t c no united_states tax_court ocmulgee fields inc petitioner v commissioner of internal revenue respondent docket no filed date p transferred appreciated real_property to a qualified_intermediary which sold the property and used the proceeds to purchase from a person related to p like-kind_property which it transferred to p held p has failed to prove the absence of a principal purpose of federal_income_tax avoidance p’s exchange with the qualified_intermediary is part of a transaction structured to avoid the purposes of sec_1031 i r c governing like-kind_exchanges between related_persons and under sec_1031 i r c the nonrecognition provisions of sec_1031 i r c do not apply to the exchange david d aughtry and david w siegel for petitioner vicki j hyche and clinton m fried for respondent halpern judge by notice_of_deficiency the notice respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax for its taxable_year ended date taxable_year and an accuracy-related_penalty of dollar_figure unless otherwise indicated all section references are to the internal_revenue_code_of_1986 as amended and in effect for taxable_year and all rule references are to the tax_court rules_of_practice and procedure the deficiency determination is the result of respondent’s adjustment requiring that petitioner recognize the gain it realized on the following transaction petitioner transferred appreciated real_property to a qualified_intermediary qualified_intermediary an unrelated third party purchased the property from the qualified_intermediary for cash a person related to petitioner sold like-kind_property to the qualified_intermediary for cash the qualified_intermediary transferred the like-kind_property to petitioner and petitioner realized a gain on the exchange petitioner claims that its exchange is a nontaxable_exchange under the so- called like-kind_exchange rules found in sec_1031 respondent claims that sec_1031 requires recognition because petitioner structured the transaction to avoid the purposes of the rules for exchanges between related_persons respondent concedes that but for the application of sec_1031 petitioner’s exchange with the qualified_intermediary qualifies for nonrecognition treatment under sec_1031 because we agree with respondent we deny petitioner nonrecognition under sec_1031 we do not sustain respondent’s determination of an accuracy-related_penalty findings_of_fact some facts have been stipulated and are so found the stipulation of facts with attached exhibits is incorporated herein by this reference petitioner is a corporation organized in the state of georgia at the time it filed the petition its principal_place_of_business was in macon georgia macon petitioner petitioner was organized in by charles h jones charles jones petitioner develops owns and manages real_estate located primarily in middle georgia an area including macon during taxable_year petitioner’s principal shareholders were charles jones his sons dwight c and c jefferson dwight jones and jeff jones respectively and jones family_partnership which was owned one-third each by charles jones dwight jones and jeff jones during taxable_year dwight jones was president of petitioner during taxable_year charles jones his sons and their related entities were among the largest owners of commercial property including shopping centers and office buildings in middle georgia at the beginning of taxable_year petitioner’s real properties included the wesleyan station shopping center wesleyan station and part of the rivergate shopping center rivergate both in macon the term barnes noble corner is the term petitioner uses which we shall adopt to describe three parcels of real_property in rivergate petitioner had owned the barnes noble corner before selling it in to treaty fields l l c treaty fields at the time of that sale the barnes noble corner was undeveloped real_property petitioner sold it so that the benefit of developing it would accrue to treaty fields treaty fields treaty fields is a georgia limited_liability_company that dwight jones organized in at all times here pertinent it was owned by dwight jones and charles jones the mceachern agreement during the spring of dwight jones met scott wilson mr wilson a licensed real_estate broker mr wilson told dwight jones that he was looking for income-producing commercial real_estate he asked him whether petitioner had any for sale they discussed wesleyan station although petitioner had not listed wesleyan station for sale or otherwise marketed it petitioner agreed to sell it on date petitioner entered into an agreement the mceachern agreement for the sale of wesleyan station to two testamentary trusts under the will of john mceachern and to mr wilson the son-in-law of john mceachern among other things the mceachern agreement provides the purchase_price would be dollar_figure the closing would take place on or before date petitioner intended to conduct the transaction as part of an exchange of property qualifying for nonrecognition to petitioner under sec_1031 and in light of petitioner could assign its interest in the agreement to a qualified_intermediary petitioner’s search for replacement_property raymond pippin mr pippin is a certified_public_accountant c p a and a member of the macon accounting firm mcnair mclemore middlebrooks co l l p mcnair mcnair is the largest accounting firm in the macon area and it has as clients more real_estate developers than any other accounting firm in macon mr pippin services more of those clients including petitioner than anyone else at mcnair even before petitioner entered into the mceachern agreement dwight jones had asked mr pippin whether he was aware of any income-producing commercial real_property in the macon area that could be acquired to replace wesleyan station petitioner’s requirements for replacement_property were that it be income-producing commercial real_property in middle georgia worth more than dollar_figure million mr pippin indicated that he was not aware of any such property and dwight jones asked him to keep his eyes open dwight jones also asked petitioner’s real_estate lawyer and two commercial real_estate brokers to help him find suitable replacement_property in addition mr wilson also a broker offered to help petitioner find replacement_property as stated the deadline for closing the mceachern agreement was date before that date petitioner had considered and rejected for various reasons at least six possible replacement properties presented by brokers as the date approached dwight jones considered the possibility of petitioner’s reacquiring the barnes noble corner as replacement_property on date petitioner engaged security bank of bibb county macon georgia security bank as a qualified_intermediary on that date it assigned its rights to sell wesleyan station to security bank on date security bank as a qualified_intermediary for petitioner sold wesleyan station as called for in the mceachern agreement petitioner’s receipt of the barnes noble corner petitioner settled on the barnes noble corner as appropriate replacement_property on date petitioner and treaty fields entered into a contract of purchase with respect to that property petitioner subsequently transferred its rights under that contract to security bank and petitioner received the barnes noble corner on date treaty fields filed a form_1065 u s return of partnership income for reporting the disposition of the barnes noble corner as a taxable sale it reported that the amount_realized on the sale was dollar_figure its adjusted_basis in the property sold was dollar_figure and it realized a gain of dollar_figure petitioner’s taxable_year federal_income_tax return for taxable_year petitioner filed form_1120 u s_corporation income_tax return petitioner’s form_1120 petitioner reported the disposition of wesleyan station as a like-kind_exchange on an attached form_8824 like-kind_exchanges it reported that the amount_realized on the exchange was dollar_figure its adjusted_basis in the property exchanged and its expenses related to the exchange were dollar_figure and it realized a gain of dollar_figure it reported that its basis in the property received the barnes noble corner was dollar_figure and under the heading of part ii related_party exchange information it identified treaty fields as the related_party it also reported on another form installment_sale income of dollar_figure resulting from the acceleration of payments due petitioner from treaty we recognize that dollar_figure differs from both the purchase_price of dollar_figure stated in the mceachern agreement and the dollar_figure reported as realized by petitioner on its form_1120 see infra those discrepancies do not bother the parties and therefore do not bother us fields on account of petitioner’s previous sale of the barnes noble corner to treaty fields mr pippin prepared petitioner’s form_1120 including form_8824 charles jones and dwight jones had great confidence in mr pippin they had relied on him and his firm for tax_advice for many years they relied on him to prepare properly petitioner’s form_1120 respondent’s determination respondent’s determination_of_a_deficiency is principally based on his adjustment increasing petitioner’s gross_income by dollar_figure on account of its exchange with security bank of wesleyan station for the barnes noble corner respondent explained his adjustment in an attachment to the notice as follows y ou have not established that you have met all of the requirements of sec_1031 for nonrecognition of that gain i introduction opinion we shall first address the deficiency in tax and then address the accuracy-related_penalty ii the deficiency in tax a introduction petitioner reported on its form_1120 that it realized a gain of dollar_figure on its exchange of one parcel of real_property wesleyan station for three others the barnes noble corner the only question we must answer is whether the exchange fails to qualify for nonrecognition treatment under sec_1031 on account of the special rules applicable to exchanges between related_persons found in sec_1031 we shall describe the relevant provisions of sec_1031 and the accompanying regulations set forth the parties’ arguments settle two questions with respect to proof and make our analysis as stated we conclude that petitioner does not qualify for nonrecognition under sec_1031 b sec_1031 sec_1031 provides that no gain_or_loss shall be recognized on the exchange of property held for productive use in a trade_or_business or for investment if the property is exchanged solely for property of a like_kind that is to be held either for productive use in a trade_or_business or for investment under sec_1031 the basis_of_property acquired in a sec_1031 exchange is the same as the basis of the property exchanged decreased by any money the taxpayer receives and increased by any gain the taxpayer recognizes sec_1031 and the regulations thereunder allow for deferred exchanges of property under sec_1031 and sec_1_1031_k_-1 income_tax regs however the property a taxpayer receives in the exchange replacement_property must be identified within days of the transfer of the property relinquished in the exchange relinquished_property and received by the earlier of days after the transfer of the relinquished_property or the due_date including extensions of the transferor’s tax_return for the taxable_year in which the relinquished_property is transferred sec_1_1031_k_-1 income_tax regs allows a taxpayer to use a qualified_intermediary to facilitate a like-kind_exchange the qualified_intermediary is not considered the agent of the taxpayer for purposes of sec_1031 sec_1_1031_k_-1 income_tax regs in the case of a transfer of relinquished_property involving a qualified_intermediary the taxpayer’s transfer of relinquished_property to a qualified_intermediary and subsequent receipt of like-kind replacement_property from the qualified_intermediary is treated as an exchange with the qualified_intermediary id sec_1031 provides special rules for property exchanged between related_persons in pertinent part it provides as follows sec_1031 special rules for exchanges between related_persons -- in general --if- a a taxpayer exchanges property with a related_person b there is nonrecognition_of_gain_or_loss to the taxpayer under this section with respect to the exchange of such property determined without regard to this subsection and c before the date years after the date of the last transfer which was part of such exchange-- i the related_person disposes of such property or ii the taxpayer disposes of the property received in the exchange from the related_person which was of like_kind to the property transferred by the taxpayer there shall be no nonrecognition_of_gain_or_loss under this section to the taxpayer with respect to such exchange certain dispositions not taken into account -- for purposes of paragraph c there shall not be taken into account any disposition-- c with respect to which it is established to the satisfaction of the secretary that neither the exchange nor such disposition had as one of its principal purposes the avoidance of federal_income_tax treatment of certain transactions -- this section shall not apply to any exchange which is part of a transaction or series of transactions structured to avoid the purposes of this subsection c arguments of the partie sec_1 petitioner’s arguments petitioner’s argument with respect to sec_1031 is straightforward on or before the date it entered into the mceachern agreement petitioner formed a plan to replace wesleyan station with property from an unrelated_person only when its search for appropriate property owned by an unrelated_person proved unfruitful and the deadline to close under the mceachern agreement approached did petitioner consider replacing wesleyan station with the barnes noble corner it chose to do so for business reasons to reunite its ownership of the barnes noble corner with its ownership of the rest of rivergate and in the face of advice from its accountant and tax adviser mr pippin that the decision would result in higher taxes therefore concludes petitioner it lacked intent to avoid the provisions of sec_1031 petitioner also argues that respondent bears the burden_of_proof respondent’s arguments respondent’s argument with respect to sec_1031 is equally straightforward the facts in this case are similar to those in 124_tc_45 a case involving the sec_1031 rules applicable to exchanges between related_persons in that case we found that a qualified_intermediary was interposed in an attempt to circumvent the limitation in sec_1031 that would have applied to an exchange directly between related_persons and the taxpayer failed to show that tax_avoidance was not one of the principal purposes of the transactions we concluded that the transactions were structured to avoid the purposes of sec_1031 and consequently pursuant to sec_1031 the taxpayer was not entitled to nonrecognition under sec_1031 respondent argues for the same result here respondent denies that he bears the burden_of_proof d questions relating to proof burden_of_proof the parties argue over who bears the burden_of_proof particularly with respect to petitioner’s eligibility for the non-tax-avoidance exception found in sec_1031 petitioner argues that respondent bears the burden for three reasons first petitioner argues that respondent bears the burden_of_proof because his explanation of his adjustment increasing petitioner’s gross_income viz you have not established that you have met all of the requirements of sec_1031 for nonrecognition is inadequate because it contains no affirmative factual determination that could be presumptively correct petitioner’s argument is misguided there is no requirement that a notice_of_deficiency that adequately informs the taxpayer of the basis for the deficiency contain a factual determination often particularly with respect to deductions we have said a taxpayer bears the burden_of_proof and respondent’s determinations are entitled to a presumption of correctness e g shafrir v commissioner tcmemo_2008_280 emphasis added that does not require that the commissioner lay out the factual predicate for his determination the determination referred to is the commissioner’s deficiency determination not any underlying factual determination see sec_6212 if the secretary determines that there is a deficiency sec_7522 requires that the notice describe the basis for and identify the amounts if any of the tax due interest additional_amounts additions to the tax and assessable_penalties included in such notice the final sentence of sec_7522 provides an inadequate description under the preceding quoted sentence shall not invalidate such notice respondent’s explanation of his deficiency determination informed petitioner that it was required to recognize gain because it had not established that it had satisfied the sec_1031 special rules applicable to like- kind exchanges between related parties in that respect 112_tc_183 is distinguishable the notice was adequate in all respects and there is nothing about respondent’s explanation of his adjustment that bears on who bears the burden_of_proof second petitioner argues that respondent bears the burden_of_proof because the ‘failure-to-establish’ non-assertion is arbitrary and capricious purportedly because respondent failed to consider intent we believe that petitioner’s second argument is directed to the sec_1031 requirement that the taxpayer establish the absence of a principal purpose of tax_avoidance we do so because in its reply brief under the heading burden_of_proof petitioner incorporates a portion of its pretrial memorandum in which it states in particular nowhere does the notice contain the sec_1031 statutorily-mandated determination as to the presence or absence of a principal purpose of tax_avoidance as established in the immediately preceding paragraph the notice is sufficient moreover as discussed infra in section ii e b of this report the evidence establishes that because of a deemed exchange basis shift and sale of wesleyan station by treaty fields petitioner and treaty fields avoided approximately dollar_figure million of gain recognition respondent makes clear in his pretrial memorandum his assumption that the deemed exchange and sale had as a principal purpose federal_income_tax avoidance we find that assumption neither arbitrary nor capricious petitioner has failed to convince us with its second argument that respondent bears the burden of proving that petitioner had a principal purpose of tax_avoidance finally petitioner argues that respondent bears the burden_of_proof under sec_7491 in pertinent part rule a provides as a general_rule the burden_of_proof shall be upon the petitioner in certain circumstances however if the taxpayer introduces credible_evidence with respect to any factual issue relevant to ascertaining the proper tax_liability sec_7491 places the burden_of_proof on the commissioner see sec_7491 rule a credible_evidence is evidence that after critical analysis a court would find constituted a sufficient basis for a decision on the issue in favor of the taxpayer if no contrary evidence were submitted 122_tc_143 bernardo v commissioner tcmemo_2004_199 n petitioner’s argument fails because for the reasons discussed infra in section ii e b of this report petitioner has not introduced credible_evidence of the absence of a principal purpose of tax_avoidance it follows that petitioner retains the burden of proving the absence of that prohibited purpose a burden that because of the absence of credible_evidence on that issue petitioner cannot sustain see bernardo v commissioner supra n see also see the discussion infra in sec ii d of this report as to what would constitute credible_evidence in this case 535_f3d_1221 10th cir citing bernardo affg tcmemo_2006_174 therefore our discussion of that issue may be viewed as setting forth the basis for our determination that petitioner has failed to introduce credible_evidence and carry its burden_of_proof see bernardo v commissioner supra see also rendall v commissioner supra pincite measure of persuasion to satisfy the non-tax-avoidance exception found in sec_1031 the secretary must be satisfied as to the absence of a principal purpose of federal_income_tax avoidance respondent acknowledges that the secretary’s discretion is not limitless he argues that nevertheless the measure of persuasion that petitioner must satisfy to show that the secretary abused his discretion is great and to satisfy that measure petitioner must show by substantial evidence the absence of the prohibited purpose petitioner argues for a strong_proof measure in teruya bros ltd subs v commissioner t c pincite n we stated that although we have applied a strong_proof measure in other contexts involving language similar to the satisfaction of the secretary language in sec_1031 because the measure made no difference to the outcome of the case we would not apply a more than usual measure of persuasion here the measure of persuasion also makes no difference petitioner cannot satisfy the usual measure of persuasion required to prove a fact in this court viz a preponderance_of_the_evidence see 109_tc_463 affd 192_f3d_844 9th cir e analysi sec_1 avoiding the purposes of the rules governing exchanges between related parties petitioner is denied nonrecognition treatment on its exchange of wesleyan station with security bank for the barnes noble corner if the exchange was part of a transaction or series of transactions structured to avoid the purposes of the rules found in sec_1031 governing exchanges between related_persons see sec_1031 we begin by considering the history of those rules and our interpretation of them in teruya bros replacement_property acquired in a like-kind_exchange generally takes the basis of the property relinquished see sec_1031 in effect the basis of the relinquished_property shifts to the replacement_property in the absence of the general_rule of sec_1031 a taxpayer anticipating the sale of low basis property might be tempted to exchange the low basis property for high basis property owned by a related_person with the related_person then selling the property received in the exchange at a reduced gain or possibly a loss because of the shift to that property of his high basis in the property he relinquished see teruya bros ltd subs v commissioner supra pincite in teruya bros we said this about the history of sec_1031 congress concluded that if a related_party exchange is followed shortly thereafter by a disposition of the property the related parties have in effect ‘cashed out’ of the investment and the original exchange should not be accorded nonrecognition treatment id pincite certain quotation marks and citation omitted we explained sec_1031 as reflecting congress’s concern that related_persons not be able to circumvent the purposes of sec_1031 by interposing an exchange with an unrelated third party id the essential facts of teruya bros are as follows the taxpayer negotiated the sale of relatively low basis real_property to an unrelated_person in anticipation of the sale the taxpayer arranged to purchase relatively high basis replacement_property from a related_person to carry out the transaction the taxpayer arranged for a qualified_intermediary to acquire the property the taxpayer had agreed to sell and to sell it to the unrelated_person to use the proceeds to purchase the replacement_property from the related_person and then to transfer that replacement_property to the taxpayer or if the property he receives is received in an exchange not qualifying for nonrecognition treatment at his tax cost for that property see sec_1012 phila park amusement co v united_states ct_cl 126_fsupp_184 in teruya bros ltd subs v commissioner supra pincite we concluded that the described transaction was economically equivalent to a direct exchange of properties between the taxpayer and the related_person followed by the related person’s sale of the property it received to an unrelated third party we stated that the interposition of a qualified_intermediary in the transactions could not obscure the end result id because the deemed exchange and sale was described in sec_1031 we then looked to see whether avoidance of federal_income_tax was one of the principal purposes of the deemed exchange id pincite we did so because we had concluded that the non-tax-avoidance exception of sec_1031 is subsumed within the purposes of sec_1031 and any inquiry into whether a transaction is structured to avoid the purposes of sec_1031 should take this exception into consideration id pincite we rejected the taxpayer’s argument that it met the requirements of the exception we restated our observation the economic_substance of the transactions remains that the investments in the relinquished properties were cashed out immediately and the related_person ended up with the cash proceeds id pincite we detailed the tax savings to the taxpayer and the related_person resulting from the redirection of the proceeds from the sale of the relinquished_property to the related_person id we concluded that the taxpayer had failed to prove that tax_avoidance was not one of the principal purposes of the two transactions and the taxpayer had interposed the qualified_intermediary to avoid the tax consequences of an economically equivalent direct exchange with the related_person id pincite non-tax-avoidance exception a introduction the transaction at bar is similar to the transaction in teruya bros petitioner exchanged wesleyan station with a third party security bank a qualified_intermediary for replacement_property the barnes noble corner formerly owned by a related_person treaty fields between the two legs of that exchange security bank sold wesleyan station to an unrelated third party and used the proceeds to acquire the replacement_property from treaty fields petitioner does not dispute that within the meaning of sec_1031 treaty fields is a related_person to determine whether petitioner’s exchange with security bank was part of a transaction or series of transactions structured to avoid the purposes of sec_1031 we must disregard that exchange and consider how petitioner would have fared had it instead exchanged wesleyan station with treaty fields for the barnes noble corner and had treaty fields then sold wesleyan station we must determine whether assuming those hypothetical facts petitioner has shown the absence of a principal purpose of federal_income_tax avoidance b application of sec_1031 to the deemed exchange petitioner must establish that neither its deemed exchange of wesleyan station with treaty fields nor treaty fields’s deemed sale of that property had avoidance of federal_income_tax as one of its principal purposes see sec_1031 h conf rept is the report of the committee of conference the conference_report that accompanied h_r 101st cong 1st sess which as enacted became the omnibus budget reconciliation act of obra publaw_101_239 103_stat_2106 obra sec_7601 103_stat_2370 added sec_1031 with respect to that addition the conference_report states the senate amendment is the same as the house bill except that the committee on finance report provides that the non-tax avoidance exception generally will apply to transactions involving certain exchanges of undivided interests dispositions in nonrecognition transactions and transactions that do not involved sic the shifting of basis between properties h conf rept supra pincite the conference_report further states that with respect to the addition of sec_1031 the conference agreement follows the senate amendment id if treaty fields had received wesleyan station from petitioner in exchange for the barnes noble corner treaty fields’s adjusted_basis of dollar_figure in the barnes noble corner would have shifted to wesleyan station which in petitioner’s hands had a basis of only around dollar_figure because of that step-up_in_basis treaty fields would have realized a gain on the sale of wesleyan station approximately dollar_figure million less than petitioner would have realized had it forgone an exchange with treaty fields and sold wesleyan station itself while the conference_report identifies transactions not involving basis shifting as transactions generally lacking federal_income_tax avoidance as a principal purpose a fair inference to be drawn from the report is that federal_income_tax avoidance generally is a principal purpose of transactions involving basis shifting indeed petitioner appears to concede the point i f all other factors were equal a basis differential may supply the principal purpose of tax_avoidance petitioner adds it is equally true however that the tax impact of a basis differential may be overridden and reversed by more important tax considerations such as rate differentials lost elections and the like--not to mention non-tax considerations petitioner lists five monumental tax factors that it argues override the basis differential that it concedes existed here i the immediate tax on treaty fields’ sale of the barnes noble corner ii the immediate tax to petitioner on the outstanding installment note from treaty fields from the earlier sale of the barnes noble corner to treaty fields iii the decrease in depreciation on the barnes noble corner iv the tax on petitioner rather than the tax_rate treaty fields’ partners would have had on the future sale of the barnes noble corner and v the sacrifice of the sec_754 election for charles jones upon his death which would entirely eliminate percent of the gain from the future sale of the barnes noble corner to a third party if treaty fields had retained ownership although there may be situations in which a taxpayer can overcome the negative inference to be drawn from basis shifting and a cash_out this is not one of them our reaction to petitioner’s five monumental tax factors is as follows first indeed there was an immediate tax on treaty fields’s sale of the barnes noble corner but that tax was approximately equal to the tax it would have paid had it first exchanged the barnes noble corner for wesleyan station and then sold wesleyan station second while treaty fields’s sale of the barnes noble corner resulted in the acceleration of dollar_figure in installment income to petitioner the result was not the addition of some new tax burden but merely the acceleration of a deferred tax burden equivalent in consequence to the early call of a loan petitioner has failed to quantify the associated cost which surely was much less than dollar_figure third petitioner’s adjusted_basis in wesleyan station shifted to the barnes noble corner and therefore it gave up no depreciable basis treaty fields’s adjusted_basis in the barnes noble corner offset the amount it realized on the sale of that property to security bank the proceeds of the sale perhaps reduced by a distribution to treaty fields’s members to pay tax were available for reinvestment in new depreciable_property fourth petitioner focuses on the tax_rate differential between gain taxable to petitioner percent and gain taxable to treaty fields’s members percent treaty fields being a pass-through entity whose members individuals are taxed on capital_gains at rates not available to corporate taxpayers like petitioner petitioner ignores that if its exchange with security bank is recast as an exchange with treaty fields followed by treaty fields’s sale of wesleyan station the deemed exchange not only shifted treaty fields’s basis in the barnes noble corner to wesleyan station reducing the amount of gain deemed recognized by treaty fields but also subjected that gain to the 15-percent tax_rate on gain taxable to treaty fields’s members rather than the 34-percent tax_rate that petitioner would have incurred had it sold the property itself moreover petitioner’s supposition as to what tax petitioner might pay in the future on a supposed taxable sale of the barnes noble corner is too speculative for us to take into account as is petitioner’s fifth argument concerning a sec_754 election made following charles jones’s death we are not prepared to say that as a matter of law a finding of basis shifting precludes the absence of a principal purpose of tax_avoidance but in this case the immediate tax consequences resulting from petitioner’s deemed exchange with treaty fields included an approximately dollar_figure million reduction in taxable gain and the substitution of a 15-percent tax_rate for a 34-percent tax_rate the tax savings are plain and petitioner’s counterfactors are unconvincing or speculative petitioner has failed to convince us that tax_avoidance was not a principal purpose of the deemed exchange petitioner offers as a business reason for exchanging wesleyan station for the barnes noble corner that the exchange allowed petitioner to reunite ownership of the barnes noble corner with the rest of rivergate and yielded operating efficiencies and increased the overall value of the reunited property yet beyond self-serving testimony petitioner offers no evidence to support that claim we need not and do not accept that testimony see 121_tc_308 this court is not bound to accept a taxpayer's self-serving unverified and undocumented testimony moreover even had petitioner shown a legitimate business_purpose for the acquisition of the barnes noble corner that would not necessarily preclude a finding that either the deemed exchange of wesleyan station for the barnes noble corner or treaty fields’s deemed sale of wesleyan station had as a principal purpose the avoidance of federal_income_tax see sec_1031 c teruya bros distinguished petitioner argues that there is a critical difference between the transaction at bar and the transaction in 124_tc_45 petitioner did not structure the wesleyan station exchange with the intention of avoiding the purposes of sub sec_1031 petitioner argues that there was no prearranged plan for security bank to acquire the barnes noble corner and to exchange it with petitioner petitioner affirmatively planned all along to swap wesleyan station through a qualified_intermediary for new replacement_property owned by a completely unrelated third party apparently petitioner seeks to rely on a negative inference to be drawn from an example in the legislative_history of sec_1031 h rept is the report of the committee on the budget4 that accompanied h_r 101st cong 1st sess which as enacted became obra as stated obra sec_7601 added sec_1031 with respect to that addition the report provides the following example of a transaction that would violate sec_1031 i f a taxpayer pursuant to a prearranged plan transfers property to an unrelated party who then exchanges the property with a party related to the taxpayer within year sec_4 including as tit xi of the report from the committee on ways and means an explanation of the revenue provisions of the accompanying bill which among other things added sec_1031 of the previous transfer in a transaction otherwise qualifying under sec_1031 the related_party will not be entitled to nonrecognition treatment under sec_1031 h rept supra pincite petitioner seems to believe that the presence or absence of a prearranged plan is dispositive of a violation of sec_1031 petitioner insists that it unlike the taxpayer in teruya bros had no prearranged plan to use property from a related_person to complete a like-kind_exchange although we set forth the above example in teruya bros and although the taxpayer in that case did have a prearranged plan we did not make much of that fact indeed outside of the example we did not even use the phrase see teruya bros ltd subs v commissioner supra the example therefore is just that one of many transactions that will fall afoul of sec_1031 as stated supra in section ii e b of this report in considering whether petitioner’s actual exchange with security bank was part of a transaction or series of transactions structured to avoid the purposes of sec_1031 we must determine whether with respect to a hypothetical direct exchange of properties between petitioner and treaty fields followed by a hypothetical sale by treaty fields of the property received in 124_tc_45 we described the example as highly elliptical a commentator has said of it because of the way this example is drafted it appears not to make the point for which it is offered mandarino reconciling rulings on related_party like- kind exchanges real_estate taxn petitioner has shown the absence of a principal purpose of federal_income_tax avoidance even if petitioner convinced us that the actual exchange was not prearranged which it has not6 we would still need to determine the application to the hypothetical facts of the non-tax-avoidance exception of sec_1031 d conclusion petitioner has failed to prove that neither its deemed exchange of wesleyan station with treaty fields for the barnes noble corner nor treaty fields’s deemed sale of wesleyan station thereafter had as one of its principal purposes the avoidance of federal_income_tax while the uncontradicted testimony of petitioner’s witnesses is that at least initially petitioner planned to swap wesleyan station for property from an unrelated_person petitioner had turned its attention exclusively to the barnes noble corner by date the day it engaged security bank as qualified_intermediary and day before security bank sold wesleyan station on petitioner’s behalf indeed petitioner’s president dwight jones testified that the sec_1031 deadline of days after the transfer of relinquished_property to identify replacement_property is so short a period to negotiate price and to do due diligence that to identify and designate replacement_property within that period is just about impossible moreover on date days after petitioner relinquished wesleyan station it agreed to purchase the barnes noble corner from treaty fields taking into account dwight jones’s testimony about the time constraints imposed by sec_1031 that indicates to us that petitioner had sometime before that date identified the barnes noble corner as the replacement_property for wesleyan station we believe that on date the day security bank sold wesleyan station for petitioner petitioner had a prearranged plan for the barnes noble corner to be received in exchange and we so find conclusion the end result of petitioner’s exchange of wesleyan station with security bank for the barnes noble corner is the same as if petitioner had made an exchange of wesleyan station with treaty fields followed by treaty fields’s sale of wesleyan station petitioner has failed to show that the deemed transaction lacked as a principal purpose the avoidance of federal_income_tax therefore the actual exchange is part of a transaction structured to avoid the purposes of sec_1031 and under sec_1031 the nonrecognition provisions of sec_1031 do not apply to that exchange f conclusion we sustain the deficiency in tax respondent determined iii sec_6662 accuracy-related_penalty a applicable law sec_6662 provides for an accuracy-related_penalty equal to percent of the portion of any underpayment_of_tax attributable to among other things negligence or intentional disregard of rules or regulations without distinction negligence any substantial_understatement_of_income_tax or any substantial_valuation_misstatement see sec_6662 - although the notice states that respondent bases his imposition of a penalty of dollar_figure on one or more of those three grounds on brief he relies on only the first two of those grounds negligence and substantial_understatement_of_income_tax negligence has been defined as lack of due care or failure to do what a reasonably prudent person would do under like circumstances see eg 98_tc_695 it also includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws or to exercise ordinary and reasonable care in the preparation of a tax_return sec_1_6662-3 income_tax regs for corporations such as petitioner a substantial_understatement_of_income_tax exists if the amount of the understatement for the taxable_year exceeds the greater of percent of the tax required to be shown on the return for the taxable_year or dollar_figure sec_6662 sec_6664 provides that the accuracy-related_penalty shall not be imposed with respect to any portion of an underpayment if it is shown that there was reasonable_cause for that portion and the taxpayer acted in good_faith with respect to that portion further the determination of whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all pertinent facts and circumstances reliance on professional advice constitutes reasonable_cause and good_faith if under all the circumstances such reliance was reasonable and the taxpayer acted in good_faith sec_1_6664-4 income_tax regs see also sec_1_6664-4 income_tax regs reliance on opinion or advice b analysis there was a substantial_understatement of petitioner’s taxable_year income_tax within the meaning of sec_6662 mr pippin prepared petitioner’s form_1120 including the attached form_8824 which reported the exchange of wesleyan station for the barnes noble corner as a like-kind_exchange mr pippin is a c p a and a member of the largest accounting firm in the macon area and he and his firm have more experience representing real_estate developers than anyone else in macon dwight jones petitioner’s president had relied on mr pippin and his firm for tax_advice for many years dwight jones had great confidence in him and relied on him to prepare properly petitioner’s tax returns mr pippin was aware of all facts relevant to the exchange of wesleyan station for the barnes noble corner he was required to interpret sec_1031 in preparing petitioner’s return as our exposition of that section in 124_tc_45 and this report show that provision is not without its interpretative difficulties when petitioner filed its form_1120 we had not yet decided teruya bros granted respondent had issued a revenue_ruling revrul_2002_83 2002_2_cb_927 presaging the result in that case but we do not think that the ruling left the result free from doubt or that given the facts before him mr pippin made unreasonable legal assumptions we conclude that with respect to petitioner’s underpayment in tax attributable to its failure to report the gain it recognized on the exchange of wesleyan station for the barnes noble corner petitioner in relying on mr pippin to prepare properly its return had reasonable_cause for the underpayment and acted in good_faith and we so find c conclusion petitioner is not liable for the sec_6662 penalty respondent determined an appropriate decision will be entered for respondent


t c memo united_states tax_court larry r johnston petitioner v commissioner of internal revenue respondent docket no 5380-04l filed date p filed a petition for judicial review pursuant to sec_6320 and sec_6330 i r c in response to a determination by r to leave in place a filed notice_of_federal_tax_lien held because p has advanced solely groundless complaints in dispute of the notice of lien r’s determination to proceed with collection action is sustained held further damages under sec_6673 i r c are due from p and are awarded to the united_states in the amount of dollar_figure larry r johnston pro_se jonae a harrison for respondent memorandum opinion wherry judge this case is before the court on respondent’s motion for summary_judgment pursuant to rule and to impose a penalty under sec_6673 the instant proceeding arises from a petition for judicial review filed in response to a notice_of_determination concerning collection action s under sec_6320 and or the issues for decision are whether respondent may proceed with collection action as so determined and whether the court should impose a penalty under sec_6673 background petitioner did not file a federal_income_tax return for the taxable years or respondent prepared substitutes for return and on date issued to petitioner notices of deficiency with respect to each of the years through the notices were addressed to petitioner pincite east harmony mesa arizona petitioner’s last_known_address and the current address reflected on his tax_court petition petitioner responded to the notices with a letter dated date referencing inter alia attempts by the unless otherwise indicated all section references are to the internal_revenue_code_of_1986 as amended and all rule references are to the tax_court rules_of_practice and procedure internal_revenue_service irs to circumvent taxpayers’ rights by prompting them to petition the u s tax_court petitioner at no time petitioned this court for redetermination of the amounts reflected in the notices respondent assessed the tax additions to tax and interest amounts due for each year on date these assessments for the years in issue totaled dollar_figure respondent also sent notices of balance due with respect to each year on february and date on date respondent issued to petitioner a final notice - final notice_of_intent_to_levy and notice of your right to a hearing with respect to his unpaid income_tax liabilities for through respondent then on date issued to petitioner a notice_of_federal_tax_lien filing and your right to a hearing under sec_6320 a form request for a collection_due_process_hearing signed by petitioner on date was apparently received by the irs on date petitioner checked boxes on the form indicating disagreement with both a filed notice_of_federal_tax_lien and a notice_of_levy seizure he also apparently attached a neither the letter sent by petitioner in response to the notices of deficiency nor the attachment to his form request for a collection_due_process_hearing has been made a part of the record in this case information regarding the existence and contents of these documents is derived from excerpts quoted in the notice_of_determination concerning collection action s under sec_6320 and or petitioner has not alleged that the notice_of_determination is in any way inaccurate in its recitation of such background information statement setting forth frivolous arguments eg there is no statute requiring me ‘to pay’ the income taxes at issue settlement officer thomas l tracy mr tracy of the irs office of appeals in phoenix arizona sent petitioner a letter dated date scheduling a hearing for date the letter briefly outlined the hearing process advised that audio or stenographic recording of hearings was not allowed and explained the circumstances in which challenges to the underlying liability would be barred by sec_6330 the letter also warned petitioner with respect to frivolous arguments and sanctions therefor citing pertinent cases and administrative materials mr tracy enclosed with the letter copies of among other things transcripts of petitioner’s accounts financial forms for petitioner’s completion and 115_tc_576 discussing the potential application of penalties where tax protesters persist in bringing frivolous cases to this court the hearing was subsequently rescheduled for date and a face-to-face conference between petitioner and mr tracy was held on that date following the hearing respondent on date issued to petitioner the aforementioned notice_of_determination concerning collection action s under sec_3 see supra note and or sustaining the lien action an attached collection_due_process appeals case memorandum addressed the verification of legal and procedural requirements the issues raised by the taxpayer and the balancing of efficient collection and intrusiveness in light of the frivolous nature of the arguments advanced by petitioner the attachment also contained a litigation note reading in part as follows at the hearing on date the taxpayer acknowledged receipt of the documents sent with the appointment letter i gave him another copy of pierson and again warned him of the potential for sanctions upon frivolous_litigation petitioner’s petition disputing the notice_of_determination was filed with the court on date the petition makes two assignments of error vis-a-vis respondent’s determination a error in failing to produce evidence that the commissioner certified and transmitted the supplemental assessments list in accordance with sec_6204 b error in failing to prove actual mailing of the notice of assessment upon the petitioner’s denial of receipts of the notice of assessment petitioner prays that this court issue an order requiring respondent to show cause why the determination should not be the notice_of_determination concerning collection action s under sec_6320 and or also explained that because petitioner’s form was untimely with respect to the notice_of_intent_to_levy petitioner was entitled only to an equivalent_hearing which is not subject_to judicial review the resultant decision was that the proposed levy action should be sustained vacated find the determination arbitrary capricious not supported by the evidence and unreasonable vacate the date determination award petitioner costs and fees incurred in the prosecution of this action and afford such other relief as the court deems just and proper after the pleadings were closed in this case respondent on date filed the subject motion for summary_judgment and to impose a penalty petitioner filed a response objecting to respondent’s motion on date in the response petitioner focuses on contentions that respondent’s failure to permit recording of the hearing necessitates a remand and that his allegations and supporting affidavit of nonreceipt of the notice of assessment require respondent to produce evidence of proof of mailing discussion rule a allows a party to move for a summary adjudication in the moving party’s favor upon all or any part of the legal issues in controversy rule b directs that a decision on such a motion shall be rendered if the pleadings answers to interrogatories depositions admissions and any other acceptable materials together with the affidavits if any the court notes that to the extent that the petition seeks reasonable administrative and or litigation costs pursuant to sec_7430 any such claim is premature and will not be further addressed see rule show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law the moving party bears the burden of demonstrating that no genuine issue of material fact exists and that he or she is entitled to judgment as a matter of law 98_tc_518 affd 17_f3d_965 7th cir facts are viewed in the light most favorable to the nonmoving party id however where a motion for summary_judgment has been properly made and supported by the moving party the opposing party may not rest upon mere allegations or denials contained in that party’s pleadings but must by affidavits or otherwise set forth specific facts showing that there is a genuine issue for trial rule d i collection actions a general rules sec_6321 imposes a lien in favor of the united_states upon all property and rights to property of a taxpayer where there exists a failure to pay any_tax liability after demand for payment the lien generally arises at the time assessment is made sec_6322 sec_6323 however provides that such lien shall not be valid against any purchaser holder of a security_interest mechanic’s_lienor or judgment lien creditor until the secretary files a notice of lien with the appropriate public officials sec_6320 then sets forth procedures applicable to afford protections for taxpayers in lien situations sec_6320 establishes the requirement that the secretary notify in writing the person described in sec_6321 of the filing of a notice of lien under sec_6323 this notice required by sec_6320 must be sent not more than business days after the notice of tax_lien is filed and must advise the taxpayer of the opportunity for administrative review of the matter in the form of a hearing before the internal_revenue_service office of appeals sec_6320 and sec_6320 and c grants a taxpayer who so requests the right to a fair hearing before an impartial appeals officer generally to be conducted in accordance with the procedures described in sec_6330 d and e sec_6330 addresses the matters to be considered at the hearing sec_6330 matters considered at hearing --in the case of any hearing conducted under this section-- requirement of investigation --the appeals officer shall at the hearing obtain verification from the secretary that the requirements of any applicable law or administrative procedure have been met issues at hearing -- a in general --the person may raise at the hearing any relevant issue relating to the unpaid tax or the proposed levy including-- i appropriate spousal defenses ii challenges to the appropriateness of collection actions and iii offers of collection alternatives which may include the posting of a bond the substitution of other assets an installment_agreement or an offer-in-compromise b underlying liability --the person may also raise at the hearing challenges to the existence or amount of the underlying tax_liability for any_tax period if the person did not receive any statutory_notice_of_deficiency for such tax_liability or did not otherwise have an opportunity to dispute such tax_liability once the appeals officer has issued a determination regarding the disputed collection action sec_6330 allows the taxpayer to seek judicial review in the tax_court or a district_court depending upon the type of tax in considering whether taxpayers are entitled to any relief from the commissioner’s determination this court has established the following standard of review where the validity of the underlying tax_liability is properly at issue the court will review the matter on a de novo basis however where the validity of the underlying tax_liability is not properly at issue the court will review the commissioner’s administrative determination for abuse_of_discretion 114_tc_604 b analysi sec_1 appeals hearing the petition emphasizes petitioner’s claim that he was denied the collection hearing to which he was entitled and seeks a remand to appeals in order to allow a conference to be held relevant caselaw precedent and regulatory authority however indicate that the circumstances here are not such as to render remand appropriate hearings conducted under sec_6320 and sec_6330 are informal proceedings not formal adjudications 115_tc_329 115_tc_35 there exists no right to subpoena witnesses or documents in connection with these hearings 118_tc_365 affd 329_f3d_1224 11th cir 118_tc_162 davis v commissioner supra pincite taxpayers are entitled to be offered a face-to-face hearing at the appeals_office nearest their residence where the taxpayer declines to participate in a proffered face-to-face hearing hearings may also be conducted telephonically or by correspondence katz v commissioner supra pincite dorra v commissioner tcmemo_2004_16 sec_301_6330-1 q a-d6 and d7 proced admin regs furthermore once a taxpayer has been given a reasonable opportunity for a hearing but has failed to avail himself or herself of that opportunity we have approved the making of a determination to proceed with collection based on the appeals officer’s review of the case file see eg taylor v commissioner tcmemo_2004_25 leineweber v commissioner tcmemo_2004_17 armstrong v commissioner tcmemo_2002_ gougler v commissioner tcmemo_2002_185 mann v commissioner tcmemo_2002_48 thus a face-to-face meeting is not invariably required regulations promulgated under sec_6320 and sec_6330 likewise incorporate many of the foregoing concepts as follows q-d6 how are cdp hearings conducted a-d6 cdp hearings are informal in nature and do not require the appeals officer_or_employee and the taxpayer or the taxpayer’s representative to hold a face-to-face meeting a cdp hearing may but is not required to consist of a face- to-face meeting one or more written or oral communications between an appeals officer_or_employee and the taxpayer or the taxpayer’s representative or some combination thereof q-d7 if a taxpayer wants a face-to-face cdp hearing where will it be held a-d7 the taxpayer must be offered an opportunity for a hearing at the appeals_office closest to taxpayer’s residence or in the case of a business taxpayer the taxpayer’s principal_place_of_business if that is not satisfactory to the taxpayer the taxpayer will be given an opportunity for a hearing by correspondence or by telephone if that is not satisfactory to the taxpayer the appeals officer_or_employee will review the taxpayer’s request for a cdp hearing the case file any other written communications from the taxpayer including written communications if any submitted in connection with the cdp hearing and any notes of any oral communications with the taxpayer or the taxpayer’s representative under such circumstances review of those documents will constitute the cdp hearing for the purposes of sec_6330 sec_301_6330-1 q a-d6 and d7 proced admin regs see also sec_301_6320-1 q a-d6 and d7 proced admin regs nearly identical language except for final reference to sec_6320 this court has cited the above regulatory provisions with approval see eg taylor v commissioner supra leineweber v commissioner supra dorra v commissioner supra gougler v commissioner supra with respect to the instant matter the record reflects that petitioner and mr tracy participated in a face-to-face hearing on date as regards petitioner’s complaints concerning recording on date this court issued 121_tc_8 in which it was held that taxpayers are entitled pursuant to sec_7521 to audio record sec_6330 hearings the taxpayer in that case had refused to proceed when denied the opportunity to record and we remanded the case to allow a recorded appeals hearing id in contrast we have distinguished and declined to remand cases where the administrative proceedings took place prior to our opinion in keene v commissioner supra where the taxpayer had participated in an appeals_office hearing albeit unrecorded and where all issues raised by the taxpayer could be properly decided from the existing record e g id pincite frey v commissioner tcmemo_2004_87 durrenberger v commissioner tcmemo_2004_44 brashear v commissioner tcmemo_2003_ kemper v commissioner tcmemo_2003_195 stated otherwise cases will not be remanded to appeals nor determinations otherwise invalidated merely on account of the lack of a recording when to do so is not necessary and would not be productive see eg frey v commissioner supra durrenberger v commissioner supra brashear v commissioner supra kemper v commissioner supra see also 117_tc_183 a principal scenario falling short of the necessary or productive standard exists where the taxpayers rely on frivolous or groundless arguments consistently rejected by this and other courts see eg frey v commissioner supra brashear v commissioner supra kemper v commissioner supra here because the contentions advanced by petitioner throughout the administrative process and before the court are of this nature and because petitioner in fact received an in-person conference this case is closely analogous to those just cited the record does not indicate that any purpose would be served by remand we conclude that all pertinent issues relating to the propriety of the collection determination can be decided through review of the materials before us review of underlying liabilities statutory notices of deficiency for and were issued to petitioner petitioner has at no time alleged that he did not receive these notices and the record indicates that petitioner sent communications referencing the notices making clear that these documents were received hence because petitioner received valid notices of deficiency and did not timely petition for redetermination he is precluded under sec_6330 from disputing his underlying tax_liabilities in this proceeding any remaining contentions raised during the administrative proceedings generally challenging the existence of any statute imposing or requiring him to pay income_tax warrant no further comment see 737_f2d_1417 5th cir we perceive no need to refute these arguments with somber reasoning and copious citation of precedent to do so might suggest that these arguments have some colorable merit review for abuse_of_discretion petitioner has also made various arguments relating to aspects of the assessment and collection procedures that we review for abuse_of_discretion action constitutes an abuse_of_discretion under this standard where arbitrary capricious or without sound basis in fact or law 112_tc_19 federal tax assessments are formally recorded on a record of assessment in accordance with sec_6203 the commissioner is not required to use form 23c in making an assessment roberts v commissioner t c pincite furthermore sec_6330 mandates neither that the appeals officer rely on a particular document in satisfying the verification requirement nor that the appeals officer actually give the taxpayer a copy of the verification upon which he or she relied 119_tc_252 nestor v commissioner t c pincite a form_4340 for instance constitutes presumptive evidence that a tax has been validly assessed pursuant to sec_6203 davis v commissioner t c pincite and cases cited thereat consequently absent a showing by the taxpayer of some irregularity in the assessment procedure that would raise a question about the validity of the assessments a form_4340 reflecting that tax_liabilities were assessed and remain unpaid is sufficient to support collection action under sec_6330 id pincite we have specifically held that it is not an abuse_of_discretion for an appeals officer to rely on form_4340 nestor v commissioner supra pincite davis v commissioner supra pincite or a computer transcript of account schroeder v commissioner tcmemo_2002_190 mann v commissioner tcmemo_2002_48 to comply with sec_6330 here the record contains forms for and indicating that assessments were made for the year and that taxes remain unpaid petitioner has cited no irregularities that would cast doubt on the information recorded thereon in addition to the specific dictates of sec_6330 the secretary upon request is directed to furnish to the taxpayer a copy of pertinent parts of the record of assessment setting forth the taxpayer’s name the date of assessment the character of the liability assessed the taxable_period if applicable and the amounts assessed sec_6203 sec_301_6203-1 proced admin regs a taxpayer receiving a copy of form_4340 has been provided with all the documentation to which he or she is entitled under sec_6203 and sec_301_6203-1 proced admin regs roberts v commissioner supra pincite n this court likewise has upheld collection action where taxpayers were provided with literal transcripts of account so-called mftrax see eg frank v commissioner tcmemo_2003_88 swann v commissioner tcmemo_2003_70 the date letter to petitioner from mr tracy enclosed copies of transcripts of account for the relevant years furthermore petitioner’s argument with regard to sec_6204 is groundless sec_6204 addresses supplemental assessments and specifies the secretary may at any time within the period prescribed for assessment make a supplemental assessment whenever it is ascertained that any assessment is imperfect or incomplete in any material respect sec_6204 renders supplemental assessment of deficiencies subject_to the restrictions of sec_6213 sec_6204 has no bearing here in that respondent assessed petitioner’s liabilities for each year in issue on date after following standard deficiency procedures the court concludes that petitioner’s complaints regarding the assessments or verification are meritless petitioner has denied receiving the notice of assessment apparently referring to the notice_and_demand for payment that sec_6303 establishes should be given within days of the making of an assessment however a notice of balance due constitutes a notice_and_demand for payment within the meaning of sec_6303 craig v commissioner supra pincite the forms indicate that petitioner was sent such notices of balance due for each of the tax years involved petitioner argues that his sworn denial of receipt of the notice of assessment shifts to respondent the burden of proving actual mailing of these notices yet petitioner has never addressed much less denied receipt of the notices of balance due reflected in the forms accordingly he has raised no genuine issue of material fact as to the accuracy of the forms showing compliance with the pertinent statutory requirements thus with respect to those issues enumerated in sec_6330 and subject_to review in collection proceedings for abuse_of_discretion petitioner has not raised any spousal defenses valid challenges to the appropriateness of the collection action or collection alternatives as this court has noted in earlier cases rule b states that a petition for review of a collection action shall contain clear and concise assignments of each and every error alleged to have been committed in the notice_of_determination and that any issue not raised in the assignments of error shall be deemed conceded see lunsford v commissioner t c pincite 114_tc_176 for completeness we have addressed various points advanced by petitioner during the administrative process but the items listed in sec_6330 were not pursued even during those proceedings accordingly the court concludes that respondent’s determination to proceed with collection of petitioner’s tax_liabilities was not an abuse_of_discretion the court will grant respondent’s motion for summary_judgment to the extent that petitioner in his response to respondent’s motion argues that summary_judgment should be granted sua sponte in his favor as the nonmoving party any such action would be unwarranted for the reasons discussed in the text ii sec_6673 penalty sec_6673 authorizes the court to require the taxpayer to pay a penalty not in excess of dollar_figure when it appears to the court that inter alia proceedings have been instituted or maintained by the taxpayer primarily for delay or that the taxpayer’s position in such proceeding is frivolous or groundless in pierson v commissioner t c pincite we warned that taxpayers abusing the protections afforded by sec_6320 and sec_6330 through the bringing of dilatory or frivolous lien or levy actions will face sanctions under sec_6673 we have since repeatedly disposed of cases premised on arguments akin to those raised herein summarily and with imposition of the sec_6673 penalty see eg craig v commissioner t c pincite and cases cited thereat with respect to the instant matter we are convinced that petitioner instituted this proceeding primarily for delay throughout the administrative and pretrial process petitioner advanced contentions and demands previously and consistently rejected by this and other courts he submitted lengthy communications quoting citing using out of context and otherwise misapplying portions of the internal_revenue_code regulations court decisions and other authorities moreover petitioner has explicitly been alerted to pierson v commisssioner supra and use of sanctions in analogous situations it is inappropriate that taxpayers who promptly pay their taxes should have the cost of government and tax collection improperly increased by frivolous arguments already fully considered and rejected by the courts hence petitioner received fair warning but has persisted in disputing respondent’s determination the court concludes that a sec_6673 penalty of dollar_figure should be awarded to the united_states in this case to reflect the foregoing an appropriate order granting respondent’s motion and decision for respondent will be entered


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b03-plr-101874-02 date date legend company q1 q2 a b d1 d2 d3 dear this letter responds to a letter dated date and subsequent correspondence submitted on behalf of p requesting a ruling under sec_301_9100-3 of the procedure and administration regulations that p be granted an extension of time to elect to treat q1 and q2 as qualified subchapter_s subsidiaries effective d2 and d3 respectively facts according to the information submitted company was formed on d1 on that date a and b the shareholders of company elected s_corporation status for company next a and b met with a tax professional and developed a plan to create several wholly owned subsidiary entities under company on d2 company formed q1 for the purpose of carrying on certain aspects of company’s business operations on d3 company formed q2 for the purpose of carrying on other aspects of company’s business operations a and b intended that company would elect effective d2 to treat q1 as a qualified_subchapter_s_subsidiary under sec_1361 of the internal_revenue_code similarly a and b intended that company would elect effective d3 to treat q2 as a qualified_subchapter_s_subsidiary under sec_1361 a and b hired another tax professional to prepare the proper forms for company to elect qualified_subchapter_s_subsidiary treatment under sec_1361 the tax professional inadvertently failed to file the proper forms to have q1 and q2 classified as qualified subchapter_s subsidiaries sec_1362 generally provides that a small_business_corporation may elect to be an s_corporation law sec_1361 defines a qualified_subchapter_s_subsidiary as a domestic_corporation which is not an ineligible_corporation if percent of the stock of the corporation is owned by the s_corporation and the s_corporation elects to treat the corporation as a qualified_subchapter_s_subsidiary sec_1_1361-3 prescribes the time and manner for making an election to be classified a qualified_subchapter_s_subsidiary sec_1_1361-3 of the income_tax regulations provides that an election to treat an eligible subsidiary as a qualified_subchapter_s_subsidiary may be effective up to two months and days prior to the date the election is filed or not more than months after the election is filed under sec_301_9100-1 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 e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose deadline is prescribed by a regulation published in the federal_register sec_301_9100-1 through 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 sec_301_9100-3 provides 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 interests of the government conclusion based on the facts submitted and representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied accordingly company is granted an extension of time of days from the date of this letter to file a form_8869 qualified_subchapter_s_subsidiary for each of q1 and q2 electing to treat q1 and q2 as qualified subchapter_s subsidiaries effective d2 in the case of q1 and effective d3 in the case of q2 a copy of this letter should be attached to each form_8869 except for the specific rulings above we express or imply no opinion concerning the federal_income_tax consequences of the facts of this case under any other provision of the internal_revenue_code this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely s heather maloy associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copies of this letter cc


internal_revenue_service department of the treasury number release date index no p o box ben franklin station washington dc person to contact telephone number refer reply to cc psi -- plr-159276-02 date february taxpayer state a company a service_center division generator state b company b company c legend company d facility date date a b c d dear this letter responds to taxpayer’s letter dated date requesting certain rulings under sec_118 and sec_61 of the internal_revenue_code the facts as represented by taxpayer and generator are as follows facts taxpayer a state a corporation is a regulated utility engaged in the business of transmitting and distributing electrical energy to wholesale and retail customers in state a taxpayer is a wholly owned subsidiary of company a and joins with company a and various affiliates in filing a consolidated federal_income_tax return at service_center taxpayer is under the audit jurisdiction of division generator is a state b limited_liability_company generator is a disregarded_entity for federal_income_tax purposes and is wholly owned by another disregarded_entity company b company b is wholly owned by company c company c files a consolidated_return as a member of a consolidated_group of which company d is the parent taxpayer is required pursuant to federal energy regulatory commission ferc orders to accommodate any request from an independent power producer to interconnect a generating facility to taxpayer’s transmission system however any costs incurred to complete the interconnection or perform system upgrades must be paid or deposited by the interconnecting independent power producer ferc policy requires taxpayer to refund amounts deposited for system upgrades in the form of transmission credits generator is an independent power producer that has proposed to construct own and operate facility on property adjacent to taxpayer’s electricity transmission system facility will be comprised of a combined cycle plant consisting of two combustion turbines and one steam turbine and have an estimated aggregate net generating capacity of approximately megawatts facility is presently scheduled to enter commercial operations on or about date and is expected to have a useful_life of approximately years prior to facility’s operation generator will seek a determination from ferc that facility will be an exempt wholesale generator within the meaning of sec_32 of the public_utility holding_company act of and will not be a qualifying_facility under sec_3 of the federal power act as amended by the public_utility regulatory policies act of purpa in order to sell the power produced at facility generator requested interconnection to taxpayer’s transmission system taxpayer and generator executed an amended and restated interconnection agreement the ia which was accepted by ferc on date and which sets forth the parties’ agreements about how generator will interconnect facility with taxpayer’s grid and following interconnection parallel operation of facility with taxpayer’s transmission system the ia is hereby incorporated and made part of this ruling the ia shall continue in force and effect for a period of a years or until retirement of the facility whichever is shorter the ia requires generator to bear the cost of construction of certain company interconnection facilities which will be constructed and owned by taxpayer the estimated cost of construction of the company interconnection facilities is dollar_figureb in addition generator at its expense is required to construct a kv switching station the station upon completion generator will transfer title to the station to taxpayer the estimated cost of the station is dollar_figurec the company interconnection facilities and the station together comprise the interconnection facilities in addition to the interconnection facilities taxpayer will make certain upgrades to taxpayer’s transmission system reasonably necessary to remedy short circuit and stability problems caused by generator’s interconnection and to accommodate the load from facility generator is required to deposit the cost of these system upgrades estimated at dollar_figured with taxpayer the ia and ferc policy require taxpayer to refund the costs of the system upgrades to generator either in the form of transmission credits or cash in accordance with ferc policy sec_3_7 of the ia under the open access transmission the ia defines system upgrades as the minimum necessary local and network upgrades that would not have been required but for the interconnection of the facility to the company transmission system including i system upgrades necessary to remove overloads and ii system upgrades necessary to remedy short-circuit or stability problems resulting from the connection of the facility to the network as such facilities are so designed and described in appendix a ia at sec_1 tariff provides that as taxpayer receives transmission service revenue from power produced at facility generator or its assignee shall receive a credit on a dollar-for- dollar basis against the cost of transmission service as indicated by taxpayer pursuant to ferc policy taxpayer must pay interest on transmission credits or cash refunds under the ia if the amounts paid for the system upgrades are not refunded within months of the date facility commences commercial operations taxpayer must refund to generator in cash any remaining costs within days assuming that taxpayer is required to pay interest under c f_r sec_35 19a a on the payments from generator the amount of interest payable is based on the average prime rate for each calendar_quarter compounded quarterly title to the net output of power produced at facility will be transferred to generator’s power customers before it enters taxpayer’s transmission system and generator will not take transmission service from taxpayer generator’s customer s will be responsible for purchasing transmission service from taxpayer under taxpayer’s oatt because generator will not take any transmission service from taxpayer generator will either i assign for consideration all or a portion of the transmission credit to its power customer s whereby such customer s will be entitled to use the credit to offset transmission service charges owed to taxpayer or ii receive a cash refund directly from taxpayer in any event taxpayer will be required to refund of the costs of the system upgrades either in the form of transmission credits to generator’s power customer s or to generator in cash based on generator’s projections it is reasonably certain that during the first ten taxable years of the utility beginning with the year the property transferred is placed_in_service less than two percent of the projected total power flowing over the intertie will flow back to facility in addition no component of the interconnection facilities is needed solely for the transmission of power from taxpayer to generator taxpayer makes the following additional representations none of the costs for the interconnection facilities will be included in taxpayer’s rate base in light of all the information available to it taxpayer is reasonably certain that during the first ten taxable years of the utility beginning with the year the interconnection facilities are placed_in_service no more than five percent of the projected total power flowing over the interconnection facilities will flow back to facility and no part of the interconnection facilities is necessary solely for the transmission of electricity from taxpayer or any third the oatt is defined under the ia as the open access transmission tariff under which taxpayer offers non-discriminatory open access transmission service over the taxpayer transmission system as filed with ferc and as amended or supplemented from time to time or any successor tariff ia at sec_1 taxpayer was required by ferc to pay interest pusuant to cfr sec_35 19a a iii on transmission credits under its interconnection procedures with a different generator see party to generator generator has represented to taxpayer that title to the net output of power produced at facility will pass to generator’s power customer s prior to entering taxpayer’s transmission system taxpayer will not take any depreciation or amortization deductions with respect to the interconnection facilities in addition generator represents that it will amortize the total cost of the interconnection facilities as an intangible asset to be recovered using the straight-line method over a useful_life of twenty years ruling requested taxpayer requests the internal_revenue_service to rule that the transfer by generator to taxpayer of the interconnection facilities is not a contribution_in_aid_of_construction ciac under sec_118 and is excludable from taxpayer’s gross_income as a nonshareholder contribution_to_capital under sec_118 the amounts deposited by generator with taxpayer for the construction of the system upgrades constitute a loan or a refundable deposit not includable in taxpayer’s gross_income under sec_61 law and analysis issue sec_61 and sec_1_61-1 of the income_tax regulations provide that gross_income means all income from whatever source derived unless excluded by law sec_118 provides that in the case of a corporation gross_income does not include any contribution_to_the_capital_of_the_taxpayer sec_118 provides that for purposes of subsection a except as provided in subsection c the term contribution_to_the_capital_of_the_taxpayer does not include any ciac or any other contribution as a customer or potential customer sec_1_118-1 of the income_tax regulations provides in part that sec_118 also applies to contributions to capital made by persons other than shareholders for example the exclusion applies to the value of land or other_property contributed to a corporation by a governmental_unit or by a civic group for the purpose of enabling the corporation to expand its operating facilities however the exclusion does not apply to any money or property transferred to the corporation in consideration for goods or services rendered or to subsidies paid to induce the taxpayer to limit production notice_88_129 1988_2_cb_541 as modified and amended by notice_90_60 1990_2_cb_345 and notice_2001_82 2001_2_cb_619 provide specific guidance with respect to the treatment of transfers of property to regulated public_utilities by qualifying small power producers and qualifying cogenerators collectively qualifying facilities as defined in sec_3 of the federal power act as amended by section of purpa notice_88_129 provides in part that with respect to transfers made by a qualifying_facility to a utility exclusively in connection with the sale of electricity by the qualifying_facility to the utility a utility will not realize income upon transfer of an intertie by a qualifying_facility an intertie may include new connecting and transmission facilities or modifications upgrades or relocations of a utility’s existing transmission network the possibility that an intertie may be used to transmit power to a utility that will in turn transmit the power across its transmission network for sale by the qualifying_facility to another utility wheeling will not cause the contribution to be treated as a ciac further the notice provides in part that a transfer from a qualifying_facility to a utility will not be treated as a qualifying_facility transfer qf transfer under this notice to the extent the intertie is included in the utility’s rate base moreover a transfer of an intertie to a utility will not be treated as a qf transfer under this notice if the term of the power purchase contract is less than ten years notice_88_129 also provides in part that a utility that constructs an intertie in exchange for a cash payment from a qualifying_facility pursuant to a purpa contract will be deemed to construct the property under contract and will recognize income from the construction in the same manner as any other taxpayer constructing similar_property under contract subsequent to the construction of the property the qualifying_facility will be deemed to transfer the property to the utility in a qf transfer that will be treated in exactly the same manner as an in-kind qf transfer notice_2001_82 amplifies and modifies notice_88_129 notice_2001_82 extends the safe_harbor provisions of notice_88_129 to include transfers of interties from non- qualifying facilities and transfers of interties used exclusively or in part to transmit power over the utility’s transmission grid for sale to consumers or intermediaries wheeling the notice requires that ownership of the electricity wheeled passes to the purchaser prior to its transmission on the utility’s transmission grid this ownership requirement is deemed satisfied if title passes at the busbar on the generator’s end of the intertie further notice_2001_82 provides that a long-term interconnection agreement in lieu of a long-term power purchase contract may be used to satisfy the safe_harbor provisions of notice_88_129 in wheeling transactions finally notice_2001_82 requires that the generator must capitalize the cost of the property transferred as an intangible asset and recovered using the straight-line method over a useful_life of years in the instant case the transfer of the interconnection facilities is subject_to the guidance set forth in notice_88_129 notice_90_60 and notice_2001_82 for the following reasons facility is a stand-alone generator as contemplated under notice_2001_82 generator and taxpayer have entered into a long-term interconnection agreement with a term of a years or until retirement of facility whichever is shorter the interconnection facilities will be used in connection with the transmission of electricity for sale to third parties wheeling the cost of the interconnection facilities will not be included in taxpayer’s rate base taxpayer will not claim a tax basis in the interconnection facilities based on all available information during the ten taxable years beginning with the year in which the interconnection facilities are placed_in_service taxpayer is reasonably certain that no more than five percent of the total power that flows over the interconnection facilities will flow to generator ownership of the electricity sold will pass from generator to its customer s prior to its transmission on taxpayer’s transmission system and the cost of the interconnection facilities will be capitalized by generator as an intangible asset and recovered using the straight-line method over a useful_life of years thus we conclude that the deemed contribution of the interconnection facilities by generator to taxpayer meets the safe_harbor requirements of notice_88_129 as amended and modified by notice_90_60 and notice_2001_82 next we must decide whether the transfer qualifies as a contribution_to_capital under sec_118 the legislative_history of sec_118 provides in part as follows this sec_118 in effect places in the code the court decisions on the subject it deals with cases where a contribution is made to a corporation by a governmental_unit chamber of commerce or other association of individuals having no proprietary interest in the corporation in many such cases because the contributor expects to derive indirect benefits the contribution cannot be called a gift yet the anticipated future_benefits may also be so intangible as to not warrant treating the treating the contribution as a payment for future services s rep no 83d cong 2d sess in 319_us_98 the court held that payments by prospective customers to an electric utility company to cover the cost of extending the utility’s facilities to their homes were part of the price of service rather than contributions to capital the case concerned customers’ payments to a utility company for the estimated cost of constructing service facilities primary power lines that the utility company otherwise was not obligated to provide the customers intended no contribution to the company’s capital later in 339_us_583 the court held that money and property contributions by community groups to induce a shoe company to locate or expand its factory operations in the contributing communities were nonshareholder contributions to capital the court reasoned that when the motivation of the contributors is to benefit the community at large and the contributors do not anticipate any direct benefit from their contributions the contributions are nonshareholder contributions to capital id pincite plr-159276-02 finally in 412_us_401 the court in determining whether a taxpayer was entitled to depreciate the cost of certain facilities that had been funded by the federal government held that the governmental subsidies were not contributions to the taxpayer’s capital the court recognized that the holding in detroit edison co had been qualified by its decision in brown shoe co the court in chicago burlington quincy r r co found that the distinguishing characteristic between those two cases was the differing purpose motivating the respective transfers in brown shoe co the only expectation of the contributors was that such contributions might prove advantageous to the community at large thus in brown shoe co since the transfers were made with the purpose not of receiving direct services or recompense but only of obtaining advantage for the general community the result was a contribution_to_capital the court in chicago burlington quincy r r co also stated that there were other characteristics of a nonshareholder contribution_to_capital implicit in detroit edison co and brown shoe co from these two cases the court distilled some of the characteristics of a nonshareholder contribution_to_capital under both the and codes first the payment must become a permanent part of the transferee’s working_capital structure second it may not be compensation such as a direct payment for a specific quantifiable service provided for the transferor by the transferee third it must be bargained for fourth the asset transferred foreseeably must benefit the transferee in an amount commensurate with its value fifth the asset ordinarily if not always will be employed in or contribute to the production of additional income and its value assured in that respect chicago burlington quincy railroad co u s pincite the proposed transfer of the interconnection facilities by generator to taxpayer possesses the characteristics of a nonshareholder contribution_to_capital as described in chicago burlington quincy railroad co first the interconnection facilities will become a permanent part of the taxpayer’s transmission system second the transfer is not compensation_for services provided for generator by taxpayer because generator will not receive transmission services of any kind from taxpayer third the transfer is a bargained-for-exchange because taxpayer and generator entered into the necessary agreements willingly and at arm’s length fourth the transfer will foreseeably result in a benefit to taxpayer commensurate with its value because the interconnection facilities will become a part of taxpayer’s transmission system fifth the interconnection facilities will be used by taxpayer in its trade_or_business for producing gross_income therefore taxpayer’s receipt from generator of the interconnection facilities will be a contribution_to_capital under sec_118 issue finally we must determine whether the amounts deposited by generator with taxpayer for the construction of the system upgrades constitute a loan or a refundable deposit not includable in taxpayer’s gross_income under sec_61 plr-159276-02 at issue is whether the loan from generator to taxpayer is a bona_fide loan generally for federal_income_tax purposes a loan is defined as a legally enforceable obligation arising from a debtor-creditor relationship to pay a fixed or determinable sum of money no debt exists without a legal and enforceable obligation to repay the existence of a debtor-creditor relationship is determined by examining the subjective intent of the parties and all relevant objective facts and circumstances pertinent to the advances no one fact is determinative in determining the existence of bona_fide debt courts have examined whether the promise was evidenced by a note or other evidence_of_indebtedness interest was charged a fixed schedule for repayments was set forth in the instrument or by agreement security or other collateral was given to insure repayment repayments were made the borrower was not insolvent at the time the advance was made and the parties otherwise acted in reliance that such transfer was a loan in the instant case no formal note is executed and no security or other collateral has been provided to insure repayment however interest is charged on taxpayer’s obligation courts have sustained the federal tax treatment of transactions as bona_fide loans even in the absence of these formalities however in the instant case taxpayer has a legal and enforceable obligation to repay generator for the amounts advanced no later the end of the month after the commercial operation date of facility under existing case law the contingency of repayment standing alone does not see for example sec_1_166-1 of the income_tax regulations see 17_tc_973 see goldstein v commissioner 40_tcm_752 see goldstein supra see also 262_f2d_512 2nd cir 398_f2d_694 3rd cir taxpayer relies on current ferc policy in finding that interest should be paid to generator for_the_use_of generator’s advances see requiring taxpayer to pay interest pursuant to cfr sec_35 19a a iii on transmission credits under its interconnection procedures see for example miller v commissioner 41_tcm_139 johnson v commissioner 38_tcm_17 and ravano v commissioner 26_tcm_793 plr-159276-02 always invalidate a loan for tax purposesdollar_figure although payments on the loan are contingent the loan’s principal is contingent only with respect to timing not amountdollar_figure treating the amount advanced by generator to taxpayer as a loan is consistent with case law dealing with the taxation of deposits when there is an obligation to repay at the time a payment is advanced the payment generally does not constitute taxable_income to the recipient the court in 493_us_203 110_sct_589 stated that in determining whether a payment is taxable as income upon receipt or rather is a nontaxable item such as a deposit depends upon the parties' rights and obligations at the time the payments are madedollar_figure the court noted that indianapolis power and light co 's ipl deposits were acquired subject_to an express obligation to repay either at the time service was terminated or at the time a customer established good credit the utility's unconstrained use of the deposits for an interim period was not crucial in deciding whether ipl had complete dominion over the deposits the crucial factor was whether ipl had some guarantee that it would be allowed to keep the money the court held that ipl's dominion over the deposits was insufficient to classify the deposits as income see 720_f2d_871 citing 615_f2d_578 2d cir and 57_f2d_992 4th cir although notice_87_82 1987_2_cb_389 date provides that to the extent that repayment is contingent the payment should be treated as a taxable ciac rather than a loan this language related to a purported loan to a utility from a person benefitting from utility_services relating to the loan eg a real_estate developer customer or potential customer in the instant facts the lender generator is not a person benefitting from taxpayer’s services similarly in illinois power company v commissioner 72_f2d_683 7th cir the taxpayer an electric company collected revenue from rate increases to its commercial customers ordered by the illinois commerce commission icc the icc stated that the purpose of its rate increase order was to discourage consumption by commercial customers and informed the taxpayer at the outset of the rate increase that the taxpayer would not be allowed to keep the excess revenue generated by the increase while the taxpayer was permitted to commingle the revenues with its general funds for an interim period the icc later ordered the taxpayer to refund the revenues with interest to its customers in the form of credits on their utility bills since the taxpayer knew from the start that it would have to pay back the revenues plus interest the court held that the revenues were not income when received by the taxpayer rather the court analogized the taxpayer's receipt of the funds as similar to that of a bank holding savings deposits or an employer that is required to withhold employees' social_security_taxes see also 204_f2d_160 9th cir plr-159276-02 at the time they were paid in the instant case under the ia taxpayer has no guarantee that it would be allowed to keep the money in contrast taxpayer has an unequivocal contractual obligation to repay the money advanced by generator although taxpayer derives a benefit from holding the funds advanced by generator the funds advanced finance the cost of the system upgrades by taxpayer like the taxpayer in indianapolis power and light co the lender has the power to force taxpayer to refund the payments in the instant case generator can force the utility to refund the payments no later the month after the commercial operation date of facility accordingly based solely upon the above facts and the representations made by taxpayer and generator we rule that the transfer of the interconnection facilities by generator to taxpayer will not be a ciac under sec_118 and will be excludable from the gross_income of taxpayer as a nonshareholder contribution_to_capital under sec_118 the payment by generator to taxpayer is a loan for federal tax purposes under general tax principles except as specifically set forth above no opinion is expressed or implied concerning the federal_income_tax consequences of the above described facts under any other provision of the code or regulations specifically no opinion is expressed or implied as to whether taxpayer’s representation that less than five percent of the total projected power that flows over the interconnection facilities will flow from taxpayer to generator is a reasonable projection for purposes of the five-percent test in notice_88_129 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 sincerely s susan reaman susan reaman chief branch office of associate chief_counsel passthroughs and special industries enclosure copy plr-159276-02 cc