office_of_chief_counsel internal_revenue_service memorandum number release date cc corp b05 roburch presp-107900-10 uilc date date to c glenn mcloughlin senior counsel oklahoma city group large mid-size business from rebecca o burch general attorney branch corporate debra l carlisle branch chief branch corporate subject the effect of a cash settlement on the deductibility of issuance costs for a forward_contract on the issuer's own stock this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent legend taxpayer ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- ------------------------ date1 date2 date3 ------------------------- -------------------------- ------------------------- presp-107900-10 date4 ------------------------- ------- ------- ------------- ------------- ---- ---- -------------- ----- --------- ----- ----- -------- -------------- -------------- ty1 ty2 w x y z dollar_figurem dollar_figuren dollar_figuren dollar_figureo dollar_figurep dollar_figureq dollar_figurer dollar_figures issue does the sec_1032 ruling in plr the plr supplemented by plr which addresses the cash settlement1 of a forward_contract on taxpayer’s own stock support taxpayer’s position that stock issuance costs may be deducted as a loss under sec_165 because taxpayer asserts that it did not issue stock pursuant to the forward_contract the use of the phrase cash settlement in this cca is discussed in section b of law and analysis presp-107900-10 conclusions the plr does not support taxpayer’s position first the ruling addresses the application of sec_1032 to gain realized by taxpayer for money received to settle a forward_contract involving its own stock issuance costs were not mentioned in the plr nor did taxpayer raise these costs in its request for the plr second in the plr sec_1032 applied to the transaction because the cash settlement of a forward was treated as if taxpayer issued its stock to complete the forward third the plr determined that there was a gain on the forward any costs attributable to the forward would have to be netted against any gain on the forward to determine overall gain_or_loss fourth a sec_165 loss can be taken for a loss incurred in a transaction that is later abandoned here taxpayer did not abandon the forward_contract taxpayer received cash on the forward and including the issuance costs there was an overall gain facts from plr the investment units in ty1 taxpayer issued w investment units units to investors each unit had an issue_price of dollar_figuren and consisted of a forward_contract on taxpayer’s own stock and a note issued by taxpayer the issue_price of dollar_figuren was allocated entirely to the note under the forward_contract taxpayer would deliver on the maturity_date one share of its common_stock in exchange for each investor’s payment of dollar_figuren the forward price investors received a quarterly fee of y percent of the unit’s value investors could settle the forward_contract in cash prior to the maturity_date the forward contract’s maturity_date was date1 under the note taxpayer paid each investor z percent interest on the dollar_figuren principal note before the note was due taxpayer was required to try to remarket resell the note on behalf of each investor the first attempt was due on date2 and required taxpayer to remarket the note for a price that would pay the dollar_figuren forward price if this attempt failed taxpayer would have to attempt a second remarketing on date3 if the second attempt failed to yield the appropriate proceeds each investor was able to deliver the note as payment under the forward_contract the note was due date4 rulings and exchange_offer by ty2 taxpayer’s stock value had decreased to dollar_figureo the numbers have been simplified throughout this discussion and its credit rating had declined this made it difficult for taxpayer to remarket the notes taxpayer wanted to satisfy its obligations under the units before the first remarketing was due in addition taxpayer was in a gain position on the forward contracts because taxpayer’s stock value was less than the forward price and the investors were in a loss position to induce the investors to complete the forward contracts before the remarketing was due taxpayer made the offer to the investors to reduce the forward price to dollar_figuren instead of the original forward presp-107900-10 price of dollar_figuren and complete the forward contracts with cash reducing the forward price had the effect of decreasing by a small portion the loss the investors would realize on the forward contracts the submission taxpayer submitted in its ruling_request provided the approximate amounts that the investors would pay taxpayer to cash settle the forward contracts issuance of plr after receiving its ruling letter taxpayer requested a supplemental plr to update the final numbers and values from the exchange_offer the supplemental request did not seek a ruling on the possibility of deducting the issuance costs at issue here the supplemental plr as with the initial plr contained the standard no opinion language the supplemental plr also made no opinion about effects resulting from the proposed transaction that are not specifically covered by the above ruling or those rulings set forth in the prior letter_ruling the current dispute the service and the taxpayer agree that there were issuance costs allocable to the forward contact portions of the units the dispute is about whether the issuance costs allocated to the forward_contract portions of the units are deductible as losses under sec_165 taxpayer asserts that the costs are deductible because they were incurred for a transaction that was abandoned on its ty2 tax_return that included the year the exchange_offer was completed taxpayer allocated all of its capitalized issuance costs to the note portion of the units since its original return tp agreed with exam to allocate dollar_figurer of its total capitalized issuance costs to the forward_contract portions of the units of the dollar_figurer allocated to the forward contracts taxpayer now claims a dollar_figures loss deduction this deduction is for a loss taxpayer claims it sustained with respect to the forward contracts the service asserts that the issuance costs offset the amount_realized from the completion of the forward contracts exam takes the position that issuance costs are not deductible because they offset the proceeds received from the permanent capital raised see mccrory v u s f 2d 2d cir 74_f2d_163 10th cir 88_tc_1157 taxpayer claims that based on the cash settlement analysis in plr the dollar_figures in issuance costs allocated to the forward contracts can be deducted in ty2 as a loss taxpayer argues that such issuance costs are allowed under sec_165 because the issuance costs were incurred to facilitate a stock issuance pursuant to the forward contracts whereas no stock was actually issued pursuant to the forward contracts it asserts that the cash settlement analysis does not allow taxpayer to issue its stock under the forward contracts as we understand the taxpayer’s argument the issuance costs incurred to facilitate a stock issuance under the forward contracts became a loss when the forward contracts were purportedly abandoned the cash presp-107900-10 paid_by the investors the argument continues was paid pursuant to the exchange_offer which was a separate new contract you asked us whether the sec_1032 ruling supports taxpayer’s position that the issuance costs allocated to the forward contracts can be deducted in ty2 because taxpayer did not issue stock under the forward contracts law and analysis a plr revproc_2004_1 2004_1_cb_1 governed taxpayer’s ruling requests pursuant to the rev_proc taxpayer submitted a proposed transaction and based on the form of the transaction chosen by taxpayer the service ruled on the tax consequences of the transaction that was presented thus taxpayer chose the form of its transaction that was addressed in plr taxpayer stated in its letter requesting an appeal from the examining agent’s determination that the national_office set forth the substance of the transaction as a cancellation of the forward contracts for cash however this is taxpayer’s characterization the national_office issued the following ruling company will be paid dollar_figurei by each accepting unit holder in settlement of each contract this amount is gain resulting from company’s receipt of property in cash settlement of its forward_contract to sell its stock emphasis added taxpayer did not raise or discuss issuance costs in its plr submission or request a ruling on these costs moreover none of the rulings taxpayer received in the plr address the deductibility of the issuance costs the rulings focused on the application of sec_1032 to the amounts received by taxpayer in cash settlement of its forward contracts we note that the ruling letter also did not contain the background analysis the service considered in reaching its decision to rule favorably on taxpayer’s ruling requests however because this analysis is pertinent to the issue that has arisen over taxpayer’s issuance costs undertaken pursuant to the forward contracts we set forth our analysis below b why did the service apply sec_1032 to taxpayer’s gain on the forward contracts when no stock was issued the service views the physical settlement and the cash settlement of a forward_contract as economically the same transaction sec_1032 provides that no gain_or_loss shall be recognized to a corporation on the receipt of money or other_property in exchange for stock including treasury_stock of such corporation thus when a corporation is in a gain position on a forward_contract on its own stock and issues stock to the counterparty in exchange for a payment physical settlement sec_1032 nonrecognition applies to any gain_or_loss from the amount_realized from the payment for such stock when a corporation is in a gain position on a forward_contract on its own stock and it does not issue stock because the parties agree to cash settle the presp-107900-10 corporation receives a payment from the counterparty in the amount that represents the difference between the forward_contract price and the value of the shares of stock on the date of the cash settlement sec_1032 nonrecognition also applies to the payment the corporation receives in the cash settlement the net amount by which the corporation is ahead is the same whether it issues the stock for the payment or receives a cash settlement in lieu of issuing stock in effect in a cash settlement the corporation is deemed to issue its stock at the forward_contract price and immediately buy it back from the counterparty at the fair_market_value in the instant case taxpayer sought a sec_1032 ruling because it was in the gain position on the forward contracts and it proposed a cash settlement of its forward contracts taxpayer was in a gain position because in a physical settlement taxpayer would have issued one share of stock worth dollar_figureo in exchange for a dollar_figuren payment resulting in a dollar_figurep gain realized in a cash settlement investors would make a dollar_figurep payment to taxpayer which would reflect the dollar_figuren payment owed less the value of taxpayer’s stock the completion of the forward contracts by taxpayer and the investors whether by physical settlement or cash settlement resulted in taxpayer realizing the same amount of gain the service did not perceive a reason to suggest that taxpayer change the form of its transaction and issue a share of stock for the sec_1032 ruling since the tax consequences under sec_1032 were the same whether taxpayer physically settled or cash settled the forward contracts the service’s policy that both a physical settlement and a cash settlement of a forward_contract on the taxpayer’s own stock should be treated as a transaction to which sec_1032 applies is based on the notion that the two transactions are economically the same and that to treat sec_1032 as applying to a physical settlement but not to a cash settlement would create an opportunity to whipsaw the service if the service did not apply sec_1032 to a cash settlement of a stock sale agreement including forward contracts taxpayers in a gain position would always physically settle to get nonrecognition under sec_1032 and taxpayers in a loss position would always cash settle to get out of sec_1032 and recognize the loss the taxpayer’s position in the instant case creates a third characterization of the transaction and one which if adopted would create yet another opportunity for whipsaw taxpayer received a net payment from a cash settlement on the forward contracts and realized gain the service ruled the gain realized was not recognized because sec_1032 applied however taxpayer now claims that the cash settlement of the forward contracts pursuant to its exchange_offer was a different contract from the forward contracts which the exchange_offer was settling it claims that the forward contracts were thus abandoned and the payments from the investors were received pursuant to the exchange_offer instead resulting in a loss deduction under sec_165 for costs allocated to the forward contracts however had the taxpayer presented as the facts in its plr submission that it received the settlement proceeds for some transaction other than the contract to sell its presp-107900-10 own stock ie the forward contracts sec_1032 would not have applied to the gain the service issued the sec_1032 ruling in the plr because it treated the cash settlement proceeds as payment for taxpayer’s stock under the forward contracts taxpayer’s tax treatment of its costs is inconsistent with its tax treatment of the proceeds received under the cash settlement taxpayer’s position would require the service to allow a loss on the same forward contracts that produced gain that position is internally inconsistent and is not the position of the service c taxpayer’s claimed sec_165 loss deduction for costs under the forwards should be disallowed because taxpayer did not abandon the forwards taxpayer’s position is that the forward contracts were abandoned to pursue the exchange_offer taxpayer relies on the fact that the service issued a ruling accepting the cash settlement form of the analysis in plr to support its position that it abandoned the forward contracts because under the cash settlement form it did not physically issue stock as originally contemplated under the forward contracts instead taxpayer’s argument continues it pursued the exchange_offer a different contract which allowed it to settle the obligations under the forward contracts the service’s position is that the taxpayer did not abandon the forward contracts and in fact completed the forward contracts via cash settling those contracts the forward contracts were profitable to taxpayer and indeed the gains realized by taxpayer were the result of the investors’ obligations to taxpayer under the forward contracts taxpayer was paid dollar_figurep per forward obligation in a cash settlement of the forward contracts the payments taxpayer received to settle the forward contracts were a payment of the investors’ obligations under the forward contracts even though some of the terms were modified in a document taxpayer labeled exchange_offer despite the modified terms taxpayer received payments based on the same subject matter stock the same counterparties the investors and the same referenced forward price therefore taxpayer received the dollar_figurep payments pursuant to the forward contracts sec_165 allows a deduction for any loss sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise deductions for abandonment losses are provided for in sec_1_165-2 which provides a loss is deductible under sec_165 if it is incurred in a business or in a transaction entered into for profit and arising from the sudden termination of the usefulness in such business or transaction of any nondepreciable_property in a case where such business or transaction is discontinued although not controlling the same dilemma could exist when costs are paid to acquire bonds that pay out tax-exempt_income in such cases however the dilemma is resolved by sec_265 which disallows a deduction for any amount otherwise allowable that is allocable to income other than interest wholly exempt from the taxes or any amount otherwise allowable under sec_212 which is allocable to interest wholly exempt from the taxes imposed by subtitle a presp-107900-10 or where such property is permanently discarded from use therein accordingly a loss is deductible only where the taxpayer has actually entered into a transaction for profit and the transaction is abandoned revrul_57_418 1957_2_cb_143 moreover under sec_1_165-2 the provisions for abandonment losses do not apply to losses sustained on the sale_or_exchange of property changes in a transaction do not constitute abandonment for example in frgc investment llc v comm’r tcmemo_2002_276 date the taxpayer in entered into a real_estate contract to purchase acres for development from an entity owned by individual after objections to surveys and other title reports the escrow for the contract was cancelled in taxpayer entered into a second real_estate contract with the same entity to purchase acres of the same land for development approval for zoning the development became unlikely so in the taxpayer and entity executed mutual cancellations of the contract to release the escrow in taxpayer and the individual owning the entity that was a party to the first two contracts decided to execute a third contract the contract was fulfilled and the escrow closed that same year resulting in taxpayer owning the land that it sought to develop taxpayer claimed a sec_165 loss for expenses_incurred in arguing the contract had been abandoned the tax_court disagreed that the contract was different from the purported abandoned contract was rebutted by the fact that taxpayer moved forward to purchase the same real_estate for the same purpose although there had been changes in the terms of the agreement furthermore the tax_court was unwilling to ignore the fact that the contract to purchase real_estate that was allegedly abandoned in fact resulted in the taxpayer owning the real_estate for development in the end the tax_court determined that the contract was not abandoned in but was merely a step in taxpayer’s attempts to complete the transaction aimed at acquiring and developing the land it eventually acquired it found that taxpayer’s claims in the instant case taxpayer claims the changes in the method of completing the forward contracts resulted in an abandonment of the forward contracts in favor of the exchange_offer the changes do not rise to the level of abandonment of taxpayer’s forward contracts moreover the transaction culminated in a sale_or_exchange of property a disposition for which the abandonment_loss provisions are not applicable a loss deduction is allowed for costs incurred for a transaction when the taxpayer is left without any value to show for the costs incurred in revrul_79_2 1979_1_cb_98 individual taxpayers were allowed a sec_165 loss when they abandoned a public offering of their corporation the shareholders of m corporation decided to make a public offering of some of their combined holdings during the months prior to the offering legal accounting registration and printing fees were paid_by the individual shareholders to make the offering the offering was postponed due to unfavorable market conditions and then the shareholders stopped their plan to publicly sell their stock the ruling reasoned that a sec_165 loss was appropriate because the public offering became worthless when it was abandoned in revrul_77_254 1977_2_cb_63 the taxpayer after investigating several businesses to purchase eventually presp-107900-10 decided to purchase a specific business and incurred expenses in an attempt to purchase this business certain disagreements between the individual and the owner of the business developed and the individual abandoned all attempts to acquire the business the ruling reasoned that costs otherwise capitalized became a loss when the transaction failed in the ruling taxpayer never acquired the business and the costs of that transaction became deductible in this case taxpayer was not left without value to show for the costs it allocated to the forward contracts taxpayer was left with cash in fact taxpayer received the same value under the exchange_offer as it would have under the forward contracts as adjusted by the amount of the inducement to the investors to settle the forward contracts early taxpayer received dollar_figurep on each of the x of the forward contracts returned in the exchange_offer the exchange_offer was the same transaction as the forward contracts taxpayer was entitled to payment from the investors under each contract for the same obligation - ie the investor’s obligation under the forward contracts to purchase a share of stock an investor who entered into one unit with taxpayer had an obligation to buy one share of stock at dollar_figuren the investor could have paid dollar_figuren for a dollar_figureo share under the forward_contract which would have resulted in a net value to taxpayer of dollar_figurep pursuant to the exchange_offer investors paid taxpayer dollar_figurep which became the net result to the taxpayer the exchange_offer merely continued the transaction started in the forward contracts and because the taxpayer did not abandon the exchange_offer but received cash under the transaction a sale_or_exchange occurred and no abandonment_loss is appropriate d taxpayer’s argument that the example under sec_1_263_a_-5 of the regulations supports its position is erroneous taxpayer stated in its appeal letter since the forward contracts were settled by the payment of cash to taxpayer and not by the issuance of stock by taxpayer taxpayer deducted the issuance costs allocable to the forward contracts under sec_165 taxpayer cited to sec_1_263_a_-5 example in the regulations sec_1_263_a_-5 provides that a taxpayer must capitalize an amount_paid to facilitate an applicable transaction an applicable transaction includes an acquisition of capital or a stock issuance sec_1_263_a_-5 example of sec_1_263_a_-5 provides facts specifying that a taxpayer incurs costs to evaluate four alternative transactions and abandons three of the four transactions the example concludes that the taxpayer may recover under sec_165 amounts to facilitate the three abandoned transactions when such transactions are abandoned in citing to example taxpayer’s point seems to be that the forward contracts were an abandoned transaction and the exchange_offer was not and thus the costs incurred on the forward_contract are deductible as a sec_165 loss presp-107900-10 however in the instant case this example is not applicable first sec_263 by its terms is not relevant in determining whether a taxpayer has abandoned an asset specifically a taxpayer must apply the regulations and precedents under sec_165 to determine whether an abandonment has occurred and whether the taxpayer is entitled to an abandonment_loss second example is factually distinguishable from and has no relevance to taxpayer’s situation because taxpayer’s facts do not involve separate and distinct transactions and do not involve an abandoned transaction the facts in example present four different possible transactions between a taxpayer and four different parties in our case there is only one transaction and one set of parties taxpayer began with units that consisted of a forward_contract and a note and taxpayer was paid under the forward_contract through a cash settlement and it paid back the note with cash and stock the forward_contract was completed and not abandoned merely because taxpayer labeled the settlement of the forward_contract as an exchange_offer in its dealings with the investors does not have the effect of abandoning the forward_contract the forward_contract contained the obligations that were the subject of the exchange_offer the investors were in a significant loss position under the forwards the price the investors ultimately paid taxpayer was based on the obligations of the investors under the forward contracts the exchange_offer did not release the investors from their obligations under the forward contracts the exchange_offer provided the investors an inducement by adjusting the forward price slightly downward to settle the forward contracts prior to their maturity thus the taxpayer’s facts do not involve the abandonment of a transaction under sec_165 this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call if you have any further questions


internal_revenue_service number release date index number 468a ------------------------- --------------------------------------- -------------------------------------------- ---------------------- -------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number -------------------- refer reply to cc psi b06 plr-136367-06 date date legend taxpayer plant parent director --------------------------------------------------------------------------------- ----------------------------------------------- ----------------------------------------------------------------- ------------------------- -------------------------------- -------------------------------- ---------------------------------------------------------------------------------- ----------------------------- -------------------------------------------------- --------------------------------------------------------------------------------- location commission a commission b ---------------------------------------------------------------------------------------------------------- commission c commission d commission e ------------------------------------------------------- ------------------------------------------------------- --------------------------------------------------------------------------------- ------------------------------------------------------------------------------ ---------------------- ------------------------------------------ --------------------------------------------------------------- method fund order dear ---------------- this letter responds to your request dated date for a schedule of deduction amounts and a revised schedule of ruling amounts pursuant to sec_468a of the internal_revenue_code and sec_1_468a-8t of the temporary income_tax regulations you also provided additional information by letters dated date plr-136367-06 date date and date taxpayer was previously granted schedules of ruling amounts most recently on date information was submitted pursuant to sec_1_468a-3t e taxpayer represents the facts and information relating to its request for a schedule of deduction amounts and request for a schedule of ruling amounts as follows taxpayer a subsidiary of parent is included in a consolidated_return filed by parent taxpayer is the sole owner of the plant taxpayer is also the operator of the plant the plant is situated at location plant’s amended operating license is scheduled to expire on ---------------------- the estimated base cost for decommissioning the plant is based on an independent study and the proposed method of decommissioning the plant is method taxpayer is subject_to the jurisdiction of commission a which covers -------------- percent of taxpayer’s total electric sales commission b which covers ----------percent commission c which covers ----------percent commission d which covers ------------ percent and commission e which covers ----------percent for a total of percent these percentages may vary slightly from year to year there is currently an accounting proceeding pending before commission e that would result in an increase in the amount of decommissioning costs to be included in taxpayer’s cost of service there are no other actions pending before any other commission that may result in an increase or decrease in the amount of decommissioning costs to be included in taxpayer’s cost of service commission a in the order recently reviewed and adjusted the amount of nuclear decommissioning costs of the plant based upon the assumptions used in the order it is estimated that fund assets will earn an after-tax rate of return of --- percent the total cost of decommissioning plant is estimated to be dollar_figure------------------in ------- dollars this base cost of decommissioning plant is escalated at a -------percent yearly rate resulting in a total future cost to taxpayer of decommissioning plant of dollar_figure-------------- ---- under ratemaking assumptions used during the first proceeding before commission a the plant would no longer be included in rate base in ------- in the prior schedule of ruling amounts issued under sec_468a of the code as in effect prior to for commission a the estimated_useful_life of the plant is --- years -------------- and the estimated period for which the fund is to be in effect is --- years -------------- thus the percentage of the total estimated costs qualifying for deduction in the schedule of ruling amounts under prior_law for commission a was ------ --------percent in the orders submitted for the prior schedule of ruling amounts commission a adjusted the ending date of the estimated_useful_life of the plant to plr-136367-06 coincide with the expiration of the plant’s operating license in ------- the estimated_useful_life of the plant was not adjusted by commission a before ------------------ sec_468a as amended by the energy tax incentives act of the act publaw_109_58 119_stat_594 allows an electing taxpayer to deduct payments made to a nuclear decommissioning reserve fund sec_468a limits the amount that may be paid into the nuclear decommissioning fund in any year to the ruling_amount applicable to that year prior to the changes made by the act the deduction was limited to the lesser_of the amount included in the utility’s cost of service for ratemaking purposes or the ruling_amount generally as a result only regulated utilities could take advantage of sec_468a the act amendment of sec_468a eliminated the cost-of-service limitation accordingly decommissioning costs of an unregulated nuclear power plant may now be funded by deductible contributions to a qualified nuclear decommissioning fund sec_468a provides that no deduction shall be allowed for any payment to the nuclear decommissioning fund unless the taxpayer requests and receives from the secretary a schedule of ruling amounts the ruling_amount for any_tax year is defined under sec_468a as the amount which the secretary determines to be necessary to fund the total nuclear decommissioning cost of that nuclear power plant over the estimated_useful_life of the plant this term is further defined to include the amount necessary to prevent excessive funding of nuclear decommissioning costs or funding of these costs at a rate more rapid than level_funding taking into account such discount rates as the secretary deems appropriate prior to the changes made by the act deductible contributions were limited to the amount necessary for an electing taxpayer to fund the plant’s post-1983 nuclear decommissioning costs determined as if decommissioning costs accrued ratably over the estimated_useful_life of the plant provided that the taxpayer elected to establish a fund in prior_law also did not allow a taxpayer electing to establish a fund later than to contribute to that fund any amount in excess of that amount necessary to fund the ratable portion of the plant’s nuclear decommissioning costs beginning in the year the fund is established sec_468a now allows a taxpayer to contribute to a nuclear decommissioning fund the entire cost of decommissioning the plant including both the pre-1984 amount that was denied under the law prior to the act as well as any amount attributable to any year after in which a taxpayer had not established a fund under sec_468a sec_468a provides that the deduction for the contribution of the previously-excluded amount is allowed ratably over the remaining useful_life of the nuclear plant plr-136367-06 sec_468a provides that a taxpayer shall be deemed to have made a payment to the nuclear decommissioning fund on the last day of a taxable_year if the payment is made on account of such taxable_year and is made within ½ months after the close of the tax_year this section applies to payments made pursuant to either a schedule of ruling amounts or a schedule of deduction amounts sec_1_468a-1t a provides that an eligible_taxpayer may elect to deduct nuclear decommissioning costs under sec_468a of the code an eligible_taxpayer as defined under sec_1_468a-1t b of the regulations is a taxpayer that has a qualifying interest in any portion of a nuclear power plant a qualifying interest is among other things a direct ownership_interest sec_1_468a-2t b provides that the maximum amount of cash payments made or deemed made to a nuclear decommissioning fund during any_tax year shall not exceed the ruling_amount applicable to the nuclear decommissioning fund for such taxable_year the limitation on the amount of cash payments for purposes of sec_1 468a- 2t b does not apply to any special transfer permitted under sec_1_468a-8t sec_1_468a-3t a provides that in general a schedule of ruling amounts for a nuclear decommissioning fund is a ruling specifying annual payments that over the tax years remaining in the funding_period as of the date the schedule first applies will result in a projected balance of the nuclear decommissioning fund as of the last day of the funding_period equal to and in no event more than the amount of decommissioning costs allocable to the fund sec_1_468a-3t a provides that to the extent consistent with the principles and provisions of this section each schedule of ruling amounts shall be based on reasonable assumptions concerning the after-tax rate of return to be earned by the amounts collected for decommissioning the total estimated cost of decommissioning the nuclear plant and the frequency of contributions to a nuclear decommissioning fund for a taxable_year under sec_1_468a-3t a the internal_revenue_service shall provide a schedule of ruling amounts identical to the schedule proposed by the taxpayer but no such schedule shall be provided by the service unless the taxpayer's proposed schedule is consistent with the principles and provisions of that section sec_1_468a-3t a provides that the taxpayer bears the burden of demonstrating that the proposed schedule of ruling amounts is consistent with the principles of the regulations and that it is based on reasonable assumptions that section also provides additional guidance regarding how the service will determine whether a proposed schedule of ruling amounts is based on reasonable assumptions for example if a public_utility commission established or approved the currently applicable rates for the furnishing or sale by the taxpayer of electricity from the plant the taxpayer can generally satisfy this burden_of_proof by demonstrating that the plr-136367-06 schedule of ruling amounts is calculated using the assumptions used by the public_utility commission in its most recent order in addition a taxpayer that owns an interest in a deregulated nuclear plant may submit assumptions used by a public_utility commission that formerly had regulatory jurisdiction over the plant as support for the assumptions used in calculating the taxpayer’s proposed schedule of ruling amounts with the understanding that the assumptions used by the public_utility commission may be given less weight if they are out of date or were developed in a proceeding for a different taxpayer the use of other industry standards such as the assumptions underlying the taxpayer's most recent financial assurance filing with the nrc are described by the temporary regulations as an alternative means of demonstrating that the taxpayer has calculated its proposed schedule of ruling amounts on a reasonable basis sec_1_468a-3t a further provides that consistency with financial_accounting statements is not sufficient in the absence of other supporting evidence to meet the taxpayer’s burden_of_proof sec_1_468a-3t b provides that in general the ruling_amount for any_tax year in the funding_period shall not be less than the ruling_amount for any earlier tax_year under sec_1_468a-3t c the funding_period begins on the first day of the first tax_year for which a deductible payment is made to the nuclear decommissioning fund and ends on the last day of the taxable_year that includes the last day of the estimated_useful_life of the nuclear power plant to which the fund relates sec_1_468a-3t c provides rules for determining the estimated_useful_life of a nuclear plant for purposes of sec_468a in general under sec_1_468a-3t c i a if the plant was included in rate base for ratemaking purposes for a period prior to date the date used in the first such ratemaking proceeding as the estimated date on which the nuclear plant will no longer be included in the taxpayer’s rate base is the end of the estimated_useful_life of the nuclear plant sec_1_468a-3t c i b provides that if the nuclear plant is not described in sec_1_468a-3t c i a the last day of the estimated_useful_life of the nuclear plant is determined as of the date the plant is placed_in_service under sec_1_468a-3t c i c any reasonable method may be used in determining the estimated_useful_life of a nuclear power plant that is not described in sec_1_468a-3t c i a sec_1_468a-3t d provides that the amount of decommissioning costs allocable to a nuclear decommissioning fund is the taxpayer's share of the total estimated cost of decommissioning the nuclear power plant sec_1_468a-3t d provides that a taxpayer's share of the total estimated cost of decommissioning a nuclear power plant equals the total estimated cost of decommissioning such plant multiplied by the taxpayer's qualifying interest in the plant plr-136367-06 sec_1_468a-3t e enumerates the information required to be contained in a request for a schedule of ruling amounts filed by a taxpayer in order to receive a ruling_amount for any taxable_year sec_1_468a-3t f provides that any taxpayer that has previously obtained a schedule of ruling amounts can request a revised schedule of ruling amounts such a request must be made in accordance with the rules of sec_1_468a-3t e the internal_revenue_service shall not provide a revised schedule of ruling amounts applicable to a taxable_year in response to a request for a schedule of ruling amounts that is filed after the deemed payment deadline date for such taxable_year sec_1_468a-8t a provides that under the provisions of sec_468a as described above a taxpayer may make a special transfer of cash or property to the nuclear decommissioning fund this special transfer is not subject_to the sec_468a limitation the amount of the special transfer is the present_value of the pre-2006 nonqualifying percentage of the estimated future costs of decommissioning the nuclear plant that was disallowed under sec_468a prior to the act sec_1_468a-8t a defines the pre-2005 nonqualifying percentage as equal to percent reduced by the sum of the qualifying percentage used in determining the taxpayer’s last schedule of ruling amounts for the fund under sec_468a as it existed prior to the act and the percentage transferred in any previous special transfer sec_1_468a-8t a provides that the taxpayer is not required to transfer the entire amount eligible for the special transfer in one year but must take any prior special transfers into account in calculating the pre-2005 qualifying percentage sec_1_468a-8t b provides that the deduction for the special transfer is allowed ratably over the remaining useful_life of the nuclear plant under sec_1 468a- 8t b iii the deduction for property contributed in a special transfer is limited to the lesser_of the fair_market_value of the property or the taxpayer’s basis in the property under sec_1_468a-8t b the taxpayer recognizes no gain_or_loss on the special transfer of property the taxpayer’s basis in the fund is not increased by reason of the special transfer of property and the fund’s basis in the property transferred in the special transfer is the same as the transferee’s basis in that property immediately prior to the special transfer sec_1_468a-8t c provides that taxpayer may not make a special transfer to a qualified nuclear decommissioning fund unless the taxpayer requests from the irs a schedule of deduction amounts in connection with such transfer a request for a schedule of deduction amounts may be made in connection with a request for a schedule of ruling amounts but in such case the calculations for both the schedule of ruling amounts and the schedule of deduction amounts must be separately_stated plr-136367-06 as stated above prior to the changes made by the act deductible contributions were limited to the lesser_of the amount necessary to fund the plant’s post-1983 nuclear decommissioning costs or the amount necessary to fund the plant’s decommissioning costs for that portion of the plant’s estimated_useful_life for which a fund had been established under that prior_law taxpayer was allowed to contribute to commission a b and d jurisdiction --------percent of the amounts necessary to fully decommission its share of the plant and to commission c and e jurisdiction ---------- percent sec_468a allows a taxpayer to contribute to the nuclear decommissioning fund the pre-1984 amount that was denied under the law prior to the act thus taxpayer is able to contribute to commission a b and d jurisdiction the --- --------percent of the amounts necessary to decommission its ownership share of plant and to commission c and e jurisdiction --------percent this amount is the present_value of the pre-2006 non-qualifying percentage of the estimated future cost of decommissioning the plant that was previously disallowed total cost of decommissioning the plant is dollar_figure------------------in ------- dollars and the total amount taxpayer is able to contribute as the pre-1984 amount that was denied under the law prior to the act is dollar_figure------------------in ------- dollars taxpayer in has elected to contribute to fund for each commission jurisdiction the assets in the total amount of dollar_figure----------------- to the extent that non-cash property was contributed to the fund the amount of the assets was determined by taxpayer using the adjusted_basis of that property taxpayer proposes to claim the amount of dollar_figure------------------contributed in ------- as a deduction on a straight_line basis utilizing a monthly convention over the period beginning with the month the first contribution occurs through the month of the original license termination_date ------------- ------- sec_1_468a-9t b provides that for a taxable_year ending on or after date and before date a taxpayer may use any reasonable method consistent with the principles and provisions of sec_468a to determine the schedule of ruling amounts or the schedule of deduction amounts we have examined the representations and information submitted by the taxpayer in relation to the requirements set forth in sec_468a and the regulations thereunder we find that taxpayer’s proposal to deduct the amount transferred on a straight_line basis utilizing a monthly convention over the period beginning with the month the first contribution occurs through the month of the original license termination_date is based on a reasonable method consistent with the principles and provisions of sec_468a for which the special transfer occurred after date and before date however to the extent that non-cash property was contributed to the fund and the amount of the assets was determined by taxpayer using the adjusted_basis of that property rather than the required lesser_of the fair_market_value or adjusted_basis the amount of the allowable deduction is not based on a reasonable method consistent with the principles and provisions of sec_468a based solely upon these representations of the facts we conclude that the taxpayer is permitted to make a plr-136367-06 special transfer of dollar_figure----------------- however under sec_1_468a-8t a a taxpayer is not required to transfer the entire amount eligible for the special transfer in one year but must take any prior special transfers into account in calculating the pre-2005 qualifying percentage taxpayer represents that it made a special transfer of dollar_figure------------------in ---- ------- and subject_to the caveats contained herein regarding the determination of the deductible amount of transferred property may deduct the amount contributed for the --- ----------------and --------tax years as set forth below schedule of deduction amounts year ------------ ------------ ------------ deduction amount ------------------------ -------------------------- ------------------------ we note that if taxpayer elects to make a special transfer of property for all or a portion of this special transfer the amount of the transfer is the lesser_of the fair_market_value of the property transferred or the basis of the property in the hands of the taxpayer immediately prior to the transfer if the taxpayer made a special transfer of property the fair_market_value of which was less than the basis at the time of transfer and calculated the deduction on the basis rather than the fair_market_value taxpayer must file an amended_return to reflect the lesser amount transferred further if the taxpayer made a special transfer of property the fair_market_value of which was less than the basis at the time of transfer and calculated the amount of the special transfer using the basis of the property rather than the lower fair_market_value taxpayer may under certain circumstances be entitled to an additional special transfer under the provisions of sec_1_468a-8t a in addition because taxpayer has elected to make a special transfer of less than the dollar_figure------------------permitted taxpayer is entitled to make an additional special transfer of the difference between the amount permitted to be transferred and the amount transferred to make any additional special transfer taxpayer must request an additional schedule of deductions such request must take the prior schedule of deductions into account in calculating the permissible amount of the special transfer furthermore regarding taxpayer’s request for a revised schedule of ruling amounts we have examined the representations and information submitted by the taxpayer in relation to the requirements set forth in sec_468a and the regulations thereunder based solely upon these representations of the facts we reach the following conclusions taxpayer has a qualifying interest in the plant and is therefore an eligible_taxpayer under sec_1_468a-1t b of the regulations plr-136367-06 taxpayer as owner of the plant has calculated its share of the total decommissioning costs under sec_1_468a-3t d of the regulations taxpayer has proposed a schedule of ruling amounts which meets the requirements of sec_1_468a-3t a and of the regulations the annual payments specified in the proposed schedule of ruling amounts are based on the reasonable assumptions and determinations used by commission and will result in a projected fund balance at the end of the funding_period equal to or less than the amount of decommissioning costs allocable to the fund pursuant to sec_1_468a-3t a taxpayer has demonstrated that by following the assumptions approved by the commissions the proposed schedule of ruling amounts is consistent with the principles of sec_468a and the regulations thereunder and that such schedule is based on reasonable assumptions the maximum amount of cash payments made or deemed made to the fund during any_tax year is restricted to the ruling_amount applicable to the fund as set forth under sec_1_468a-2t b of the regulations based solely on the determinations above we conclude that the taxpayer’s proposed schedule of ruling amounts satisfies the requirements of sec_468a of the code approved schedule of ruling amounts year commission a commission b commission c commission d commission e total ------ --------- --------- --- ------- ----- ----------------- ----- ----------------- ----- ------ ------ ---------------- - ---------------- - ---------------- ------- ---------------- - ---------------- ---------- ---------------- - ---------------- ------- ---------------- ------ approval of the schedule of ruling amounts is contingent on there being no change in the facts and circumstances known or assumed at the time the current ruling is issued if any of the events described in sec_1_468a-3t f occur in future years the taxpayer must request a review and revision of the schedule of ruling amounts generally the taxpayer is required to file such a request on or before the deemed payment deadline date for the first taxable_year in which the rates reflecting such action became effective when no such event occurs the taxpayer must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline of the plr-136367-06 tenth taxable_year following the close of the tax_year in which the most recent schedule of ruling amounts was received except as specifically determined above no opinion is expressed or implied concerning the federal_income_tax consequences of the transaction described above this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer we are also sending a copy of this letter_ruling to the director pursuant to sec_1_468a-7t a a copy of this letter must be attached with the required election statement to the taxpayer's federal_income_tax return for each tax_year in which the taxpayer claims a deduction for payments made to the fund sincerely peter c friedman senior technician reviewer branch passthroughs special industries cc


t c summary opinion united_states tax_court renita rose best petitioner v commissioner of internal revenue respondent docket no 6192-07s filed date renita rose best pro_se michael a pesavento for respondent swift judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined a dollar_figure deficiency in petitioner’s federal_income_tax for the only issue for decision is whether petitioner is liable for a 10-percent dollar_figure additional tax under sec_72 on an early withdrawal of dollar_figure from her individual_retirement_account ira unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue background some of the facts have been stipulated and are so found during when petitioner wa sec_53 years old petitioner received a dollar_figure early distribution from her ira account at wells fargo investments l l c petitioner requested the early distribution because she had lost her job with a publishing company and incurred large medical_expenses eventually petitioner lost her home and she now lives on disability on her federal_income_tax return petitioner included the full dollar_figure ira distribution in income but petitioner did not report on her return and did not pay the 10-percent additional tax generally due under sec_72 on early distributions from qualified_retirement_plans including ira accounts see sec_401 k a c 106_tc_337 discussion petitioner acknowledges that she does not qualify for any of the specific exceptions to application of the 10-percent additional tax under sec_72 iii and iv f petitioner asks us however to read into sec_72 a financial hardship exception to the 10-percent additional tax and apply such an exception to her we previously have rejected taxpayer requests to read into sec_72 an exception to the 10-percent additional tax on early ira_distributions based on financial hardship 111_tc_250 milner v commissioner tcmemo_2004_111 gallagher v commissioner tcmemo_2001_ we conclude that petitioner is liable for the dollar_figure percent additional tax on her early dollar_figure ira distribution decision will be entered for respondent


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 b02 - plr-139921-03 date date ------------------------------ a -------------------------------------------- b ---------------------- -------------------------- ----------------- --------- country d1 dear ----------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of b by its authorized representative requesting a ruling that b be given an extension of time to elect under ' c of the procedure and administration regulations to be classified as a disregarded_entity for federal tax purposes the information submitted states that a is a us partnership for federal tax purposes b a limited_company was formed on d1 pursuant to the laws of country b is wholly owned by a b represents that pursuant to ' a b is a foreign eligible_entity that is not required to be classified as a corporation for federal tax purposes b has single owner that has limited_liability as defined in sec_301_7701-3 b intended to disregarded for federal tax purposes effective d1 however b inadvertently failed to timely file a form_8832 entity classification election sec_301_7701-3 provides that a business_entity that is not classified as a corporation under ' b or an eligible_entity can elect its classification for federal tax purposes a business_entity is any entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the internal_revenue_code sec_301_7701-2 sec_301_7701-3 provides that unless a foreign eligible_entity elects otherwise the entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owners if it has a single owner that does not have limited_liability sec_301_7701-3 provides that for purposes of ' b i a member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member sec_301_7701-3 provides that to elect to be classified other than as provided in ' b an eligible_entity must file form_8832 entity classification election with the designated service_center sec_301_7701-3 provides that an election will be effective on the date specified on the form_8832 or on the date filed if no such date is specified the effective date specified on the form_8832 cannot be more than days prior to the date the election is filed under c the commissioner may 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 code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or an announcement published in the internal_revenue_bulletin use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of ' granted when the taxpayer provides evidence to establish that the taxpayer acted sec_301_9100-3 provides that requests for relief under ' will be sec_301_9100-1 and sec_301_9100-3 provide the standards the commissioner will based solely on the facts submitted and representations made we conclude that reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer failed to make the election because after exercising reasonable diligence taking into account the taxpayer's experience and the complexity of the return or issue the taxpayer was unaware of the necessity for the election the requirements of ' have been satisfied as a result b is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center and elect under ' c to be classified as a disregarded_entity for federal tax purposes effective for d1 a copy of this letter should be attached to the form_8832 a copy is included for that purpose federal tax consequences of the facts described above under any other provision of the code the internal_revenue_code provides that it may not be used or cited as precedent sent to b’s authorized representatives except as specifically set forth above no opinion is expressed concerning the pursuant to a power_of_attorney on file with this office a copy of this letter is being this ruling is directed only to the taxpayer who requested it sec_6110 of sincerely heather c maloy associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for ' purposes


t c memo united_states tax_court rita grant ndirika petitioner v commissioner of internal revenue respondent docket no filed date rita grant ndirika pro_se roger w bracken for respondent memorandum findings_of_fact and opinion chiechi judge respondent determined the following defi- ciency in and additions to petitioner’s federal_income_tax tax for her taxable_year additions to tax_deficiency sec_6651 sec_6651 sec_6654 dollar_figure dollar_figure dollar_figure dollar_figure year in respondent’s answer respondent conceded the addition_to_tax under a for petitioner’s taxable_year and alleged an increase for that year in the addition_to_tax under sec_6651 the issues remaining for decision are are certain payments that petitioner received from gardner carton douglas gc d or firm during excludable under sec_104 from petitioner’s gross_income for that year we hold that they are not is petitioner liable for for the addition_to_tax under sec_6651 we hold that she is is petitioner liable for for the addition_to_tax under sec_6654 we hold that she is to the extent stated herein findings_of_fact most of the facts have been stipulated and are so found petitioner resided in lanham maryland at the time she filed the petition in this case during the period that began around and that ended on 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 date gc d a law firm employed petitioner as an attorney during that period gc d made biweekly salary payments to petitioner around late date gc d advised petitioner that it intended to discharge her unless she voluntarily resigned from the firm shortly thereafter petitioner informed gc d that she intended to resign and petitioner and gc d began discussing the terms relating to petitioner’s resignation around date gc d sent petitioner a draft separa- tion release and waiver agreement separation agreement on or about date petitioner sent gc d a memorandum re- sponding to gc d’s draft separation agreement in that response petitioner listed certain matters that she wanted gc d to take into consideration in finalizing the separation agreement including the following with respect to the consideration that she was to receive under that agreement i valuable consideration a severance_pay for months or year from termination_date of date at dollar_figure annual rate or severance_pay for months from termi- nation date as of date at dollar_figure per year rate retroactive to date 2the number of months set forth in petitioner’s response to gc d’s draft separation agreement that is part of the record in this case was illegible election of lump sum due on or before date applicable taxes and fica deduc- tions will be based on current w-4 elections not to exceed total annual deduction amounts reported on w-2 on or about date petitioner and gc d executed a separation agreement that reflected the final terms to which they had agreed the separation agreement provided in pertinent part i valuable consideration in exchange for ndirika’s entering into this agreement gc d agrees to provide ndirika with the following consideration a gc d will pay ndirika severance_pay in the form of salary continuation at the annualized rate of dollar_figure less applicable taxes and fica for a period of twelve months following the separation date ie through date as defined in section ii below the severance period such severance_pay will be paid at ndirika’s election either i in equal bi- monthly payments during the severance period on dates corresponding with gc d’s regular payroll dates or ii in one lump sum payment on the first regular payroll date following the separation date severance will be paid regardless of whether ndirika accepts other employment during the severance period c ndirika shall also receive a lump sum supple- mental severance payment in the amount of dollar_figure less applicable taxes and fica on the first regular payroll date following the separation date d during the severance period ndirika may continue to use her office and telephone in furtherance of her job search and will continue to be allowed access to her firm voicemail and e-mail provided ndirika elects to receive her salary continuation severance_pay under paragraph a above in equal bi- monthly payments rather than in one lump sum payment ndirika will not be required to nor should she per- form work on client matters or any other matter on behalf of gc d during the severance period if ndirika elects to receive her salary continuation severance payment in a lump sum under paragraph a ii above she will vacate her office by the end of the business_day on the day after the separation date and she will be allowed access to her firm voicemail and e-mail for a period of days ending date ii termination_date ndirika hereby voluntarily resigns effective date the separation date iii release and waiver by signing this agreement ndirika hereby releases and waives all legal and equitable claims rights and causes of action of any kind whatsoever known and unknown ndirika has or may have against gc d includ- ing individually and collectively its partners associates employees agents clients benefit plans and plan administrators successors and assigns as of the date this agreement is signed by ndirika this includes but is not limited to all claims relating to ndirika’s past relationship with and resignation from employment with gc d this release and waiver includes but is not limited to a b c any claims for wrongful termination termina- tion in violation of public policy defama- tion intentional infliction of emotional distress and any other common_law claims any claims for the breach of any implied written or oral contract including but not limited to any contract of employment any claims of discrimination harassment or retaliation based on such things as age marital status citizenship national origin race religion sex sexual orientation pregnancy including pregnancy-related dis- ability or physical or mental_disability or medical_condition unrelated to the ability to perform d any claims for payments of any nature in- cluding but not limited to wages overtime pay severance_pay vacation pay commis- sions bonuses and benefits or the monetary equivalent of benefits and e any claims to reinstatement rehire or re- employment this release and waiver also includes claims rights and causes of action that may arise under any federal state local or district of columbia statutes ordinances rules regulations and orders including but not limited to any claim right or cause of action based on the fair labor standards act title vii of the civil rights act of the family_and_medical_leave act the americans with disabilities act the age discrimination in employment act the civil rights acts of and the employee_retirement_income_security_act_of_1974 the district of columbia human rights act the district of columbia family_and_medical_leave act of the district of columbia parental leave law the district of columbia employment rights of blind and physically disabled persons the district of columbia wage and hour laws the illinois wage payment and collection act the illinois human rights act the cook county human rights ordinance and the chicago human rights ordinance as each of them has been or may be amended ndirika agrees not to file any lawsuit against gc d or any of the related individuals or entities listed above in this section iii based on any claims released or right waived pursuant to this agreement ndirika also agrees to waive her rights to any claims for attorneys’ fees and recovery or compen- sation of any kind which she might otherwise receive as the result of any claim filed by her or on her behalf against gc d or any of the entities or individuals listed above gc d will not oppose ndirika’s rights to unemployment_compensation notwithstanding the foregoing this release and waiver does not include any claims which by law may not be waived such as claims to workers’ compensation benefits and ndirika’s covenant not to sue does not apply to any lawsuit filed by ndirika to enforce this agreement gc d timely furnished to petitioner form_w-2 wage and tax statement form_w-2 in which it reported that during it paid her wages tips and other compensation of dollar_figure and that it withheld federal_income_tax of dollar_figure state_income_tax of dollar_figure and employment_taxes ie social_security_tax and medicare_tax totaling dollar_figure the_amount_of_wages tips and other compensation reported in form_w-2 that gc d furnished to petitioner included the two settlement payments of dollar_figure and dollar_figure settlement payments or a total of dollar_figure that petitioner received pursuant to the separation agreement after having received form_w-2 from gc d petitioner did not contact the firm to inform it that gc d had improperly reported the settlement payments as wages tips and other compensation in that form at a time not disclosed by the record during peti- tioner received two early retirement or pension distributions of dollar_figure and dollar_figure respectively from the northern trust company northern trust in its capacity as the fiduciary for the gardner carton douglas plan northern trust timely furnished to petitioner two forms 1099-r distributions from pensions annuities retirement or profit-sharing_plans iras insurance contracts etc forms 1099-r forms 1099-r that northern trust furnished to petitioner showed the following information payer’s name recipient distribution gross taxable_amount federal_income_tax withheld northern trust rita grant ndirika dollar_figure dollar_figure dollar_figure payer’s name recipient distribution gross taxable_amount federal_income_tax withheld northern trust rita grant ndirika dollar_figure dollar_figure dollar_figure during petitioner received interest_income of dollar_figure from hew fcu hew fcu timely furnished to petitioner form int interest_income in which it reported that during it paid her interest_income of dollar_figure during petitioner paid expenses totaling dollar_figure which qualify as itemized_deductions for that year petitioner did not make any estimated_tax payments with respect to her taxable_year nor did she file form_1040 u s individual_income_tax_return tax_return for that year respondent has no record that petitioner filed a tax_return for her taxable_year respondent’s records show that for that year petitioner received wage income of dollar_figure and interest_income totaling dollar_figure respondent’s records also show that peti- tioner paid mortgage interest of approximately dollar_figure during that year respondent issued to petitioner a notice_of_deficiency notice for her taxable_year in that notice respondent 3respondent’s records are not part of the record in this case a revenue_agent who had reviewed respondent’s records with respect to petitioner’s taxable_year testified that those records indicated inter alia that petitioner paid between dollar_figure and dollar_figure of mortgage interest during that year determined inter alia that petitioner is not entitled to exclude from her gross_income any of the payments that she received during that year from gc d northern trust and hew fcu respondent further determined inter alia that petitioner is liable for additions to tax under sec_6651 and and a respectively as discussed above in the answer respon- dent conceded the addition_to_tax under sec_6651 opinion respondent concedes that sec_7491 is applicable in the instant case with respect to sec_7491 respondent maintains that petitioner has not introduced credible_evidence under sec_7491 or complied with the applicable require- ments of sec_7491 therefore according to respondent the burden_of_proof with respect to respondent’s deficiency determination for petitioner’s taxable_year does not shift to respondent on the record before us we find that petitioner has failed to carry her burden of establishing that she has complied with the applicable_requirements of sec_7491 on that record we further find that petitioner has not intro- duced credible_evidence with respect to any factual issue rele- vant to the court’s determining whether to sustain respondent’s deficiency determination at issue on the record before us we conclude that petitioner has the burden of proving that that determination is wrong see rule a 290_us_111 payments at issue it is petitioner’s position that approximately dollar_figure payments at issue of the payments that she received pursuant to the separation agreement was on account of personal physical injuries or physical sickness and therefore should be excluded from her gross_income under sec_104 it is respon- dent’s position that petitioner is not entitled to exclude from her gross_income under sec_104 the payments at issue or any other_payments that she received during sec_61 provides the following sweeping definition of the term gross_income except as otherwise provided in this subtitle gross_income means all income from whatever source derived the regulations promulgated thereunder specifically provide that compensation_for services such as termination or severance_pay is included within the definition of gross_income see sec_61 sec_1_61-2 income_tax regs not only is sec_61 broad in its scope 515_us_323 exclusions from gross_income must be narrowly construed id 504_us_229 sec_104 on which petitioner relies provides that 4the court ordered the parties to file posttrial briefs petitioner failed to do so gross_income does not include the amount of any damages other than punitive_damages received whether by suit or agreement and whether as lump sums or as periodic_payments on ac- count of personal physical injuries or physical sick- ness the regulations under sec_104 provide in pertinent part the term damages received whether by suit or agree- ment means an amount received other than workmen’s compensation through prosecution of a legal suit or action based upon tort or tort type rights or through a settlement agreement entered into in lieu of such prosecution sec_1_104-1 income_tax regs the supreme court summarized the requirements of sec_104 as follows in sum the plain language of sec_104 the text of the applicable regulation and our decision in burke establish two independent requirements that a taxpayer must meet before a recovery may be excluded under sec_104 first the taxpayer must demon- strate that the underlying cause of action giving rise to the recovery is based upon tort or tort type rights and second the taxpayer must show that the damages were received on account of personal injuries or sickness commissioner v schleier supra pincite when the supreme court issued its opinion in commissioner v schleier supra sec_104 as in effect for the year at issue in schleier required inter alia that in order to be excluded from gross_income an amount of damages had to be received on account of personal injuries or sickness after the supreme court issued its opinion in schleier congress amended amendment sec_104 effective for amounts received after date by adding the requirement that in order to be excluded from gross_income any amounts received must be on account of personal injuries that are physical or sickness that is physical small_business job protection act of publaw_104_188 sec 110_stat_1755 the amendment does not otherwise change the requirements of sec_104 or the analysis set forth in commissioner v schleier supra it imposes an additional requirement for an amount to qualify as an exclusion_from_gross_income under that section where damages are received pursuant to a settlement agree- ment such as is the case here the nature of the claim that was the actual basis for settlement controls whether such damages are excludable under sec_104 united_states v burke supra pincite the determination of the nature of the claim is factual 102_tc_116 affd in part revd in part and remanded on another issue sec_104 provides that emotional distress is not to be treated as a physical injury or physical sickness for purposes of sec_104 except for damages not in excess of the amount_paid for medical_care attributable to emotional distress in this connection the legislative_history of the amendment states it is intended that the term emotional distress in- cludes symptoms eg insomnia headaches stomach disorders which may result from such emotional distress h conf rept pincite ndollar_figure 1996_3_cb_741 n f 3d 5th cir 58_tc_32 where there is a settlement agreement that determina- tion is usually made by reference to it see 349_f2d_610 10th cir affg tcmemo_1964_33 robinson v commissioner supra if the settlement agreement lacks express language stating what the settlement amount was paid to settle the intent of the payor is critical to that determination knuckles v commissioner supra see also 290_f2d_283 2d cir affg per curiam tcmemo_1960_21 although the belief of the payee is relevant to that inquiry the character of the settlement payment hinges ultimately on the dominant reason of the payor in making the payment agar v commissioner supra 79_tc_680 affd without published opinion 749_f2d_37 9th cir whether the settlement payment is excludable from gross_income under sec_104 depends on the nature and character of the claim asserted and not upon the validity of the claim see 87_tc_236 affd 835_f2d_67 3d cir 76_tc_116 affd without published opinion 676_f2d_682 1st cir seay v commissioner supra in support of petitioner’s position that the payments at issue are excludable from her gross_income under sec_104 petitioner testified that she had informed the management of gc d that i felt that i had a claim related to not only my current pregnancy but also the fact that i had lost a child in date and that i intended to pursue that claim when i left petitioner further testified that to release my pregnancy related claim i said to the firm you know that i wanted a settlement amount equal to a year’s salary we found petitioner’s testimony to be vague self-serving uncorrob- orated inconsistent with the terms of the separation agreement and not credible as made clear by the following provisions of the separation agreement the settlement payments received thereunder were salary continuation severance payments i valuable consideration in exchange for ndirika’s entering into this agreement gc d agrees to provide ndirika with the following consideration 6at the call of this case from the calendar petitioner informed the court that she intended to call as a witness an individual who during had been the managing partner part- ner of gc d and who would corroborate her claim that the pay- ments at issue were received on account of personal physical injuries or physical sickness at the call of this case for trial petitioner informed the court that the partner whom she intended to call has come down with a case of amnesia we infer from petitioner’s failure to call that partner that his testimony would not have been favorable to petitioner’s position see 6_tc_1158 affd 162_f2d_513 10th cir 7the separation agreement contains a release and waiver provision that appears to contain boilerplate language and we do not attribute any significance to that provision a gc d will pay ndirika severance_pay in the form of salary continuation at the annualized rate of dollar_figure less applicable taxes and fica for a period of twelve months following the separation date ie through date as defined in section ii below the severance period such severance_pay will be paid at ndirika’s election either i in equal bi- monthly payments during the severance period on dates corresponding with gc d’s regular payroll dates or ii in one lump sum payment on the first regular payroll date following the separation date severance will be paid regardless of whether ndirika accepts other employment during the severance period c ndirika shall also receive a lump sum supple- mental severance payment in the amount of dollar_figure less applicable taxes and fica on the first regular payroll date following the separation date d during the severance period ndirika may continue to use her office and telephone in furtherance of her job search and will continue to be allowed access to her firm voicemail and e-mail provided ndirika elects to receive her salary continuation severance_pay under paragraph a above in equal bi- monthly payments rather than in one lump sum payment ndirika will not be required to nor should she per- form work on client matters or any other matter on behalf of gc d during the severance period if ndirika elects to receive her salary continuation severance payment in a lump sum under paragraph a ii above she will vacate her office by the end of the business_day on the day after the separation date and she will be allowed access to her firm voicemail and e-mail for a period of days ending date petitioner did not introduce any reliable evidence that persuades us that the separation agreement which treats the payments at issue as salary continuation severance payments incorrectly characterized such payments petitioner had the opportunity to challenge the characterization of the settlement payments as salary continuation severance payments when she responded to gc d’s draft separation agreement signed the separation agreement and received form_w-2 from gc d in which the firm reported such payments as wages tips and other compensation she did not based upon our examination of the entire record before us we find that the salary continuation severance payments that gc d made to petitioner pursuant to the separation agreement are gross_income see sec_61 sec_1_61-2 income_tax regs on that record we further find that petitioner has failed to carry her burden of establishing that the nature of the claim that was the actual basis for the payments made pursuant to the separation agreement was certain personal physical injuries or physical sickness that she suffered while working for gc d relating to a miscarriage that she may have had a pregnancy that she may have had when she left the firm or another cause on the record before us we find that peti- tioner has failed to carry her burden of establishing that she received the payments at issue on account of personal physical injuries or physical sickness on that record we further find that petitioner has failed to carry her burden of establishing that she is entitled under sec_104 to exclude the payments at issue from her gross_income addition_to_tax under sec_6651 respondent determined that petitioner is liable for the addition_to_tax under sec_6651 sec_6651 imposes an addition_to_tax for failure_to_file a tax_return on the date prescribed for filing unless petitioner proves that such failure_to_file was due to reasonable_cause and not willful neglect sec_6651 116_tc_438 respondent must carry the burden of production with respect to the addition_to_tax under sec_6651 sec_7491 higbee v commissioner supra pincite to satisfy respon- dent’s burden of production respondent must come forward with sufficient evidence indicating that it is appropriate to impose the addition_to_tax higbee v commissioner supra pincite although at trial petitioner appeared to concede the addi- tion to tax under sec_6651 it is not altogether clear to the court that she in fact conceded that addition_to_tax consequently we shall address whether petitioner is liable for the addition_to_tax under sec_6651 for her taxable_year we have found that petitioner did not file a tax_return for her taxable_year on the record before us we find that respondent has satisfied respondent’s burden of production under sec_7491 with respect to the addition_to_tax under sec_6651 on that record we further find that petitioner has failed to carry her burden of showing that her failure_to_file a tax_return for was due to reasonable_cause and not due to willful neglect respondent conceded in the answer the addition_to_tax under sec_6651 determined in the notice as a result according to respondent sec_6651 does not apply we agree with respondent on the record before us we find that respondent has established that the amount of the addition_to_tax under sec_6651 that respondent determined in the notice should be increased addition_to_tax under sec_6654 respondent determined that petitioner is liable for the addition_to_tax under sec_6654 sec_6654 imposes an addition_to_tax in the case of an underpayment of estimated_tax by an individual 8the increase in the addition_to_tax under a that we have sustained will be determined by the parties under rule 9for purposes of sec_6654 it is necessary to determine whether there is an underpayment of a required_installment of estimated_tax see sec_6654 and b in this connection the amount of any required_installment i sec_25 percent of the required_annual_payment sec_6654 the required_annual_payment is equal to the lesser_of percent of the tax shown in the tax_return for the taxable_year or if no tax_return was filed percent of the tax for such year or if the individual filed a tax_return for the preceding_taxable_year percent of the tax shown in such return sec_6654 respondent has the burden of production with respect to the addition_to_tax under sec_6654 sec_7491 higbee v commissioner supra pincite we have found that petitioner did not file a tax_return for her taxable_year and that respondent has no record that petitioner filed a tax_return for her taxable_year petitioner introduced no reliable evi- dence establishing that she filed a tax_return for either of those years we have also found that petitioner did not make any estimated_tax payments with respect to her taxable_year although the amounts of tax withheld during that year are treated under sec_6654 as estimated_tax payments we find that the record contains evidence from which the parties in the computations under rule will be able to calculate the amount of any required_installment by petitioner within the meaning of sec_6654 with respect to her taxable_year and the amount if any of an underpayment of estimated_tax for that year in the event that such calculation were to establish that petitioner underpaid her estimated_tax for her taxable_year we find that respondent has satisfied respondent’s burden of production with respect to the addition_to_tax under sec_6654 for that year in that event we further find on the instant record that none of the excep- tions in sec_6654 applies and that petitioner is liable for the addition_to_tax under sec_6654 for her taxable_year in the event that the calculation relating to sec_6654 were to establish that petitioner did not underpay her estimated_tax for her taxable_year we find that respondent has not satisfied respondent’s burden of production with respect to the addition_to_tax under sec_6654 for that year and that petitioner is not liable for such addition_to_tax we have considered all of the contentions and arguments of petitioner that are not discussed herein and we find them to be irrelevant and or without merit to reflect the foregoing and the concessions of the parties decision will be entered under rule