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-117502-06 date date ------------------------------------------------------------------------------------------- ---------------------------------------------- re revised schedule of ruling amounts taxpayer ----------------------- --------------------------------------------- ---------------------------------- ----------------------------------------------- ------------------------------------------------------------ ----------------------------------------------------- --------------------------------- ------------------------------------------ plant location commission a commission b commission c station fund dear ------------- this letter responds to the taxpayer s request filed date as modified by submission dated date for a revised schedule of ruling amounts in accordance with sec_1_468a-3 of the income_tax regulations relating to the plant's ----------------------------------------- afund taxpayer was previously granted a schedule of ruling amounts on --------------------------- the request for a revised schedule of ruling amounts is the result of commissions a and b reducing the amount of decommissioning costs to be included in cost of service information for the schedule of ruling amounts was submitted on behalf of the taxpayer pursuant to sec_1 468a- h plr-117502-06 - - taxpayer represents the facts and information relating to its request for a revised schedule of ruling amounts as follows situated in location taxpayer has a direct ownership_interest of ----- percent in plant which is plant’s renewed operating license is set to expire on ------------------- 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 for a total of ----------percent the total is slightly above ----- percent due to the fact that each commission determines its jurisdictional percentage at a different point in time these percentages may vary slightly from year to year a portion of taxpayer’s wholesale operations consist of sales to the joint owners of station the rates charged for supplemental sales to the joint owners are set through contractual agreements which were approved by commission c taxpayer maintains its records as prescribed by commission c -------percent of taxpayer’s total electric sales from sales to the joint owners of station and -------percent of taxpayer’s total electric sales from other customers the estimated base cost for decommissioning plant is based on an independent study and is premised on the prompt removal dismantling method in ---------------------------------- commission a included decommissioning costs for taxpayer’s plant in taxpayer’s cost of service for ratemaking purposes in the annual amount of dollar_figure------------- in determining the amount of decommissioning costs commission a determined the total estimated base cost of decommissioning taxpayer’s interest in plant to be dollar_figure------------------ ------- dollars the base cost for decommissioning plant was escalated at the rate of -----percent annually to ------- resulting in an estimated future decommissioning cost of dollar_figure-------------------- ------- dollars commission b in ----------------------------included decommissioning costs for taxpayer’s plant in taxpayer’s cost of service for ratemaking purposes in the annual amount of dollar_figure------------- commission c included decommissioning costs for taxpayer’s plant in taxpayer’s cost of service for ratemaking purposes in the annual amount of dollar_figure----------- the funding_period of plant extends from ------- to ------- and the level_funding limitation period for plant extends from ------- through ------- the estimated period for which the fund will be in effect is --- years ------- through ------- the assumed after tax_rate of return expected to be earned by the assets of the fund is -----percent taxpayer has calculated its qualifying percentage to be -------- percent plr-117502-06 - - sec_468a of the internal_revenue_code provides that a taxpayer may elect to deduct the amount of payments made to a qualified nuclear decommissioning fund however former ' 468a b limited the amount_paid into the fund for any taxable_year to the lesser_of the amount of ------------------------------------------ allocable to the fund that is included in the taxpayer's cost of service for ratemaking purposes for the taxable_year or the ruling_amount applicable to that year sec_468a of the code provides that no deduction shall be allowed for any payment to the ---------------------------------------- unless the taxpayer requests and receives from the secretary a schedule of ruling amounts the ruling_amount for any taxable_year is defined under ' 468a d as the amount which the secretary determines to be necessary to fund that portion of -------------------------------------------------- which bears the same ratio to the nuclear power plant as the period for which the fund is in effect bears to 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 sec_468a of the code provides that a taxpayer shall be deemed to have made a payment to the ----------------------------------------- on the last day of the taxable_year if the payment is made on account of the taxable_year within months after the close of the taxable_year sec_1_468a-1 of the regulations provides that an eligible_taxpayer may elect to deduct ------------------------------------------ under ' 468a of the code an eligible_taxpayer as defined under ' 468a-1 b is a taxpayer that has a qualifying interest in a nuclear power plant as defined under ' 468a-1 b a qualifying interest is among other things a direct ownership_interest including an interest held as a tenant in common or joint tenant sec_1_468a-2 of the regulations provides that the maximum amount of cash payments made or deemed made to a ----------------------------------------- during any taxable_year shall not exceed the lesser_of i the cost of service amount applicable to the ---------------------------------------- for such taxable_year or ii the ruling_amount applicable to the ------------------------------------------for such taxable_year sec_1_468a-3 of the regulations provides that in general a schedule of ruling amounts for a -----------------------------------------is a ruling specifying annual payments that over the taxable years remaining in the funding_period as of the date the schedule first applies will result in a projected balance of the ------------------------------ ------------------------------ 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 plr-117502-06 - - sec_1_468a-3 of the regulations provides that each schedule of ruling amounts shall be based on the reasonable assumptions and determinations used by the applicable public_utility commission s in establishing or approving the amount of decommissioning costs to be included in the cost of service for ratemaking purposes taking into account amounts that are otherwise required to be included in the taxpayer's income under ' of the code and the regulations thereunder each schedule of ruling amounts shall be based on the public_utility commission's reasonable assumptions concerning i the after-tax rate of return to be earned by the amounts collected for decommissioning ii the total estimated cost of decommissioning the nuclear power plant and iii the frequency of contributions to the ------------------------------------------------- ------------------------------------------------------------------------------------------------------------ for a taxable_year sec_1_468a-3 of the regulations permits the internal_revenue_service to provide a schedule of ruling amounts that is 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 this section sec_1_468a-3 of the regulations provides that the ruling_amount specified in a schedule of ruling amounts for any taxable_year in the level_funding limitation period shall not be less than the ruling_amount specified in such schedule for any earlier taxable_year under ' 468a-3 b the level_funding limitation period begins on the first day of the first taxable_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 estimated date on which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes sec_1_468a-3 of the regulations provides that the funding_period for a nuclear decommissioning fund is the period that begins on the first day of the first taxable_year for which a deductible payment is made or deemed to be made to such nuclear decommissioning fund and ends the later of i the last day of the taxable_year that includes the estimated date on which decommissioning costs of the nuclear power plant to which the nuclear decommissioning fund relates will no longer be included in the taxpayer's cost of service for ratemaking purposes or ii the last day of the taxable_year that includes the estimated date on which the nuclear power plant to which the nuclear decommissioning fund relates will no longer be included in the taxpayer's rate base for ratemaking purposes sec_1_468a-3 of the regulations provides that the amount of decommissioning costs allocable to a nuclear decommissioning fund is the taxpayer's plr-117502-06 - - share of the total estimated cost of decommissioning the nuclear power plant multiplied by the qualifying percentage sec_1_468a-3 of the regulations provides that in general the total estimated cost of decommissioning a nuclear power plant is the reasonably estimated cost of decommissioning used by the applicable public_utility commission in establishing or approving the amount of these costs to be included in cost of service for ratemaking purposes sec_1_468a-3 of the regulations provides that a taxpayer's share of the total estimated cost of decommissioning a nuclear power plant equals the total estimated cost of decommissioning the plant multiplied by the taxpayer's qualifying interest in the plant sec_1_468a-3 of the regulations provides that the qualifying percentage for any nuclear decommissioning fund is equal to the fraction the numerator of which is the number of taxable years in the estimated period for which the nuclear decommissioning fund is to be in effect and the denominator of which is the number of taxable years in the estimated_useful_life of the applicable nuclear power plant sec_1_468a-3 of the regulations provides that the estimated period for which a nuclear decommissioning fund is to be in effect begins on the later of the first day of the first taxable_year for which a deductible payment is made to the ------------ ------------------------------ or deemed made or the first day of the taxable_year that includes the date that the nuclear power plant begins commercial operations as determined by the applicable public_utility commission at the time the plant was first included in the taxpayer's rate base and ends on the last day of the taxable_year that includes the estimated date on which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes according to ' 468a-3 e the estimated date on which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes is determined under the ratemaking assumptions used by the applicable public_utility commission in establishing or approving rates during the first ratemaking proceeding in which the nuclear power plant was included in the taxpayer's rate base sec_1_468a-3 of the regulations provides that the estimated_useful_life of a nuclear power plant begins on the first day of the taxable_year that includes the date that the plant begins commercial operations as determined by the applicable public_utility commission at the time the plant was first included in the taxpayer's rate base and ends on the last day of the taxable_year that includes the estimated date on which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes according to ' 468a-3 e the estimated date on which the plr-117502-06 - - nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes is determined under the ratemaking assumptions used by the applicable public_utility commission in establishing or approving rates during the first ratemaking proceeding in which the nuclear power plant was included in the taxpayer's rate base sec_1_468a-3 of the regulations provides that if two or more public_utility commissions establish or approve rates for electric energy generated by a single nuclear power plant then the schedule of ruling amounts shall be separately determined pursuant to the rules of 468a-3 a through e for each public_utility commission that has determined the amount of decommissioning costs to be included in the cost of service for ratemaking purposes for this plant under ' 468a-3 f this separate determination shall be based on the reasonable assumptions and determinations used by the relevant public_utility commission and shall take into account only that portion of the total estimated cost of decommissioning that is properly allocable to the ratepayer whose rates are established or approved by the public_utility commission according to ' 468a-3 f the ruling amounts for any taxable_year is the sum of the ruling amounts for such taxable_year determined under the separate schedules of ruling amounts sec_1_468a-3 of the regulations provides that the internal_revenue_service shall not provide a taxpayer with a schedule of ruling amounts for any nuclear decommissioning fund unless the public_utility commission that establishes or approves the rates for electric energy generated by the plant to which the nuclear decommissioning fund relates has determined the amount of decommissioning costs to be included in the taxpayer's cost of service for ratemaking purposes and has disclosed the after-tax rate of return and any other assumptions and determinations used in establishing or approving the amount sec_1_468a-3 of the regulations 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-3 of the regulations provides that a taxpayer is required to request a revised schedule of ruling amounts for a nuclear decommissioning fund if a any public_utility commission that establishes or approves rates for the furnishing or sale of electric energy generated by a nuclear power plant to which the nuclear decommissioning fund relates increases the proposed period over which decommissioning costs of the nuclear power plant will be included in cost of service for ratemaking purposes adjusts the estimated date on which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes or reduces the amount of decommissioning costs to be included in cost of service for any taxable_year and b the taxpayer's most recent request for a schedule of ruling plr-117502-06 - - amounts did not provide notice to the service of such action by the public_utility commission sec_1_468a-3 of the regulations provides that any taxpayer that has previously obtained a schedule of ruling amounts can request a revised schedule of ruling amounts such a request must be made in accordance with the rules of ' 468a-3 h the internal_revenue_service shall not provide a revised schedule of ruling amounts applicable to a taxable_year in response to a request for a schedule of ruling amounts that is filed after the deemed payment deadline date for such taxable_year we have examined the representations and information submitted by the taxpayer in relation to the requirements set forth in the ' 468a of the code and the regulations thereunder based solely on these representations of the facts we reach the following conclusions commissions a b and c have determined the amount of taxpayer has determined that pursuant to sec_1_468a-3 of the taxpayer has a qualifying interest in the plant and is therefore an eligible taxpayer under sec_1_468a-1 of the regulations decommissioning costs to be included in the taxpayer's cost of service for ratemaking purposes as required by sec_1_468a-3 of the regulations regulations the qualifying percentage is --------percent taxpayer has proposed a schedule of ruling amounts which meets the requirements of sec_1_468a-3 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 the commissions 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 fund during any taxable_year is restricted to the lesser amount of the decommissioning costs applicable to the fund or the ruling_amount applicable to the fund as set forth under sec_1_468a-2 of the regulations taxpayer subject_to the jurisdiction of three public_utility commissions for ratemaking purposes has calculated its share of the total decommissioning costs allocable to commissions a b and c as required by sec_1_468a-3 of the regulations the maximum amount of cash payments made or deemed made to the plr-117502-06 - - based on the above determinations 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 taxable years ------- through ------- year comm a comm b ------------ comm c-------- total ----------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------ commissions a b and c1 comm c ------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ --------- ------------------------------------------------------------------------------------------------------------ ------------------ ------------------------------------------------------------------------------------------------------------ --------- ------------------------------------------------------------------------------------------------------------ ------------------ ------------------------------------------------------------------------------------------------------------ --------- ------------------------------------------------------------------------------------------------------------ ------------------ ------------------------------------------------------------------------------------------------------------ ------------------ ------------------------------------------------------------------------------------------------------------ --------- ------------------------------------------------------------------------------------------------------------ ------------------ ------------------------------------------------------------------------------------------------------------ ------------------ amounts for commission c are not specifically reviewed herein and are merely reprinted to arrive at the amount for the total annual ruling_amount for purposes of the review and revision under sec_1_468a-3 of the regulations the date of the schedule of ruling amounts approved by the service on ---------------------------- governs the review period for the commission c ruling amounts plr-117502-06 - - ------------------------------------------------------------------------------------------------------------ ------------------ ------------------------------------------------------------------------------------------------------------ comm c year comm a comm b ------------ comm c-------- 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-3 of the regulations 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 tax_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 10th tax_year following the close of the tax_year in which the most recent schedule of rulings amounts was received the approved schedule of ruling amounts is relevant only to those payments made to the fund payments allocable to any funds other than the fund cannot qualify for purposes of the deduction under the provisions of sec_468a of the code effective date amendments were made to sec_468a by the energy tax incentives act of publaw_109_58 119_stat_594 regulations based on these amendments are being developed but have not yet been proposed because the period to which the schedule of ruling amounts above relates began prior to the effective date of these amendments the discussion above is based on the law in effect prior to date however this ruling will be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in the letter_ruling see section dollar_figure of revproc_2006_1 2006_1_irb_1 however when the criteria in section dollar_figure of revproc_2006_1 2006_1_irb_49 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances the ruling is directed only the taxpayer who requested it sec_6110 of the code provides it may not be used or cited as precedent pursuant to sec_1_468a-7 of the regulations a copy of this letter must be attached with the required election statement to the taxpayer's federal_income_tax plr-117502-06 - - return for each tax_year in which the taxpayer claims a deduction for payments made to the fund in accordance with the powers of attorney a copy of this letter_ruling is being sent to your authorized representatives a copy of this letter_ruling also is being sent to the appropriate industry director sincerely yours peter c friedman peter c friedman senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries


tcmemo_2012_38 united_states tax_court steven a esrig petitioner v commissioner of internal revenue respondent steven a esrig and lori s esrig petitioners v commissioner of internal revenue respondent docket nos filed date steven a esrig and lori s esrig pro_se bradley c plovan for respondent memorandum findings_of_fact and opinion holmes judge steven and lori esrig didn’t timely file their tax returns for any year from through for some years they were so late that the commissioner prepared substitute returns for them and for all those years he sent them notices of deficiency but the esrigs claim the commissioner got it all wrong that they don’t owe any taxes additions to tax or penalties because they were involved in a number of businesses for which in total they have more losses and deductions than income the case is all about substantiation and we therefore must decide whether the esrigs have substantiated their claimed losses and deductions and then figure out how much they owe in taxes additions to tax and penalties if any when the commissioner learns that someone has received income--usually from third parties under a duty to report--but has not filed a return sec_6020 gives him the power to prepare a substitute for return sfr an sfr is not a comprehensive return the commissioner uses only one of the two filing statuses-- single or married filing separately--and he allows only one personal_exemption and no business_expenses or personal deductions see internal_revenue_manual pt date unless we say otherwise all section references are to the internal_revenue_code in effect for the years in issue all rule references are to the tax_court rules_of_practice and procedure findings_of_fact steven and lori esrig earned much of their income from real-estate sales and investments in securities lori was licensed as a real-estate broker and had her own business buying and selling real_estate for others steven was an entrepreneur sometime before the esrigs decided to go into business together starting sec financial services inc --a company steven said rented renovated and repaired properties owned by the esrigs and even some owned by others steven explained that lori bought sold and rented out the real_estate but he himself handled the day-to-day maintenance and repair work he also claimed that sec produced income from the rent they received and the repair work sec’s crew performed for other_property owners steven testified that sec had one full-time_employee who helped out and from time to time he would also hire either college students or other part-time renovation tradesmen electricians carpenters plumbers and that type of thing he claimed that sec didn’t actually pay the student workers but that they did a licensed real-estate broker has to complete more coursework than a licensed real-estate agent in most states a real-estate agent must be supervised by a broker selling real_estate independently often requires a broker’s license cleanup work in exchange for a discount on their rent sec did pay its subcontractors however and steven said that he kept records of how much he paid and to whom he also said that he and his wife kept calendar records of the time they spent doing work for sec but even though he said all this he actually introduced no supporting documents or other proof of sec’s expenses by early the esrigs were out of the real-estate rental and repair business and had sold off all their rental properties lori still had her real-estate sales business but steven started a new company called stelor productions inc he chose the name stelor because it was a portmanteau of steven and lori steven told us at trial that he got the idea for the company after an incident involving one of his children apparently his then-five-year-old child asked to look at the power rangers website steven logged on but inadvertently mistyped a character in the web address instead of getting the power rangers website up popped a seriously pornographic one this he told us was the reason he started stelor a company he claims invented a technology that protects children from predators and pornography and shuts down identity theft we find however that much of steven’s trial testimony was not credible and this particular tale we believe to be nothing more than a pourquoi story what we do find is that stelor operated out of the esrigs’ home in darnestown maryland and even paid some rent dollar_figure in and dollar_figure in steven was the president and ceo of the company and stelor did have a board_of directors and several other investors stelor however never made any money and lost most if not all of what the investors put in steven told us that the company failed because it ran into some litigation after it bought the domain name googles com from someone who had it before google this he said led to five or six years of litigation with google and ultimately bankrupted his company some background from the public record sometime before date steven a silvers a convicted narcotics trafficker and money launderer wrote a children’s book about loveable four-eyed alien creatures called googles who live on the planet goo see 90_f3d_95 4th cir 932_fsupp_702 d md stelor prods inc v google inc no u s dist lexis at s d fla date order partially granting plaintiff’s motion to compel and defendant’s motion for protective_order silvers said he wanted to use his googles to teach children about social values stelor prods inc v google inc no u s dist lexis at s d fla date order partially granting plaintiff’s motion to compel and defendant’s motion for protective_order in silvers registered the domain name googles com coincidentally around the time google inc registered its ip address claiming that he wanted to develop an interactive children’s website to promote and sell books and other googles merchandise id in stelor acquired silvers’s rights to sell googles products and use the googles trademarks intellectual_property and ip address stelor prods llc v continued opinion the commissioner noticed that the esrigs hadn’t filed their tax returns for and and sent steven notices of deficiency for those three years in date the notices asserted that steven had more than dollar_figure million in total unreported taxable_income and that he was also liable for various penalties the esrigs finally filed their and returns in late date and their tax_return a week later steven quickly filed his petition for all three years we set the case for trial in but the parties then agreed to continue the case to see if they could settle after the commissioner looked at the late-filed returns what happened instead was that the commissioner got more curious about the esrigs and expanded his investigation to later years and related companies in early he sent both esrigs notices of deficiency for and the esrigs filed another petition for these years which we consolidated with continued silvers no s d fla date report and recommendations it then used them to sue other companies one of which was google for trademark infringement and the like stelor prods llc v oogles n googles franchising llc no s d ind date order of dismissal with prejudice of all claims counterclaims and third party claims stelor prods inc v google inc no u s dist lexis at s d fla date steven’s earlier one settlement talks continued but in the summer of the esrigs’ attorney moved to withdraw as counsel the couple had filed for divorce and steven wouldn’t waive the resulting conflict of interest the case finally staggered to trial in baltimore in with the esrigs representing themselves they are and were when they filed their petitions maryland residents after making several concessions the commissioner says these are the deficiencies additions to tax and penalties still at issue the commissioner conceded enough deductions elsewhere in the notices of deficiency and in the prolonged pretrial proceedings that it’s possible that the esrigs did not underpay for some of the years at issue for any such years of course there may not be penalties additions to tax penalties year deficiency sec_6651 sec_6654 sec_6662 dollar_figure dollar_figure big_number big_number big_number big_number big_number dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure --- --- --- and these are the particular items being disputed --- --- --- dollar_figure big_number big_number net_operating_loss nol carryovers claimed for sec’s business_losses for office expenses deducted for and sec_179 deduction for unreported rental income for and capital_gain and losses for and additions to tax under sec_6651 for additions to tax under sec_6654 for failing to make estimated_tax payments in and accuracy-related_penalties under sec_6662 for everything else is computational i substantiation issues we begin by noting that the esrigs bear the burden of proving the commissioner’s deficiency determinations are incorrect see rule a 503_us_79 the code also requires the esrigs to maintain sufficient records to substantiate their claimed deductions see sec_1_6001-1 income_tax regs the fact that the esrigs reported deductions on their returns is not itself substantiation see eg 71_tc_633 a nol carryovers year total nol carryovers claimed amount allowed by irs dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number -0- -0- -0- in general a taxpayer has an nol when he has more deductions than income in a given tax_year see sec_172 and d taxpayers with a big nol in one year may be able to report zero income in that year and use the remaining loss to offset income in other years see sec_172 and b sec_172 says that an nol has to be carried back to the taxable years before the loss_year and if the loss hasn’t been fully absorbed forward up to years see sec_172 the taxpayer however may elect to waive the carryback years see sec_172 the parties dispute the nol carryovers the esrigs reported on their returns and that we summarize in the table above to substantiate their nol carryovers the esrigs had to establish that they incurred nols for and and that they were entitled to carry those losses forward to the years at issue but the only documents they introduced to support their nols are the returns they filed for through including certain irs worksheets used to help taxpayers with their nol computations tax returns however are not substantiation see eg 103_tc_428 so we sustain the commissioner’s determination and disallow the esrigs’ nols before the taxpayer_relief_act_of_1997 pub_l_no sec_1082 sec_111 stat pincite an nol was first carried back tax years and then carried forward for we may determine the amount of a net_operating_loss for a year--even if an assessment of tax for that year is barred--to determine the correct nol_carryover for the tax_year that is at issue see sec_6214 95_tc_257 b schedule e losses sec financial services sec financial services per return per irs dollar_figure big_number big_number big_number big_number big_number -0- -0- -0- -0- -0- -0- year the commissioner conceded the losses the esrigs reported on their schedule e for their real_estate rental business and for egg international but continues to dispute the losses the esrigs reported for sec on their returns the commissioner argues that the esrigs haven’t shown that sec was engaged in a trade_or_business and that they haven’t shown that sec actually incurred the expenses that generated the losses claimed on their returns the commissioner has a point the only evidence of sec’s business activities--other than the esrigs’ tax returns--that we could find in the record was a maryland building contractor’s license issued in and of course steven’s own testimony the documentary_evidence isn’t enough to prove the sec losses and steven’s testimony didn’t jibe with what was reported on the esrigs’ returns we do not find it credible the esrigs reported income expenses and losses from their real-estate rental properties separately and the commissioner generously left those items unadjusted sec however didn’t report any gross_receipts for through we therefore aren’t sure why the esrigs claimed additional losses_and_expenses for sec on their returns and what they were for we also can’t apply the rule_of 39_f2d_540 2d cir and estimate the proper deductions because we have no reasonable way to approximate sec’s deductible business_expenses from the record see 245_f2d_559 5th cir 85_tc_731 we find for the commissioner on this issue and don’t even need to address his argument that sec was not a trade_or_business in sec reported dollar_figure of net_income but we have no idea how it was earned and where it came from the commissioner has agreed that this income doesn’t exist and reduced the esrig’s tax_liability by a corresponding amount c office expenses year per return per irs office expense at issue steven lori steven lori steven lori total dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number --- big_number the esrigs both worked out of their big_number square-foot home and deducted office expenses during all the years in dispute the commissioner however challenges many of their office-expense deductions only for and he says that the esrigs haven’t shown that they had office expenses in an amount greater than what he’s already allowed them for he also argues that the esrigs shouldn’t have taken an office-expense deduction on their return for the costs of painting the exterior of their home and maintaining a fish tank we agree the esrigs offered no credible_evidence on these points d sec_179 expense steven claimed a dollar_figure deduction under section on his tax_return for the cost of a fish tank and dining room furniture the commissioner sec_179 allows a taxpayer in some circumstances to deduct the entire cost of a capital_asset in the year it’s first used in a business rather than depreciating that cost over the asset’s life disallowed these expenses because the esrigs weren’t able to demonstrate the business use of the property the only evidence they offered at trial to substantiate this deduction was steven’s testimony he told us that both he and his wife used their dining room table primarily for business meetings and that they put in a fish tank in the foyer of their home where their business contacts would sit and wait for meetings we did not find steven’s testimony credible and agree with the commissioner on this issue as well e unreported rental income year claimed amount determined by irs dollar_figure big_number steven admitted at trial that the esrigs received rent from stelor for the business use of their home and on the returns signed by steven on behalf of stelor the company deducted rental expenses of dollar_figure and dollar_figure for and the esrigs however didn’t report this income on their personal returns for those two years we therefore sustain the commissioner’s determinations as to the esrigs’ unreported rental income for and f capital_gains property sold gain loss reported q street s street r street nw marymount drive dollar_figure big_number big_number big_number year total adjustment to income --- --- dollar_figure big_number big_number someone who sells property is taxed on the gain not the sale price see sec_1001 sec_1011 the seller gets basis for the amount he paid for the property and his basis is then adjusted according to the rules in sec_1016 see sec_1012 sec_1016 the gain is basically the amount the seller receives reduced by the seller’s adjusted_basis in the property see sec_1011 the commissioner argues that the esrigs had more gain on the sale of their properties in and than what they reported because they overstated their bases in both the r street and marymount drive properties the esrigs presented no evidence on this issue so we find for the commissioner once again ii additions to tax and penalties the final issues are the additions to tax that the commissioner asserts under sec_6651 and sec_6654 and the penalties under sec_6662 for a sec_6651 sec_6651 imposes an addition_to_tax for failing to timely file a tax_return a taxpayer can beat the penalty by showing reasonable_cause id which here would mean proof that the esrigs acted with ordinary business care and prudence and nevertheless were still unable to file as required see 469_us_241 sec_301_6651-1 proced admin regs the esrigs were often very late in filing year filing_date tardiness of the return date date date date date date yrs mos day sec_3 yrs mos day sec_2 yrs mos day sec_2 yrs mo day sec_1 yr mos day sec_1 yr mos days at trial steven blamed the couple’s return preparer he said that he’d asked his accountant to request extensions for all the years at issue but his accountant missed all the deadlines because she had to serve a very long prison sentence for murdering her husband and the person in her office who took over their account made a slew of mistakes we aren’t convinced the esrigs had no evidence to corroborate this lurid tale and we therefore find that they had no reasonable_cause for failing to timely file accordingly we find steven liable for the failure-to-timely-file additions to tax for and both esrigs liable for the failure-to-timely-file additions for the later years b sec_6654 the commissioner also asserts additions to tax against steven under sec_6654 for the failure to pay estimated_taxes for we are satisfied that the commissioner has carried his burden in showing that steven owed taxes and had paid insufficient estimated_taxes for those three years the only tax_payments the esrigs showed on any of the returns were a measly dollar_figure in withholding for and dollar_figure for plus an earned_income_tax_credit for we therefore find steven liable for the sec_6654 addition_to_tax for and if of course the rule_155_computations show an underpayment for those years c sec_6662 the final issue is whether the esrigs are liable for the accuracy-related_penalty under sec_6662 and b and for neglecting or disregarding the tax rules and regulations or for substantially understating their income_tax_liability negligence includes any failure to make a reasonable attempt to comply with the provisions of the code including any failure to keep adequate books_and_records or to substantiate items properly see sec_6662 sec_1_6662-3 income_tax regs and a substantial_understatement includes an understatement of income_tax that exceeds the greater of of the tax required to be shown on the return or dollar_figure see sec_6662 sec_1_6662-4 income_tax regs the commissioner certainly showed that the esrigs kept generally inadequate books_and_records for given that the esrigs have not produced any credible_evidence to establish why this penalty should not apply for we sustain the commissioner’s determinations that they are liable for the accuracy-related_penalty on the ground of negligence for the entire amount of the underpayment for each of these years we also specifically find that the esrigs were negligent in deducting from their income the cost of dining room furniture and of feeding and housing their pet fish we also specifically find them negligent in failing to report the rental income they got from stelor decisions will be entered under rule


department of the treasury_department of the treasury int ernal revenue service int ernal revenue service washington d c washington d c o f f i c e o f o f f i c e o f c h i e f c o u n s e l c h i e f c o u n s e l date number release date cc ita uilc internal_revenue_service national_office field_service_advice memorandum for associate area_counsel sbse attention leslie buzzutto cc sb lou from heather c maloy associate chief_counsel income_tax accounting subject this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 of the internal_revenue_code this chief_counsel_advice should not be cited as precedent legend a year date date date date issue whether the petitioner meets the support_test of sec_152 for the purpose of deducting a dependency_exemption for his son in year conclusion based on the facts presented the petitioner does not meet the support_test of sec_152 therefore the petitioner may not claim a dependency_exemption for his son in year facts petitioner and a are the divorced parents of a son and a daughter on date petitioner and a signed an order stating that petitioner could claim the son as a dependent and that a could claim the daughter as a dependent at that time petitioner had custody of both children petitioner signed a form_8332 release of claim to exemption for child of divorced or separated parents on date releasing his claim to an exemption for his daughter in an order signed by a judge on date a was granted custody of the two children the order stated that if petitioner was current on his payments of child_support and medical_expenses he could claim his daughter as a dependent the order did not state who could claim the dependency_exemption for the son on date the petitioner obtained a clarification order stating that the order on date along with the terms of the divorce decree granted the petitioner the right to claim dependency_exemptions for both children on his tax returns this order was not signed by petitioner or a in year both petitioner and a claimed a dependency_exemption for the son law and analysis sec_152 provides that if a child receives over half of his support during the calendar_year from his parents who are divorced and the child is in the custody of one or both of his parents for more than one-half of the calendar_year the child shall be treated as receiving over half of his support during the calendar_year from the parent having custody for a greater portion of the calendar_year sec_152 provides an exception to the general_rule that the custodial_parent is treated as providing over half of the child’s support it provides that the noncustodial_parent is treated as providing over half of the child’s support if the custodial_parent signs a written declaration that the custodial_parent will not claim the child as a dependent for the tax_year and the noncustodial_parent attaches the written declaration to the noncustodial parent’s return for the tax_year under a-3 of sec_1_152-4t of the income_tax regulations the custodial_parent may release a claim to an exemption by form_8332 or a written declaration that conforms to the substance of that form federal tax law determines whether a parent may claim a dependency_exemption for a child sec_152 sets forth the rules for determining which parent will meet the support_test for claiming the child as a dependent when the parents are divorced the child is in the custody of one or both parents for more than one-half of the calendar_year and the parents provide over half of the child’s support during the calendar_year although petitioner had custody of his son for a time after the divorce the statement of facts submitted to this office indicates that in year a was the custodial_parent of the son of petitioner and a a did not sign a form_8332 releasing her claim to an exemption for the son nor did a make a written declaration that conformed in substance to form_8332 in response to your specific question the order on date which was signed by a is not a written declaration that satisfies sec_152 because a was not the custodial_parent at that time therefore petitioner is not entitled to claim a dependency_exemption for the son in year case development hazards and other considerations in general the internal_revenue_service should take a protective position in cases under sec_152 when two parents have claimed an exemption for the same child this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views please call if you have any further questions


t c summary opinion united_states tax_court jonell s and sedelia r durand petitioners v commissioner of internal revenue respondent docket no 21076-07s filed date jonell s and sedelia r durand pro sese derek p richman for respondent dean special_trial_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 unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure for respondent determined a dollar_figure deficiency in petitioners’ federal_income_tax respondent disallowed petitioners’ claimed miscellaneous_itemized_deductions of dollar_figure before application of the 2-percent floor of sec_67 and deduction for charitable_contribution s of dollar_figure respondent allowed petitioners the standard_deduction instead the issue remaining for decision2 is whether petitioners are entitled to itemized_deductions in an amount in excess of the standard_deduction background some of the facts have been stipulated and are so found 1sedelia r durand mrs durand did not appear at trial or sign the stipulation of facts the court will dismiss mrs durand for failure properly to prosecute and will enter a decision against mrs durand consistent with the decision entered against jonell durand mr durand 2mr durand concedes that petitioners are not entitled to the claimed dollar_figure deduction for job supplies or the claimed dollar_figure deduction for education respondent concedes that petitioners are entitled to a dollar_figure lifetime_learning_credit for and dollar_figure deduction for tax preparation for subject_to sec_67 finally mr durand presented neither evidence nor argument that petitioners are entitled to their claimed deduction for charitable_contribution s of dollar_figure petitioners are therefore deemed to have conceded the issue see 61_tc_311 mikalonis v commissioner tcmemo_2000_281 the stipulation of facts and the exhibits received into evidence are incorporated herein by reference when the petition was filed mrs durand resided in new york and mr durand resided in florida during mr durand worked as a salesperson for benq latin america corp he was required to visit accounts within the immediate territory of miami and fort lauderdale mr durand was also required by his employer to have a cell phone and internet service at his home he was not reimbursed by his employer for his expenditures instead petitioners claimed dollar_figure in unreimbursed employee_expenses on their schedule a itemized_deductions before application of the 2-percent floor of sec_67 petitioners’ unreimbursed employee_expenses consist of dollar_figure for vehicle expenses based on the standard mileage rate of cents for big_number miles dollar_figure for parking fees and tolls dollar_figure for unspecified business_expenses dollar_figure for job supplies and dollar_figure for education i burden_of_proof discussion the commissioner’s determinations in a notice_of_deficiency are presumed correct and the taxpayer bears the burden to prove that the determinations are in error see rule a 290_us_111 but the burden_of_proof on factual issues that affect the taxpayer’s tax_liability may be shifted to the commissioner where the taxpayer introduces credible_evidence with respect to the issue and the taxpayer has satisfied certain conditions see sec_7491 petitioners have not alleged that sec_7491 applies and they have neither complied with the substantiation requirements nor maintained all required records see sec_7491 and b accordingly the burden_of_proof remains on petitioners ii unreimbursed employee_expenses sec_162 authorizes a deduction for all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business but as a general_rule deductions are allowed only to the extent that they are substantiated sec_274 no deductions are allowed for gifts listed_property or traveling entertainment amusement or recreation unless substantiated taxpayers must keep records sufficient to establish the amount of the items required to be shown on their federal_income_tax returns if the taxpayer establishes that he has incurred a deductible expense yet is unable to substantiate the exact amount the court may estimate the deductible amount in some circumstances the cohan_rule 39_f2d_540 2d cir 3the term listed_property is defined to include passenger automobiles and cell phones sec_280f v but the court cannot estimate a taxpayer’s expenses with respect to the items enumerated in sec_274 50_tc_823 affd per curiam 412_f2d_201 2d cir rodriguez v commissioner tcmemo_2009_22 the strict substantiation requirements of sec_274 preclude the court and taxpayers from approximating their expenses sec_274 and the regulations thereunder require taxpayers to substantiate their deductions by adequate_records or sufficient evidence to corroborate the taxpayer’s own testimony the amount of the expenditure or use the time of the expenditure or use the place of the expenditure or use the business_purpose of the expenditure or use and the business relationship to the taxpayer of the persons entertained or receiving the gift see sec_1_274-5t and b temporary income_tax regs fed reg date as to the rules of substantiation the temporary_regulation provides that taxpayers must maintain and produce such substantiation as will constitute proof of each expenditure or use sec_1_274-5t temporary income_tax regs fed reg date written evidence has considerably more probative value than oral evidence and the probative value of written evidence is greater the closer in time it is to the expenditure or use id although a contemporaneous log is not required a record made at or near the time of the expenditure or use that is supported by sufficient documentary_evidence has a higher degree of credibility than a subsequently prepared statement id the corroborative evidence required to support a statement not made at or near the time of the expenditure or use must have a high degree of probative value to elevate the statement and evidence to the level of credibility reflected by a record made at or near the time of the expenditure or use supported by sufficient documentary_evidence id to satisfy the adequate_records requirement of sec_274 the taxpayer shall maintain an account book diary log statement of expense trip sheets or similar record and documentary_evidence that in combination are sufficient to establish each element of expenditure or use sec_1 5t c i temporary income_tax regs fed reg date the adequate record must be prepared or maintained in such manner that each recording of an element or use is made at or near the time of the expenditure or use sec_1 5t c ii temporary income_tax regs fed reg date ‘ m ade at or near the time of the expenditure or use’ means that the elements of an expenditure or use are recorded at a time when in relation to the use or making of an expenditure the taxpayer has full present knowledge of each element of the expenditure or use sec_1_274-5t temporary income_tax regs supra the level of detail required in an adequate record to substantiate the taxpayer’s business use may vary depending on the facts and circumstances sec_1_274-5t temporary income_tax regs fed reg date for example a taxpayer’s use of a vehicle for both business and personal purposes and whose only business use of the vehicle is to make deliveries to customers on an established route may satisfy the adequate record requirement by recording the total number of miles driven during the taxable_year the length of the delivery route once and the date of each trip at or near the time of the trips or establishing the date of each trip with a receipt record of delivery or other documentary_evidence id a vehicle expense sec_1 deduction based on the standard mileage rate to substantiate petitioners’ deduction for vehicle expenses mr durand submitted a letter from his employer which states that mr durand was not entitled to reimbursement for his visits and travel to his accounts a customer list and a summary that includes customers’ names and addresses the number of miles traveled one way and round trip and the total miles traveled per month from his employer’s office to each account the cost per toll and the total cost per month and the cost of parking per visit and the total cost per month in addition mr durand testified that he created his summary by googling the miles from my office to each customer’s address from the customer list his employer_provided and providing a conservative average of the number of visits to each customer during an average month he also testified that his summary was not created in rather he made the summary recently mr durand’s testimony established that he did not accurately record his business mileage at or near the time of his business use and that the numbers of visits were mere estimates or averages see sec_1_274-5t c temporary income_tax regs fed reg date the court therefore finds that petitioners are not entitled to their deduction for mileage see sanford v commissioner supra pincite rodriguez v commissioner supra see also sec_1 5t c temporary income_tax regs supra the substantiation requirements are designed to encourage taxpayers to maintain records and documentary_evidence respondent’s determination is sustained deduction for parking fees tolls and transportation_expenses petitioners claimed a dollar_figure deduction for parking fees and tolls these expenses may generally be deducted as a separate item see revproc_2003_76 sec_5 2003_2_cb_924 with respect to mr durand’s summary of his expenses for tolls and parking mr durand testified that he took the customers that he would have to pay the tolls coming from the office to downtown by the toll road he also testified that he did not have any receipts for his parking expense rather he put an average between dollar_figure to dollar_figure finally he explained that his estimates were very conservative with regard to the parking with the tolls and the miles other than mr durand’s summary and testimony petitioners have provided no other evidence eg a receipt to substantiate their deduction for parking fees and tolls the court therefore finds that petitioners are not entitled to their deduction for parking fees and tolls see kodak v commissioner tcmemo_1991_485 affd without published opinion 14_f3d_47 3d cir jones v commissioner tcmemo_1987_554 see also 294_f2d_328 4th cir the court may reject a taxpayer’s uncorroborated self-serving testimony affg 34_tc_845 87_tc_74 same absent credible documentation of petitioners’ expenditures the record provides no basis for making a determination under the cohan_rule respondent’s determination is sustained b unspecified business_expenses petitioners’ deduction for unspecified business_expenses consists of charges for internet service and mr durand’s cell phone use to substantiate petitioners’ deduction for unspecified business_expenses mr durand provided the letter from his employer which states that cell phone charges and home internet service were not reimbursed by benq and a cingular wireless statement for the period - mr durand also testified that he had no other records of these expenses for because some of them were thrown away expenses for cell phone use must be substantiated in accordance with sec_274 and the regulations thereunder sec_274 see supra pp and note petitioners have provided no evidence that substantiates their cell phone expense in accordance with sec_274 and the regulations thereunder thus petitioners are not entitled to their claimed deduction and the court cannot apply the cohan_rule to estimate a deductible expense see sanford v commissioner t c pincite 4petitioners did not attempt to reconstruct the records of their unspecified business_expenses see 122_tc_305 sanderlin v commissioner tcmemo_2008_209 sec_1_274-5t temporary income_tax regs fed reg date if a taxpayer can establish that the taxpayer’s failure to produce an adequate record is due to the loss of the record through circumstances beyond the taxpayer’s control the taxpayer may substantiate a deduction by reasonable reconstruction of the expenditures the court has characterized internet expenses as utility expenses verma v commissioner tcmemo_2001_132 strict substantiation therefore does not apply and the court may apply the cohan_rule to estimate petitioners’ deductible expense provided that the court has a reasonable basis for making an estimate see 85_tc_731 an estimate must have a reasonable evidentiary basis pistoresi v commissioner tcmemo_1999_39 petitioners have provided no receipts or other documentation to substantiate their internet expense therefore petitioners are not entitled to the deduction and the court cannot estimate a deductible expense because they have not provided the court with any basis for making an estimate in sum respondent’s determination denying petitioners’ dollar_figure deduction for unspecified business_expenses is sustained iii itemized_deductions respondent conceded that petitioners are entitled to a dollar_figure miscellaneous itemized_deduction for tax preparation fees the dollar_figure amount however does not exceed the 2-percent floor of sec_67 thus petitioners are not entitled to the claimed deduction 5taking into account respondent’s concession of a dollar_figure lifetime_learning_credit petitioners’ adjusted_gross_income for is dollar_figure to exceed the 2-percent floor of sec_67 petitioners’ miscellaneous_itemized_deductions must exceed continued respondent made no adjustments in the notice_of_deficiency to petitioners’ itemized_deductions for real_property_taxes of dollar_figure and mortgage interest of dollar_figure but taking into account petitioners’ concessions and the court’s determinations their remaining itemized_deductions total dollar_figure which is less than the dollar_figure standard_deduction see revproc_2003_85 sec_3_10 2003_2_cb_1184 the court assumes that petitioners would want the larger amount and therefore sustains respondent’s use of the standard_deduction see sec_63 george v commissioner tcmemo_2006_121 taxpayers may either elect the standard_deduction or elect to itemize deductions to reflect the foregoing an appropriate order will be issued and decision will be entered under rule continued dollar_figure


internal_revenue_service number release date index number --------------------- -------------------- ---------------------------------- in re ---------------------------------------------------- -------------------------------------------------------- - 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 b09 plr-167772-03 date december legend husband wife year year trust child trust a child trust b child trust c year year year year year year year property company property company company -------------------------------------------------------------------------------------------- ------------------------- -------------------------------------------------------------------------------------------- ------------------------- ------- ------- ---------------------------------------------- --------------------- -------------------------------------------------------------------------------------------- ----------------------- ------------------------ -------------------------------------------------------------------------------------------- ----------------------- ------------------------- -------------------------------------------------------------------------------------------- ----------------------- ------- ------- ------- ------- ------- ------- ------- ------------------------------------------------------- -------------------------------------------------------------------------------------------- -------- ----------------------------- --------------------------------------- ----------------------------------------- plr-167772-03 trust trust d trust e trust f year year year year property property trust trust g trust h trust i ---------------------------------------------- -------------------------------------------------------------------------------------------- ----------------------- -------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- ----------------------- ----------------------- ------- ------- ------- ------- -------------------------------------------------------- --------------------------------------------------------------------------------- ---------------------------------------------- -------------------------------------------------------------------------------------------- ----------------------- -------------------------------------------------------------------------------------------- ----------------------- -------------------------------------------------------------------------------------------- ----------------------- ------- ------- ------- --------------------------- year year year property partnership ------------------------------------------------- partnership -------------------------------------------- dear ----------- correspondence requesting an extension of time under sec_2642 of the internal_revenue_code and sec_301_9100-3 of the procedure and administration regulations to allow husband and wife to allocate their individual generation-skipping_transfer gst exemptions to transfers from year through year trust sub-trusts the facts and representations submitted are summarized as follows this is in response to your letter dated date and prior husband and wife executed the trust agreement prior to date creating an irrevocable_trust article a paragraph of the trust agreement provides that the trust property should be segregated into three separate trusts one each for the benefit of child trust a child trust b and child trust c collectively the trust sub-trusts article b paragraph provides that the primary beneficiary of each separate trust has the right to withdraw any principal that has been added to the plr-167772-03 beneficiary’s trust during the calendar_year provided the right to withdraw shall not exceed the lesser_of the amount contributed to the trust during the calendar_year or the maximum annual_gift_tax_exclusion permitted under sec_2503 or the total amount contributed to the trust during the calendar_year divided by the number of beneficiaries the discretionary right to withdraw principal shall relate only to principal added to the trust during the calendar_year at issue and shall terminate as of december 31st of the calendar_year in the event an addition is made in december the beneficiary shall have thirty days from the date the addition is made within which to exercise the beneficiary’s right to withdraw any unused portion of a beneficiary’s right to withdraw shall not accumulate to future years paragraph provides generally that income from each trust shall be distributed to or for the benefit of the named beneficiary at least annually paragraph provides that the trust sub-trusts shall terminate on the death of the last to die of child child and child paragraph provides that if a beneficiary dies before the time fixed for distribution of the beneficiary’s trust then the trust shall be held for the benefit of the person s appointed by the beneficiary in his or her will the beneficiary may not make an appointment in favor of his or her estate his or her creditors or the creditors of his or her estate in addition the beneficiary may not make an appointment that will terminate the trust prior to the termination_date provided in paragraph paragraph provides that any unappointed portion of any trust will be held in trust for the beneficiary’s then living descendants per stirpes post-date transfers to the trust sub-trusts were made in year year year year year year year and year the trust sub-trusts in addition husband gifted a paid life_insurance_policy on husband’s life in equal shares to the trust sub-trusts finally husband and wife transferred a total of shares of company stock to the trust sub-trusts husband and wife filed form sec_709 united_states gift and generation-skipping_transfer_tax returns gift_tax returns for year but did not report the transfers to trust sub-trusts and did not allocate gst_exemption to the transfers to the trust sub-trusts on the year gift_tax returns husband and wife elected to split_gifts under sec_2513 of the trust sub-trusts later that year husband and wife transferred shares of company stock to each of the trust sub-trusts neither husband nor wife filed a gift_tax_return for year the trust sub-trusts also that year husband and wife transferred shares of company stock to each trust sub-trust for a total of shares neither husband nor wife filed a gift_tax_return for year trust sub-trust for a total of shares also that year husband and wife in year husband and wife transferred a 30th interest in property to each of in year husband and wife transferred shares of company stock to each in year husband and wife transferred shares of company stock to each in year husband and wife transferred a interest in property to each of in year husband and wife transferred a interest in a note receivable in year husband and wife transferred a total of shares of company plr-167772-03 transferred shares of company stock to each trust sub-trust for a total of shares neither husband nor wife filed a gift_tax_return for year secured_by a mortgage to each of the trust sub-trusts neither husband nor wife filed a gift_tax_return for year in year husband and wife transferred shares of company stock to each of the trust sub-trusts for a total of shares neither husband nor wife filed a gift_tax_return for year stock to the trust sub-trusts husband and wife also transferred cash to the trust sub-trusts in year the transfers to the trust sub-trusts were reported on year gift_tax returns but gst_exemption was not allocated to the transfers in year husband and wife transferred cash to the trust sub-trusts the transfers to the trust sub-trusts were reported on year gift_tax returns but gst_exemption was not allocated to the transfers trust sub-trusts husband and wife executed the trust agreement in year article a paragraph of the trust agreement provides that the trust property should be segregated into three separate trusts one each for the benefit of child trust d child trust e and child trust f collectively the trust sub-trusts article b paragraph provides that the primary beneficiary of each separate trust has the right to withdraw any principal that has been added to the beneficiary’s trust during the calendar_year any unused portion of a beneficiary’s right to withdraw shall not accumulate to future years paragraph provides generally that the trustee may in his discretion distribute income or principal from each trust to or for the benefit of the named beneficiary paragraph provides that the trust sub-trusts shall terminate on the death of the last to die of child child and child paragraph provides that if child or child dies before the time fixed for distribution of the beneficiary’s trust then the trust shall be held for the benefit of the person s appointed by the beneficiary in his or her will the beneficiary may not make an appointment in favor of his or her estate his or her creditors or the creditors of his or her estate in addition the beneficiary may not make an appointment that will terminate the trust prior to the termination_date provided in paragraph paragraph provides that the sub-trust for the benefit of child and any unappointed portion of any trust for the benefit of child or child will be held in trust for the beneficiary’s then living descendants per stirpes post-date transfers to the trust sub-trusts were made in year year year year and year in year husband and wife transferred shares of company stock to each in year husband and wife transferred a 18th interest in property to each of in year husband and wife transferred a 18th interest in property to each of in year husband and wife transferred a 6th interest in property to each of in year husband and wife transferred a 18th interest in property to each of plr-167772-03 of the trust sub-trusts neither husband nor wife filed a gift_tax_return for year the trust sub-trusts neither husband nor wife filed a gift_tax_return for year the trust sub-trusts husband and wife also transferred cash to the trust sub- trusts during year neither husband nor wife filed a gift_tax_return for year the trust sub-trusts neither husband nor wife filed a gift_tax_return for year the trust sub-trusts husband and wife also transferred a interest in two mortgage note receivables to each of the trust sub-trusts in year neither husband nor wife filed a gift_tax_return for year trust sub-trusts trust agreement provides that the trust property should be segregated into three separate trusts one each for the benefit of child trust g child trust h and child trust i collectively the trust sub-trusts sec_3_1 provides that the primary beneficiary of each separate trust has the right to withdraw any principal that has been added to the beneficiary’s trust during the calendar_year any unused portion of a beneficiary’s right to withdraw shall not accumulate to future years sec_3_2 provides generally that the trustee shall distribute income from each trust to the named beneficiary at least annually the trustee in the trustee’s discretion may distribute principal from each trust to or for the benefit of the named beneficiary sec_3_4 provides that the trust sub-trusts shall terminate on the death of the last to die of child child and child on termination each beneficiary’s respective trust shall be distributed to the beneficiary’s then living descendants by right of representation if a beneficiary leaves no descendants surviving him or her the trustee shall distribute the trust by right of representation to the then living descendants of husband and wife post-date transfers to trust were made in year year year year and year property to each of the trust sub-trusts husband and wife filed gift_tax returns for year and reported the transfers to the trust sub-trusts on those returns no gst_exemption was allocated to the transfers husband and wife executed the trust agreement in year sec_1 of the in year husband and wife transferred an percent undivided_interest in in year husband and wife transferred of their general_partnership in year husband and wife transferred a percent interest in in year husband and wife transferred a combined total of percent husband and wife relied on multiple professional tax advisors for information in year husband and wife transferred additional partnership interests to plr-167772-03 partnership to each of the trust sub-trusts neither husband nor wife reported these transfers on a year gift_tax_return each of the trust sub-trusts neither husband nor wife reported these transfers on a year gift_tax_return interest in partnership to the trust sub-trusts husband and wife reported these transfers on late-filed year gift_tax returns accordingly gst_exemption was not timely allocated to the year transfers interests in partnership to each of the trust sub-trusts husband and wife reported the year transfers on gift_tax returns filed for year however no gst_exemption was allocated to the transfers regarding available elections and allocations through inadvertence neither their accountants nor their attorney advised them of the need to allocate gst_exemption on their gift_tax returns filed prior to the preparation of the current private_letter_ruling request husband and wife have each requested the following rulings an extension of time to allocate each taxpayer’s gst_exemption as of the date of the gifts to the trust trust and trust sub-trusts in each of year sec_1 through the allocations will be effective as of the dates of each of those gifts and the date of gift value of each of the transfers will be used in determining the amount of gst_exemption to be allocated to each of the trusts than the other spouse shall for the purposes of this chapter be considered as made one-half by him and one-half by his spouse but only if at the time of the gift each spouse is a citizen or resident_of_the_united_states have signified under the regulations provided for in subsection b their consent to the application of paragraph in the case of all such gifts made during the calendar_year by either while married to the other sec_25_2513-2 of the gift_tax regulations provides that consent to the application of the provisions of sec_2513 with respect to a calendar_period shall in order to be effective be signified by both spouses if both spouses file gift_tax returns sec_2513 provides that a gift made by one spouse to any person other sec_2513 provides that paragraph shall apply only if both spouses sec_2631 provides that for purposes of determining the inclusion_ratio sec_2601 imposes a tax on every generation-skipping_transfer a generation- sec_2632 provides that any allocation by an individual of his or her gst plr-167772-03 within the time for signifying consent it is sufficient if the consent of each spouse is signified on his own return skipping transfer is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under sec_2631 which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual’s estate determined with regard to extensions regardless of whether such a return is required to be filed sec_2642 provides that except as provided in sec_2642 if the allocation of the gst_exemption to any transfers of property is made on a gift_tax_return filed on or before the date prescribed by sec_6075 for such transfer or is deemed to be made under sec_2632 or c the value of such property for purposes of sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period on and after the close of such estate_tax_inclusion_period prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of this paragraph this paragraph the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief under this paragraph the time for making the allocation or election shall be treated as if not expressly prescribed by statute for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a gst_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation sec_2642 provides generally that the secretary shall by regulation sec_2642 provides that in determining whether to grant relief under notice_2001_50 2001_2_cb_189 provides that under sec_2642 the time requests for relief under sec_301_9100-3 will be granted when the taxpayer under sec_301_9100-1 a regulatory election includes an election whose due sec_301_9100-3 provides that in general requests for extensions of time plr-167772-03 described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except in subtitles e g h and i for regulatory elections that do not meet the requirements of sec_301_9100-2 must be made under the rules of sec_301_9100-3 date is prescribed by a notice published in the internal_revenue_bulletin in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an election described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or to advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore husband and wife are each granted an extension of time of days from the date of this letter to make allocations of their respective gst exemptions to the year to year transfers to the trust sub-trusts the trust sub-trusts and the trust sub-trusts an individual or supplemental form_709 should be filed for each taxpayer for each year each form_709 should include a notice of allocation properly allocating the taxpayer’s gst_exemption to the transfers to each trust the allocations will be effective as of the date of the transfer and the gift_tax value of the transfer to the trusts will be used in determining the amount of gst_exemption to be allocated to each trust the inclusion_ratio for each trust will be determined under sec_2642 and sec_2642 a copy of this letter should be attached to each individual or supplemental form_709 and filed with the internal_revenue_service center cincinnati ohio copies are included for this purpose sec_301_9100-3 provides that a taxpayer is deemed to have acted the rulings contained in this letter are based upon information and except as expressly provided herein no opinion is expressed or implied plr-167772-03 concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter 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 specifically we express or imply no opinion regarding the value of any of the property transferred to the various sub-trusts over the years in addition we have not expressed an opinion as to whether the transfers to the trust sub-trusts are subject_to an estate_tax_inclusion_period under sec_2642 finally we have not expressed an opinion regarding the inclusion_ratio of any of the sub-trusts to the taxpayer’s representative provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office this letter is being sent this ruling is directed only to the taxpayer requesting it sec_6110 sincerely heather c maloy heather c maloy associate chief_counsel passthroughs and special industries enclosures cc ------------------------------------------------ copy of this letter for sec_6110 purposes copy of this letter -------------------------- -------------------------- ----------------------------------------------- -------------------- --------------------------


internal_revenue_service number release date index number ----------------------------------- ---------------------------------------------------------- --------------------- ------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------------- id no ------------- ----------------- telephone number ---------------------- refer reply to cc psi plr-136973-17 date date legend x state date date date date date dear --------------- ---------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- ----------- --------------- --------------------------- ------------------------ ---------------------- -------------------------- ---------------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_301 c iv and of the procedure and administration regulations specifically your letter requests the service’s consent to change x’s classification from an association_taxable_as_a_corporation to a partnership effective date facts the information submitted states that on date x was formed as a limited_liability_company under the laws of state at the time of formation x had a single owner and was treated as a disregarded_entity for federal tax purposes on date x elected to be an s_corporation effective date under sec_301_7701-3 x is also treated as having made an election to be classified as an association_taxable_as_a_corporation effective date on date new owners acquired interests in x x represents that as of date x had a change_of_ownership of more than fifty percent that would satisfy sec_301_7701-3 plr-136973-17 law sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes elections are necessary only when an eligible_entity does not want to be classified under the default classification or when an eligible_entity chooses to change its classification sec_301_7701-3 provides that except as provided in sec_301 b unless the entity elects otherwise a domestic eligible_entity is i a partnership if it has two or more members or ii disregarded as an entity separate from its owner if it has a single owner sec_301_7701-3 provides that except as provided in sec_301 c iv and v an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 entity classification election with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under sec_301 c i will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 cannot be more than days prior to the date on which the election is filed and cannot be more than months after the date on which the election is filed if an election specifies an effective date more than days prior to the date on which the election is filed it will be effective days prior to the date it was filed sec_301_7701-3 provides that if an eligible_entity makes an election under sec_301_7701-3 to change its classification the entity cannot change its classification by election again during the sixty months succeeding the effective date of the election however the commissioner may permit the entity to change its classification by election within the sixty months if more than fifty percent of the ownership interests in the entity as of the effective date of the subsequent election are owned by persons that did not own any interests in the entity on the filing_date or on the effective date of the entity’s prior election sec_301_7701-3 provides that an eligible_entity that timely elects to be an s_corporation under sec_1362 of the internal_revenue_code code is treated as having made an election under sec_301_7701-3 to be classified as an association provided that as of the effective date of the election under sec_1362 the entity meets all other requirements to qualify as a small_business_corporation under sec_1361 subject_to sec_301_7701-3 the deemed_election to be classified as an association will apply as of the effective date of the s_corporation_election and will remain in effect until the entity makes a valid election under sec_301_7701-3 to be classified as other than an association plr-136973-17 sec_301_9100-1 provides that the commissioner in exercising the commissioner’s discretion may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but not more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that the term regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the standards the commissioner will use to determine whether to grant an automatic_extension of time for making certain elections sec_301_9100-3 provides the guidelines for granting extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301 a provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the information submitted and the representations made we consent to x changing its classification for federal tax purposes less than months after its previous classification change as a result x is granted an extension of time of days from the date of this letter to file form_8832 with the appropriate service_center to elect to be classified as a partnership for federal tax purposes effective date a copy of this letter should be attached to the form_8832 except as expressly provided herein we express or imply no opinion concerning the tax consequences of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion regarding whether x is otherwise eligible to make the election this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited as precedent the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination plr-136973-17 in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representatives sincerely associate chief_counsel passthroughs special industries laura c fields by laura c fields senior technician reviewer branch passthroughs special industries enclosures copy of letter copy for sec_6110 purposes


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi - plr-110986-00 date date x a b d1 year dear this letter responds to your letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated on d1 in year a and b as the shareholders of x represent that x was intended to be an s_corporation beginning year its first taxable_year the minutes of the first meeting of the directors of x evidences this intent moreover for year x filed a form_1120s u s income_tax return for an s_corporation x’s attorney instructed x’s accountant to file a form_2553 election by a small_business_corporation with the internal_revenue_service however due to a misunderstanding x’s accountant did not file a form_2553 x sec_1362 of the code provides that if -- a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation for x's year taxable_year accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective for its year taxable_year within days following the date of this letter then such election will be treated as timely made for x’s year taxable_year a copy of this letter should be attached to the form_2553 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 of the code 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 x’s authorized representative sincerely yours jeanne m sullivan assistant to the chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes