t c memo united_states tax_court bradford m daniel petitioner v commissioner of internal revenue respondent docket no 4968-07l filed date martin j nash and michael b axman for petitioner nancy l karsh for respondent memorandum opinion swift judge this matter is before us on respondent’s motion for remand to respondent’s appeals_office and on petitioner’s motion for partial summary_judgment because petitioner does not object to respondent’s motion for remand respondent’s motion for remand to respondent’s appeals_office on the issue as to whether petitioner’s offer-in- compromise oic should be accepted on the ground of doubt as to collectibility will be granted we are left however with the question raised in petitioner’s motion for partial summary_judgment to which respondent objects whether on remand to respondent’s appeals_office petitioner’s oic also should be considered on the basis of doubt as to liability unless otherwise noted all section references are to the internal_revenue_code petitioner resided in florida at the time the petition was background filed on petitioner’s individual federal_income_tax return petitioner reported the sale of a flower business and a dollar_figure federal_income_tax liability relating thereto with the filing of the return however petitioner paid only dollar_figure respondent assessed the dollar_figure reported tax_liability and after no additional payments were received from petitioner respondent filed a federal_tax_lien against petitioner relating to the outstanding dollar_figure balance in petitioner’s federal income taxes on date respondent notified petitioner of the federal_tax_lien filing and of his right to request a collection appeals_office hearing under sec_6320 petitioner however anxious for relief from respondent’s lien filing on date requested a withdrawal of respondent’s tax_lien_filing under respondent’s general collection_appeals_program cap and sec_6323 not under the collection_due_process cdp provisions of sec_6320 petitioner proceeded with the cap appeal and upon denial by respondent’s office of compliance services of the requested withdrawal of respondent’s lien filing petitioner appealed the decision to respondent’s office of technical services technical services technical services sustained the denial of the requested lien withdrawal and petitioner appealed that decision under cap to respondent’s appeals_office after review respondent’s appeals_office handling the cap appeal sustained the denial of the requested lien withdrawal on date respondent also issued to petitioner a notice of proposed levy action relating to petitioner’s dollar_figure outstanding federal income taxes petitioner challenged respondent’s proposed levy by filing with respondent’s appeals_office a cdp appeal under sec_6330 also on date petitioner separately submitted to respondent’s oic office an oic relating to his dollar_figure outstanding federal income taxes based on doubt as to both liability and collectibility upon learning of petitioner’s pending cdp appeal and without acting on petitioner’s oic respondent’s oic office forwarded petitioner’s oic to respondent’s appeals_office for consideration in connection with petitioner’s cdp appeal on date petitioner’s sec_6330 cdp hearing with respondent’s appeals_office was held at the hearing respondent’s appeals officer refused to consider the correctness of petitioner’s underlying federal_income_tax liability on the ground that petitioner already had two prior opportunities to challenge that underlying tax_liability first in a sec_6320 cdp hearing relating to the tax_lien_filing and second in the cap proceeding also in the sec_6330 cdp hearing respondent’s appeals officer did not consider petitioner’s oic petitioner’s oic remains outstanding on date respondent’s appeals_office issued a notice_of_determination sustaining respondent’s proposed levy on date petitioner filed this action 1under petitioner’s oic petitioner offered to pay respondent a total of dollar_figure--dollar_figure within days and dollar_figure monthly thereafter for months 2respondent now acknowledges that petitioner’s cap appeal under sec_6323 did not constitute a prior opportunity to litigate the underlying tax_liability for purposes of sec_6330 on date respondent filed the instant motion for remand and petitioner filed the instant motion for partial summary_judgment the above motions were calendared for hearing on date in tampa florida at the hearing the parties agreed to put the motions on hold until after petitioner provided to respondent for audit_reconsideration documentation that might substantiate petitioner’s entitlement to claimed net_operating_loss carrybacks that might significantly reduce or eliminate petitioner’s outstanding federal_income_tax liability this audit_reconsideration was to take place separate and apart from the instant cdp collection case and with the understanding that the instant cdp case would be held in abeyance pending the review over the course of the next months the parties negotiated and sought to settle this case each making settlement offers but without success since early fall of in part because of an illness of petitioner’s lead counsel no further progress has been made in this case and the parties now ask this court to act on the pending motions discussion as indicated petitioner does not object to respondent’s motion for remand of this case to respondent’s appeals_office for purposes of considering petitioner’s oic on the ground of doubt as to collectibility respondent’s motion for remand will be granted petitioner however moves for partial summary_judgment seeking an order that respondent’s appeals_office on remand consider petitioner’s oic on the basis of doubt as to liability petitioner focuses on sec_6330 and emphasizes that under that section a taxpayer is precluded from raising an issue in a sec_6330 proceeding only if the same issue was raised in a prior cdp proceeding or in some other administrative or judicial proceeding in which the taxpayer materially participated because he did not file an appeal under sec_6320 of respondent’s date notice_of_federal_tax_lien filing petitioner obviously did not materially participate in any such proceeding and petitioner contends that he now should be allowed to challenge his dollar_figure underlying federal_income_tax liability in the instant sec_6330 cdp hearing petitioner also asks that sec_301_6330-1 q a-e7 proced admin regs be invalidated in that it supports respondent’s reading of sec_6330 and on brief petitioner states-- all levies are preceded by an assessment and a notice of lien an interpretation which would require a sec_6320 cdp appeal to be filed in order to raise the issue of the underlying tax_liability would render sec_6330 superfluous as it applies to sec_6330 and conflict with sec_6330 petitioner’s statement is erroneous on a number of points first not all tax assessments are followed by tax_lien filings not all levies are preceded by filed tax_liens and respondent may issue a notice of proposed levy without filing a notice of tax_lien a statutory lien arises upon assessment and subjects a taxpayer’s property to the federal_tax_lien sec_6322 this occurs before a notice_of_federal_tax_lien is filed or a notice of proposed levy is ever issued sec_6321 because the lien is already in place a notice_of_intent_to_levy may be issued before a notice of tax_lien is filed and regardless of whether a notice of tax_lien is ever filed second the two statutory provisions in question address different types of issues sec_6330 addresses only the issue as to the underlying tax_liability and is triggered whenever a taxpayer had a prior opportunity to challenge same whether the taxpayer did so or not sec_6330 addresses any other issue that is raised in a sec_6320 or sec_6330 proceeding and is triggered only when the issue was considered and decided in a prior administrative or judicial proceeding and when the taxpayer materially participated in the prior proceeding respondent’s reading of sec_6330 does not render superfluous sec_6330 and respondent’s reading and application of the language of sec_6330 does not conflict with the language of sec_6330 sec_301_6330-1 q a-e7 proced admin regs reflects the same interpretation and application that we adopt of the statutory provisions before us the regulation provides a reasonable interpretation of the statute and is valid see 126_tc_183 see also 128_tc_48 126_tc_356 as respondent on brief explains with regard to sec_6330 b -- requiring taxpayers to challenge an underlying liability with the first notice filed also promotes early efficient and complete resolution of legitimate disputes between the irs and taxpayers concerning the validity of the federal_tax_lien such disputes are best resolved at the earliest stages of the collection sec_301_6330-1 q a-e7 proced admin regs states as follows q-e7 what issues may a taxpayer raise in a cdp hearing under sec_6330 if the taxpayer previously received a notice under sec_6320 with respect to the same tax and tax period and did not request a cdp hearing with respect to that notice a-e7 the taxpayer may raise appropriate spousal defenses challenges to the appropriateness of the proposed collection action and offers of collection alternatives the existence or amount of the tax_liability for the tax for the tax period specified in the cdp_notice may be challenged only if the taxpayer did not already have an opportunity to dispute that tax_liability where the taxpayer previously received a cdp_notice under sec_6320 with respect to the same tax and tax period and did not request a cdp hearing with respect to that earlier cdp_notice the taxpayer already had an opportunity to dispute the existence or amount of the underlying tax_liability process because the agency and taxpayer records upon which resolution of disputes turns will be most contemporaneous and complete at the time of the first issuance of a notice because petitioner could have filed an appeal of respondent’s date notice of tax_lien_filing and therein challenged his underlying federal_income_tax liability respondent’s appeals_office properly refused to allow petitioner to challenge his federal_income_tax liability in the subsequent cdp appeal relating to respondent’s notice of proposed levy see 129_tc_178 appropriate orders will be issued


internal_revenue_service number release date index numbers ------------------------------------------------------------ ------------ ------------------------- ---------------------------- ------------------------------------- -------------------------------------------------- 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 tege eb hw plr-102028-15 date july legend taxpayer --------------------------------------------- --------------------------------------------- --------------------------------------------- --------------------------- state -------------- dear ----------------- this is in response to a request submitted on behalf of taxpayer by its authorized representatives taxpayer is asking for rulings regarding the federal_income_tax consequences of offering to taxpayer’s employees ------------------------------------------------ group term life_insurance coverage on the lives of these employees --------------------------- ---------- facts taxpayer is a life_insurance_company organized under the laws of state taxpayer provides basic group term life_insurance coverage for its employees at no cost to them plr-102028-15 in addition taxpayer’s employees are offered the ability to purchase optional group term life_insurance ------------------------------------------------------------------------------------------ ----------------------------------------------------------- the employees ---------------------------------- purchase the optional insurance from taxpayer on an after-tax basis the rates charged to active employees -------------------------------are higher for those who use tobacco than for those who do not use tobacco the rates charged to those employees -------------------------------are all the same as or below the table i uniform premium rates found in sec_1_79-3 of the income_tax regulations taxpayer represents that the premiums charged for optional life_insurance are determined independently of the basic coverage no premium loading expenses are allocated between the policies and dividends and rate credits for the policies are determined separately taxpayer further represents that the premiums charged under the optional life_insurance_policy are the same as the company charges unrelated employers with similar coverage and terms law and analysis the taxation of group term_insurance on the life of an employee carried directly or indirectly by an employer is governed by sec_79 of the internal_revenue_code for this purpose sec_1_79-0 of the regulations defines the term employee as a a person who performs services if his or her relationship to the person for whom services are performed is the legal relationship of employer and employee described in sec_31_3401_c_-1 or b -------------------------------------------------------------------------------- --------------------------a person who formerly performed services as an employee assuming a group term plan meets the non-discrimination requirements of sec_79 the cost of dollar_figure of such coverage is excludable from each employee's income for coverage above dollar_figure sec_79 requires an employee to include in income an amount equal to the cost of life_insurance provided under a policy carried directly or indirectly by his or her employer less any amounts paid_by the employee toward the purchase of such insurance sec_79 requires the cost of the insurance to be computed by using the uniform premiums prescribed in table i of the sec_79 regulations life_insurance is subject_to sec_79 only if it is provided under a policy carried_directly_or_indirectly_by_the_employer reg sec_1_79-1 sec_1_79-0 of the regulations provides that a policy of life_insurance is carried directly or indirectly by an employer if a the employer pays any part of the cost of the life_insurance directly or through another person or b the employer or two or more employers arrange for payment of the cost of the life_insurance by their employees and charge at least one employee less than the cost of his or her insurance as determined plr-102028-15 under table i of sec_1_79-3 and at least one other employee more than the cost of his or her insurance determined in the same way sec_1_79-0 of the regulations provides that the term policy includes two or more obligations of an insurer or its affiliates that are sold in conjunction obligations that are offered or available to members of a group_of_employees are sold in conjunction if they are offered or available because of the employment relationship the actuarial sufficiency of the premium charged for each obligation is not taken into account in determining whether the obligations are sold in conjunction whether or not the obligations are contained in separate documents thus as a general_rule to test whether insurance coverage is provided under a policy carried_directly_or_indirectly_by_the_employer all obligations of the same insurer that are offered to members of a group_of_employees must be aggregated and treated as one policy the regulations however allow an employer to elect to treat two or more obligations each of which provides no permanent benefits as separate policies if the premiums are properly allocated among such policies provided premiums are properly allocated among two or more obligations of an insurer that provide no permanent benefits and provided further that the employer elects to treat them as separate policies each policy is tested separately to determine if it is carried_directly_or_indirectly_by_the_employer if a policy is not carried_directly_or_indirectly_by_the_employer no income will be imputed to an employee under sec_79 of the code on account of the insurance provided under that policy applying the above rules to the group term life_insurance on the lives of taxpayer’s employees both the taxpayer’s basic insurance coverage and the optional insurance coverage are available to the eligible employees ---------------------------------------------------- --------------------------------------------------------------because of the employment relationship in addition both the basic insurance coverage and the optional coverage are purchased from the same insurer therefore the obligations contained in taxpayer’s basic coverage and optional coverage will be treated as a single policy for purposes of sec_79 unless the requirements have been met to allow taxpayer to elect to treat such obligations as separate policies and taxpayer so elects because neither the basic coverage nor the optional coverage contains permanent benefits the only requirement for taxpayer electing to treat the optional insurance as a separate policy for purposes of determining whether or not the optional coverage is carried directly or directly by the employer and thus whether or not that coverage is subject_to imputed_income under sec_79 is that the premiums be properly allocated among the policies if optional insurance coverage offered by taxpayer is treated as a separate policy the optional insurance on the life of an employee is not treated as carried directly or indirectly by taxpayer because taxpayer pays no part of the insurance and all premium rates charged to the employees for the optional insurance are the same as or less than the table i rates plr-102028-15 accordingly based on the information submitted representations made and authorities cited above we conclude as follows the premiums for the basic insurance and the optional insurance are properly allocated so that taxpayer can elect to treat the optional insurance as separate from the basic insurance provided that the taxpayer elects to treat the optional insurance separately from the basic optional insurance on the life of an employee ------------------------------------- ------------------------------------------------------------------------ will not be treated as provided under a policy carried directly or indirectly by taxpayer within the meaning of sec_79 of the code accordingly no income will be imputed under sec_79 of the code to those employees purchasing the optional life_insurance except as expressly provided herein no opinion is expressed or implied concerning the federal tax consequences of the transaction under any other provision of the code or regulations in particular no opinion is expressed concerning the tax consequences of coverage on the life of any individual who is not an employee within the meaning of sec_1_79-0 of the regulations this letter_ruling is directed only to the taxpayer who requested it code 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 the taxpayer's representatives sincerely s harry beker chief health and welfare branch office of associate chief_counsel tax exempt and government entities cc


internal_revenue_service number release date index number ---------------------- ---------------------- -------------------------- ---------------------- ---------------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc ita b03 plr-116216-11 date date ty ------- ty ------- legend parent ---------------------- power company --------------------------------------------------- power plant ------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ------------------------------------------------------------------------------------ ----------------------------- local power company ----------------------------------------------------- sub a -------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------- sub b -------------------------------------------- taxpayer -------------------------- partner ------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- buyer ------------------------------------------ original license commencement_date ------------------- plr-116216-11 original license expiration date ------------------- new license commencement_date -------------------- new license issuance date ---------------------- new license expiration date ------------------- power company incorporation date ---------------------- original ppa date ----------------- original ppa expiration date ------------------- new ppa date -------------------------- new ppa effective date ------------------------- new ppa expiration date ------------------- reorganization date ---------------- taxpayer formation date --------------------------- sale agreement execution date -------------------------- sale agreement effective date ------------------- dollar_figurea ------------------- dollar_figureb ------------------ x --- dear ------------- this is in response to your letter dated ------------------ in your letter you requested that the irs rule that the right to buy power from power company held on the date of sale by parent’s wholly-owned subsidiary taxpayer is a capital_asset under sec_1221 of the internal_revenue_code in the hands of taxpayer and that any gain from the assignment of such right to buyer qualifies as capital_gain facts plr-116216-11 parent a corporation is the common parent of an affiliated_group_of_corporations that file a consolidated_return for federal tax purposes it is engaged in the business of electric power generation and distribution power company a corporation is the owner and operator of the power plant under a license from the federal energy regulatory commission ferc power company’s original ferc license for the power plant was issued on original license commencement_date for a ----year term that expired on original license expiration date power company applied for renewal of the ferc license for the power plant between original license expiration date and new license commencement_date power company operated the power plant under an annual ferc license on new license issuance date ferc issued a new license to power company for the power plant effective new license commencement_date and expiring on new license expiration date power company was incorporated on power company incorporation date with two stockholders local power company which owned -------------of the total authorized stock of power company and partner which owned --------------of the total authorized stock of power company on original ppa date local power company merged into sub a a wholly-owned subsidiary of parent as a result sub a acquired local power company’s stock interest in power company after this merger partner retained its ---- --------------stock interest in power company and sub a owned -------------of the total authorized stock of power company also on the original ppa date sub a partner and power company entered into a power purchase agreement the original ppa pursuant to the original ppa sub a and partner are entitled to purchase all the capacity and energy available from the power plant the original ppa entitled sub a and partner to purchase -------------and -- ------------- respectively of the total capacity and energy available from the power plant on the new ppa date sub a partner and power company entered into a power purchase agreement effective on the new ppa effective date the new ppa which superseded and replaced the original ppa pursuant to the new ppa sub a and partner are entitled to purchase all the capacity and energy available from the power plant the new ppa entitled sub a and partner to purchase -------------and ------------- respectively of the total capacity and daily energy available from the power plant the new ppa provides that it shall remain in force until the expiration of power company’s ferc license for the power plant on the new ppa expiration date and for such time thereafter as power company is the licensee from the federal energy regulatory commission of the power plant sub a paid no consideration to power company for the right to purchase capacity and energy from the power plant under the original ppa and the new ppa plr-116216-11 effective on the reorganization date parent underwent a divisive_reorganization ie a drop_down of assets followed by a spinoff of parent’s generation assets under sec_368 of the internal_revenue_code the transaction was tax free to parent under sec_355 tax free to sub a under sec_361 and tax free to sub b a direct and wholly- owned subsidiary of sub a under sec_1032 as part of this divisive_reorganization sub a transferred its stock interest in power company and assigned its rights and obligations under the new ppa to sub b sub b took a carryover_basis of zero in the new ppa parent then caused sub b to transfer the stock interest in power company and assign the rights and obligations under the new ppa down a chain of entities that are disregarded as separate from their owners under sec_301_7701-2 of the income_tax regulations to taxpayer taxpayer took a carryover_basis of zero in the new ppa from sub b taxpayer did not pay any consideration for the assignment of the new ppa taxpayer a limited_liability_company is wholly owned by sub b and is a disregarded_entity for federal_income_tax purposes taxpayer was formed on taxpayer formation date in anticipation of parent’s divisive_reorganization in order to receive parent’s -------- ------------------------------------------business taxpayer is an exempt wholesale generator authorized to sell electric energy capacity and certain ancillary services at market- based rates parent represents that the rights and obligations of sub a under the new ppa were transferred to sub b in a transaction described in sec_197 and sec_1 g ii c taxpayer entered into a purchase and sale agreement dated sale agreement execution date effective as of the agreement’s closing date on sale agreement effective date in which taxpayer sold its entire stock interest in power company to buyer as part of the purchase and sale agreement taxpayer also entered into an assignment and assumption_agreement in which taxpayer assigned its rights and obligations under the new ppa to buyer the total consideration buyer paid to taxpayer for the sale of its power company stock and the assignment of its rights and obligations under the new ppa was dollar_figurea the purchase and sale agreement does not allocate this amount between the sale of the power company stock and the assignment of the new ppa however parent has obtained a valuation concluding that x of the dollar_figurea or dollar_figureb is allocable to the assignment of taxpayer’s rights and obligations under the new ppa because taxpayer’s basis in the power purchase right is zero taxpayer will recognize a gain on the assignment of its rights and obligations under the new ppa of dollar_figureb parent represents that i ferc licenses generally are always renewed ii according to its outside ferc counsel as long as a ferc licensee has a good compliance record as a licensee then it is virtually certain that the licensee can relicense its facility albeit with more onerous environmental conditions so long as the licensee complies with the plr-116216-11 notice and application deadlines of the federal power act fpa iii absent the rare instance of a government takeover or abandonment of a power project ferc licenses almost always continue through the renewal process and iv power company has a good compliance record as a licensee parent states that to the best of its knowledge it believes that power company fully intends to renew its current ferc license for the power plant which expires on the new license expiration date law and analysis sec_1222 provides that capital_gain or loss is generated upon a sale_or_exchange of a capital_asset sec_1221 defines the term capital_asset as property held by the taxpayer regardless of whether it is connected with the taxpayer's trade_or_business unless the property meets one of eight listed exceptions inventory property of a character which is subject_to the allowance for depreciation provided in sec_167 or real_property used in a trade_or_business certain intangible_property accounts_receivable acquired in the ordinary course of a trade_or_business certain publications of the united_states government certain commodities financial derivatives certain hedging_transactions and supplies of a type regularly consumed by the taxpayer in the ordinary course of a trade_or_business of the taxpayer none of the exceptions listed in sec_1221 to qualification as a capital_asset apply with the possible exception of sec_1221 property of a character which is subject_to the allowance for depreciation provided in sec_167 is the new ppa property of a character that is subject_to the allowance for depreciation provided under sec_167 the first issue is whether taxpayer’s right to purchase capacity and energy under the new ppa is property of a character that is subject_to the allowance for depreciation provided under sec_167 sec_167 allows as a depreciation deduction a reasonable allowance for the exhaustion wear_and_tear and obsolescence of property used in a trade_or_business or of property_held_for_the_production_of_income sec_1_167_a_-3 provides that if an intangible asset is known from experience or other factors to be of use in the business or in the production_of_income for only a limited period the length of which can be estimated with reasonable accuracy such an intangible asset may be the subject of a depreciation allowance however an intangible asset the useful_life of which is not limited is not subject_to an allowance for depreciation thus an intangible asset is depreciable under sec_167 if it has a determinable useful_life plr-116216-11 the new ppa provides that it shall remain in force until the expiration of power company’s ferc license for the power plant on new license expiration date and for such time thereafter as power company is the licensee from the federal energy regulatory commission of the power plant consequently the new ppa has a life that is coterminous with power company’s ferc license for the power plant further parent represents that according to its outside ferc counsel as long as a ferc licensee has a good compliance record as a licensee then it is virtually certain that the licensee can relicense its facility albeit with more onerous environmental conditions so long as the licensee complies with the notice and application deadlines of the fpa parent also represents that power company has a good compliance record as a licensee to renew a ferc license for a hydroelectric plant the existing licensee must notify ferc whether the licensee intends to file an application_for a new license or not u s c sec_808 this notice must be submitted at least years before the expiration of the existing license id further the existing licensee must file the application_for a new license with ferc at least months before the expiration of the term of the existing license u s c sec_808 power company applied for a renewal of its original ferc license for the power plant which expired on original license expiration date and as a result ferc issued a new license to power company for power plant for a ----year term expiring on new license expiration date parent states that to the best of its knowledge parent believes that power company fully intends to renew its current license for the power plant several courts have held that an fcc broadcasting license does not have a limited useful_life for depreciation purposes because there is a high probability of renewal of the license by the fcc see 608_f2d_485 amortization disallowed for fcc broadcasting license due to high probability of an indefinite succession of automatic renewals see also 251_fsupp_43 w d va the same reasoning was used in 191_f2d_934 5th cir denied depreciation deduction for the cost of a liquor license because there was no indication that the city would depart from its custom of renewing existing licenses and in ueckler v commission 81_tc_983 denied depreciation deduction for the cost of a federal grazing privilege license with preferential rights of renewal a ferc license for a hydroelectric plant is analogous to an fcc broadcasting license and other renewable licenses issued by governmental agencies that have a high certainty of renewal consequently a ferc license for a hydroelectric plant has an indeterminable useful_life for depreciation purposes because the new ppa has a life plr-116216-11 that is coterminous with power company’s ferc license for the power plant the new ppa also has an indeterminable useful_life for depreciation purposes is the new ppa an amortizable sec_197 intangible even though we have concluded that the new ppa has an indeterminable useful_life for depreciation purposes a second issue is whether the new ppa is property of a character_subject_to_depreciation under sec_167 if it is an amortizable sec_197 intangible sec_197 provides that for purposes of chapter of the code any amortizable sec_197 intangible shall be treated as property which is of a character subject_to the allowance for depreciation provided in sec_167 sec_197 defines the term amortizable sec_197 intangible as generally meaning any sec_197 intangible that is acquired by the taxpayer after date and that is held in connection with the conduct_of_a_trade_or_business or an activity described in sec_212 however sec_197 provides that the term amortizable sec_197 intangible shall not include any sec_197 intangible that is not described in sec_197 e or f and that is created by the taxpayer sec_197 provides that in the case of any sec_197 intangible transferred in a transaction described in sec_197 the transferee shall be treated as the transferor for purposes of applying sec_197 with respect to so much of the adjusted_basis in the hands of the transferee as does not exceed the adjusted_basis in the hands of the transferor the transactions described in sec_197 are i any transaction described in sec_332 sec_351 sec_361 sec_721 sec_731 sec_1031 or sec_1033 and ii any transaction between members of the same affiliated_group during any taxable_year for which a consolidated_return is made by such group sec_1_197-2 provides the rules relating to sec_197 and b sec_1_197-2 provides that if a sec_197 intangible is transferred in a transaction described in sec_1_197-2 the transfer is disregarded in determining whether with respect to so much of the intangible’s basis in the hands of the transferee as does not exceed its basis in the hands of the transferor the intangible is an amortizable sec_197 intangible and the amount of the deduction under sec_197 with respect to such basis sec_1_197-2 provides in relevant part that if the intangible was not an amortizable sec_197 intangible in the hands of the transferor the transferee’s adjusted_basis to the extent it does not exceed the transferor’s adjusted_basis cannot be amortized under sec_197 sec_1_197-2 further provides that the rules of plr-116216-11 sec_1_197-2 also apply to any subsequent transfers of the intangible in a transaction described in sec_1_197-2 sec_1_197-2 provides that the transactions described in this paragraph are any transaction described in sec_332 sec_351 sec_361 sec_721 or sec_731 and any transaction between corporations that are members of the same consolidated_group immediately after the transaction in this case sub a originally acquired the right to purchase -------------of the capacity and energy from the power plant under the original ppa on original ppa date the new ppa superseded the original ppa under the new ppa sub a continued to have the right to purchase -------------of the capacity and energy from the power plant because sub a acquired the right to purchase -------------of the capacity and energy from the power plant prior to date the right is not an amortizable sec_197 intangible in the hands of sub a on reorganization date the rights and obligations of sub a under the new ppa were transferred to sub b in a transaction described in sec_197 and sec_1 g ii c sub b then transferred the rights and obligations under the new ppa to taxpayer a limited_liability_company that is wholly owned by sub b and is disregarded as an entity separate from sub b for federal_income_tax purposes sub b and taxpayer did not pay any consideration for this power purchase right accordingly pursuant to sec_1_197-2 the right to purchase -------------of the capacity and energy from the power plant under the new ppa is not an amortizable sec_197 intangible in the hands of sub b and taxpayer thus we conclude that taxpayer’s right to purchase capacity and energy under the new ppa is not property of a character that is subject_to the allowance for depreciation provided under sec_167 and thus the new ppa is a capital_asset was the assignment of the new ppa a sale_or_exchange under sec_1222 finally to qualify for capital_gain treatment there must be a sale_or_exchange of property amounting to a capital_asset sec_1222 a sale has been defined as a transfer of property for a fixed price in money or its equivalent 380_us_563 the tax_court has held that the terms sale_or_exchange in sec_1222 include transactions in which all rights to property or all rights to a portion thereof have been transferred permanently from one party to another including assignment of rights under a contract 84_tc_50 taxpayer entered into a purchase and sale agreement on sale agreement execution date in which taxpayer sold its entire stock interest in power company to buyer on the same date taxpayer also entered into an assignment and assumption_agreement in which taxpayer assigned its rights and obligations under the new ppa to buyer total consideration for the two transactions was dollar_figurea and parent has obtained a valuation concluding that dollar_figureb of the total is allocable to the assignment of plr-116216-11 taxpayer’s rights and obligations under the new ppa parent represents that the assignment and assumption_agreement constitutes a sale_or_exchange under sec_1222 and that an assignment and assumption_agreement is commonly used in its industry to sell a contract right under the rule_of foy the assignment of the new ppa for consideration is a sale_or_exchange under sec_1222 because all rights under the new ppa a capital_asset were transferred to buyer conclusion we conclude that the new ppa is a capital_asset in the hands of taxpayer for purposes of sec_1221 and that any gain from the assignment of such right to buyer qualifies for capital_gain treatment except as expressly provided herein no opinion is expressed or implied concerning the federal_income_tax consequences of any aspect of any transaction or item discussed or referenced in this ruling 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 a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling 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 robert casey senior technician reviewer branch income_tax accounting


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi br 1-plr-106610-03 date may legend x a estate a d1 d2 dear this letter responds to your representative’s letter dated date submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations for x to elect under sec_754 of the internal_revenue_code to adjust the basis of partnership property facts according to the information submitted a owned a a interest in x a partnership a died on d1 and a’s interest in x passed under will to estate x intended to file a sec_754 election with its tax_return for the taxable_year ending d2 however x inadvertently failed to file the sec_754 election with its return x seeks relief under sec_301_9100-1 and sec_301_9100-3 for the late election plr-106610-03 law and analysis under sec_754 a partnership may elect to adjust the basis of partnership property where there is a distribution_of_property or a transfer of a partnership_interest the election applies to all distributions of property by the partnership and to all transfers of interests in the partnership during the taxable_year that the election applies and all subsequent taxable years sec_1_754-1 of the income_tax regulations provides that an election under sec_754 is made in a written_statement filed with the partnership return for the taxable_year during which the distribution or transfer occurs for the election to be valid the return must be filed no later than the time for filing for the taxable_year including extensions sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose deadline is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-2 and sec_301_9100-3 provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interest of the government conclusion based on the information submitted and representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time for making the sec_754 election until days following the date of this letter x should make the election by filing an amended_return with the applicable service_center for the taxable_year ending d2 with a properly completed sec_754 election attached a copy of this letter should be attached to the statement filed except as specifically set forth above we express no opinion concerning the federal_income_tax consequences of the transactions described above under any other plr-106610-03 provision of the code specifically we express no opinion as to whether or not x is a partnership for tax purposes this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer’s authorized representative enclosures copy of this letter copy for purposes sincerely heather c maloy associate chief_counsel passthroughs and special industries


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-144079-02 date date legend corporation shareholder state date dear this letter responds to a letter dated date and subsequent correspondence requesting a ruling on behalf of corporation under sec_1362 of the internal_revenue_code facts corporation was incorporated in state on date corporation has one shareholder shareholder it is represented that corporation has intended to be taxed as an s_corporation since date however corporation discovered that form_2553 election by a small_business_corporation was not filed timely with the internal_revenue_service corporation requests a ruling that its sec_1362 election will be treated as timely made for its taxable_year that begins on date applicable law sec_1362 generally provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides when an s election will be effective generally if an election to be treated as an s_corporation is made within the first two and one-half months of a corporation’s taxable_year then the corporation will be treated as an s_corporation beginning in the year in which the election is made if the election is made plr-144079-02 after the first two and one-half months of a corporation’s taxable_year then the corporation will not be treated as having made an effective election to be treated as an s_corporation for federal tax purposes until the following taxable_year sec_1362 provides that if an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making the election or no election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such election as timely made for such taxable_year and sec_1362 shall not apply conclusion based on the facts submitted and representations made we conclude that corporation has established reasonable_cause for failing to make a timely election pursuant to sec_1362 accordingly corporation’s late election under sec_1362 is to be treated under sec_1362 as filed timely for its tax_year beginning date however this ruling is contingent on corporation filing a completed form_2553 containing an effective date of date for the election with the appropriate service_center within days following the date of this letter a copy of this letter should be attached to the form_2553 filed with the service_center a copy is enclosed for that purpose except as specifically set forth above we express or imply no opinion concerning the federal tax consequences of the facts described above under any other provision of the internal_revenue_code specifically we express or imply no opinion concerning whether corporation is an s_corporation for federal tax purposes this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being forwarded to your authorized representative sincerely yours christine ellison chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury washington dc person to contact -------------------- telephone number --------------------- refer reply to cc tege eb qp2 - plr-123647-06 date november internal_revenue_service number release date index number ------------------------ -------------------------- ------------------ -------------------------------------- - legend taxpayer company year y year z ---------------------------------------------------- ---------------------- ------- ------- this responds to your letter dated ------------------- which was submitted on your dear -------------- behalf by your authorized representative concerning whether the transfer of qualified_replacement_property to and from a grantor_retained_annuity_trust would result in a disposition under sec_1042 of the internal_revenue_code taxpayer participated as a significant shareholder in the establishment of an employee_stock_ownership_plan esop for company taxpayer represents that the esop satisfied the requirements under sec_4975 the esop was established prior to the retirement of taxpayer’s spouse and purchased company shares from taxpayer and other existing shareholders in year y in year z taxpayer and other individual shareholders again sold company shares to the esop taxpayer represents that the sale of taxpayer’s company shares to the esop met the requirements for the sale of qualified_securities under sec_1042 and that the company shares constituted qualified_securities under sec_1042 plr-123647-06 after both the year y and year z sale of taxpayer’s company shares the taxpayer represents that she elected to defer recognition of long term capital_gain on the sale of company shares to the esop under sec_1042 and purchased qualified_replacement_property qrp as defined in sec_1042 within the replacement_period as defined in sec_1042 taxpayer represents that she intends to transfer the qrp to a_trust intended to be a grantor_retained_annuity_trust grat within the meaning of sec_2702 the trust provides that the taxpayer shall have the power solely in a nonfiduciary capacity and without the approval of any person in a fiduciary capacity to reacquire the trust principal by substituting other_property of equivalent value you have requested the following rulings that the transfer of qrp to a grat does not constitute a disposition under sec_1042 that the exercise of taxpayer’s power held during the term of the grat in a non-fiduciary capacity to substitute cash or other qrp assets of at least equal value does not constitute a disposition under sec_1042 that the transfer of qrp to the taxpayer as a periodic annuity_payment does not constitute a disposition under sec_1042 that the transfer of qrp at the termination of the grat to the trust beneficiaries does not result in a disposition under sec_1042 that if the taxpayer dies while the grat is still in existence an interim or final annuity_payment in the form of qrp made to the taxpayer’s successor_in_interest that is an estate or inter-vivos trust does not constitute a disposition under sec_1042 since you have not requested a ruling concerning whether the sale of securities to the esop or the election by the taxpayer to defer recognition of gain satisfied the requirements of sec_1042 or sec_1_1042-1t of the temporary income_tax regulations we express no opinion on that issue for purposes of your ruling_request we will assume that the property purchased by the taxpayer constitutes qrp as defined in sec_1042 and that sec_1042 applies to such property under sec_1042 a taxpayer or executor may elect in certain cases not to recognize long-term_capital_gain on the sale of qualified_securities to an esop as defined in sec_4975 or eligible worker owned cooperative if the taxpayer purchases qualified_replacement_property as defined in sec_1042 within the plr-123647-06 replacement_period of sec_1042 and the requirements of sec_1042 and sec_1_1042-1t are satisfied sec_1042 provides that a taxpayer’s basis in qrp purchased during the qualified replacement_period will be reduced by the amount of gain not recognized by reason of the application of sec_1042 if more than one item of qrp is purchased the basis of each item of qrp shall be reduced by an amount determined by multiplying the total gain not recognized by reason of the application of sec_1042 by a fraction the numerator of which is the cost of such item of qrp and the denominator of which is the total cost of all items of such property sec_1042 provides that i f a taxpayer disposes of any qualified_replacement_property then notwithstanding any other provision of this title gain if any shall be recognized to the extent of the gain which was not recognized under subsection a by reason of the acquisition by such taxpayer of such qualified_replacement_property the legislative_history of sec_1042 indicates that it was added to the internal_revenue_code as part of the tax_reform_act_of_1986 to coordinate the requirement that deferred gain be recognized on the disposition of any qrp with other nonrecognition provisions of the code effective for dispositions made after the date of enactment the act overrides all other provisions permitting nonrecognition and requires that gain realized upon the disposition of qualified_replacement_property be recognized at that time s rep 99th congr 2nd sess c b v limited exceptions to this rule are provided in sec_1042 thus gain realized from the disposition of any qrp by a taxpayer who made an election under sec_1042 must be recognized at the time of the disposition regardless of any other nonrecognition provisions of the code that may otherwise have applied sec_1042 provides that the recapture rules of sec_1042 shall not apply to any transfer of qrp that occurs in any reorganization within the meaning of sec_368 unless the person making the election under sec_1042 owns stock representing control of the acquiring or acquired_corporation and such property is substituted_basis_property in the hands of the transferee by reason of the death of the person making the election by gift or in any transaction to which sec_1042 applies sec_671 provides that where it is specified in subpart e of part i of subchapter_j that the grantor or another person shall be treated as the owner of any portion of a_trust there shall then be included in computing the taxable_income and credits of the grantor or the other person those items of income deductions and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under chapter in computing taxable_income or credits against the tax of an individual sec_673 through specify the circumstances under which the grantor is sec_1_675-1 of the income_tax regulations provides in general that the sec_675 provides that the grantor shall be treated as the owner of any plr-123647-06 treated as the owner of a portion of a_trust portion of a_trust in respect of which a power_of_administration is exercisable in a nonfiduciary capacity by any person without the approval or consent of any person in a fiduciary capacity the term power_of_administration includes a power to reacquire the trust corpus by substituting other_property of an equivalent value grantor is treated as the owner of any portion of a_trust if under the terms of the trust instrument or circumstances attendant on its operation administrative control is exercisable primarily for the benefit of the grantor rather than the beneficiaries of the trust sec_1_675-1 provides that the circumstances which may cause administrative controls to be considered exercisable primarily for the benefit of the grantor include the existence of certain powers of administration exercisable in a nonfiduciary capacity by any nonadverse_party without the approval or consent of any person in a fiduciary capacity the term powers of administration includes a power to reacquire the trust corpus by substituting other_property of an equivalent value if a power is not exercisable by a person as trustee the determination of whether the power is exercisable in a fiduciary or a nonfiduciary capacity depends on all the terms of the trust and the circumstances surrounding its creation and administration revrul_85_13 1985_1_cb_184 holds that if a grantor is treated as the owner of any portion of an entire trust the grantor is the owner of the trust’s assets for federal_income_tax purposes the circumstances surrounding the administration of the trust will determine whether the power_of_administration is exercisable in a fiduciary or nonfiduciary capacity this is a question of fact the determination of which must be deferred until the federal_income_tax returns of the parties involved have been examined by the internal_revenue_service office where the returns are filed therefore we cannot determine at this time whether the taxpayer will be treated as the owner of the trust under sec_675 provided that the circumstances indicate that the power_of_administration is exercisable in a nonfiduciary capacity the taxpayer will be treated as the owner of the trust under sec_671 and sec_675 we assume for purposes of this ruling that the taxpayer is treated as the owner of the qrp transferred to the purported grat under the rules of sec_671 and sec_675 the taxpayer represents that she will not relinquish any powers during the term of the plr-123647-06 trust that would cause the grat to fail to be a_trust in which the taxpayer is the owner of the trust under sec_671 and sec_675 of the code the following therefore based on the facts presented and representations made we conclude provided that the taxpayer is treated as the owner of the qrp held in the grat under sec_671 and sec_675 at the time of the transfer the transfer of qrp to the grantor_retained_annuity_trust does not constitute a disposition of the qrp under sec_1042 provided that the taxpayer is treated as the owner of the qrp held in the grat under sec_671 and sec_675 at the time of exercise the exercise of taxpayer’s power held during the term of the grat in a non-fiduciary capacity to substitute cash or other qrp assets of at least equal value does not constitute a disposition of the qrp under sec_1042 provided that the taxpayer is treated as the owner of the qrp held in the grat under sec_671 and sec_675 at the time of any annuity payments under the trust the transfer of qrp to the taxpayer as a periodic annuity_payment does not constitute a disposition of the qrp under sec_1042 provided that the funding of the grat with qrp constituted a completed_gift of the remainder_interest for federal transfer_tax purposes the transfer of qrp to the trust beneficiaries pursuant to the terms of the trust does not result in a recapture of gain deferred under sec_1042 because of the operation of sec_1042 if the taxpayer dies while the grat is still in existence an interim or final annuity_payment in the form of qrp made to the taxpayer’s successor_in_interest an estate or inter-vivos trust will not result in a recapture of gain deferred under sec_1042 because of the operation of sec_1042 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 does not express an opinion as to validity of the grantor_retained_annuity_trust under sec_2702 of the code plr-123647-06 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 the rulings contained in this letter are based upon information and representations 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 yours robert d patchell chief qualified_plans branch division counsel associate chief_counsel tax exempt and government entities enclosure copy for purposes


t c summary opinion united_states tax_court john h fisher and lisa m fisher petitioners v commissioner of internal revenue respondent docket no 24480-11s filed date john h fisher and lisa m fisher pro sese luanne s dimauro for respondent summary opinion carluzzo 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 unless otherwise indicated subsequent section references are to the continued reviewable by any other court and this opinion shall not be treated as precedent for any other case in a notice_of_deficiency dated date notice respondent determined deficiencies in and penalties with respect to petitioners’ federal_income_tax for and after concessions the issues for decision for each year are whether petitioners are entitled to a trade_or_business expense deduction for wages to minor children are entitled to various trade_or_business expense deductions for amounts expended in connection with lisa m fisher’s petitioner book writing activity and are liable for a sec_6662 accuracy-related_penalty background some of the facts have been stipulated and are so found at the time the petition was filed petitioners resided in new york at all times relevant here petitioners were attorneys practicing in new york--petitioner as a sole_proprietor and mr fisher as a partner in an albany new york law firm mr fisher is also the author of at least two books relating to the practice of law continued internal_revenue_code_of_1986 as amended in effect for the years in issue rule references are to the tax_court rules_of_practice and procedure petitioners have three children all of whom were under nine years old as of the close of petitioners maintained a sec_529 qualified_tuition_program account sec_529 account for each of their children petitioner’s law practice during the years in issue petitioner’s law office was in rented space in kingston new york during and for a part of she also served as a part-time law clerk to a new york judge during summer school recesses petitioner often brought her children into her office usually for approximately two hours a day two or three days a week she did this because at times other family members were not available to care for the children and also because according to petitioner day care was cost-prohibitive for petitioners and so she had the children working for her in the office instead petitioners also believed that allowing their children to work in petitioner’s office would help to teach the children about the value of money and develop a healthy work ethic while at petitioner’s office the children provided various services to her in connection with her practice for example the children shredded waste mailed things answered telephones photocopied documents greeted clients and escorted clients to the office library or other waiting areas in the office complex the children also helped petitioner move files from a flooded basement in they helped her remove files damaged in a bathroom flood in and they helped to move petitioner’s office to a different office in the same building in petitioner did not issue a form_w-2 wage and tax statement to any of her children for any year in issue no payroll records regarding their employment were kept nor were any federal tax withholding payments made from any amounts that might have been paid to any of them petitioner’s book writing activity during in connection with her law practice and at the request of a client petitioner traveled to the czech republic for an extended period because mr fisher could not take time away from his employment to tend to the children petitioner took them with her on the trip she was concerned about entertaining the children during the long car rides she anticipated taking during the trip and came up with the idea of writing a book about the country that would be informative and hold the children’s interest or as she testified keep them busy while traveling by car she had no previous experience writing or publishing books it later occurred to her that other parents traveling with children might be interested in travel books created for children and she decided to write a series of children’s travel books each directed to a different destination in the united_states or elsewhere during the years in issue petitioner traveled with petitioners’ three children to disney world in orlando florida and several cities in europe according to petitioner the purpose of each trip was to conduct research for a yet-to-be written children’s travel book before traveling to a particular destination petitioner typically would complete a rough draft of a children’s travel book she and the children used the rough draft to tour the area and petitioner would record any helpful hints or other information she thought should be included in the final version of the children’s travel book that she planned to complete at some future date in and petitioner devoted approximately and hours a week respectively to her book writing activity sometime in petitioner consulted with one of her clients gabrielle euvino a published author who gave her advice with respect to writing and or publishing books ms euvino has written at least three published books each related in one way or another to the italian language from through petitioner and ms euvino spoke regularly about petitioner’s plans regarding publishing children’s travel books ms euvino introduced petitioner to a book distributor who suggested that petitioner hire a graphic designer she did so at some point not disclosed in the record during the years in issue petitioner also consulted with rhatiya hill a friend who worked in the children’s book department of the harpercollins publishing company ms hill recommended that petitioner hire an agent but she had not done so as of the close of petitioner ultimately completed at least four prototype travel books although she cannot remember the order in which she wrote them other than that the travel book for rome was first to the extent that any of the prototypes were completed during the years in issue petitioner did not submit any of them for publication during she sold some of the books by word-of-mouth in response to specific requests from friends and or clients planning to travel with their children to various locations petitioner planned to hire an agent by the end of but as of the close of that year had not yet done so petitioner did not submit any proposals to any publishing company during any of the years in issue to the extent that she did during none were accepted by the close of that year she had decided to it might be that the only existing versions of these prototypes are now part of the evidentiary record in this case if so and if petitioners want those items returned then application_for the return of the exhibits may be made pursuant to rule e self-publish her books using an internet web site however it is unclear whether any of her books were ever sold through the web site petitioners’ federal_income_tax returns for each year in issue petitioners’ timely filed joint federal_income_tax return was prepared by a certified_public_accountant return preparer as relevant here each return includes two schedules c profit or loss from business one relating to petitioner’s law practice and the other to petitioner’s book writing activity among other items and as relevant here on the and schedules c relating to petitioner’s law practice petitioners reported gross_income of dollar_figure dollar_figure and dollar_figure respectively deducted wages to minor children of dollar_figure dollar_figure and dollar_figure respectively and taking into account other deductions not here in dispute reported net losses of dollar_figure dollar_figure and dollar_figure respectively the net losses shown on the schedules c are taken into account in the computation of the adjusted gross incomes reported on petitioners’ and returns petitioners reported income and expenses on the schedules c relating to petitioner’s book writing activity as follows item income gross_receipts or sales -0- -0- dollar_figure gross_income -0- -0- expenses depreciation and sec_179 dollar_figure -0- -0- legal and professional -0- office -0- -0- rent or lease of vehicles machinery and equipment big_number dollar_figure big_number supplies -0- -0- meals and entertainment big_number big_number big_number other big_number big_number big_number total big_number big_number big_number net profit loss big_number big_number big_number other expenses reported on the schedules c for and include lodging airfare and entrance fees these net losses are also taken into account in the adjusted_gross_income reported on petitioners’ and returns notice_of_deficiency in the notice respondent disallowed all of the deductions for wages to minor children claimed on the and schedules c relating to petitioner’s law practice disallowed all of the deductions claimed on the and schedules c relating to petitioner’s book writing activity disallowed all but dollar_figure of the deductions claimed on the schedule c relating to petitioner’s book writing activity and imposed a sec_6662 accuracy-related_penalty for each year in issue on several grounds including negligence or disregard of rules or regulations and substantial_understatement_of_income_tax other adjustments made in the notice need not be discussed as the adjustments are computational or have no consequence to the deficiencies here in dispute discussion as we have observed in countless opinions deductions are a matter of legislative grace and the taxpayer bears the burden_of_proof to establish entitlement to any claimed deduction rule a 503_us_79 292_us_435 this burden requires the taxpayer to substantiate expenses for deductions claimed by keeping and producing adequate_records that enable the commissioner to determine the taxpayer’s correct_tax liability sec_6001 65_tc_87 aff’d per curiam 540_f2d_821 5th cir 43_tc_824 a taxpayer claiming a deduction on a federal_income_tax return must demonstrate petitioners do not claim and the record does not show that the provisions of sec_7491 are applicable and we proceed as though they are not that the deduction is allowable pursuant to some statutory provision and must further substantiate that the expense to which the deduction relates has been paid_or_incurred see sec_6001 hradesky v commissioner t c pincite sec_1_6001-1 income_tax regs as a general_rule if a taxpayer provides sufficient evidence that the taxpayer has incurred an expense contemplated by sec_162 but the taxpayer is unable to adequately substantiate the amount of expense then the court may estimate the amount of such expense and allow the sec_162 deduction to that extent 39_f2d_540 2d cir however in order for the court to estimate the amount of an expense there must be some basis upon which an estimate may be made 85_tc_731 otherwise any allowance would amount to unguided largesse 245_f2d_559 5th cir the types of deductions here in dispute are allowable if at all under sec_162 that section generally allows a deduction for ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business the determination of whether an expenditure satisfies the requirements for deductibility under sec_162 is a question of fact see 320_us_467 on the other hand sec_262 generally disallows a deduction for personal living or family_expenses with these fundamental principles in mind we turn our attention to the deductions here in dispute petitioners claim a deduction for wages to minor children on the schedule c relating to petitioner’s law practice for each year in issue according to petitioners the children provided various services to petitioner in connection with her law practice and petitioners should be entitled to a deduction for the compensation the children were paid for doing so according to respondent petitioners have not established that the wages were actually paid or that any payment that was made was a payment for an ordinary and necessary business_expense as noted sec_162 allows as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business including compensation_for_personal_services actually rendered compensation is deductible only if it is reasonable in amount based on services actually rendered and paid_or_incurred 77_tc_934 if an amount deducted as wages involves a familial relationship then the court not to mention the internal_revenue_service closely scrutinizes the transaction to determine whether there is a bona_fide employer-employee relationship and whether or not payments were made for services actually performed for the business see 48_tc_439 this is particularly true when the deduction is attributable to payments from a parent to the parent’s child a normal supposition when payments are made to dependent_children or when items are purchased by a parent for dependent_children is that the money or items are in the nature of support and nondeductible see sec_262 holtz v commissioner tcmemo_1982_436 on the other hand payments made to minor children by a related_party for services rendered in connection with the payor’s trade_or_business might very well qualify for deduction see denman v commissioner t c pincite as with many issues we see all of the facts and circumstances surrounding the payments must be considered keeping in mind the requirement that any deduction for compensation must be reasonable we first note that we cannot tell from what has been presented how much was paid to each of petitioners’ children nor can we tell how many hours each worked or what the hourly rate of pay might have been without records showing these details we cannot tell whether the amounts deducted were reasonable especially when the ages of the children are taken into account furthermore according to petitioner payments to her children for services rendered to her law practice were made in part by contributions into their sec_529 accounts and in part in cash so that the children could purchase books things they needed chachkies sic souvenirs things of that nature according to mr fisher payments to his children for services rendered to petitioner’s law practice were made solely by contributions to their sec_529 accounts although he testified that only portions of the contributions were reported as wages according to petitioners’ return preparer the deductions were not computed with reference to the childrens’ sec_529 account contributions as noted petitioner did not issue a form_w-2 to any of her children for any year in issue nor did she maintain payroll records with respect to any payments that might have been made furthermore at trial petitioners did not present any documentary_evidence such as bank account statements canceled checks or records for their childrens’ sec_529 accounts that support the deductions all things considered we find that petitioners have failed to establish their entitlement to the deductions for wages to minor children as claimed on the and schedules c relating to petitioner’s law practice we are satisfied however that each of petitioners’ children performed services in connection with petitioner’s law practice during each year in issue and each was compensated for doing so taking into account their ages generalized descriptions of their duties generalized statements as to the time each spent in the office and the lack of records we find that petitioners are entitled to a dollar_figure deduction for wages paid to each child for each year see cohan v commissioner f 2d pincite vanicek v commissioner t c pincite according to petitioners petitioner’s book writing activity fits within the definition of a trade_or_business within the meaning of sec_162 for each year in issue therefore according to petitioners the expenses petitioner paid_or_incurred in carrying on this activity should be allowed as deductions although they could not substantiate the expenses underlying the deductions for wages to petitioners’ children apparently petitioners were able to substantiate their book writing activity expenses to respondent’s satisfaction according to the notice however petitioners are not entitled to deductions for these expenses because the activity does not meet the guidelines of carrying_on_a_trade_or_business within the meaning of sec_162 arguments presented in respondent’s pretrial memorandum lead us to believe that the guidelines referenced in the notice are found at least in part in sec_1 b income_tax regs those guidelines more commonly referred to as factors are applied to determine whether a taxpayer conducts an activity with an actual and honest profit objective or a profit_motive see 78_tc_642 aff’d without published opinion 702_f2d_1205 d c cir expenses paid_by a taxpayer in connection with an activity not conducted by the taxpayer with an actual and honest profit objective are not allowable under sec_162 but might be allowable under some other provision of the internal_revenue_code see eg sec_183 in considering whether a taxpayer’s activity constitutes a trade_or_business within the meaning of sec_162 we examine not only the taxpayer’s profit_motive but also whether the business was conducted with continuity and regularity and as a means of earning a living see 480_us_23 more fundamentally before a sec_162 deduction is allowable the business must have actually commenced see 345_f2d_901 4th cir vacated and remanded on other grounds 382_us_68 separate and apart from the hurdles petitioners face in satisfying the tests set forth in groetzinger and the above-referenced regulation after considering their evidence we are left with the firm conviction that if petitioner’s book writing activity ever matured into a trade_or_business within the meaning of sec_162 it did not do so before the close of the idea to write children’s travel books did not occur to petitioner until and then only because of a business trip related to her practice of law for the rest of that year and throughout and petitioner’s activities are best described as planning and or research in connection with the business she had in mind as of the close of petitioner had not yet hired an agent she had not yet completed a final version of any book she had not yet submitted any proposal to any publishing company and she had not yet had any products to offer for sale to the general_public under the circumstances we decline to rule on whether petitioner conducted her book writing activity with the requisite profit_motive as respondent would have us do instead assuming without finding that she did we find that as of the close of to the extent that petitioner’s book writing activity ever became an active trade_or_business it had not done so as of the close of as noted petitioner sold some books during in response to specific requests from friends or clients for the books we also note that respondent allowed deductions in to the extent of the income from that activity see sec_183 deductions allowable under that section presume that the activity was not conducted for profit a point that we decline to rule upon nevertheless given the small amount_involved we are not inclined to disturb respondent’s allowance in continued that being so petitioners are not entitled to the deductions claimed on the schedules c for petitioner’s book writing activity sec_6662 imposes a penalty of of the portion of an underpayment_of_tax attributable to the taxpayer’s negligence disregard of rules or regulations or substantial_understatement_of_income_tax sec_6662 and b and 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 b income_tax regs 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 respondent bears the burden of production with respect to the imposition of the penalty here in dispute see sec_7491 and that burden has been satisfied for each year in issue because the understatement of income_tax which equals the continued that regard in this case the deficiencies underpayments of tax and understatements of income_tax are all computed in the same manner see sec_6211 sec_6662 sec_6664 deficiency exceeds dollar_figure for each year in issue see sec_6211 sec_6662 sec_6664 furthermore with respect to the portions of the underpayments attributable to the disallowed amounts of the deductions for wages to their children we find that petitioners were negligent within the meaning of sec_6662 because they failed to keep adequate books_and_records regarding those expenses see sec_1_6662-3 income_tax regs that being so it is petitioners’ burden to establish that the imposition of the penalty is not appropriate see 116_tc_438 see also rule a 290_us_111 sec_6664 provides an exception to the imposition of the accuracy-related_penalty if the taxpayer establishes that there was reasonable_cause for and the taxpayer acted in good_faith with respect to the underpayment sec_1_6664-4 income_tax regs the determination of whether the taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account the pertinent facts and circumstances id para b under certain circumstances a taxpayer’s reliance upon professional advice may establish the taxpayer’s reasonable_cause and good_faith with respect to an underpayment_of_tax if the taxpayer establishes that the professional was provided with complete and accurate information an incorrect return was a result of the preparer’s mistakes and the taxpayer demonstrates good_faith reliance on a competent professional see 112_tc_317 aff’d without published opinion sub nom schutter v commissioner 242_f3d_390 10th cir see also 115_tc_43 aff’d 299_f3d_221 3d cir according to petitioners the penalties are not applicable because they relied upon their return preparer with respect to the deductions here in dispute we agree with petitioners at least with respect to the underpayments of tax attributable to the deductions claimed on the schedules c relating to petitioner’s book writing activity petitioners apparently kept records sufficient to substantiate the deductions for the various expenses shown on the schedules c and their return preparer readily admitted at trial that he advised petitioners that they were entitled to deduct those expenses given the same set of circumstances reasonable minds could differ over when a taxpayer’s trade_or_business commences or whether a taxpayer conducts an activity with the profit_motive necessary to allow the activity to be treated as a trade_or_business within the meaning of sec_162 petitioners are not liable for a sec_6662 penalty with respect to the portion of the underpayment_of_tax attributable to the disallowance of the deductions for petitioner’s book writing activity for any of the years in issue the same is not true with respect to the portions of the underpayments of tax attributable to the now disallowed portions of the deductions for wages for petitioners’ children taking into account the ages of the children the reasons the children were with petitioner at her office the amount of time they spent in petitioner’s office the lack of substantiating records to support the payments and the amounts of the claimed deductions we find that petitioners’ decision albeit with the concurrence of their return preparer to claim those deductions renders them liable for the sec_6662 accuracy-related_penalty on the portions of the underpayments of tax attributable to the portions of those deductions that exceed the amounts here allowed to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number ---------------------- -------------------------- ------------------------------------------ --------------------------------------------------------- -------------------------------------------- ----------------------------- - - department of the treasury washington dc person to contact --------------- id no ------------- telephone number --------------------- refer reply to cc te_ge eo2 - plr-164689-03 date date --------- ------------- ------------------------------------------ ------------------------------------------------ legend authority ------------------------------------------------------------------------ city year ordinance ------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ state statute ------------------------------------------------------ budget review board dear ---------------- this is in reply to a letter dated date requesting a ruling that the income of authority is excluded from gross_income under sec_115 of the internal_revenue_code code and that contributions made to authority will be deductible by the donors as charitable_contributions under sec_170 of the code ----------------------------------------------------- ------------------------- facts ordinance provides that authority is to be governed by a five member board_of authority is a nonprofit non-stock state chartered corporation created by city in year pursuant to city ordinance ordinance was enacted to effectuate the purposes of state statute the purpose of state statute is to relieve conditions of unemployment and promote economic development by providing parking facility by public parking authorities that are responsive to local needs ordinance authorizes authority to develop own and operate parking facilities in city directors board four of board’s members are appointed by the mayor of city and confirmed by the city council one board member is a member of city council appointed by the city council president any member of board may be removed at will by the appointing official operations as well as from city authority’s board must develop an annual financial plan which is subject_to the approval of city’s budget review board additionally board must make available to the public an annual report of its past activities and future plans the funds are to be deposited in accordance with state law governing the investment of local governmental funds and authority must provide annual audited financial statements to the mayor the president of the city council and the city budget review board all of authority’s contracts are subject_to the approval of the city budget review board authority’s articles of incorporation provide that it was created pursuant to state statute and ordinance pursuant to state statute the net_earnings of authority may not inure to the benefit of any private interest also pursuant to the statute upon termination of authority its assets must be transferred to city funding for authority is to come from revenue generated from parking law and analysis sec_115 sec_115 of the code provides that gross_income does not include income derived from any public_utility or the exercise of any essential government function and accruing to a state or any political_subdivision thereof established under a written declaration of trust by a state for the temporary investment of cash balances of the state and its participating political subdivisions was excludable from gross_income for federal_income_tax purposes under sec_115 the ruling indicated that the statutory exclusion was intended to extend not to the income of a state or in revrul_77_261 1977_2_cb_45 income from an investment fund municipality resulting from its own participation in activities but rather to the income of a corporation or other entity engaged in the operation of a public_utility or the performance of some governmental function that accrued to either a state or municipality the ruling points out that it may be assumed that congress did not desire in any way to restrict a state’s participation in enterprises that might be useful in carrying out projects that are desirable from the standpoint of a state government and which are within the ambit of a sovereign to properly conduct in addition pursuant to sec_6012 and the underlying regulations the investment fund being classified as a corporation that is subject_to taxation under subtitle a of the code was required to file a federal_income_tax return each year in revrul_90_74 1990_2_cb_34 the service determined that the income of an organization formed funded and operated by political subdivisions to pool various risks casualty public liability workers’ compensation and employees’ health is excludable from gross_income under sec_115 of the code in revrul_90_74 private interests neither materially participate in the organization nor benefit more than incidentally from the organization promote economic development and help relieve unemployment the promotion of economic development and relief of unemployment are essential government functions for purposes of sec_115 authority’s income will be retained by authority to be used exclusively for its public purpose no part of the income or earnings may inure to the benefit of any private interest upon dissolution authority’s assets will be distributed to city accordingly the income of authority accrues to the state or a political_subdivision thereof for purposes of sec_115 authority was established to provide public parking facilities for city in order to sec_170 sec_170 of the code provides subject_to certain limitations that there shall be allowed as a deduction any charitable_contribution payment of which is made within the taxable_year under sec_170 the term charitable_contribution means a contribution or gift to or for_the_use_of a state a possession_of_the_united_states or any political_subdivision of any of the foregoing or the united_states or the district of columbia but only if the contribution is made for exclusively public purposes taxpayer indicates that it is not a political_subdivision of a state as that term has been defined for federal tax purposes see 3_tc_131 aff’d 144_f2d_998 2nd cir nevertheless an entity not expressly described in sec_170 may qualify to receive deductible charitable_contributions if it is an instrumentality of a state or an instrumentality of a political_subdivision of a state and if the contributions are made for exclusively public purposes see revrul_75_359 1975_2_cb_79 consideration in determining whether an organization is an instrumentality of one or more states or political subdivisions under revrul_75_359 the following six factors are to be taken into whether the organization is used for a governmental purpose and performs a governmental function whether performance of its function is on behalf of one or more states or political subdivisions whether there are any private interests involved or whether the states or political subdivisions involved have the powers and interests of an owner whether control and supervision of the organization is vested in public authority or authorities whether express or implied statutory or other authority is necessary for the creation and or use of such an instrumentality and whether such authority exists and the organization’s degree of financial autonomy and the source of its operating_expenses under the criteria set forth in revrul_75_359 authority constitutes an instrumentality of city for purposes of sec_170 authority was created pursuant to an ordinance duly adopted by the city council under enabling legislation passed by the state general assembly authority is used for a governmental purpose and performs a governmental function as stated in the enabling legislation authority’s purpose is to promote the economic redevelopment of the city as well as to promote the health welfare and safety of the city’s residents through the provision of vehicle parking facilities responsive to local needs authority performs these functions solely on behalf of the city and its residents and thereby serves an exclusively public purpose furthermore the autonomy of authority is subject_to substantial governmental although the term exclusively for public purposes is not defined in the code or regulations it has been applied in several published revenue rulings revrul_79_323 1979_2_cb_106 concludes that contributions to a commission that promoted general economic health of a region and maintained and attracted industry benefited the residents of the region and served an exclusively public purpose revrul_69_90 1969_1_cb_63 indicates that the provision of parking facilities for_the_use_of the general_public in the general business area is for an exclusively public purpose so that contributions to the city for this purpose are deductible under sec_170 checks authority is governed by a board_of directors of which all members are appointed and subject_to removal by the mayor and or president of the city council authority’s activities are subject_to the oversight of the mayor the city council and the city board_of estimates and authority reports its financial dealings to city on an annual basis as required by city code part of its operations authority also expects to receive contributions authority’s revenue is applied solely toward offsetting the expenses of its operations no part of the net_earnings of authority inures to the benefit of or is distributable to any private interest other than reasonable_compensation for services rendered and to make payments and distributions as needed to further the purposes of authority no private interests hold any ownership or management interests in authority members of authority’s board_of directors receive no compensation other than reimbursement of necessary expenses upon dissolution of authority all of its net assets will be distributed to city which has the powers and interest of an owner political_subdivision of a state and operates for exclusively public purposes we further conclude that contributions made to authority will be deductible by the donors as charitable_contributions under sec_170 of the code to the extent otherwise provided under sec_170 authority receives all of its funding from the city and from the fees it collects as in view of the foregoing we conclude that authority is an instrumentality of a conclusion sec_1 the income of authority is excludible from gross_income under sec_115 of the code charitable_contributions to authority are deductible by the donors to the extent provided by sec_170 of the code except as specifically provided otherwise no opinion is expressed on the federal this ruling is directed only to the taxpayer who requested it sec_6110 in accordance with a power_of_attorney on file we are sending a copy of this tax consequences of any particular transaction provides that this ruling may not be used or cited as precedent letter to your representative enclosures copy of this letter copy for sec_6110 purposes cc sincerely ______________________________ barbara e beckman assistant chief branch exempt_organizations division counsel associate chief_counsel tax exempt and government entities