internal_revenue_service number release date index number -------------------------------------------------- ------------------- ------------------------------------ - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc fip b04 plr-121657-04 date date -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------- legend taxpayer -------------------------------------------------------------- trust ------------------------------------------------------------- ----------------------------------------------------------- trust --------------------------------------------------------------------------------- ----------------------------------------------------------- ptp stp sibtp policy --------------------------------------------------------------------------------------------------- policy --------------------------------------------------------------------- state corp dear ----------------- -------------------------------------------------- --------------------- -------------------- ------------------ ---------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- plr-121657-04 this is in reply to the ruling_request filed by your representative dated date and supplementary submissions the ruling_request concerns the transfer of two life_insurance policies from trust to trust facts trust is an irrevocable_trust created by taxpayer for the benefit of taxpayer’s descendants sibtp and sibtp’s descendants ptp2 is the trustee of trust the trust provides that except as otherwise provided in the trust instrument trust will be governed by the laws of state under the provisions of trust the trustee may receive or acquire one or more insurance policies of any kind and pay the premiums on such policies trust 1’s assets consist of two whole_life_insurance policies policy and policy trust has entered into split-dollar_life_insurance agreements with corp for each policy taxpayer represents that taxpayer is an employee of corp and that the split-dollar agreements are designed to assist trust in insuring taxpayer’s life the two split-dollar agreements are in the form of collateral assignments naming trust as the owner taxpayer further represents that trust is a grantor_trust falling within the scope of subpart e of subchapter_j of chapter of the code trust is an irrevocable_trust created by taxpayer for the benefit of taxpayer’s descendants sibtp and stp are the trustees of trust trust provides that taxpayer reserves the right at any time to reacquire property transferred to the trust by substituting property of an equivalent value such right shall be exercisable by taxpayer in a non-fiduciary capacity and without the approval or consent of any person then serving in a fiduciary capacity under the trust notwithstanding the foregoing the taxpayer’s power to acquire any property held in the trust by substituting property of equivalent value shall not extend to any stock in a controlled_corporation as defined in sec_2036 trust has assets with significant net_worth these assets include shares of corp and other_property taxpayer represents that corp is a controlled_corporation as defined in sec_2036 of the code taxpayer further represents that trust is a grantor_trust at least with respect to all of its assets other than the corp stock it is contemplated that trust will transfer policy and policy to trust in exchange for consideration trust will use assets other than corp stock to fund the transfer the proposed transaction will free trust from the having to service the loans resulting from the conversion of the two split-dollar arrangements trust will use its cash_flow to pay policy premiums keeping the two policies in force sibtp is taxpayer’s sibling ptp is taxpayer’s parent sections plr-121657-04 the consideration for the transfer of the policies will be equal to the fair_market_value of the policies as determined under sec_25_2512-6 of the gift_tax regulations if the amounts received for policy and policy suffice trust will use those amounts to terminate the two split-dollar agreements by paying off the respective loan balances otherwise it is anticipated that trust will use its significant cash_flow to cover any shortfall owed to corp under the split-dollar insurance agreements the split-dollar insurance agreements will then be terminated requested ruling the transfer of policy and policy from trust to trust will be disregarded for federal_income_tax purposes the transfer-for-value rule_of sec_101 will not apply to diminish the exclusion_from_gross_income under sec_101 for amounts received by the beneficiaries of policy and policy law and analysi sec_1 sec_1_671-3 of the income_tax regulations provides that when a grantor is treated under subpart e of part i of subchapter_j sec_671 and following as the owner of any portion of a_trust there are included in computing the grantor’s tax_liability those items of income deduction and credit against tax attributable to that portion see also sec_1_671-3 revrul_85_13 1985_1_cb_184 concludes that if a grantor is treated as the owner of portion of a_trust consisting of specific trust property and its income the grantor is considered to be the owner of that specific trust property for federal_income_tax purposes revrul_85_13 also concludes that a transaction is disregarded for federal_income_tax purposes if the same person is treated as owning the purported consideration both before and after the transaction taxpayer has represented that trust is a grantor_trust at least with respect to all of its assets other than the corp stock the corp stock will not be used as consideration for the transfer of policy and policy taxpayer has represented that all of trust is a grantor_trust assuming these representations are correct taxpayer will be treated for federal_income_tax purposes as owning the purported consideration for the transfer of the insurance policies both before and after the proposed transaction under revrul_85_13 the proposed transaction will therefore be disregarded for federal_income_tax purposes plr-121657-04 sec_101 of the code provides that except as otherwise provided in sec_101 sec_101 and sec_101 gross_income does not include amounts received under a life_insurance_contract if such amounts are paid_by reason of the death of the insured sec_101 of the code provides generally that if a life_insurance_contract or any interest therein is transferred for a valuable consideration the exclusion_from_gross_income provided by sec_101 is limited to an amount equal to the sum of the actual value of the consideration and the premiums and other_amounts subsequently paid_by the transferee the term transfer for a valuable consideration is defined for purposes of sec_101 of the code in sec_1_101-1 of the regulations as any absolute transfer for value of a right to receive all or a part of the proceeds of a life_insurance_policy we have concluded above that based on the representations the transfer of policy and policy from trust to trust is disregarded for federal_income_tax purposes therefore it is not a transfer for a valuable consideration within the meaning of sec_1_101-1 of the regulations and the transfer-for-value rule_of sec_101 will not apply to diminish the exclusion_from_gross_income under sec_101 for amounts received by the beneficiaries of policy and policy ruling sec_1 the proposed transfer of policy and policy from trust to trust will be disregarded for federal_income_tax purposes the transfer-for-value rule_of sec_101 will not apply to diminish the exclusion_from_gross_income under sec_101 for amounts received by the beneficiaries of policy and policy except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter including the gift_tax consequences of the transaction no opinion is expressed or implied concerning any matter of state law this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant plr-121657-04 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely s donald j drees jr acting chief branch office of associate chief_counsel financial institutions products


t c memo united_states tax_court james a venuto petitioner v commissioner of internal revenue respondent docket no filed date james a venuto pro_se shaina e boatright for respondent memorandum findings_of_fact and opinion paris judge respondent determined deficiencies of dollar_figure and dollar_figure in petitioner’s federal_income_tax for and respectively he also determined sec_6651 additions to tax of dollar_figure and dollar_figure for failure to timely file federal_income_tax returns for and respectively sec_6651 additions to tax for failure to timely pay federal_income_tax for and a sec_6654 addition_to_tax of dollar_figure for failure to pay estimated_tax for and a sec_6662 accuracy-related_penalty of dollar_figure for after concessions the issues for decision are whether petitioner is entitled to deduct trade_or_business_expenses for and is liable for sec_6651 and additions to tax for findings_of_fact some of the facts have been stipulated and are so found the first stipulation of facts the first supplemental stipulation of facts the second 1the amounts of any sec_6651 additions to tax shall be determined pursuant to sec_6651 b and c unless otherwise stated all section references are to the internal_revenue_code_of_1986 as amended and in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure 2after a day of trial the parties resolved all issues for respondent conceded that petitioner was insolvent in and thus the cancellation_of_indebtedness_income of dollar_figure reflected in the notice_of_deficiency attributable to him was not taxable for respondent also conceded that petitioner was not liable for a sec_6654 failure to pay estimated_tax addition_to_tax for because after resolution of all issues for petitioner did not owe any income_tax for therefore he had no duty to pay estimated_tax payments in respondent also conceded certain amounts of several of the trade_or_business_expenses that are in issue which will be discussed in detail infra petitioner conceded that he received interest_income of dollar_figure for supplemental stipulation of facts the third supplemental stipulation of facts the fourth supplemental stipulation of facts and the facts drawn from stipulated exhibits are incorporated herein by this reference petitioner resided in nebraska when he timely filed his petition i petitioner’s professions petitioner has had an eclectic professional life with titles including teacher consultant author and entrepreneur petitioner taught high school english for two years in the early 1970s although he earned no income from teaching in he did complete some college-level coursework so that his teaching license could be reinstated and he could again pursue a career in teaching petitioner also owned his own business the blackstone group llc blackstone through which he performed business consulting and business brokerage services in blackstone started operations in one of blackstone’s clients was alr systems software inc alr petitioner became an alr employee on date while working with alr before petitioner became an employee blackstone incurred graphic art design expenses from new idea designs that alr did not pay petitioner performed the business consulting and business brokerage services through blackstone locally in omaha nebraska but also traveled to conduct business and to attend a conference when petitioner traveled to conduct business he flew to his destination and then rented a car petitioner traveled to orange county california for business on april to on may to on may to date and on november to while there petitioner met with the owner of past times collectibles--a longtime friend of petitioner--to consult about selling that business petitioner was to be paid dollar_figure an hour for his consulting services to a maximum of dollar_figure he was paid dollar_figure in cash under the agreement with past times collectibles in petitioner attended one business conference in he drove from omaha nebraska to dallas texas to attend a conference in date he spent the night in andover kansas on that trip petitioner also traveled to phoenix arizona to meet with another longtime friend to discuss that friend’s construction business additionally petitioner traveled to las vegas nevada returning to omaha nebraska on date petitioner ran blackstone from his home where he had a dedicated telephone line for the business that business telephone line was originally for elkhorn publishing inc a business petitioner operated in but not in he changed the name on the telephone account in date but the line was operational the entire year blackstone took out ads in newspapers and carried out a direct mail campaign to small businesses to advertise its services in ii tax forms and expenses in issue petitioner neither timely filed his form_1040 u s individual_income_tax_return nor had one timely filed on his behalf on date respondent under sec_6020 filed a substitute for return sfr on petitioner’s behalf respondent issued petitioner a notice_of_deficiency based on the sfr the parties entered into evidence a form_1040 signed by petitioner and dated date petitioner’s proposed form_1040 included all of the income reported on form_w-2 wage and tax statement and all of the gross_receipts reflected on the sfr were also reflected on schedule c profit or loss from business he included additional income of dollar_figure reported on a form 1099-misc miscellaneous income which had not been included on the sfr the dollar_figure petitioner earned under the agreement with past times collectibles was not included on the form_1040 nor was it included on the sfr attached to the form_1040 was a computer-generated table with the heading schedule a - james a venuto petitioner testified that he submitted the form_1040 to respondent in date the same time that he submitted hi sec_2010 form_1040 respondent’s position is that the form_1040 was never received the 3the document is redacted in accordance with rule foundations for the parties’ arguments at trial were the items claimed on the form_1040 the purported schedule a contained four columns with the headings business_expenses elkhorn publishing inc blackstone group llc and personal business elkhorn publishing inc was not in operation in and the parties settled all issues related to it for petitioner claimed a deduction for trade_or_business_expenses of dollar_figure which included elkhorn publishing inc expenses of dollar_figure respondent’s argument is that petitioner is not entitled to deduct most of the expenses claimed on the purported schedule a opinion generally the commissioner’s determination set forth in a notice_of_deficiency is presumed correct and the taxpayer bears the burden of showing the determination is in error rule a 290_us_111 deductions and credits are a matter of legislative grace and the taxpayer bears the burden of proving entitlement to any deduction or credit claimed on a 4there is no explanation in the record of what trade_or_business petitioner conducted through his personal business 5see supra note return 503_us_79 292_us_435 under certain circumstances the burden_of_proof as to factual matters may shift to the commissioner pursuant to sec_7491 petitioner did not argue the applicability of sec_7491 and did not show that he met its requirements to shift the burden_of_proof therefore the burden_of_proof remains his i petitioner’s business_expenses sec_162 permits a deduction for ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business an expense is ordinary if it is customary or usual within a particular trade business or industry 308_us_488 an expense is necessary if it is appropriate and helpful for the business 320_us_467 a taxpayer’s burden requires him to substantiate deductions claimed by keeping and producing adequate_records that enable the commissioner to determine his correct_tax liability see sec_6001 65_tc_87 aff’d per curiam 540_f2d_821 5th cir 43_tc_824 sec_1_6001-1 income_tax regs if a taxpayer establishes that an expense is deductible but is unable to substantiate the precise amount the court may estimate the deductible amount bearing heavily against the taxpayer whose inexactitude is of his own making see 39_f2d_540 2d cir the taxpayer must present sufficient evidence for the court to form an estimate because without such a basis any allowance would amount to unguided largesse 245_f2d_559 5th cir 85_tc_731 for certain expenses the cohan_rule is unavailable and a taxpayer must satisfy strict substantiation requirements before a deduction is allowed see sec_274 to deduct expenses related to travel meals and entertainment gifts or listed_property the taxpayer must substantiate by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement the amount of the expense ie mileage the time and place of the expense the business_purpose of the expense and in the case of entertainment the business relationship between the taxpayer and the person entertained sec_274 listed_property includes passenger automobiles sec_280f to satisfy the requirements of sec_274 by adequate_records a taxpayer must maintain records and documentary_evidence that in combination are sufficient to establish each element of an expenditure or use sec_1_274-5t and temporary income_tax regs fed reg date petitioner provided hundreds of receipts for various expenses although the court recommended that he provide the court his clients’ names and the expenses associated with each including business travel_expenses in his posttrial brief he elected not to do so although the receipts were arranged in four three-ring binders for trial the presentation of petitioner’s expenses was tantamount to the shoebox method of substantiating them the court will not sort through the voluminous evidence to decide whether petitioner substantiated each and every expense he claimed see akey v commissioner tcmemo_2015_227 patterson v commissioner tcmemo_1979_362 the parties disagree as to whether petitioner is allowed deductions and if so the amounts for trade_or_business expense categories for ease of discussion the court will group the expenses into five categories a air travel lodging meals entertainment car rental gasoline car local gasoline expenses petitioner did travel for business and he testified about multiple business trips to california he credibly testified about the details of his business relationship with the owner of past times collectibles--who was also his friend-- including the amount petitioner was to be compensated for his services from petitioner’s testimony and the documentary_evidence in the record the court finds that petitioner was traveling for business on the following dates april to may to may to date and november to petitioner met the sec_274 strict substantiation requirements for the expenses related to his business travel on those dates and he is entitled to deduct the air travel lodging and meals and entertainment_expenses associated with those dates when petitioner was in california on business he rented a car from thrifty car rental the parties entered into evidence car rental receipts and some gasoline receipts for each of the travel dates supra petitioner is also entitled to deduct car rental and gasoline expenses for those travel dates petitioner also testified about traveling to phoenix arizona to meet with another longtime friend to discuss that friend’s construction business flight and car rental records were entered into evidence for that trip too no other evidence was presented that connected the travel to phoenix with petitioner’s business although the court does not doubt that petitioner traveled to phoenix to see a longtime friend it does not find that petitioner’s statement that there was a business_purpose for his trip to phoenix--with no more details such as those he provided for his business relationship with the owner of past times collectibles also petitioner’s friend--substantiates a genuine business_purpose for the travel petitioner has failed to substantiate a business_purpose for his trip to phoenix therefore he is not entitled to deduct any of the claimed expenses associated with that trip petitioner also entered into evidence documentation of a flight from las vegas nevada to omaha nebraska on date he provided no evidence of having business in las vegas petitioner is not entitled to deduct expenses related to his travel to and from las vegas petitioner attended a conference in dallas texas in date he drove to the conference staying overnight in andover kansas respondent allowed a deduction for petitioner’s lodging in andover and at trial conceded two business meals for that trip petitioner did not substantiate expenses for any other business meals on that trip petitioner is also allowed to deduct the conference fee expense and his lodging_expenses while in dallas for the conference petitioner testified that he drove his ex-wife’s car to the conference and he claimed a deduction for the mileage expense associated with that trip petitioner is 6evidence of other flights and car rentals was entered into evidence petitioner’s testimony failed to tie those receipts to business travel therefore he is entitled to deduct business travel_expenses only for the travel dates enumerated supra p not entitled to a deduction for mileage expenses for a car he does not own or lease see siragusa v commissioner tcmemo_1980_68 holding that a taxpayer could not deduct vehicle expenses for a borrowed car aff’d 659_f2d_1062 2d cir see also revproc_2008_72 sec_5 2008_2_cb_1286 a taxpayer may use the business standard mileage rate with respect to an automobile that is either owned or leased by the taxpayer emphasis added petitioner did not provide any substantiation for gasoline expenses associated with driving to the conference petitioner also claimed a deduction for local mileage and gasoline expenses for trips in and around omaha although the court finds credible petitioner’s testimony that he conducted business in and around omaha he provided no mileage log for those trips petitioner is not entitled to a deduction for any of the local mileage and gasoline expenses the parties entered into evidence numerous receipts for meals in and around omaha petitioner did not provide any evidence of the business_purpose for those meals or the names of persons with whom he dined therefore petitioner is not entitled to a deduction for any local meals and entertainment_expenses b printing copying graphic art design and website design expenses petitioner claimed a deduction for printing and copying expenses of dollar_figure and respondent argued that petitioner is not entitled to deduct any of that amount on brief respondent conceded that petitioner had paid printing expenses of dollar_figure but maintained that he had not substantiated a business_purpose for that amount petitioner testified as to and the parties entered into evidence examples of brochures and other advertisements for petitioner’ business blackstone on the basis of respondent’s concession the court finds that petitioner is entitled to a deduction for printing and copying expenses of dollar_figure for petitioner claimed a deduction for graphic art design expenses of dollar_figure and respondent argued that petitioner was not entitled to deduct any of that amount the parties entered into evidence an invoice from indigo graphics inc to petitioner showing a payment of dollar_figure on date and an amount due of dollar_figure petitioner also entered into evidence a request he submitted to alr for payment of graphic art expenses of dollar_figure from new idea design petitioner paid this amount before he became an alr employee and alr did not repay petitioner the court finds that petitioner is entitled to a deduction for graphic art expenses of dollar_figure dollar_figure paid to indigo graphics inc and dollar_figure paid to new idea design for petitioner claimed a deduction for website design expenses of dollar_figure and respondent argued that petitioner was not entitled to deduct any of that amount the parties entered into evidence a canceled check for dollar_figure payable to teknote system written in the check’s memo line is website-blackstone the court finds that petitioner is entitled to a deduction for website design expenses of dollar_figure for c computer equipment and computer maintenance_expenses petitioner claimed deductions for computer equipment and maintenance_expenses of dollar_figure and dollar_figure respectively respondent argued that petitioner is not entitled to deduct any computer equipment expenses but he conceded that petitioner is entitled to a deduction for computer maintenance_expenses of dollar_figure petitioner credibly testified about the purchase of computer equipment in but there is no evidence in the record of the purchase of any computer equipment in therefore petitioner is not entitled to a deduction for any 7petitioner did not argue that the computer expense for was depreciation for the computer equipment purchased in even if he had he failed to meet the strict substantiation requirements for listed_property which includes computer equipment see sec_280f sec_1_274-5t continued computer equipment expenses in petitioner testified that he used elkhorn computer for computer maintenance the parties entered into evidence canceled checks payable to elkhorn computer drafted on blackstone’s account totaling dollar_figure petitioner is entitled to a deduction for computer maintenance_expenses of dollar_figure which includes the dollar_figure respondent conceded for d supply shipping postage business education telephones internet association fees dues books materials and miscellaneous expenses respondent argued that petitioner is not entitled to a deduction for any supply shipping and postage business education telephones and internet and association fees and dues expenses he also argued that petitioner is entitled to a deduction for books and materials and miscellaneous expenses of only dollar_figure and dollar_figure respectively petitioner claimed a deduction for supply expenses of dollar_figure but offered no evidence at trial to substantiate those expenses therefore he is not entitled to a deduction for any supply expenses petitioner claimed a deduction for shipping and postage expenses of dollar_figure he substantiated shipping expenses of dollar_figure and postage expenses of dollar_figure for continued temporary income_tax regs fed reg date petitioner’s other receipts were illegible or related to elkhorn publishing inc or no connection was made between the receipts and petitioner’s business petitioner claimed a deduction for business education expenses of dollar_figure the only education expenses to which petitioner testified or for which he provided documentary_evidence were tuition payments related to classes in which he enrolled so that he could have his nebraska teaching license reinstated petitioner was a high school english teacher for two years in the 1970s but had not taught since then petitioner was not in the trade_or_business of teaching but paid his tuition expenses so that he might resume teaching after an absence of more than years petitioner is not entitled to a deduction for any of his business education expenses see 56_tc_517 finding that a taxpayer who had been absent from teaching for fours years was not in the trade_or_business of teaching and was preparing for the resumption of an old trade_or_business 8see supra p 9respondent conceded that petitioner’s qualified tuition expense for is eligible for a lifetime_learning_credit subject_to the parties’ rule_155_computations petitioner claimed a deduction for telephone and internet expenses of dollar_figure petitioner testified to and provided documentary_evidence that supported the fact that he had two telephone lines at his residence--one for personal_use and one for business use both lines were operational for the entire year in issue in date petitioner changed the name on the account for the business line from elkhorn publishing inc to blackstone the february telephone statement for the business line showing a charge of dollar_figure for a month’s service was entered into evidence petitioner is allowed a deduction for phone expenses of dollar_figure dollar_figure months for see 39_f2d_540 petitioner did not enter any evidence of what amounts of his internet use were for personal or for business purposes he is not entitled to a deduction for telephone and internet expenses in excess of the dollar_figure the court has allowed petitioner claimed a deduction for association fees and dues of dollar_figure he did not provide any substantiation for that amount therefore he is not entitled to a deduction for any association fees and dues expenses for petitioner claimed a deduction for books and materials expenses of dollar_figure and respondent has conceded that petitioner substantiated dollar_figure of those expenses petitioner produced an invoice totaling dollar_figure for the purchase of the books business reference guide and the complete guide to business brokerage the invoice states that the payment method for the purchase was by credit card petitioner has substantiated and is entitled to a deduction for books and materials expenses of dollar_figure which includes the dollar_figure respondent conceded for petitioner claimed a deduction for miscellaneous expenses of dollar_figure and respondent conceded that petitioner substantiated dollar_figure of those expenses petitioner did not substantiate miscellaneous expenses in excess of the dollar_figure respondent conceded therefore that is the amount of a deduction for miscellaneous expenses to which he is entitled for e interest on loans and interest on credit cards expenses petitioner claimed a deduction for interest_expenses on loans and credit cards of dollar_figure and dollar_figure for respectively generally a deduction is allowed for interest_paid or accrued on indebtedness sec_163 no deduction is allowed however for personal_interest paid_or_accrued on indebtedness sec_163 for purposes here personal_interest is any interest allowable as a deduction under this chapter other than interest_paid or accrued on indebtedness properly allocable to a trade_or_business sec_163 the only loan documents in the record are for a loan for elkhorn publishing inc that was paid in full in there are no loan documents for although blackstone did have a business_credit card no statements were entered into evidence detailing the interest_paid in therefore petitioner is not entitled to a deduction for any loan or credit card interest_expenses for ii sec_6651 and additions to tax sec_6651 and imposes additions to tax for failure to timely file a federal_income_tax return and failure to timely pay tax_liabilities respectively unless it is shown that the failure is due to reasonable_cause and not due to willful neglect the addition_to_tax under subsection a is equal to of the amount_required_to_be_shown_as_tax on the delinquent_return for each month or fraction thereof during which the return remains delinquent up to a maximum addition of for returns more than four months delinquent the addition_to_tax under subsection a is per month of the amount due during which such failure continues up to a maximum amount of the commissioner bears the burden of production with respect to any penalty or addition_to_tax sec_7491 petitioner did not timely file a federal_income_tax return for respondent has met his burden of production for the a addition_to_tax for respondent filed an sfr under sec_6020 for petitioner for a return prepared by the commissioner in accordance with sec_6020 is treated as the return filed by the taxpayer for the purpose of determining the amount of the addition under sec_6651 sec_6651 127_tc_200 respondent has the burden of proving that an sfr for satisfying the requirements of sec_6020 was submitted see 120_tc_163 aff’d without published opinion a f t r 2d ria 3d cir gleason v commissioner tcmemo_2011_154 wl at see also wheeler v commissioner t c pincite to constitute a sec_6020 sfr the return must be subscribed it must contain sufficient information from which to compute the taxpayer’s tax_liability and the return form and any attachments must purport to be a ‘return’ 143_tc_376 quoting spurlock v commissioner tcmemo_2003_124 wl at aff’d 616_fedappx_391 10th cir the court has held that the requirements of sec_6020 have been met where an sfr consists of form 4549-a income_tax examination changes unagreed and excepted agreed form 886-a explanation of items and form sec_6020 certification see id gleason v commissioner wl at the sfr respondent issued to petitioner included forms 886-a and it also included form_5287 income_tax changes which includes essentially the same information as form 4549-a on form both forms and 4549-a are listed as possible forms to use to report the summarizing of the examination changes or adjustments to constitute a valid sfr the sfr respondent issued to petitioner constitutes a valid sfr and is deemed to have been filed by petitioner for purposes of sec_6651 therefore respondent has also met his burden of production under sec_7491 for the sec_6651 addition_to_tax for the burden_of_proof thus shifts to petitioner a taxpayer is not liable for an addition_to_tax for failure to timely file or pay if he shows the untimeliness was due to reasonable_cause and not due to willful neglect sec_6651 and 116_tc_438 petitioner provided no evidence that he acted with reasonable_cause and not willful neglect in failing to timely file a federal_income_tax return or to timely pay his tax_liability for if petitioner did indeed file his form_1040 when he filed hi sec_2010 form 1040--in date--then by his own explanation he did not timely file his form_1040 therefore petitioner is liable for the sec_6651 and additions to tax for the court has considered all of the arguments made by the parties and to the extent they are not addressed herein they are considered unnecessary moot irrelevant or without merit to reflect the foregoing decision will be entered under rule


t c memo united_states tax_court estate of robert h lurie deceased ann lurie executor petitioner v commissioner of internal revenue respondent docket no filed date carleen l schreder robert m levin steven s brown royal b martin jr patricia e kaplan william g sullivan daniel t hartnett samuel b sterrett and sheli z rosenberg for petitioner john j comeau james s stanis james m cascino and patricia pierce davis for respondent memorandum findings_of_fact and opinion colvin judge respondent determined a dollar_figure deficiency in the federal estate_tax of the estate of robert h lurie the estate respondent filed an amended answer asserting that the deficiency in federal estate_tax is dollar_figure robert h lurie decedent created the robert lurie revocable_trust revocable_trust which upon decedent’s death distributed property to a marital trust the estate claimed a marital_deduction the trust instrument states that if as is the case here the assets in the residue of the probate_estate are insufficient to pay federal estate_tax and legal costs the revocable_trust is to pay the federal estate_tax and legal costs from property that would otherwise pass to decedent’s surviving_spouse decedent executed his will days later the will is silent as to the source of payment of federal estate_tax and legal costs if the assets in the residue of the probate_estate are insufficient to pay the estate_tax and costs after concessions the issues for decision are whether the revocable_trust instrument establishes that decedent intended for federal estate_tax and legal costs to be paid out of property in the revocable_trust that would otherwise pass to decedent’s surviving_spouse we hold that it does whether under illinois law we may consider decedent’s intent expressed in his revocable_trust instrument regarding whether federal estate_tax and legal costs are payable out of property in the revocable_trust that would otherwise pass to decedent’s surviving_spouse we hold that we may whether the marital_deduction is reduced under sec_2056 by the amount of federal estate_tax paid_by the revocable_trust with property that would otherwise pass to decedent’s surviving_spouse we hold that it is section references are to the internal_revenue_code in effect as of the date of decedent’s death rule references are to the tax_court rules_of_practice and procedure a decedent and his family findings_of_fact decedent died on date he was domiciled in illinois on that date decedent was survived by his wife ann lurie and six minor children ann lurie the executor of decedent’s estate lived in winnetka illinois when the petition was filed b trusts created before decedent executed the will notice trusts a lf trusts decedent’s mother created robert lurie family trusts lf trusts in date on february and decedent exercised his limited powers of appointment over the lf trusts to create trusts for the benefit of each of his six children to succeed and receive the assets of the lf trusts decedent’s six children were the sole beneficiaries of the six successor trusts the lf trusts contain no provision for the payment of federal estate_tax from trust assets b rd trusts ten rd trusts were created in date the record does not indicate who created the rd trusts on date decedent exercised his powers of appointment over the rd trusts and created trusts to succeed and receive the assets of the rd trusts the rd trusts contain no provision for the payment of federal estate_tax from trust assets we refer to the lf trusts the rd trusts and their successors as the notice trusts because respondent determined in the notice_of_deficiency and the parties agree that the value of those trusts is includable in decedent’s gross_estate revocable_trust decedent created a revocable_trust on date under which he was the grantor and the trustee decedent retained until his death the right to revoke modify alter or amend the trust instrument and to withdraw income and principal from the revocable_trust article sec_3_2 and sec_4 of the trust instrument provide as follows amount of allocation to marital trust the allocation herein to the marital trust shall have a value equal to the smallest pecuniary amount which if allowed as a federal estate_tax_marital_deduction would result in the least federal estate_tax being payable by reason of the grantor’s death taking into account the maximum available unified_credit and the credit_for_state_death_taxes but only to the extent that those state_death_taxes are not thereby increased debts and taxes upon the death of the grantor the trustee shall to the extent that the assets of the grantor’s estate are insufficient pay reasonable expenses of administration of his estate all income estate inheritance transfer and succession taxes including any interest and penalties thereon which may be assessed by reason of the grantor’s death without reimbursement from the grantor’s executor or administrator from any beneficiary of insurance upon the grantor’s life or from any other person provided however that even if the assets of the grantor’s estate shall not be insufficient if the trustee shall be holding as part of the trust estate treasury bonds which are redeemable at par in payment of federal_estate_taxes then such bonds shall be used to pay any federal estate_tax due before any other asset is used all such payments shall be charged first against the principal of the trust estate other than a marital trust c decedent’s will decedent executed his will on date in it he provided for all of his personal effects to be distributed to his wife and the remainder of his estate referred to in decedent’s will as the residuary_estate to be distributed to the revocable_trust in his will decedent directed payment of his debts funeral_expenses costs of administration legal expenses and taxes assessed by reason of his death from his residuary_estate except to the extent that certain u s treasury bonds redeemable at par_value flower bonds were held by the revocable_trust when decedent died the revocable_trust held assets worth dollar_figure the trustees distributed those assets to the marital trust the circuit_court of cook county probate division admitted decedent’s will to probate on date the value of the probate_estate was dollar_figure on decedent’s date of death the personal effects which decedent bequeathed to ann lurie were worth dollar_figure when he died the value of the residue of the probate_estate was dollar_figure on decedent’s date of death the funeral_expenses and miscellaneous administration_expenses were paid from the residue of the probate_estate the probate_estate distributed the residue to the revocable_trust during his lifetime decedent made taxable_gifts which fully absorbed the unified_credit as a result the nonmarital residuary_trust was not formed and the revocable_trust distributed all of its assets to the marital trust the estate reported on its federal estate_tax_return a gross_estate of dollar_figure deductions totaling dollar_figure marital_deduction of dollar_figure and other deductions of dollar_figure and a taxable_estate of zero decedent’s estate did not include the value of the notice trusts in the gross_estate on its federal estate_tax_return respondent determined that the value of the notice trusts is included in decedent’s gross_estate respondent also determined that the marital_deduction is reduced by the amount of federal estate_tax dollar_figure payable out of property passing to the surviving_spouse from the revocable_trust leaving according to respondent a marital_deduction of dollar_figure the parties agree that the value of the notice trusts is dollar_figure and that the value of the notice trusts is included in the gross_estate opinion a whether federal estate_tax is payable from property that would otherwise pass to the surviving_spouse background a tax is imposed on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2001 in computing the amount of the taxable_estate an estate may deduct the value of property which passes from a decedent to the decedent’s spouse marital_deduction but only to the extent that that property is included in determining the value of the gross_estate sec_2056 the marital_deduction is reduced by the amount of federal estate_tax payable from the property passing to the surviving_spouse sec_2056 state law governs how a taxpayer’s estate_tax burden is allocated among its assets 317_us_95 73_tc_1 illinois law applies in this case under illinois law equitable_apportionment applies if the decedent provided no direction such as in a will about payment of federal estate_tax and costs in re estate of gowling n e 2d ill roe v estate of farrell n e 2d ill if equitable_apportionment applies the estate_tax is apportioned among the recipients of probate property and nonprobate property ie property that passes outside the will the estate_tax liability is borne only by property includable in the taxable_estate see in re estate of gowling supra roe v estate of farrell supra decedent’s will directs that federal estate_tax be paid from the residue of the probate_estate decedent’s will is silent on the source of payment of federal estate_tax under the circumstances here ie there are not enough assets in the probate residue to pay that tax petitioner’s contentions petitioner contends that under illinois law if a decedent dies testate illinois courts consider only the decedent’s will to decide his or her intent regarding which property is to be used to pay estate_taxes petitioner contends that equitable_apportionment applies here because decedent’s will does not specify the source of payment of estate_taxes thus petitioner contends that the notice trusts must pay the portion of the federal estate_tax equal to the ratio that their value bears to the total value of the gross_estate and that the marital trust is not reduced by the federal estate_tax paid_by the notice trusts petitioner also contends that the trust instrument does not provide that that tax is payable out of property in the marital trust whether the provision in decedent’s trust instrument that federal estate_tax is payable from property in the revocable_trust that would otherwise pass to decedent’s surviving_spouse is given effect article of decedent’s trust instrument provides that the amount allocated to the marital trust shall be the smallest amount which if allowed as a marital_deduction would result in the least federal estate_tax being paid article dollar_figure provides that to the extent that there are not enough assets in decedent’s probate_estate to pay the federal estate_tax due to decedent’s death that tax is to be paid from the revocable_trust petitioner contends that reading the trust instrument as a whole shows that decedent intended to maximize the marital_deduction and not reduce it by the amount of the federal estate_tax petitioner contends that article conflicts with article which directs payment of estate_taxes from the revocable_trust with property that would otherwise pass to decedent’s surviving_spouse petitioner contends that article must be construed to permit decedent’s estate to claim the maximum unless otherwise specified references to art are to art of decedent’s trust instrument marital_deduction and thereby decrease estate_taxes to achieve this result petitioner contends that article applies only if decedent’s wife predeceased him because under those circumstances there would be no marital_deduction inherent in petitioner’s position is the contention that the notice trusts bear the burden of the federal estate_tax we disagree first article does not say that it applies only if decedent’s wife did not survive him we must give effect to article as written and we do not read into it a requirement that decedent’s wife predecease him second petitioner’s position that the notice trusts must pay the federal estate_tax because decedent intended to minimize federal estate_tax by maximizing the marital_deduction overlooks the fact that article of the trust instrument provides that the estate_tax is payable from the revocable_trust under petitioner’s interpretation article is given no effect this is contrary to illinois law which requires that we give effect to all provisions of decedent’s trust instrument harris trust sav bank v donovan n e 2d ill in re halas n e 2d ill we must assume that decedent intended both article sec_3_2 and sec_4 to be given effect third decedent intended that federal estate_tax be paid either from the residuary probate_estate or the revocable_trust but not from the notice trusts this is shown by the fact that a decedent specified in article of the will and article of the trust instrument only two sources for payment of federal estate_tax the assets of the residuary probate_estate and the assets of the revocable_trust and b the notice trust instruments do not provide for the payment of federal estate_tax from trust assets article of the trust instrument provides that where the assets in the residue of the probate_estate are insufficient to pay federal estate_tax that tax is to be paid from the revocable_trust without reimbursement from decedent’s executor any beneficiary of insurance upon decedent’s life or any other person this shows that decedent intended that the notice trusts not be burdened with payment of the federal estate_tax because the phrase without reimbursement from any other person applies to the notice trusts decedent may not have anticipated that the notice trusts which the parties have agreed have a value of dollar_figure would be included in his gross_estate he may have expected that the residue of his probate_estate would be enough to pay the federal estate_tax and legal costs and that there would be no need to the term person in the trust instrument includes individuals and trusts art dollar_figure of the trust instrument art of the will use property in the revocable_trust to pay these expenses if decedent had anticipated the inclusion of the notice trusts in the estate he might or might not have included article but the issue is not whether decedent might have done things differently if he had known what we now know we must apply the terms in the trust instrument as written and not speculate as to what decedent might have done under different circumstances see larison v record n e 2d ill in re estate of cancik n e 2d ill hampton v dill n e ill decedent was extremely intelligent effective in his business activities and financially successful the very best financial and estate_planning resources were available to him this is surely an appropriate case in which to apply the terms of the trust instrument as written and to refrain from providing a belated court-made opportunity to make choices differently we conclude that decedent’s trust instrument provides that if the residue of his probate_estate is insufficient to pay federal estate_tax federal estate_tax is payable from property in the revocable_trust that would otherwise pass to decedent’s surviving_spouse whether decedent’s intent regarding the source of payment of the federal estate_tax as stated in the trust instrument may be considered petitioner contends that under illinois law if a decedent dies testate courts will consider the decedent’s intent regarding the source of payment of estate_tax if it is stated in his or her will but not if it is stated in the decedent’s trust instrument petitioner relies on the following cases in re estate of gowling n e 2d pincite landmark trust co v aitken n e 2d ill app ct in re estate of fry n e 2d ill app ct in re estate of rosta n e 2d ill app ct in re estate of lyons n e 2d ill app ct estate of fender v fender n e 2d ill app ct in re estate of maddux n e 2d ill app ct in re estate of gowling n e 2d ill app ct affd n e 2d ill estate of callner v am natl bank trust co n e 2d ill app ct and in re estate of wheeler n e 2d ill app ct none of these cases support petitioner’s position that illinois courts do not enforce the intent of a decedent stated in his or her trust instrument regarding the source of payment of estate_tax where the will is silent on that subject in estate of fender v fender n e 2d ill app ct the illinois appellate court said it is evident that apportionment is now the rule in illinois absent a clearly manifested contrary intent in the will petitioner contends that no illinois case has considered an instrument other than a will to ascertain the decedent’s intent regarding the source of payment of federal estate_tax we disagree illinois courts have considered a decedent’s trust instrument executed close in time to the decedent’s will to decide his or her intent regarding the source of payment of federal estate_tax see eg harris trust sav bank v donovan supra pincite frederick v lewis n e 2d ill app ct harris trust sav bank v taylor n e 2d ill app ct in frederick v lewis supra the illinois appellate court considered whether a_trust instrument provided specific instructions for paying estate_tax petitioner contends that frederick does not support the proposition that a revocable_trust instrument is considered in deciding what a decedent intended regarding the source of payment of estate_tax we disagree with petitioner’s contentions about frederick the court’s sole reason for examining the trust instrument in frederick was to decide the decedent’s intention regarding the source of payment of tax frederick is contrary to petitioner’s claim that illinois courts do not consider instruments other than a decedent’s will to discern the decedent’s intent regarding the source of payment of estate_tax similarly in harris trust sav bank v donovan supra the illinois supreme court considered the terms of a decedent’s trust and will executed days after the trust in deciding the decedent’s intent in disposing of his property the illinois supreme court found that the decedent intended that his will and trust be read together to effect his intent in disposing of his property in the instant case decedent made clear that he intended that his trust and will be read together because each refers to the other decedent executed his will days after he executed the trust instrument and the will refers to the revocable_trust or its trustee in article sec_2_1 sec_2 and while the trust instrument refers to the will in article sec_3_1 sec_3_2 and sec_4 harris trust sav bank v taylor supra is also contrary to petitioner’s claim that illinois courts do not consider instruments other than a decedent’s will to discern the decedent’s intent regarding the source of payment of estate_tax in that case the illinois appellate court found that the settlor’s inter_vivos trusts clearly evidenced his intent that federal estate and illinois inheritance taxes be paid from the assets of those trusts and enforced tax apportionment provisions in the trust instrument see 90_tc_304 citing in re estate of rosta n e 2d ill continued we conclude that under illinois law we may consider the trust instrument in discerning a decedent’s intent regarding the source of funds to pay federal estate_tax in the instant case decedent executed his will days after he created the revocable_trust decedent’s trust instrument and will referred to each other and were part of his estate plan we believe that decedent intended that we read his will and trust together to give effect to his intent regarding the source of payment of federal estate_tax accordingly we give effect to decedent’s intent whether equitable_apportionment applies where decedent’s intent is clearly stated in decedent’s trust instrument petitioner contends that equitable_apportionment applies in this case because decedent’s will does not specify otherwise and as a result the notice trusts must pay the estate_tax and the marital trust is not reduced continued app ct wills and harris trust sav bank v taylor n e 2d ill app ct trust instruments for the proposition that the decedent’s intent as manifested in the language of his or her will or trust instrument controls under illinois law where the interpretation of the tax apportionment provision in a will or trust instrument is in dispute a equitable_apportionment under illinois law illinois has no statute specifying who bears the burden of federal_estate_taxes thus application of equitable_apportionment of estate_tax is governed by caselaw estate of maierhofer v maierhofer n e 2d ill app ct landmark trust co v aitken supra pincite in re estate of fry supra pincite under illinois law if equitable_apportionment applies estate_tax liability is borne only by property included in the taxable_estate see in re estate of gowling n e 2d pincite roe v estate of farrell n e 2d pincite if equitable_apportionment applies in this case the marital_deduction would not be reduced because the federal estate_tax would be payable from the notice trusts ie property that would not otherwise pass to the surviving_spouse b equitable_apportionment does not apply because decedent’s trust instrument clearly provided that federal estate_tax is payable from the marital trust under illinois law equitable_apportionment applies if the decedent provided no direction about payment of federal estate_tax in re estate of gowling n e 2d pincite roe v estate of farrell supra pincite decedent’s trust instrument clearly provides that if there are not enough assets in the residue of the probate_estate to pay the federal estate_tax that tax is payable from the revocable_trust ie out of assets that would otherwise pass to decedent’s surviving_spouse under illinois law equitable_apportionment does not apply where the decedent expressed a clear intention to the contrary equitable_apportionment of federal estate_tax is not recognized under illinois law when as in the instant case a decedent’s trust instrument directs that the trust will be responsible for payment of all income estate inheritance transfer and succession taxes and that his trustee shall not be entitled to reimbursement from the decedent’s executor or administrator from any beneficiary of insurance upon decedent’s life or from any other person see landmark trust co v aitken n e 2d pincite and in re estate of fry n e 2d pincite in which illinois courts construed language similar to the language in article of decedent’s trust instrument as evidencing the testators’ clear intentions that equitable_apportionment not apply c whether equitable_apportionment applies here on the basis of technical_advice_memorandum in technical_advice_memorandum date tam the commissioner considered application of equitable_apportionment to property passing to the spouse and eligible for the federal estate_tax_marital_deduction under illinois law petitioner contends that equitable_apportionment applies in this case on the basis of tam we disagree first technical_advice memoranda may not be used or cited as precedent unless regulations so provide sec_6110 regulations do not so provide here second tam does not discuss the situation present here ie decedent’s intent relating to payment of estate_tax was stated in a_trust not a will as discussed above illinois courts recognize those expressions of a decedent’s intent conclusion about the source of payment of federal estate_tax we conclude that as provided in decedent’s trust instrument federal estate_tax on his estate is payable out of property in the revocable_trust that would otherwise pass to decedent’s surviving_spouse b whether legal costs are payable from property in the revocable_trust petitioner contends that equitable_apportionment applies to payment of legal costs and that as a result those costs are payable by the notice trusts and not out of property in the revocable_trust because the notice trusts caused those costs to be incurred petitioner points out that the estate incurred the legal costs to contest respondent’s determination of additional estate_tax generated solely by inclusion of the notice trusts in in light of our conclusion that technical_advice_memorandum date tam does not control here we need not decide petitioner’s contention based on tam that a preresiduary marital bequest is exempt from estate_tax decedent’s gross_estate petitioner relies on roe v estate of farrell n e 2d ill estate of fender v fender n e 2d ill app ct and in re estate of breault n e 2d ill app ct for the proposition that equitable_apportionment principles apply to attorney’s fees incurred by an estate we disagree that equitable_apportionment applies to payment of legal costs for the same reason that it does not apply to payment of federal estate_tax article of the trust instrument requires that legal costs be paid_by the revocable_trust in roe v estate of farrell supra estate fender v fender supra and in re estate of breault supra the courts apportioned legal costs to the property which generated those costs because the decedents in those cases had not specified the source of payment of those costs here decedent directed in article of his will and article of the trust instrument that administration costs incurred because of his death are payable first from the principal of his residuary probate_estate and then from the revocable_trust assets legal costs are administration costs under illinois law see in re rolley n e 2d ill illinois supreme court described legal fees as costs of administration of an estate in re desisles’ estate n e 2d ill app ct costs of administration include more than legal costs we do not apply equitable_apportionment to the payment of the estate’s legal costs we conclude that decedent’s trust instrument requires that legal costs be paid out of property in the revocable_trust to reflect concessions and the foregoing an appropriate order will be issued and decision will be entered under rule


department of the treasury internal_revenue_service washington d c 2oqls vu u4h tax exempt ano government entities division date sfr oz t _ l contact person identification_number telephone number dear sir or madam this is in reference to your letter of date requesting advance approval of your grant procedures under sec_4945 of the internal_revenue_code the information submitted indicates that grants will be administered and supervised by b b is exempt from federal_income_tax under sec_501 of the internal_revenue_code and has been classified as other than a private_foundation under sec_509 and sec_170 your scholarship program is called c under the terms of an agreement you will make annual contributions to b to fund scholarships for the benefit of the children of the employees of b will prepare and furnish application forms receive all applications determine the recipients d and amount to be awarded notify the recipients of the award confirm enrollment in an educational_institution make payment of the award and supervise and investigate the use of the grant funds by the recipients in their educational programs recipients are determined solely by b utilizing selection criteria whereby each candidate is evaluated based on the following scholastic aptitude as measured by performance on the scholastic aptitude test scholastic performance measured by rank in class counselor appraisal and interests activities and leadership contributions in addition financial need is taken into consideration the scholarships will not be used as a means of inducement to recruit employees for d nor will a grant be terminated if the employee leaves the company scholarships wilt only be awarded to students that plan to enroll in an institution that meets the requirements of sec_170 of the code the recipient will not be restricted in his her course of study b will supply statistical information on applications received and grants made which will enable you to maintain the records required by revproc_76_47 1976_2_cb_670 you will ensure compliance with the percentage tests under section dollar_figure of revproc_76_47 in the aggregate with respect to your other scholarship programs available to the same individuals sec_4945 of the code provides for the imposition of taxes on each taxable_expenditure of a private_foundation sec_4945 of the code provides that the term taxable_expenditure means any amount_paid or incurred by a private_foundation as a grant to an individual for travel study or other similar purposes by such individual unless such grant satisfies the requirements of sec_4945 sec_4945 of the code provides that sec_4945 shall not apply to an individual grant awarded on an objective and nondiscriminatory basis pursuant to a procedure it is demonstrated to the satisfaction of the secretary approved in advance by the secretary if that the grant constitutes a scholarship or fellowship_grant which is subject_to the provisions of sec_117 and is to be used for study at an educational_institution described in sec_170 revproc_76_47 1976_2_cb_670 sets forth guidelines for a private_foundation conducting an employer related grant program to obtain advance approval of its procedures for conducting such a program under sec_4945 of the code sections dollar_figure through dollar_figure set forth seven conditions which a private_foundation must meet in order to obtain advance approval of its procedures under sec_4945 of the code section dollar_figure provides that a private_foundation which makes scholarship awards to children of employees of a company or to the it limits these grants to of all eligible applicants employees themselves will meet this test if or of all those shown to be eligible in any given year renewals of grants awarded in prior years will not be considered in determining the number of grants awarded in a current_year based upon the information submitted and assuming your program will be conducted as proposed with a view to providing objectivity and nondiscrimination in the awarding of scholarship grants we rule that your grants to b for the awarding of scholarship grants comply with the requirements of sec_4945 of the code expenditures made in accordance with these procedures will not constitute taxable_expenditures within the meaning of sec_4945 of the code and as such are eligible for the exclusion from income provided for in sec_117 of the code to the extent that such grants are actually used for qualified_tuition_and_related_expenses within the meaning of sec_117 of the code this ruling is conditioned on the understanding that there will be no material changes in the facts upon which it is based it is further conditioned on the understanding that no grants will be awarded to your organization’s creators officers directors trustees or members of the selection committee or for a purpose inconsistent with the purposes described in sec_170 of the code the approval of your grant-making procedures is a one time approval of your system of standards and procedures for selecting recipients of grants that meet the requirements of sec_4945 of the code thus approval will apply to succeeding grant programs only as long as the standards and procedures under which they are conducted do not differ materially from those described in your request we are informing the ohio te_ge office of this action please keep a copy of this ruling with your organization’s permanent records this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited as precedent if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter sincerely erata book gerald v sack manager exempt_organizations technical group


index nos control no cc ebeo tam-119183-98 jul internal_revenue_service hh national_office technical_advice_memorandum district_director taxpayer's name taxpayer's address taxpayer's tdent no taxable years at issue_date of conference legend company a company b company c issue whether under the rules of sec_83 of the internal_revenue_code company a was entitled to deduct the compensation income that was includible in its employees’ gross incomes as a result of cancellation of certain nonlapse restrictions on their company a shares facts as initially organized company a was a professional services corporation that was wholly owned by doctors as was required by state law from the outset all company a shares were subject_to nonlapse book-value buyback provisions that would be triggered upon a doctor’s termination of employment with company a eventually the business of company a came to include the management of in the doctors decided to separate their clinic-management medical clinics business from their medical practice and contemporaneously took the following integrated steps here in simplified form to effectuate the separation they canceled the book-value buyback provisions on their company a shares they then formed company b by contributing their employment contracts with company a to company b and received in exchange all of the shares of company b company a became the parent_corporation of company 8b they then caused company a to redeem of each outstanding company a share held by them and in consideration for the redemption they caused company a to transfer to each of them the number of company b shares equal to the number of company a shares then owned by them after completion of these transactions the doctors’ medical practice was housed in company b the clinic-management business remained with company a and the doctors owned company b in the same proportions that they owned company a almost immediately thereafter the doctors sold their company a shares to company c the service and the companies agree that company a’s cancellations of the nonlapse restrictions on the doctors’ company a shares were compensatory on its return filed for its taxable_year ending or compensation income attributable to cancellation of the nonlapse restrictions when doing so it used the normal method_of_accounting exception to the general timing-rule for deductions governed by sec_83 of the code company a deducted the applicable law and analysis under sec_83 if in_connection_with_the_performance_of_services property is transferred to anyone other than the service_recipient the excess of the fair_market_value of the property over the amount_paid for the property is included as compensation income in the service provider's gross_income for the first taxable_year in which the tights to the property are transferable or not subject_to a substantial_risk_of_forfeiture substantially_vested for this purpose the fair_market_value of the property is determined on the date that the rights to the property become substantially_vested and without regard to restrictions that lapse under sec_83 if a nonlapse_restriction imposed on sec_83 property is canceled then unless the taxpayer establishes i that the cancellation was noncompensatory and ii that the person who would be allowed a deduction if the cancellation were treated as compensatory will treat the transaction as noncompensatory the excess of the fair_market_value of the property at the time of cancellation determined without regard to the restriction over the sum of i the fair market_value of the property immediately before the cancellation taking the restriction into account and ii the amount if any paid for the cancellation is treated as compensation income for the taxable_year in which such cancellation occurs under sec_83 the service_recipient is allowed a compensation expense deduction under sec_162 of the code in an amount equal to the amount included in the service provider's gross_income under sec_83 under the general_rule of sec_83 the deduction is allowed for the service recipient's taxable_year in which or with which ends the service provider's taxable_year in which the amount is included in gross_income however sec_1_83-6 of the income_tax regulations provides an exception to the general timing rule for the deduction in cases such as here where the property transferred here cancellation of the restrictions is substantially_vested upon transfer the deduction is allowed to the service_recipient in accordance with its normal method_of_accounting sec_482 of the code provides that in the case of two or more organizations trades_or_businesses owned or controlled directly or indirectly by the same interests the secretary may distribute apportion or allocate gross_income deductions credits or allowances among such organizations trades_or_businesses if the secretary determines that such distribution apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of such organizations trades_or_businesses applying the above rules to the facts of the instant case we conclude that a deduction is allowed under the rules of sec_83 for the amounts includible in the doctors’ gross incomes as a result of the cancellation of the nonlapse restrictions on their company a shares however in cases such as this where cancellation of a nonlapse_restriction is contemporaneous with a reorganization of the employer_corporation into a parent_corporation and a subsidiary_corporation the rules of sec_482 should be referenced to determine whether the sec_83 deductions attributable to the cancellation should be allocated between the resulting corporations under those rules compare revrul_80_198 1980_2_cb_113 in this regard please note that no opinion is expressed and none was requested as to allocation of the deductions under the rules sec_482 conclusion under the rules of sec_83 deductions were allowable for the compensation income that became includible in the doctor's gross incomes as a result of cancellation of the nonlapse restrictions on their company a shares sec_482 should be referenced to determine whether the deductions should be allocated between company a and company b to clearly reflect their incomes qos a copy of this technical_advice_memorandum is to be given to the companies sec_6110 of the code provides that it may not be used or cited as precedent end- op


t c memo united_states tax_court james e hendricks and roberta j hendricks petitioners v commissioner of internal revenue respondent docket no filed date james eb hendricks and roberta j hendricks pro_se jeanne gramling for respondent memorandum findings_of_fact and opinion colvin judge respondent determined a dollar_figure deficiency in petitioners’ federal_income_tax for and a dollar_figure - accuracy-related_penalty under sec_6662 and d for substantial_understatement of tax following concessions we must decide the following issues whether dollar_figure that james e hendricks petitioner withdrew from his individual_retirement_account ira is taxable to petitioners in we hold that it is whether petitioners are liable for the accuracy-related_penalty under sec_6662 and d for substantial_understatement of tax we hold that they are findings_of_fact some of the facts have been stipulated and are so found a petitioners petitioners are married and lived in laurinburg north carolina when they filed the petition in this case b bechtel trust thrift_plan petitioner worked for bechtel corp bechtel from to when he resigned and from until when he retired he became a participant in the bechtel trust thrift unless otherwise stated section references are to the internal_revenue_code in effect in and rule references are to the tax_court rules_of_practice and procedure sec_6662 did not exist in we assume that respondent meant to cite sec_6662 petitioners concede that their income should be increased by dollar_figure for unemployment_compensation and by dollar_figure for interest_income plan a retirement_plan on date the bechtel trust thrift_plan included a_trust and profit-sharing account a sec_401 account to which bechtel contributed funds on behalf of petitioner which he and bechtel treated as elective_deferrals of petitioner an account comprising contributions by bechtel that matched petitioner’s elective_deferrals the company matching account and an after-tax thrift savings account ée an account to which petitioner contributed funds on which he had paid income taxes the following table shows petitioner’s thrift savings account contributions earnings losses withdrawals and balances contributions to earnings_of distributions from and balances in petitioner’s thrift savings account contributions withdrawals balance contributions dollar_figure dollar_figure earnings dollar_figure dollar_figure contributions dollar_figure dollar_figure earnings dollar_figure dollar_figure list 2d gtrs contributions -o- dollar_figure lst 2d gtrs distributions big_number -0- 3d qtr contributions dollar_figure dollar_figure 3d gtr earnings dollar_figure 4th gtr contributions dollar_figure dollar_figure 4th gtr earnings dollar_figure 4th gtr withdrawals big_number -0o- contributions -o- -0o- refund -o0- ' bechtel refunded the dollar_figure loss from the thrift savings account to petitioner on date for reasons not apparent in the record q4e- all of the funds in petitioner’s thrift savings account had been distributed to him by the end of he made no contributions to the thrift savings account in c petitioner’s sec_401 account with bechtel petitioner had a sec_401 account with bechtel to which bechtel contributed on petitioner’s behalf dollar_figure in dollar_figure in and dollar_figure in bechtel issued forms w-2 wage and tax statement for those years d rollover from petitioner’s bechtel trust thrift_plan to an tra and withdrawal of ira funds on date petitioner received a dollar_figure distribution from the bechtel trust thrift_plan on date petitioner deposited that amount in a nations bank regular money market individual_retirement_account petitioner withdrew dollar_figure dollar_figure plus dollar_figure in interest from his nations bank ira in be petitioners’ income_tax returns petitioners reported petitioner’s wages as income from to petitioners did not report as income the dollar_figure in dollar_figure in and dollar_figure in that he contributed to his sec_401 account petitioners did not attach a statement to their income_tax return disclosing the dollar_figure withdrawal or explaining why they excluded that amount from their income -- - opinion a whether petitioners must include in income dollar_figure that petitioner withdrew from his ira account in we first decide whether petitioners must include in income dollar_figure that petitioner withdrew from his nations bank ira in petitioners contend that they need not do so because petitioner had basis in his ira petitioner had paid taxes on the funds that were deposited in the ira and the thrift savings account lost money in its last years we disagree for reasons stated below whether petitioner had basis in his ira when he withdrew funds in a taxpayer may exclude from income ira_distributions attributable to after-tax contributions for which the taxpayer has basis sec_72 d 108_tc_54 petitioners contend that they may exclude from income dollar_figure because petitioner had basis of that amount in his ira when he withdrew amounts in petitioners contend that petitioner had dollar_figure in his thrift savings account on date and that he rolled over that amount to his tra we disagree petitioner had no funds in his thrift saving sec_3 the examination in this case began after date petitioners were aware at trial that the commissioner bears the burden_of_proof if conditions stated in sec_7491 are met however they do not contend that sec_7491 applies thus petitioners bear the burden_of_proof on this issue rule a however the burden_of_proof does not affect our holding on this issue - - account on date made no contributions to that account in or and did not roll over any funds from that account to his ira in or bechtel’s records of petitioner’s earnings distributions losses and balances for his thrift savings account state that bechtel had distributed all of the funds in the thrift savings account to petitioner by the end of that petitioner made no contributions to his thrift savings account in or and that petitioner had no balance in his thrift savings account on date petitioners point out that the bechtel quarterly statement of account as of date said the maximum amount you can withdraw from your after-tax thrift account and k contributions is dollar_figure and they contend that this establishes that petitioner had a balance of dollar_figure in his thrift savings account on date we disagree the guarterly statement states that petitioner’s thrift savings account balance was zero on date bechtel contributed on behalf of petitioner a total of dollar_figure to his sec_401 account in and petitioner had no funds in his thrift savings account to roll over to the nations bank ira on date and he made no contributions to his thrift savings account nor did he roll over any amount from that account to his ira in or as discussed next petitioner did not pay income_tax on bechtel’s contributions on his behalf to his sec_401 k account we conclude that petitioner had no basis in his nations bank ira when he withdrew retirement_funds from the ira whether petitioner paid income_tax on funds in his sec_401 account that he rolled over to the ira petitioners contend in the alternative that petitioner had paid income_tax on the funds in his sec_401 account that he rolled over to the ira and as a result the dollar_figure that he withdrew from his ira in is a nontaxable return of contributions for which he had previously paid income_tax and is not included in income under sec_408 we disagree on petitioner’s forms w-2 for and bechtel reported that petitioner did not pay income_tax on contributions to his sec_401 account in and and that he deferred tax on compensation contributed to his pension_plan bechtel reported on the forms w-2 that petitioner deferred income_tax on dollar_figure in dollar_figure in and dollar_figure in the difference between the amounts for medicare wages and the amounts for wages tips and other compensation on petitioner’s forms w-2 for and equaled dollar_figure in dollar_figure in and dollar_figure in petitioners did not report the contributions of dollar_figure in dollar_figure in and dollar_figure in to petitioner’s sec_401 account as income on their - - and income_tax returns thus petitioners’ tax returns for and and petitioner’s forms w-2 for those years show that petitioners did not include in income the contributions to his sec_401 account for those years bechtel made contributions to petitioner’s sec_401 k account in petitioners’ return is not in evidence we assume that petitioners and bechtel treated the contributions like those made in or we conclude that petitioners had not previously included in income the funds petitioner deposited in his ira and that his ira distribution is included in petitioners’ income in petitioners’ other contentions petitioners contend that they did not receive dollar_figure in interest as part of the distribution from the ira in because petitioner’s retirement_plan had losses in and we disagree the earnings on the accounts exceeded the losses petitioner rolled over dollar_figure to his ira in and received dollar_figure from the ira in petitioner made no contributions to the ira after the rollover we conclude that the difference of dollar_figure between the dollar_figure distribution in and the dollar_figure rollover in is taxable interest petitioners point out that they and respondent had settled a case involving petitioners’ tax years through docket no 13027-92s and contend that settlement binds respondent here --- - we do not consider that settlement here see fed r evid petitioners also contend that they have paid more tax than their coworkers that respondent unreasonably refused to settle this case and that respondent has harassed them petitioners state no details to support these claims and we do not consider them further conclusion we conclude that petitioners must include in income the dollar_figure that petitioner withdrew from his ira in b whether petitioners are liable for the accuracy--related penalty respondent concedes that respondent bears the burden of production relating to petitioners’ liability under sec_6662 sec_7491 the commissioner satisfies the burden of production with respect to the accuracy-related_penalty under sec_6662 by coming forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty the commissioner need not introduce evidence regarding reasonable_cause substantial_authority or similar provisions 116_tc_438 see h conf rept pincite 1998_3_cb_747 a substantial_understatement of tax exists if the amount of the understatement is more than percent of the correct amount of tax or dollar_figure sec_6662 a petitioners reported tax liability for of dollar_figure however their liability is dollar_figure thus respondent has satisfied the burden of production under sec_7491 we deem petitioners to have conceded that they are liable for the accuracy-related_penalty under sec_6662 for substantial_understatement of their income_tax because they make no argument about the penalty see 87_tc_698 we deemed the taxpayers to have abandoned claims in the petition for which they made no argument affd 832_f2d_403 7th cir 67_tc_94 n we deemed the taxpayers to have conceded an issue they raised in their petition because they made no argument at trial or on brief relating to that issue we conclude that petitioners are liable for the accuracy-related_penalty under sec_6662 for substantial_understatement_of_income_tax for for the foregoing reasons decision will be entered for respondent