t c summary opinion united_states tax_court harris craig cohen and jennifer gayle cohen petitioners v commissioner of internal revenue respondent docket no 18208-11s filed date harris craig cohen and jennifer gayle cohen pro sese karen e walkenhorst for respondent summary opinion panuthos chief 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 years in issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency in harris craig cohen’s federal_income_tax of dollar_figure for tax_year respondent also determined a deficiency in petitioner and jennifer gayle cohen’s federal_income_tax of dollar_figure for tax_year after concessions the issues for decision are whether petitioner is entitled to deductions claimed on schedule c profit or loss from business for tax_year and whether petitioners are entitled to the same for tax_year and whether petitioner is entitled to deductions claimed on schedule a itemized_deductions greater than those respondent allowed for tax_year and whether petitioners are entitled to the same for tax_year respondent concedes that petitioners are entitled to a deduction of dollar_figure for books on their schedule a petitioners did not provide any evidence at trial to substantiate the remaining dollar_figure deduction for books that respondent disallowed for tax_year accordingly that amount is deemed conceded by petitioners see rule b respondent stipulated that petitioner made a cash charitable_contribution of dollar_figure in accordingly petitioner is entitled to that amount as a deduction on his schedule a the parties stipulated that petitioner paid union dues of dollar_figure in and dollar_figure in respondent previously allowed those amounts as deductions on the and schedules a and petitioner did not provide any evidence at trial to substantiate the disallowed portions of the deductions therefore the disallowed portions are deemed conceded see id background some of the facts have been stipulated and we incorporate the stipulation of facts and accompanying exhibits by this reference petitioners lived in california when they filed the petition ms cohen is a party to this case because she filed a joint federal_income_tax return with petitioner for the tax_year in and the years in issue petitioner was employed full time by ep entertainment ep as a picture editor in his job as a picture editor petitioner created promotional videos for television shows the promotional videos were generally to seconds long and petitioner created them daily in petitioner established an llc known as untitled productions up petitioner formed up in order to produce small television pilot programs on speculation petitioner was the executive producer at up and he intended to film pilot programs and then set up meetings to try to sell the pilot programs to clients the pilot programs that petitioner filmed were basically small sales reels kind of like reality tv short trailers petitioner did not receive any income from up in or and he dissolved up in because of lack of interest in the pilot programs petitioner asserted that he filmed two pilot programs as executive producer for up during and after filming petitioner contacted producers that he knew in the business to see whether they had any interest in his pilot programs he talked to the producers about the concept and the idea and if he presented the pilot program to a potential client he presented a two-minute trailer of the program petitioner’s testimony was vague about the years in which the pilot programs were actually filmed the documents petitioner submitted to establish that he filmed the pilot programs in and instead indicate that he likely filmed the pilot programs in and not during the years in issue petitioner maintained a home_office during the years in issue his employer ep did not require him to maintain a home_office but did require that he log onto ep’s servers to write scripts and start producing the promotional videos that he would create the following day at ep’s offices petitioner typically worked hours per day for ep of the hours petitioner worked about hours per day from his home_office when petitioner was not working for ep at his home_office he used the same equipment and office for up the schedule c activity petitioner used four or five computers in his home_office petitioner filed an individual return for tax_year and a joint_return for the tax_year on his return petitioner claimed a noncash charitable_contribution_deduction of dollar_figure he also claimed a schedule a deduction of dollar_figure for unreimbursed employee_expenses consisting of books union and professional dues and vehicle expenses petitioner attached a schedule c to his return for up he did not report gross_receipts for the schedule c activity but he claimed expense deductions totaling dollar_figure for depreciation and sec_179 expenses meals and entertainment and other expenses on their joint_return petitioners claimed schedule a deductions of dollar_figure for noncash charitable_contributions and dollar_figure for unreimbursed employee_expenses consisting of books union and professional dues and home_office expenses petitioners also claimed a schedule a deduction of dollar_figure for miscellaneous mileage petitioners attached a schedule c to their return for up petitioners did not report any gross_receipts for the schedule c activity but they claimed expense deductions totaling dollar_figure for depreciation and sec_179 expenses taxes and licenses and other expenses respondent issued notices of deficiency for petitioner’s tax_year and petitioners’ tax_year on date the notices of deficiency disallowed the following expenses for lack of substantiation expense charitable_contributions unreimbursed employee_expenses subject_to floor miscellaneous_itemized_deductions subject_to floor expense depreciation meals and entertainment taxes and licenses other expenses schedule a dollar_figure big_number --- schedule c dollar_figure big_number --- big_number discussion dollar_figure big_number big_number dollar_figure --- big_number the commissioner’s determination set forth in a notice_of_deficiency is presumed correct and a taxpayer generally bears the burden of proving otherwise rule a 290_us_111 deductions are a matter of legislative grace and the taxpayer bears the burden of proving entitlement to any deduction claimed rule a 292_us_435 pursuant to sec_7491 the burden_of_proof may shift to the commissioner if the taxpayer produces credible_evidence with respect to any relevant factual issue and meets other requirements petitioners do not contend that sec_7491 shifts the burden_of_proof to respondent nor does the record establish that petitioners satisfy the sec_7491 requirements sec_162 allows a deduction for ordinary and necessary business_expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business in order for an expense to be necessary it must be appropriate and helpful to the taxpayer’s business welch v helvering u s pincite an expense will be considered ordinary if it is a common or frequent occurrence in the type of business in which the taxpayer is involved 308_us_488 to be engaged in a trade_or_business an individual must be involved in an activity with continuity and regularity and the primary purpose for engaging in the activity must be for income or profit 480_us_23 taxpayers must keep sufficient records to substantiate any deductions claimed sec_6001 as a general_rule if the trial record provides sufficient evidence that the taxpayer has paid_or_incurred a deductible expense but the taxpayer is unable to adequately substantiate the precise amount of the deduction to which he is otherwise entitled the court may estimate the amount of the deductible expense and allow the deduction to that extent bearing heavily against the taxpayer whose inexactitude in substantiating the amount of the expense is at his own making 39_f2d_540 2d cir we cannot estimate the amount however unless the taxpayer proves that he or she paid_or_incurred some deductible expense and provides some basis from which we can develop a reasonable estimate 245_f2d_559 5th cir in the case of expenses paid_or_incurred with respect to listed_property eg passenger automobiles or other_property used as a means of transportation sec_274 overrides the cohan doctrine and provides that these expenses are deductible only if the taxpayer meets stringent substantiation requirements sec_274 sec_280f see 560_f2d_973 9th cir rev’g on other grounds tcmemo_1974_59 50_tc_823 aff’d per curiam 412_f2d_201 2d cir sec_1_274-5t temporary income_tax regs fed reg date i schedules c on his return petitioner claimed and respondent disallowed deductions totaling dollar_figure for schedule c depreciation and sec_179 expenses meals and entertainment and other expenses respondent determined that petitioner did not establish that the expenses were paid_or_incurred during the taxable_year and that the expenses were not ordinary and necessary business_expenses on their return petitioners claimed and respondent disallowed deductions totaling dollar_figure for schedule c depreciation and sec_179 expense taxes and licenses and other expenses respondent determined that petitioners did not establish that the expenses were paid_or_incurred during the taxable_year and that the expenses were not ordinary and necessary business_expenses a depreciation petitioner claimed and respondent disallowed a schedule c deduction of dollar_figure for depreciation expenses on his return petitioner attached to his return a form_4562 depreciation and amortization as well as a federal depreciation schedule the form_4562 does not contain a description of the property for which petitioner claimed the depreciation expenses the federal depreciation schedule allocates the total depreciation expenses claimed for between machinery and equipment expenses of misc cost-up exp and misc cost-up exp tv pilot and miscellaneous expenses for misc cost-up exp tv pilo petitioners claimed and respondent disallowed a schedule c deduction of dollar_figure for depreciation expenses on their return petitioners attached to their return a form_4562 as well as a federal depreciation schedule the form_4562 claims a sec_179 expense deduction of dollar_figure for a 5-year laptop and the federal depreciation schedule allocates the remaining depreciation expenses claimed for between machinery and equipment expenses of misc cost-up exp misc cost-up exp tv pilot tv project exp and miscellaneous expenses for misc cost-up exp tv pilo sec_167 allows as a depreciation deduction a reasonable allowance for the exhaustion wear_and_tear of property used in a trade_or_business the purpose of the deduction for depreciation is to allow the taxpayer to recover over the useful_life of the property its cost or other basis 274_us_295 pursuant to sec_168 the depreciation deduction provided by sec_167 is determined by using the applicable_depreciation_method applicable convention and the applicable_recovery_period the period for depreciation of an asset begins when the taxpayer first places the asset into service sec_1 a - b income_tax regs generally depreciation is computed by using the cost of the property as its basis sec_167 sec_1011 sec_1012 sec_1_167_g_-1 income_tax regs petitioner attempted to substantiate the depreciation_deductions with the two depreciation schedules credit card statements from and and his testimony regarding the depreciation_deductions petitioner testified that the miscellaneous cost-up exp listed on the depreciation schedule was for computer equipment such as hard drives cables tapes and cd burners that petitioner purchased to transfer videotapes into a digital format petitioner asserted that the misc cost-up exp tv pilot listed on his depreciation schedule was for computer decks and equipment that he rented or purchased for his project petitioner asserted that miscellaneous expenses for misc cost-up exp tv pilo on the depreciation schedule were incurred in and were associated with his production of a pilot program in that year there is nothing in the record that adequately identifies the assets for which petitioner claimed depreciation_deductions for and the depreciation schedules are unclear in that they do not identify the property for which the depreciation_deductions were claimed and it is not clear from the credit card statements whether the items purchased were personal or business related furthermore some of the items may be subject_to the substantiation requirements of sec_274 for those purchases petitioner did not provide sufficient proof of the amounts expended the time and place of acquisition or the business_purpose see sec_1_274-5t and b temporary income_tax regs supra petitioner has not substantiated the claimed depreciation or sec_179 expense deductions and his testimony does not establish that he is entitled to a deduction for depreciation or sec_179 expenses nor does it provide a basis on which we might estimate those claimed deductions that are not subject_to the substantiation requirements of sec_274 see cohan v commissioner f 2d pincite we sustain respondent’s determination disallowing the deductions for depreciation and sec_179 expenses for tax years and b meals and entertainment on his schedule c petitioner claimed and respondent disallowed a deduction for dollar_figure in meals and entertainment_expenses a deduction is not allowed for meals and entertainment_expenses unless the taxpayer properly substantiates the amount of such expense the time and place of the expense the business_purpose and the business relationship between the taxpayer and the persons being entertained sec_274 to substantiate the claimed deduction for meals and entertainment_expenses petitioner offered credit card statements that he argues show payments for business-related meals and entertainment some of the charges do bear the names of restaurants but none of them reflects that the meals were business related some of the charges on the credit card statements have handwritten notations such as dinner business-chris next to the charge for the purported business meal petitioner also offered business meal logs for both the and tax years the logs list the date of the meal the location the first names of the people with whom petitioner had the meal the reason for the meal and the cost of the meal the logs which were not prepared at the time the expenses were incurred were provided to respondent the day before trial although the logs purport to set forth the amount and the date of each expense petitioner admitted that the entries in the logs were not made at or near the time any expenses were incurred additionally there is nothing in the record but petitioner’s own testimony to indicate that the credit card charges for meals related to petitioner’s business we are not required to find this self-serving and unsupported testimony to be sufficient to prove that petitioner incurred meal and entertainment_expenses in see 87_tc_74 65_tc_87 aff’d per curiam 540_f2d_821 5th cir petitioner’s testimony did not contain specific information in detail about the meals and entertainment_expenses and petitioner did not provide corroborative evidence of such expenses see sec_1 5t c i temporary income_tax regs fed reg date furthermore a noncontemporaneous log does not satisfy the requirements of sec_274 sec_1_274-5t temporary income_tax regs fed reg date accordingly respondent’s determination that petitioner is not entitled to a deduction for meals and entertainment_expenses is sustained c taxes and licenses on their schedule c petitioners claimed and respondent disallowed a deduction of dollar_figure for taxes and licenses to substantiate the expense petitioner provided a copy of a personal check for dollar_figure payable to the franchise tax board the exact date written on the check is illegible but it is clear that the date is in date petitioner also provided a copy of a personal check for dollar_figure dated date and payable to the city of anaheim we are satisfied that petitioner paid dollar_figure to the franchise tax board and dollar_figure to the city of anaheim in but the record does not reflect for what the dollar_figure and the dollar_figure were paid the personal checks are insufficient to establish that these expenses were not personal and therefore the expenses are not deductible see sec_262 d other expense sec_2 petitioner claimed and respondent disallowed schedule c deductions totaling dollar_figure for other expenses on his return petitioner’s claimed other expenses consist of dollar_figure for cable expenses dollar_figure for cellular phone expenses dollar_figure for equipment rentals dollar_figure for miscellaneous expenses dollar_figure for repairs and maintenance and dollar_figure for software supplies on their return petitioners claimed and respondent disallowed schedule c deductions totaling dollar_figure for other expenses petitioners’ claimed other expenses consist of dollar_figure for cable expenses dollar_figure for cellular phone expenses dollar_figure for software supplies dollar_figure for admissions fees dollar_figure for convention expenses dollar_figure for internet expenses dollar_figure for office supplies dollar_figure for parking dollar_figure for small equipment and dollar_figure for video rentals to establish that the other expenses claimed for and on the schedules c were ordinary and necessary business_expenses petitioner submitted a letter dated date from the director of membership services at the motion picture editors guild the letter is addressed to whom it may concern and describes a picture editor’s job requirements and lists various expenses that are an integral part of an editor’s job and are requirements for meeting the expectations of their employers in an extremely demanding and competitive field we are not persuaded that the letter establishes that the claimed other expenses are ordinary and necessary business_expenses for petitioner’s schedule c activity since petitioner was an executive producer and not a picture editor cellular phone expenses petitioner claimed deductions of dollar_figure and dollar_figure on the and schedules c respectively for cellular phone expenses such expenses are subject_to heightened substantiation requirements see sec_274 sec_280f petitioner used his personal cellular phone to accept calls related to his business and provided copies of credit card statements and canceled checks showing payments to verizon and verizon wireless to substantiate the expenses petitioner did not provide an allocation between his business and personal_use of the cellular phone although petitioner provided records of payments for cellular phone expenses in and he failed to provide adequate_records or other_sufficient_evidence to corroborate his claimed business use see sec_274 sec_1_274-5t temporary income_tax regs fed reg date petitioner has not met the heightened substantiation requirements for his cellular phone expenses and thus respondent’s determination as to those expenses is sustained travel to convention petitioners claimed and respondent disallowed a deduction of dollar_figure for travel to las vegas for a convention in petitioner testified that he attended computer conventions and national broadcast association conventions in las vegas and that he incurred airfare and hotel expenses although petitioner claimed travel_expenses only on the schedule c and not the schedule c petitioner submitted a log titled harris cohen conventions travel_expenses listing the dates on which he incurred expenses for travel from los angeles to las vegas for both a convention in and a b-roll shoot in the logs he submitted also list charges for registration transportation and meals petitioner provided copies of credit card statements from both and with handwritten notations next to certain charges for airline tickets and hotel reservations the credit card statements that show that airline ticket charges were incurred in and not the year for which the travel_expenses are at issue travel_expenses are another type of expenditure to which the strict substantiation requirements of sec_274 apply petitioner did not explain and the record does not show how the travel expenditures if incurred were ordinary and necessary business_expenses petitioner did not introduce evidence to substantiate the expenditures under sec_274 and is therefore not entitled to any deductions for travel_expenses respondent’s determination disallowing the deduction for convention expenses for tax_year is sustained cable expenses petitioner claimed and respondent disallowed deductions for cable expenses of dollar_figure and dollar_figure on the and schedules c respectively petitioner had cable in his entire home in and and he claimed deductions for the entire cable expense for each year on the schedules c to substantiate the cable expenses petitioner submitted copies of bank statements and canceled checks showing payments to direct tv though petitioner incurred cable expenses during the years in issue his testimony and the documents submitted do not establish that the cable expenses are ordinary and necessary business_expenses for an executive producer we sustain respondent’s determination disallowing the deductions for cable expenses equipment rental petitioner claimed and respondent disallowed a schedule c deduction of dollar_figure for equipment rental for the taxable_year petitioner submitted several equipment rental agreements dated date and credit card statements with handwritten notations of equip rental next to various charges petitioner did not describe what equipment he rented and when and nothing in the record establishes that the equipment rental expenses were incurred in or that they were ordinary and necessary business_expenses we sustain respondent’s determination disallowing the deduction for equipment rental miscellaneous petitioner claimed and respondent disallowed a schedule c deduction of dollar_figure for miscellaneous expenses for the taxable_year petitioner submitted several pages of credit card statements with handwritten notations such as registration and actor search for tv pilot next to certain charges nothing in the record establishes that these charges were for ordinary and necessary business_expenses and not for personal expenses therefore petitioner is not entitled to deduct the miscellaneous expenses for the taxable_year repairs and maintenance petitioner claimed and respondent disallowed a schedule c deduction of dollar_figure for repairs and maintenance for the taxable_year to substantiate this deduction petitioner submitted several pages of credit card statements with handwritten notations of office repair and office supplies next to certain charges petitioner also submitted a receipt dated date for the purchase of an air conditioner that was purportedly for the home_office nothing in the record establishes that repairs and maintenance charges were incurred in the year for which petitioner claimed the deduction and petitioner has not established that the expenses were ordinary and necessary for his business rather than personal we sustain respondent’s determination disallowing the deduction for repairs and maintenance software supplies petitioner claimed and respondent disallowed deductions for software supplies of dollar_figure and dollar_figure on the and schedules c respectively petitioner submitted copies of credit card statements with handwritten notations next to the charges for the purported software supplies as well as a receipt for a stylus replacement shipped to jennifer colley nothing in the record establishes that these charges were not personal and that they were instead ordinary and necessary business_expenses we sustain respondent’s determination disallowing the deductions for software supplies for tax years and admission fees petitioners claimed and respondent disallowed a schedule c deduction for admission fees for the taxable_year petitioner testified that the admission fees were for the tv academy and arc light cinemas and he submitted one page from a credit card statement with the handwritten notation admissions next to a dollar_figure charge at tv academy for records video petitioner did not describe the purpose of the admission fees so there is nothing in the record to establish that the expenses were ordinary and necessary business_expenses thus respondent’s determination disallowing the deduction for admission fees is sustained internet petitioners claimed and respondent disallowed a schedule c deduction for internet expenses for the taxable_year petitioner testified that for his full- time job at ep he used the internet at home to log onto ep’s web site to decide what portions of the videos to use in the promotions the following day petitioner submitted copies of canceled checks payable to verizon and copies of pages from bank statements showing payments to verizon generally a taxpayer who is an employee may deduct unreimbursed employee_expenses as an ordinary and necessary business_expense under sec_162 79_tc_1 an employee however cannot deduct such expenses to the extent that the employee is entitled to reimbursement from his employer id pincite in addition sec_6001 requires a taxpayer to maintain sufficient records to allow the determination of the taxpayer’s correct_tax liability petitioners deducted the internet expenses in relation to the schedule c activity but petitioner did not establish that internet expenses were ordinary and necessary business_expenses for that activity petitioner used the internet for his full-time job at ep but his testimony did not establish whether he received reimbursement from his employer or had the right to obtain reimbursement from his employer for the internet expenses see id we sustain respondent’s determination disallowing the deduction for internet expenses office supplies petitioners claimed and respondent disallowed a schedule c deduction for office supplies for the taxable_year petitioner submitted pages from credit card statements with handwritten notations next to charges at office depot staples circuit city lowes best buy and target to substantiate the claimed deduction petitioner did not explain the charges and has not offered any evidence to establish that the reported expenses were ordinary and necessary business_expenses see sec_162 accordingly we hold that petitioners are not entitled to a deduction for office supplies for the tax_year parking petitioners claimed and respondent disallowed a schedule c deduction for parking for the taxable_year petitioner did not substantiate the expense and has not offered any evidence to establish that the claimed parking expenses were ordinary and necessary business_expenses see id accordingly we hold that petitioners are not entitled to a deduction for parking for the tax_year small equipment petitioners claimed and respondent disallowed a schedule c deduction for small equipment for the taxable_year to substantiate the claimed deduction petitioner submitted a best buy receipt for an mp3 player though the receipt establishes that the expense was incurred petitioner has not offered any evidence to establish that the expense was an ordinary and necessary business_expense see id accordingly we hold that petitioners are not entitled to a deduction for small equipment for the tax_year video rentals petitioners claimed and respondent disallowed a schedule c deduction for video rentals for the taxable_year to substantiate the claimed deduction petitioner submitted pages from credit card statements with handwritten notations next to charges for netflix the daily grind espres and the paramount commissary petitioner testified that the video rental expense is just dvd’s that again in my industry are customary and ordinary to my job despite petitioner’s testimony that the video rental expenses are customary and ordinary some of the charges on the credit card statements are not clearly for video rentals petitioners deducted the video rental expenses for his schedule c activity but petitioner did not establish that these expenses were ordinary and necessary business_expenses for that activity petitioner’s letter from the motion picture editors guild stated that someone with the job of picture editor is expected to keep up with movies to learn new techniques and to know who is working and on what project petitioner testified however that at his schedule c activity he was not an editor he was the executive producer petitioner’s testimony and documents do not establish that the video rental expenses were ordinary and necessary business_expenses for the schedule c activity we are satisfied that petitioners did incur at least some video rental expenses in and that they may have been related to petitioner’s full-time job as a picture editor but petitioner did not establish whether he received reimbursement from his employer or had the right to obtain reimbursement from his employer for the video rental expenses see lucas v commissioner t c pincite we sustain respondent’s determination disallowing the deduction for video rental expenses ii schedules a a charitable_contributions petitioner deducted noncash charitable_contributions of dollar_figure for the taxable_year and respondent disallowed dollar_figure of that amount petitioner reported noncash contributions of dollar_figure to council thrift shops on date and dollar_figure to goodwill on date petitioners deducted noncash charitable_contributions of dollar_figure for the taxable_year and respondent disallowed dollar_figure of that amount petitioners reported noncash contributions of dollar_figure to council thrift shops on date and dollar_figure to out of the closet on date a taxpayer generally may deduct charitable_contributions made during the taxable_year sec_170 charitable_contributions however are deductible only if verified under regulations prescribed by the secretary sec_170 109_tc_258 aff’d without published opinion 166_f3d_332 4th cir for charitable_contributions made in property other than cash in general the value of the contribution is the fair_market_value at the time of contribution hewitt v commissioner t c pincite sec_1_170a-1 income_tax regs the fair_market_value of contributed_property is the price at which the property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts sec_1_170a-1 income_tax regs for any claimed charitable_contribution_deduction of dollar_figure or more the taxpayer must obtain a contemporaneous written acknowledgment from the donee sec_170 sec_170 provides that the contemporaneous written acknowledgment must include the following b content of acknowledgment --an acknowledgment meets the requirements of this subparagraph if it includes the following information i the amount of cash and a description but not value of any property other than cash contributed ii whether the donee organization provided any goods or services in consideration in whole or in part for any property described in clause i iii a description and good_faith estimate of the value of any goods or services referred to in clause ii or if such goods or services consist solely of intangible religious benefits a statement to that effect sec_170 provides that a written acknowledgment is contemporaneous when the taxpayer obtains it on or before the earlier of the date the taxpayer files a return for the year of contribution or the due_date including extensions for filing that return in addition to the written acknowledgment requirement the regulations establish a three-tier recordkeeping system for contributions of property other than money for a noncash contribution of dollar_figure or less the taxpayer must substantiate the contribution with a receipt from the donee indicating the donee’s name the date and location of the contribution and a description of the property in detail reasonably sufficient under the circumstances sec_1_170a-13 income_tax regs if the taxpayer makes a charitable_contribution of property other than money and claims a deduction in excess of dollar_figure the taxpayer must maintain written records showing the manner of acquisition of the item the approximate date_of_acquisition and the cost or adjusted_basis of the property sec_1 170a- b income_tax regs see also lattin v commissioner tcmemo_1995_ lastly if the noncash contribution deduction exceeds dollar_figure the taxpayer must obtain a qualified_appraisal for the contributed_property attach a fully completed appraisal_summary ie form_8283 noncash charitable_contributions to the tax_return on which the deduction is claimed and maintain records pertaining to the claimed deduction in accordance with sec_1 170a- b ii income_tax regs see sec_1_170a-13 income_tax regs generally the amount reported as a deduction for contributions of property is an aggregate amount for all similar items of property see sec_1 170a- c i income_tax regs in petitioner’s reported contributions fall into the general categories of clothing and housewares accordingly we aggregate all items in these categories and consider the claimed deduction in both categories to exceed dollar_figure petitioner therefore needs to establish that he met the substantiation requirements applicable to deductions over dollar_figure in petitioners’ claimed contributions also fall into the general categories of clothing and housewares accordingly we aggregate all items in these categories and consider the claimed deduction for clothing to exceed dollar_figure and the claimed deduction for housewares to exceed dollar_figure petitioners therefore need to establish that they met the substantiation requirements applicable to deductions over dollar_figure for the clothing contributions and that they met the substantiation requirements applicable to deductions over dollar_figure for the housewares contributions petitioner’s noncash contributions of clothing and housewares in exceed dollar_figure so he must introduce contemporaneous written acknowledgments as well as written records showing the manner of acquisition the approximate date_of_acquisition and the cost or adjusted_basis of the contributed_property see sec_1_170a-13 income_tax regs see also lattin v commissioner tcmemo_1995_233 petitioner introduced three receipts from goodwill with lists of donated items and three receipts from council thrift shops petitioner reported his cost or adjusted_basis in the contributed items on his form_8283 as dollar_figure for the items donated to council thrift shops and dollar_figure for the items donated to goodwill and the date acquired for all of the items as various petitioner reported the fair market values of the items donated to council thrift shops and goodwill as dollar_figure and dollar_figure respectively petitioner did not provide the approximate dates of acquisition of the contributed items and he introduced no documentation to corroborate his calculation of his cost or adjusted_basis in the contributed items petitioner failed to show that he had reasonable_cause for not providing information regarding the acquisition dates or cost_basis in the contributed items see sec_1 170a- b ii income_tax regs furthermore petitioner testified that he calculated the fair market values of the contributed items by using the prices of similar items listed on ebay and amazon petitioner submitted printouts of items for sale on ebay to support his calculations but all of the printouts are dated either september or in the absence of corroborating evidence we are not required to accept petitioner’s self-serving testimony see 112_tc_183 to substantiate their contributions petitioners introduced four receipts from goodwill with lists of donated items a receipt from out of the closet thrift stores with a list of donated items and five receipts from council thrift shops petitioners reported their costs or adjusted bases in the contributed items on their form_8283 as dollar_figure for the items donated to council thrift shops and dollar_figure for the items donated to out of the closet thrift stores they reported the date acquired for all items as various and reported the fair market values of the items donated to council thrift shops and out of the closet thrift stores as dollar_figure and dollar_figure respectively petitioners did not provide the approximate dates of acquisition of the contributed items nor did they introduce documentation to corroborate the calculations of the costs or adjusted bases in the contributed items furthermore petitioners’ deduction for clothing exceeded dollar_figure but they did not obtain a qualified_appraisal for the contributed_property or maintain records pertaining to the claimed deduction in accordance with sec_1_170a-13 income_tax regs see sec_1_170a-13 income_tax regs in the absence of corroborating evidence we are not required to accept petitioner’s self-serving testimony see shea v commissioner t c pincite accordingly we sustain respondent’s determination disallowing the deductions for noncash charitable_contributions of dollar_figure and dollar_figure for tax years and respectively b unreimbursed employee_business_expense sec_1 vehicle expenses petitioner claimed and respondent disallowed an unreimbursed employee_business_expense deduction for vehicle expenses of dollar_figure on his schedule a petitioners claimed and respondent disallowed a deduction of dollar_figure for misc mi on their schedule a passenger automobiles and any other_property used as a means of transportation are listed_property see sec_280f and ii and these expenses are subject_to the strict substantiation requirements of sec_274 sec_274 requires a taxpayer to substantiate the expenses by adequate_records or other corroborating evidence of the amount of each use ie the mileage the time and place of the use and the business purposes of the use see fessey v commissioner tcmemo_2010_ slip op pincite sec_1_274-5t c temporary income_tax regs fed reg date petitioner submitted several service invoices from cerritos nissan to substantiate the claimed vehicle expense deduction for tax_year and the claimed miscellaneous mileage deduction for tax_year petitioner also submitted pages from credit card statements that show charges at cerritos nissan the invoices list the vehicle’s mileage at the time it was dropped off at the service_center and at the time it was picked up petitioner submitted recently created mileage logs for both and and provided the logs to respondent the day before trial petitioner did not establish that he did not receive reimbursement and did not have the right to obtain reimbursement from his employer for the vehicle expenses or the miscellaneous mileage expenses see lucas v commissioner t c pincite petitioner’s mileage logs and credit card statements do not substantiate the vehicle expense deduction claimed for or the miscellaneous mileage deduction claimed for petitioner did not establish the business_purpose of the use of his vehicle and we do not find his mileage logs to be credible petitioner admitted that there were mistakes in the logs and his credit card statements establish that he incurred charges in hawaii on the same dates that he claimed to have driven business miles in california while we believe that petitioner did use his vehicle for some business travel he failed to substantiate the amount of his business mileage and vehicle expenses as required by sec_274 consequently we sustain respondent’s determination that petitioner is not entitled to deduct any amount for vehicle expenses for or miscellaneous mileage for business use of home petitioners claimed and respondent disallowed home_office_deductions totaling dollar_figure for rent repairs and maintenance and utilities on their schedule a in general a taxpayer is not entitled to deduct any expenses related to the use of a dwelling_unit used by the taxpayer as a residence during the taxable_year see sec_280a expenses attributable to a home_office are excepted from this general_rule however if the expenses are allocable to a portion of the dwelling_unit which is exclusively used on a regular basis as the principal_place_of_business for the taxpayer’s trade_or_business see sec_280a 125_tc_271 if the taxpayer is an employee the exception under sec_280a will apply only if the home_office is maintained for the convenience_of_the_employer see 94_tc_348 an employee satisfies this requirement when the employee maintains the home_office as a condition of his employment or as necessary for the functioning of the employer’s business or as necessary for the employee to properly perform his duties id pincite the home_office must not however be ‘purely a matter of personal convenience comfort or economy’ with respect to the employee id quoting 66_tc_515 aff’d 591_f2d_1273 9th cir petitioner does not claim and has not established that during the home_office was used exclusively on a regular basis as the principal_place_of_business for either petitioner or that the home_office was maintained for the convenience of either of their employers petitioner’s employer ep did not require him to maintain a home_office the fact that petitioner used the home_office for business purposes as he claims is insufficient to allow any deduction attributable to that use see lofstrom v commissioner t c pincite petitioners are not entitled to a home_office deduction for and respondent’s determination in this regard is sustained we have considered the parties’ arguments and to the extent not discussed herein we conclude the arguments to be irrelevant moot or without merit to reflect the foregoing decision will be entered under rule


internal_revenue_service date number info release date conex-119035-04 cc ita b03 uil --------------------------------------- ----------------------------------------- ---------------------------------------------- --------------------------------- attn -------------------- dear ----------------- i am responding to your letter of date to commissioner everson you wrote on behalf of your constituent ------------------------- who asked about certain rules concerning the deferral of crop insurance proceeds specifically she inquired about the rule that if a taxpayer receives both federal crop insurance and private crop insurance proceeds as a result of destruction or damage to crops the taxpayer cannot defer one type of insurance proceeds but not the other type if those amounts are attributable to crops representing a single trade_or_business ---------------’s letter mentioned that she had been told that this rule was a recent change to the regulations robert basso of my staff called --------------of your staff to discuss this matter and they agreed that a conference call among mr basso ------------- and --------------- would be appropriate the conference call was held on date they discussed not only ------------------- -----------------------------------------------------------------------------------------------------------------’s specific issue but also the broader issues concerning the deferral of crop insurance proceeds and disaster payments including the statutory and regulatory provisions allowing this deferral mr basso explained that the specific rule --------------- described has been in effect since he also explained that it was based on sec_451 of the internal_revenue_code the code and that legislation would be required to change it at the conclusion of the conference call it was agreed that our written response to your office would also contain information about the statutory and regulatory provisions discussed in general a taxpayer must include any item_of_gross_income in gross_income for the taxable_year in which received by the taxpayer unless under the method_of_accounting used in computing taxable_income that amount is to be properly accounted for as of a different period see sec_451 of the code most individual farmers use the cash_receipts_and_disbursements_method of accounting under the cash_receipts_and_disbursements_method of accounting generally they must include an amount in gross_income when actually or constructively received see sec_1_451-1 and sec_1_451-2 of the income_tax regulations the regulations the following special rule applies for crop insurance proceeds and disaster payments in the case of insurance proceeds received as a result of destruction or damage to crops a taxpayer reporting on the cash_receipts_and_disbursements_method of accounting may elect to include such proceeds in income for the taxable_year following the taxable_year of destruction or damage if he establishes that under his practice income from such crops would have been reported in a following taxable_year for purposes of the preceding sentence payments received under the agricultural act of as amended or title ii of the disaster assistance act of as a result of destruction or damage to crops caused by drought flood or any other natural disaster or the inability to plant crops because of such a natural disaster shall be treated as insurance proceeds received as a result of destruction or damage to crops an election under this subsection for any taxable_year shall be made at such time and in such manner as the secretary prescribes sec_451 of the code a taxpayer cannot use sec_451 to defer income from insurance or disaster payments into the following year unless the taxpayer would have reported more than of the income from the destroyed or damaged crops in the following year under normal business practice see revrul_74_145 1974_1_cb_113 sec_451 of the code was originally enacted in to ease hardships caused under prior_law when a farmer had to report crop insurance proceeds in the year received even though the farmer under normal circumstances would not have reported income from the crop until the following year see sec_215 of the tax reform act of pub_l_no 83_stat_487 h_r conf_rep no 91st cong 1st sess s rep no 91st cong 1st sess as originally enacted sec_451 applied to crop insurance proceeds but not to disaster payments in sec_451 was expanded to include disaster payments received under the agricultural act of as amended see sec_2102 of the tax reform act of pub_l_no 90_stat_1520 the legislative_history describe sec_1 in our research we located a document titled a history of the crop insurance program on the website of the u s department of agriculture at www rma usda gov aboutrma history html copy enclosed that document states that federal crop insurance was first authorized during the 1930s and that participation in the program increased significantly during the 1990s how a amendment to the agricultural act of provided for disaster payments to farmers but such payments were not treated as insurance proceeds under sec_451 of the code because no premiums were paid_by the farmers see h_r rep no 94th cong 2nd sess s rep no 94th cong 2nd sess in sec_451 was again expanded to include payments received under title ii of the disaster assistance act of see sec_6033 of the technical_and_miscellaneous_revenue_act_of_1988 pub_l_no 102_stat_3342 sec_451 has not been amended since in the disaster assistance act of pub_l_no stat was enacted to provide disaster relief payments to farmers but without any corresponding amendment to sec_451 of the code consequently whether sec_451 treatment was available to farmers receiving these payments was questionable in response temporary regulations were written making it clear that federal disaster payments made under statutes other than those specifically listed in sec_451 were also covered provided the farmers received the payments as a result of destruction or damage to crops caused by drought flood or any other natural disaster or the inability to plant crops because of such a natural disaster see fed reg big_number date these regulations were made final as sec_1_451-6 and still provide that federal payments received as a result of destruction or damage to crops caused by drought flood or any other natural disaster or the inability to plant crops because of such a natural disaster shall be treated as insurance proceeds received as a result of destruction or damage to crops see fed reg big_number date unfortunately many farmers filed their income_tax returns without the guidance provided by the temporary regulations consequently some farmers deferred crop insurance proceeds but not federal disaster payments received under title i of the disaster assistance act of this was a problem because the regulations do not permit a taxpayer to defer crop insurance proceeds but not disaster payments or vice versa if such amounts were attributable to crops representing a single trade_or_business in the case of a taxpayer who receives insurance proceeds as a result of the destruction of or damage to two or more specific crops if such proceeds may be included in gross_income for the taxable_year following the taxable_year of such destruction or damage and if such taxpayer makes a sec_451 election with respect to any portion of such proceeds then such election will be deemed to cover all such proceeds that are attributable to crops representing a single trade_or_business under sec_446 of the code see sec_1_451-6 of the regulations this regulation has been in effect since see fed reg big_number date as corrected by fed reg big_number date we have reviewed the provisions of the farm security and rural investment act of pub_l_no 116_stat_134 the act as we said we would during the conference call subtitle a of title x of the act covers crop insurance the act did not make any changes to the tax rules concerning the deferral of crop insurance proceeds in notice_90_28 1990_1_cb_339 the internal_revenue_service addressed the problem the notice informed farmers that they could elect to defer crop insurance proceeds under sec_451 without also deferring federal disaster payments made under the disaster assistance act of but only for a tax_year ending before date the purpose of this one-time modification of the general_rule was to eliminate the need for many farmers to file amended returns the notice specifically mentioned that while the notice allows an election to defer insurance proceeds but not federal disaster payments it does not allow an election to defer federal disaster payments but not insurance proceeds as mentioned above a taxpayer cannot defer crop insurance proceeds but not disaster payments or vice versa if such amounts are attributable to crops representing a single trade_or_business see sec_1_451-6 of the regulations also the regulations do not permit a taxpayer who grows different types of crops to defer crop insurance proceeds for only one type of crop but not others if such insurance proceeds are attributable to crops representing a single trade_or_business furthermore if a taxpayer receives both federal crop insurance and private crop insurance proceeds as a result of destruction or damage to crops the taxpayer cannot defer one type of insurance proceeds but not the other type if such amounts are attributable to crops representing a single trade_or_business this regulatory rule is in accord with sec_451 of the code which does not make a distinction between federal crop insurance proceeds and private crop insurance proceeds i hope this information is helpful if you or your staff need further assistance please contact me or -------------------at --------------------- sincerely christopher f kane chief branch office of associate chief_counsel income_tax and accounting enclosure


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-118027-15 date date legend x ------------------------------------------- ---------------------------------------- y ------------------------------------------- --------------------------------------- z ------------------------------------------- ------------------------------------------- a b c d ---------------- ---------------- ------------------ ---------------------------- year1 --------- date1 --------------------------- state1 -------------- fund1 --------------------------------------------- fund2 ---------------------------------------------- n1 -------------------- plr-118027-15 n2 n3 n4 n5 -------------------- ------------------ ---------------- ---------------- dear --------------- this responds to your letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_707 and sec_267 of the internal_revenue_code code facts according to the information submitted x y and z are grantor trusts within the meaning of sec_671 through x y and z were formed in year1 by a b and c respectively and each is held for the benefit of its grantor’s descendants d is a state1 limited_liability_company treated as a partnership for u s federal_income_tax purposes on date1 pursuant to separate purchase and sale agreements d sold its membership interests in fund1 and fund2 to x y and z collectively the purchasing trusts in equal proportions the sale fund1 and fund2 are partnerships for u s federal_income_tax purposes for which no sec_754 elections have been made in connection with the sale of d’s membership interests in fund1 and fund2 d reported a dollar_figuren1 capital_loss pursuant to sec_743 and d and the bases of the assets of fund1 and fund2 were in the aggregate decreased with respect to the purchasing trusts by dollar_figuren2 dollar_figuren3 of the capital_loss was disallowed pursuant to sec_707 the disallowed loss the portion of the loss attributable to membership interests in fund1 and fund2 sold to x was dollar_figuren4 the downward basis_adjustment with respect to x was dollar_figuren5 notwithstanding the disallowed loss the downward basis_adjustment with respect to x was not changed and remains in effect since the sale both fund1 and fund2 have recognized gains on disposition of assets held at the time of the sale in addition it is expected that fund1 and fund2 may recognize gains in the future on dispositions of assets held at the time of the sale x may also recognize gain in the future on the disposition of its membership interest in fund1 or fund2 x requests a ruling regarding when it is entitled to reduce all or a portion of the gain allocated to it on the sale of the assets by the previously disallowed loss plr-118027-15 law analysis sec_267 provides that if in the case of a sale_or_exchange of property to the taxpayer a loss sustained by the transferor is not allowable to the transferor as a deduction by reason of subsection a and the taxpayer sells or otherwise disposes of such property or of other_property the basis of which in his hands is determined directly or indirectly by reference to such property at a gain then such gain shall be recognized only to the extent that it exceeds so much of such loss as is properly allocable to the property sold or otherwise_disposed_of by the taxpayer this subsection shall not apply if the loss sustained by the transferor is not allowable to the transferor as a deduction by reason of sec_1091 relating to wash sales sec_707 provides that no deduction shall be allowed in respect of losses from sales or exchanges of property other than an interest in the partnership directly or indirectly between a a partnership and a person owning directly or indirectly more than percent of the capital interest or the profits interest in such partnership or b two partnerships in which the same persons own directly or indirectly more than percent of the capital interests or profits interests in the case of a subsequent sale_or_exchange by a transferee described in this paragraph sec_267 shall be applicable as if the loss were disallowed under sec_267 for purposes of sec_267 partnerships described in subparagraph b of this paragraph shall be treated as persons specified in sec_267 sec_1_707-1 provides that if a gain is realized upon the subsequent sale_or_exchange by a transferee of property with respect to which a loss was disallowed under the provisions of subdivision i of this paragraph sec_267 shall apply as though the loss were disallowed under sec_267 conclusion based solely on the facts submitted and the representations made we conclude that pursuant to sec_707 and sec_267 upon a sale_or_other_disposition by fund1 or fund2 of property that was the subject of a downward basis_adjustment pursuant to sec_743 and sec_743 with respect to x as a result of the sale or of other_property the basis of which is determined directly or indirectly by reference to such property x shall recognize gain only to the extent that it exceeds the amount of the disallowed loss properly allocable to the property sold or otherwise_disposed_of by fund1 or fund2 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 request for rulings it is subject_to verification on examination plr-118027-15 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely david r haglund david r haglund chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purpose


ay significant index no department of the treasury - - internal_revenue_service washington d c tax_exempt_and_government_entities_division may tep ra re salaried plan company former parent this letter constitutes notice that for a conditional waiver of the minimum_funding_standard for the hourly plan has been granted for the plan_year ending september this conditional waiver has been granted in accordance with sec_412 of the internal_revenue_code code and sec_303 of the employee_retirement_income_security_act_of_1974 erisa the amount for which this conditional waiver has been granted is equal to the contributions that would otherwise be required to reduce the balance in the funding_standard_account to zero as of date the company is a u s -based global supplier of vehicle electronics transportation components integrated systems and modules and other electronic technology with a network of manufacturing sites technical centers sales offices and joint ventures in every major region of the world the company supplies products to automotive original equipment manufacturers worldwide and its customer base includes customers in the communications computer consumer electronics energy and medical devices industries 0u2t based on the information submitted by the company it is clear that it has suffered a substantial business hardship while the company generated net_income for its and and fiscal years the company suffered losses for its fiscal years the company's financial condition particularly began to deteriorate in three issues have largely contributed to the company’s financial deterioration as a result of downturns in its industry and the first half of unsustainable u s legacy liabilities and restrictions driven by collective- bargaining agreements which have had the effect of creating large fixed labor costs reduced production for the former parent which is the company's major u s customer and increased commodity prices in date the company filed a voluntary petition under chapter of the u s bankruptcy code the company continues to operate its business as debtor-in- possession the company has announced that it will cease accruals to the hourly plan for most participants as soon as practicable following its emergence from chapter bankruptcy protection participants in the hourly plan who are employed by the company after the freeze date will continue to earn service for purposes of eligibility and vesting until termination of employment with the company the company is expected to emerge from chapter bankruptcy protection fully restructured with trimmed legacy labor costs sufficient access to capital markets and a business plan to diversify its customer base based on the company's diversification strategy and vastly improved equity position the company i is poised to return to profitability upon emergence from chapter bankruptcy protection also the company has represented that it intends to contribute funds to the hourly plan that had been required to satisfy the minimum_funding_standard for the plan_year ending september the company has represented that it intends to meet the minimum_funding_standard for and subsequent plan years upon emergence the plan_year ending september from chapter bankruptcy protection the actuary for the hourly plan has projected that the full funding limitation for the plan will be zero for the plan_year ending september if the company is able to successfully reorganize under chapter bankruptcy protection its financial condition will be vastly improved and its financial hardship can be considered temporary however it is still uncertain whether the company can successfully emerge from chapter bankruptcy protection accordingly the waiver of the of the minimum_funding_standard for the hourly plan has been granted for the plan_year ending september subject_to the following conditions no later than date the company files a plan_of_reorganization with the bankruptcy court providing for continuation of the hourly plan compliance with the conditions of this waiver and providing for the combination of transfers under sec_414 1i of the internal_revenue_code code and cash contributions described below the company will not seek approval of a plan_of_reorganization which is inconsistent with the conditions of this waiver the company does not enter into any agreement or amend any existing agreement that would prevent it from satisfying its agreement under this funding waiver to make the pension contributions described in condition by date the company provides the pension_benefit_guaranty_corporation pbgc’ a letter_of_credit in favor of the hourly plan from a financial_institution acceptable to the pbgc in the amount of dollar_figure million if the company fails to meet any one of the conditions under which this funding waiver has been granted the pbgc may draw upon this letter_of_credit for the benefit of the hourly plan at anytime thereafter this letter_of_credit will expire when the contributions described in condition are made upon the effective date of the company's plan_of_reorganization under chapter not later than the effective date of the company’s plan_of_reorganization under chapter the company either i effects a transfer under sec_414 of the code of unfunded liabilities from the hourly plan to a plan sponsored by the former parent ii makes contributions to the hourly plan or iii makes a combination of transfers of unfunded liabilities under the hourly plan and cash contributions so that the net unfunded liabilities under the hourly pian are reduced by at least dollar_figure billion as determined on a fa sec_87 basis not later than the effective date of the company's plan_of_reorganization under chapter the company makes contributions to the hourly planinan amount sufficient to result in a projected funded_current_liability_percentage as of date when measured reflecting such contributions and the projected impact of the sec_414 transfer that is the same funded_current_liability_percentage that would have been projected as of date if a the funding waiver had not been granted b the sec_414 transfer did not occur and c a contribution was made on the effective date of the company’s reorganization under chapter equal to the accumulated employee_retirement_income_security_act_of_1974 erisa funding deficiency projected to the effective date of the reorganization not later than the effective date of the company's plan_of_reorganization under chapter the company makes a contribution to the hourly plan in the amount of dollar_figure million for the plan_year ending september not later than the effective date of the company's plan_of_reorganization under chapter the company makes a contribution to the hourly plan in the amount of dollar_figure million in addition to the dollar_figure million contribution in condition above for the plan_year ending september settlement of all claims or potential claims against the company under sec_4971 of the code with respect to the hourly plan and the salaried plan for the plan years ending september any such claims against the company prior to the effective date of the company's plan_of_reorganization under chapter the service will not pursue _ in full and final not later than the effective date of the company's plan_of_reorganization under’ chapter the company reimburses the pbgc for outside consulting fees incurred in the review of the company’s funding waiver request in an amount not to exceed dollar_figure million the effective date of the company's plan_of_reorganization is no later than date the company makes contributions to the hourly plan i in amounts sufficient to meet the minimum_funding_standard for the hourly plan for the plan_year ending september by date your authorized representative agreed to these conditions in a letter dated date if any one of the conditions is not met the waiver for the plan_year ending september is retroactively null and void 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 by others as precedent your attention is called to sec_412 of the code and sec_304 of erisa which describe the consequences that would result in the event the hourly plan is amended to increase benefits change the rate in the accrual_of_benefits or to change the rate of vesting while any portion of the waived_funding_deficiency remains unamortized please note that any amendment to a profit sharing plan or any other retirement plans covering employees covered by the hourly plan maintained by the company to increase the liabilities of those plans would be considered an amendment for purposes of sec_412 of the code and sec_304 of erisa similarly the establishment of a new profit sharing plan or any other retirement_plan by the company covering employees covered by the hourly plan would be considered an amendment for purposes of sec_412 of the code and sec_304 of erisa when filing form_5500 for the plan_year ending september letter should be entered on schedule b actuarial information for this reason we suggest that you furnish a copy of this letter to the enrolled_actuary who i is responsible for the completion of the schedule b _ the date of this we have sent a copy of this letter to the to the and to your authorized representative pursuant to a power_of_attorney on file in this office if you require further assistance in this matter please contact sincerely yours ql h grant director employee_plans


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 b04 plr-151361-07 date date internal_revenue_service number release date index number ------------------------- ---------------------------- --------------------------- ----------------------------- ----- --------------------------- legend ---------------------------------------------------- ------------------------------------------------------- ----------------------------------------------------- --------------------------- ----- ------- --- -------------------------------------------------------------------- taxpayer spouse corporation date x y z limited_partnership ----------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------- accounting firm attorney attorney year year year year year year year date -------------------------- ------------------------ -------------------------- ------- ------- ------- ------- ------- ------- ------- ------------------ dear ------------------------------ plr-151361-07 this is in response to correspondence requesting a ruling under sec_2701 of the internal_revenue_code facts taxpayer is the president and a shareholder in corporation a privately held company taxpayer’s parents founded corporation taxpayer and his brother each received gifts of stock from their parents between year and year in year prior to taxpayer’s parents exchanged their remaining shares of common_stock for preferred_stock this left taxpayer and his brother with equal ownership of the common_stock of corporation taxpayer’s father died in year and his mother died in year taxpayer and his brother each inherited percent of their parent’s preferred_stock on date taxpayer and his brother each exchanged x shares of common voting_stock representing z percent of their respective shares of common voting_stock for y non-cumulative preferred shares of stock the purpose of the transaction was to provide taxpayer and his brother with an additional preferential right to receive corporation’s earnings before the holders of common shares could receive dividend distributions after the transaction taxpayer and his brother each continued to control percent of corporation’s common voting_stock at the time of the exchange taxpayer’s son held common non-voting stock individually and all of taxpayer’s children held common non-voting stock by attribution through their ownership interests in limited_partnership accounting firm provided no advice to taxpayer spouse or corporation with regards to the transaction taxpayer and spouse did not consult with legal counsel prior to undertaking the transaction taxpayer had consulted with attorney about exchanges on other occasions but did not consult attorney regarding the date transaction on date taxpayer and spouse retained accounting firm to prepare their respective form sec_709 united_states gift and generation-skipping_transfer_tax returns for year taxpayer and spouse elected to gift-split their year gifts under sec_2513 at the time the returns were prepared taxpayer and spouse failed to inform accounting firm about the transaction so they were not aware that taxpayer and his brother had exchanged voting_stock for non-cumulative preferred_stock as a result the transaction was not reported on taxpayer’s and spouse’s year return and no elections were made pursuant to sec_25_2701-2 of the gift_tax regulations to treat the distribution_right in the preferred_stock as a qualified_distribution right the year returns were timely filed plr-151361-07 in year accounting firm was engaged to assist taxpayer and spouse with additional estate_planning in connection with this project accounting firm raised the issue of whether taxpayer’s exchange of common voting_stock for non-cumulative preferred_stock was a transaction subject_to sec_2701 after discussion with accountants and their new attorney attorney it was determined that the transaction was subject_to sec_2701 and should have been reported on the year gift_tax returns taxpayer and spouse intend to file amended year form sec_709 to report the exchange of the common voting_stock for the shares of non-cumulative preferred_stock in addition on the amended returns taxpayer and spouse intend to elect under sec_25_2701-2 to treat the distribution_right in the preferred_stock as a qualified_payment_right taxpayers and spouse will each attach a statement to the amended returns signifying their intent to elect under sec_25_2701-2 you have requested a ruling that the elections attached to the amended form sec_709 united_states gift and generation-skipping_transfer_tax return satisfy the requirements of sec_25_2701-2 and as such will be a valid election under sec_2701 sec_2701 provides in general that solely for purposes of determining whether a transfer of an interest in a corporation or partnership to or for the benefit of a member_of_the_transferor's_family is a gift and of the value of such transfer the value of any right that is described in sec_2701 or b and that is with respect to any applicable_retained_interest that is held by the transferor or an applicable_family_member immediately_after_the_transfer shall be determined under sec_2701 sec_2701 provides that the value of any right described in sec_2701 other than a distribution_right that consists of a right to receive a qualified_payment shall be treated as being zero sec_2701 provides that the term applicable_retained_interest means any interest in an entity with respect to which there is a distribution_right but only if immediately before the transfer described in sec_2701 the transferor and applicable family members hold after application of subsection e control of the entity sec_2701 provides that in the case of a corporation the term control means the holding of at least percent by vote or value of the stock of the corporation sec_2701 provides that the term distribution_right means a right to distributions from a corporation with respect to its stock sec_2701 provides that the term member_of_the_family means with respect to any transferor a the transferor's spouse b a lineal descendant of the plr-151361-07 transferor or the transferor's spouse and c the spouse of any such descendant see also sec_25_2701-1 sec_2701 provides that the term applicable_family_member means with respect to any transferor a the transferor's spouse b an ancestor of the transferor or the transferor's spouse and c the spouse of any such ancestor see also sec_25_2701-1 sec_2701 provides that except as provided in regulations a contribution_to_capital or a redemption recapitalization or other change in the capital structure of a corporation or partnership shall be treated as a transfer of an interest in such entity to which sec_2701 applies if the taxpayer or an applicable_family_member a receives an applicable_retained_interest in such entity pursuant to such transaction or b under regulations otherwise holds immediately after such transaction an applicable_retained_interest in such entity sec_2701 shall not apply to any transaction other than a contribution_to_capital if the interests in the entity held by the transferor applicable family members and members of the transferor's family before and after the transaction are substantially identical sec_25_2701-1 provides that if sec_2701 applies to a transfer the amount of the transferor's gift if any is determined using a subtraction_method of valuation described in sec_25_2701-3 sec_25_2701-1 provides that sec_2701 applies to determine the existence and amount of any gift whether or not the transfer would otherwise be a taxable gift under chapter of the internal_revenue_code sec_25_2701-2 provides that in determining the amount of a gift under sec_25_2701-3 the value of any applicable_retained_interest held by the transferor or by an applicable_family_member is determined using the rules of chapter with the modifications prescribed by sec_25_2701-2 sec_25_2701-2 provides that any distribution_right in a controlled_entity is valued at zero unless it is a qualified_payment_right sec_25_2701-2 provides a special rule for valuing a qualified_payment_right held in conjunction with an extraordinary_payment_right if an applicable_retained_interest confers a qualified_payment_right and one or more extraordinary payment rights the value of all these rights is determined by assuming that each extraordinary_payment_right is exercised in a manner that results in the lowest total value being determined for all the rights using a consistent set of assumptions and giving due regard to the entity's net_worth prospective earning power and other_relevant_factors this is known as the lower_of valuation rule plr-151361-07 sec_25_2701-2 provides that any other right including a qualified_payment_right not subject_to sec_25_2701-2 is valued as if any right valued at zero does not exist and as if any right valued under the lower_of rule is exercised in a manner consistent with the assumptions of that rule but otherwise without regard to sec_2701 thus if an applicable_retained_interest carries no rights that are valued at zero or under the lower_of rule the value of the interest for purposes of sec_2701 is its fair_market_value sec_25_2701-2 provides that the term applicable_retained_interest means any equity_interest in a corporation or partnership with respect to which there is either i an extraordinary_payment_right or ii in the case of a controlled_entity a distribution_right sec_25_2701-2 provides that the term distribution_right means the right to receive distributions with respect to an equity_interest a distribution_right does not include i any right to receive distributions with respect to an interest that is of the same class as or a class that is subordinate to the transferred interest ii any extraordinary_payment_right or iii any right described in sec_25_2701-2 sec_25_2701-2 provides that mandatory payment rights liquidation participation rights rights to guaranteed payments of a fixed amount under sec_707 and non-lapsing conversion rights are neither extraordinary payment rights nor distribution rights sec_25_2701-2 provides that a qualified_payment_right is a right to receive qualified payments a qualified_payment is a distribution_right that is a a dividend payable on a periodic basis at least annually under any cumulative preferred_stock to the extent such dividend is determined at a fixed rate b any other cumulative distribution payable on a periodic basis at least annually with respect to an equity_interest to the extent determined at a fixed rate or as a fixed amount or c any distribution_right for which an election has been made pursuant to sec_25_2701-2 sec_2701 provides that except as otherwise provided in sec_2701 the term qualified_payment means any dividend payable on a periodic basis under any cumulative preferred_stock or a comparable payment under any partnership_interest to the extent that such dividend or comparable payment is determined at a fixed rate sec_2701 provides that a transferor or applicable_family_member holding any distribution_right which without regard to this subparagraph is not a qualified_payment may elect to treat such right as a qualified_payment to be paid in the amounts and at the times specified in such election the preceding sentence shall apply only to the extent that the amounts and times so specified are not inconsistent with the underlying legal instrument giving rise to such right plr-151361-07 sec_2701 provides that any election under this subparagraph with respect to an interest shall once made be irrevocable sec_25_2701-2 provides that any individual may elect to treat a distribution_right held by that individual in a controlled_entity as a qualified_payment_right an election may be a partial election in which case the election must be exercised with respect to a consistent portion of each payment right in the class as to which the election has been made an election under sec_25_2701-1 will not cause the value of the applicable_retained_interest conferring the distribution_right to exceed the fair_market_value of the applicable_retained_interest determined without regard to sec_2701 the election is effective only to the extent i specified in the election and ii that the payments elected are permissible under the legal instrument giving rise to the right and are consistent with the legal right of the entity to make the payment sec_25_2701-2 provides that the election is made by attaching a statement to the form_709 federal gift_tax_return filed by the transferor on which the transfer is reported an election filed after the time of the filing of the form_709 reporting the transfer is not a valid election this regulation provides the requirements for the statement to be attached to the return and further provides that if payments are not made as provided in the election the individual’s subsequent taxable_gifts or taxable_estate will upon the occurrence of a taxable_event as defined in sec_25_2701-4 be increased by an amount determined under sec_25_2701-4 in sec_25_2701-2 example l holds 10-percent non-cumulative preferred_stock and common_stock in a corporation that is a controlled_entity l transfers the common_stock to l's child l holds no extraordinary payment rights with respect to the preferred_stock l elects under sec_25_2702-2 to treat the non-cumulative dividend right as a qualified_payment_right consisting of the right to receive a cumulative annual dividend of percent under sec_25_2701-2 the value of the distribution_right pursuant to the election is the lesser_of a the fair_market_value of the right to receive a cumulative percent dividend from the corporation giving due regard to the corporation's net_worth prospective earning power and dividend-paying capacity or b the value of the distribution_right determined without regard to sec_2701 and without regard to the terms of the qualified_payment_election sec_2701 provides rules for transfers of interests in corporations to family members at the time of the date exchange taxpayer’s son and other children held interests in corporation taxpayer and his brother each exchanged x shares of common voting_stock for y shares of non-cumulative preferred_stock after this transaction each of them remained in control of percent of corporation’s common voting shares of stock corporation is a controlled_entity within the meaning of sec_25_2701-2 and therefore taxpayer’s dividend right in the preferred_stock is a retained distribution_right that is subject_to sec_2701 moreover because the preferred_stock is non-cumulative the distribution_right retained by taxpayer is not a qualified plr-151361-07 payment right thus the value of the preferred_stock held by taxpayer is deemed to be zero under sec_25_2701-2 see sec_25_2701-2 example sec_2701 however provides for an election to have a distribution_right treated as a qualified_payment_right an election under sec_25_2701-2 is made on the gift_tax_return reporting the transfer the regulations specify that the election must be made by attaching a statement to the form_709 filed by the transferor on which the transfer is reported in this case neither taxpayer nor spouse reported the transfer on the gift_tax returns filed in year they now propose to file amended form sec_709 report the transfer and make the election under sec_25_2701-2 under these circumstances the election under sec_25_2701-2 will be treated as a valid election to treat the distribution_right in the preferred_stock as a qualified_payment_right under sec_2701 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely james f hogan senior technician reviewer branch associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes cc