_1031_k_-1 of the regulations sets forth four safe harbors the use of any of which will result in a determination that the taxpayer is not in actual or constructive receipt of money or other_property for sec_1031 purposes sec_1_1031_k_-1 of the regulations provides that in the case of a taxpayer's transfer of relinquished_property involving a qualified_intermediary the qualified_intermediary is not considered the taxpayer's agent for sec_1031 purposes in such a case the taxpayer's transfer of relinquished_property and subsequent receipt of like-kind replacement_property is treated as an exchange and the determination of whether the taxpayer is in actual or constructive receipt of money or other_property before the taxpayer actually receives like-kind replacement_property is made as if the qualified_intermediary is not the agent of the taxpayer sec_1_1031_k_-1 of the regulations provides that sec_1 k - g i applies only if the agreement between the taxpayer and the qualified_intermediary expressly limits the taxpayer’s right to receive pledge borrow or otherwise obtain the benefits of money or other_property held by the qualified_intermediary as provided in sec_1_1031_k_-1 taxpayer’s written_agreement with qi limits taxpayer’s rights to receive pledge borrow or otherwise obtain the benefits of money or other_property held by qi as required by sec_1_1031_k_-1 and g of the regulations a qualified_intermediary as defined in sec_1_1031_k_-1 of the regulations must be a person who is not the taxpayer or a disqualified_person according to sec_1_1031_k_-1 of the regulations the term disqualified_person includes a person who is the taxpayer's agent at the time of the transaction for this purpose a person who has acted as the taxpayer's employee attorney accountant investment banker or broker or real_estate agent or broker within the two-year period ending on the date of the transfer of the first of the relinquished properties is treated as the taxpayer's agent however performance of certain services does not cause an entity to be a disqualified_person these services include a services for the taxpayer with respect to exchanges of property intended to qualify for nonrecognition_of_gain_or_loss under sec_1031 and b routine financial title insurance escrow or trust services for the taxpayer by a financial_institution title insurance_company or escrow company qi parent is an independent third-party financial_institution that has not previously performed services other than the routine financial services previously described for taxpayer in the instant case as such qi will not be a disqualified_person under sec_1_1031_k_-1 of the regulations in order to qualify as a qualified_intermediary the intermediary must enter into a written_agreement with the taxpayer the exchange_agreement and as required by the exchange_agreement acquires the relinquished_property from the taxpayer transfers the relinquished_property acquires the replacement_property and transfers the replacement_property to the taxpayer sec_1_1031_k_-1 regardless of whether an intermediary acquires and transfers property under general tax principles an intermediary treated as acquiring and transferring the relinquished_property if the intermediary either on its own behalf or as the agent of any party to the transaction enters into an agreement with a person other than the taxpayer for the transfer of the relinquished_property to that person and pursuant to that agreement the relinquished_property is transferred to that person sec_1_1031_k_-1 an intermediary is treated as acquiring and transferring replacement_property if the intermediary either on its own behalf or as the agent of any party to the transaction enters into an agreement with the owner of the replacement_property for the transfer of that property and pursuant to that agreement the replacement_property is transferred to the taxpayer sec_1_1031_k_-1 for these purposes an intermediary is treated as entering into an agreement if the rights of a party to the agreement are assigned to the intermediary and all parties to that agreement are notified in writing of the assignment on or before the date of the relevant transfer of property sec_1_1031_k_-1 in the instant case taxpayer has assigned to qi its rights to sell relinquished_property in all instances the purchaser receives notice of the assignment prior to the time that the relinquished_property is transferred to the purchaser each form of notice informs the purchaser in writing that taxpayer has assigned to qi its rights to sell the property the property will be transferred directly from taxpayer to the purchaser of the property pursuant to the agreement between taxpayer and purchaser thus qi will be treated as acquiring and transferring the relinquished_property pursuant to sec_1_1031_k_-1 and v in addition taxpayer assigned its right to purchase replacement_property to qi in all instances the seller receives notice prior to the time that the replacement_property is transferred to taxpayer each form of notice informs the seller in writing that taxpayer has assigned to qi its rights to purchase the property the property is transferred directly to taxpayer pursuant to the agreement between seller and taxpayer thus qi will be treated as acquiring and transferring the replacement_property pursuant to sec_1_1031_k_-1 and v accordingly qi acting in accordance with the agreement will be treated as a qualified_intermediary as defined in sec_1_1031_k_-1 of the regulations and will be treated as acquiring and transferring each relinquished_property and each replacement_property for purposes of sec_1031 constructive receipt - proceeds of relinquished_property the agreement between taxpayer and qi provides that taxpayer will have no rights to receive pledge borrow or otherwise obtain the benefits of money or other_property as required by sec_1_1031_k_-1 and i of the regulations proceeds from the sale of relinquished_property are deposited into or to the extent that funds from the sale of the relinquished_property are insufficient to cover the purchase of replacement_property taxpayer transfers funds to cover the amount of the purchases taxpayer is not in actual or constructive receipt of proceeds of sales of relinquished_property that are deposited in transferred to and ultimately transferred to and used to acquire replacement_property all agreements governing the flow of funds limit taxpayer’s ability to actually or constructively receive those funds as required by sec_1_1031_k_-1 and g of the regulations taxpayer’s agreements with and provide that amounts collected from and are deposited into accounts specified by the qi and taxpayer the agreement and provide that qi those funds in the full amount of proceeds from sales of relinquished_property the agreement and also provide that no funds can be without qi approval and all of these agreements restrict as required by sec_1_1031_k_-1 and g of the regulations taxpayer's right to receive pledge borrow or otherwise obtain the benefit of relinquished_property proceeds and earnings thereon held in and prior to the end of the relevant periods described in sec_1_1031_k_-1 constructive receipt - under taxpayer’s like-kind_exchange program all transactions with or are and payments the or are resulting in either or in each type of transaction involving qi receives the full amount of proceeds from the sale of relinquished_property for example the the sale of relinquished_property purchasing under program does not result in actual or constructive receipt of the proceeds by taxpayer in each such sale of relinquished_property qi receives the sales proceeds of relinquished_property in effect the has the amount the this is accomplished thus taxpayer is not in actual or constructive receipt of proceeds of relinquished_property constructive receipt -- program and program under program are for by taxpayer and can simply by in a program sale the does not the property from the and taxpayer with respect to this transaction taxpayer is not in actual or constructive receipt of proceeds of relinquished_property by reason of that results from a program transaction taxpayer is in the business of purchasing are not required to and are free to use the to a is a separate and distinct arm's-length_transaction from the sale of the property and accordingly taxpayer does not actually or constructively receive money or other_property on account of its receipt of the before taxpayer actually receives like-kind replacement_property see 65_tc_6 acq 1976_2_cb_2 program transactions are similar to program transactions except that the proceeds from the sale of the relinquished_property and the accordingly under these facts the is a separate and independent transaction and taxpayer is not in actual or constructive receipt of proceeds of relinquished_property by reason of holding that results from a program transaction accordingly based on your representations and the above analysis we rule as follows property in category is of like_kind with property in category 2b within the meaning of sec_1031 taxpayer’s transfer of each relinquished_property or group of relinquished properties and the corresponding receipt of each related replacement_property or group of replacement properties in accordance with the agreement and as represented in this request for rulings will be treated as a separate and distinct like- kind exchange that qualifies for nonrecognition_of_gain_or_loss for federal_income_tax purposes under sec_1031 each exchange pursuant to the agreement of one or more relinquished properties for one or more replacement properties will qualify for nonrecognition_of_gain_or_loss provided no money or other non-like-kind property is received by taxpayer if taxpayer does receive money or other non-like-kind property in an exchange the gain with respect to the relinquished_property involved in the exchange will be recognized in an amount not in excess of the sum of such money and the fair_market_value of such other_property qi acting in accordance with the agreement will be treated as a qualified_intermediary as defined in sec_1_1031_k_-1 of the regulations and will be treated as acquiring and transferring each relinquished_property and each replacement_property for purposes of sec_1031 pursuant to sec_1_1031_k_-1 and g of the regulations taxpayer will not be in constructive receipt of any of the proceeds from the sale of relinquished_property or any money or other_property held by qi unless and until such amounts or items are actually received by taxpayer ie if replacement_property is not acquired during the identification period and the related sale proceeds are transferred to taxpayer neither nor from the sale of relinquished_property with including results in actual or constructive receipt of any portion of the proceeds by taxpayer where qi receives the full amount of proceeds from the sale of relinquished_property with respect to relinquished_property that is the to the purchaser of the relinquished_property is not part of the transfer of the relinquished_property by taxpayer and therefore taxpayer does not actually or constructively receive money or other_property on account of before taxpayer actually receives like-kind replacement_property no opinion is expressed as to the tax treatment of the proposed transaction under the provisions of any other section of the code or regulations that may be applicable or the tax treatment of any conditions existing at the time of or effects resulting from the transaction described that are not specifically covered in the above ruling in this connection we understand that if a favorable ruling is obtained for this transaction it will serve as a model for subsequent like-kind_exchanges as previously stated no opinion is expressed as to any other transaction that you contemplate a copy of this letter should be attached to the federal_income_tax return for the year in which the transaction in question occurs this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be cited as precedent sincerely yours associate chief_counsel income_tax accounting by _________________________ kelly e alton senior technician reviewer branch


t c summary opinion united_states tax_court donna m bokman petitioner v commissioner of internal revenue respondent docket no 14105-99s filed date donna m bokman pro_se daniel j parent for respondent dinan special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed the decision to be entered is should not subsequent effect for not reviewable by any other court and this opinion be cited as authority unless otherwise indicated section references are to the internal_revenue_code in the year in issue - - respondent determined a deficiency in petitioner’s federal_income_tax of dollar_figure for the taxable_year the issue for decision is whether petitioner made a valid election under sec_453 not to report the sale of a residence using the installment_method some of the facts have been stipulated and are so found the stipulations of fact and the attached exhibits are incorporated herein by this reference petitioner resided in byron california on the date the petition was filed in this case petitioner and her former husband joseph bokman were divorced in petitioner purchased a residence in byron california on date she then sold a joint_tenancy interest in this residence to mr bokman on date mr bokman received this interest in exchange for a secured note requiring him to pay petitioner dollar_figure a month in interest for a period of years followed by the payment of the principal_amount of dollar_figure payment of interest was to commence on date the note was secured using a deed_of_trust on mr bokman’s interest in the residence mr bokman made the following payments during date amount dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number petitioner received an extension of time to file her federal_income_tax return until date on that date she mailed the return from her byron california home in an envelope stamped by a private post meter with the same date the internal_revenue_service center in ogden utah received the return on date petitioner paid dollar_figure with her return she paid an additional dollar_figure in connection with the return on date for interest and an addition_to_tax for failure to pay petitioner filed with the return a form_2119 sale of your home reflecting the sale of an interest in the residence on this form she reported an amount_realized of dollar_figure and gain of dollar_figure she reported that she had used the residence as her main home for at least years of the 5-year period before the sale claiming the exclusion under sec_121 in the maximum amount of dollar_figure she included in income only dollar_figure of the gain on the sale q4e- on date respondent issued petitioner a statutory_notice_of_deficiency for with the determination that petitioner had unreported capital_gain of dollar_figure the notice_of_deficiency stated that petitioner had elected out of the installment_method and did not qualify for the claimed exclusion petitioner concedes that she did not live in the residence for the years as she claimed on her return and is therefore not entitled to the exclusion she argues that respondent’s determination is in error because her election out of the installment_method was invalid as a general_rule taxpayers are required to use the installment_method with respect to any income from an installment_sale sec_453 the installment_method is a method under which income is recognized in the year or years in which payments are received sec_453 an installment_sale generally is any sale in which at least one payment is to be received after the close of the taxable_year of the sale sec_453 taxpayers may elect out of the otherwise mandatory installment_method sec_453 subject_to exceptions not applicable here such an election must be made on or before the due_date including extensions for filing the taxpayer’s return ‘all other adjustments in the notice_of_deficiency are computational and will be resolved by the court’s holding on the issue in this case - - for the taxable_year of the sale sec_453 one method by which a taxpayer makes the election is to report the full amount_realized on the sale on his income_tax return filed for the taxable_year of the sale sec_15a_453-1 temporary income_tax regs fed reg date once made an election cannot be revoked without the consent of the secretary sec_453 petitioner concedes that she reported the full amount_realized from the sale of her residence on her tax_return she argues however that this was not a valid election out of the installment_method because her return was not timely filed thereby causing the election to be invalid under sec_453 d generally a tax_return is filed on the date it is received by the internal_revenue_service irs however if a tax_return meets the requirements of sec_7502 the return will be deemed to have been filed on the date it was postmarked even if it is received by the irs after its due_date the following requirements apply to documents which are mailed in envelopes with private post meter postmarks if the postmark on the envelope is made other than by the united_states post office the postmark so made must bear a date on or before the last date prescribed for filing the document and the document must be received not later than the time when a document contained in an envelope which is properly addressed and mailed and sent by the same class of mail would ordinarily be received if it -- - were postmarked at the same point of origin by the united_states post office on the last date prescribed for filing the document however in case the document is received after the time when a document so mailed and so postmarked by the united_states post office would ordinarily be received such document will be treated as having been received at the time when a document so mailed and so postmarked would ordinarily be received if the person who is required to file the document establishes i that it was actually deposited in the mail before the last collection of the mail from the place of deposit which was postmarked except for the metered mail by the united_states post office on or before the last date prescribed for filing the document that the delay in receiving the document was due to a delay in the transmission of the mail and the cause of such delay sec_301_7502-1 b proced admin regs petitioner is making the unusual argument that her return was not timely filed despite the fact that respondent has apparently treated it as timely in all respects respondent argues that petitioner made prior representations that her return was timely filed and that petitioner should not be allowed to choose whether or not her return was mailed timely based upl on which scenario is to her benefit at that particular moment we disagree petitioner’s ability to rely on the fact that her return was filed late to escape the unintended election is admittedly fortuitous for her but cannot be set_aside merely for that reason the regulation quoted above is written under the assumption that the taxpayer desires to show that a return was timely filed reading the regulation in light of petitioner’s situation leads - to some incongruities nonetheless we find that the record in this case shows that sec_7502 is inapplicable and that petitioner’s return was not timely filed the first requirement for the applicability of sec_7502 is that the postmark on the envelope bear a date on or before the due_date of the return id this requirement is met because the return bears the date of date its due_date the second requirement is that the return be received in the ordinary amount of time for a document bearing that postmark date id this requirement has not been met petitioner mailed her return on date and the irs did not receive the return until days later on date we take judicial_notice of the u s postal service’s publication consumer’s guide to postal services products a portion of which petitioner attached to her trial memorandum this publication states that days is the normal delivery time for nonlocal first class mail see also kirschenbaum v commissioner tcmemo_2001_102 robinson v commissioner tcmemo_2000_146 fujioka v commissioner tcmemo_1999_316 chang v commissioner tcmemo_1998_298 the delivery time of days in this case falls outside this timeframe a return that is not received in the ordinary amount of time will nevertheless be considered as having been so received if certain requirements are met these requirements have not been --- - met in this case first it must have been deposited in the mail before the last collection of mail on the return’s due_date sec_301_7502-1 b proced admin regs there is no evidence of when the last collection was made in this case or what time of day petitioner deposited the return second the delay in receiving the return must be shown to have been due to a delay in the transmission of the mail id there is no evidence showing such a delay in this case because sec_7502 is not applicable petitioner’s return was untimely filed when the irs received it on date thus her election out of the installment_method was not a valid election under sec_453 contrary to respondent’s determination see 92_tc_303 finally petitioner included in gross_income a capital_gain of dollar_figure from the sale of the residence the portion of the gain which exceeded the claimed exclusion because petitioner did not make a valid election under sec_453 she is required under sec_453 to report the gain on the sale of the residence using the installment_method thus the inclusion of any portion of the gain from the sale in taxable_year is in error see sec_453 respondent has conceded that if petitioner had not included the gain from the sale of her residence on the return she would have had no tax_liability for the record supports this concession we accordingly find - that petitioner has made an overpayment in the amount of dollar_figure see sec_6512 reviewed and adopted as the report of the small_tax_case division to reflect the foregoing decision will be entered for petitioner reflecting no deficiency and an overpayment in the amount of dollar_figure