internal_revenue_service number release date index numbers ------------------------------------ ---------------------------------------- -------------------------- ---------------------------------------------------------- department of the treasury washington dc person to contact ---------------------- id no ------------------ telephone number ---------------------- refer reply to cc psi b03 - plr-146582-14 date date legend x ------------------------------------------------------------ --------------------------------------- country d1 ------------------------- -------------------------- dear ---- - ------------ this letter responds to a letter dated date submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be classified as a disregarded_entity for federal tax purposes facts the information submitted discloses that x was formed on d1 under the laws of country x intended to be treated as a disregarded_entity for federal tax purposes effective d1 however x failed to timely file form_8832 entity classification election to be classified as a disregarded_entity for federal tax purposes law and analysis sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in plr-146582-14 sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301 b unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides in part that for purposes of sec_301_7701-3 a member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member sec_301_7701-3 provides in part that except as provided in sec_301_7701-3 and v an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides in part that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which 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 internal_revenue_code code except subtitles e g h and i sec_301_9100-1 provides that the term regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 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 regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government plr-146582-14 conclusion based solely on the facts and representations submitted we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 consequently x is granted an extension of time of one hundred twenty days from the date of this letter to elect under sec_301_7701-3 to be treated as a disregarded_entity effective d1 x must file form_8832 within the extension period with the appropriate service_center with a copy of this letter attached this ruling is contingent on x and its owner filing within days from the date of this letter all required federal_income_tax and information returns including amended returns consistent with the requested relief granted in this letter to the extent appropriate these returns may include but are not limited to form_8858 information_return of u s persons with respect to foreign disregarded entities a copy of this letter should be attached to any such returns except for the specific ruling above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code in addition sec_301_9100-1 provides that the granting of an extension of time for making an election is not a determination that the taxpayer is otherwise eligible to make the election this ruling is directed only to the taxpayer requesting it according to sec_6110 of the code this ruling may not be used or cited as precedent under a power_of_attorney on file with this office we are sending a copy of this letter to x’s authorized representative plr-146582-14 the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination sincerely associate chief_counsel passthroughs special industries by __ s ___________________________ holly porter chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


t c summary opinion united_states tax_court antim g and jane v straus petitioners v commissioner of internal revenue respondent docket no 22555-05s filed date antim g and jane v straus pro sese charles e graves for respondent goldberg special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency in petitioners’ federal_income_tax for the year in the amount of dollar_figure and an accuracy-related_penalty of dollar_figure under sec_6662 the issues for decision are whether the distributions of the cash_value of a whole_life_insurance policy and interest in are taxable to petitioners and whether petitioners are liable for the accuracy-related_penalty under sec_6662 arising from a substantial_understatement of tax for that year background the stipulation of facts and the attached exhibits are incorporated herein by reference at the time the petition was filed petitioners resided in springfield missouri when katherine straus petitioners’ daughter wa sec_3 years old petitioners purchased a whole_life_insurance policy policy from northwestern mutual_life_insurance_company northwestern mutual which insured katherine petitioners were listed as the sole owners on the policy annual premiums on the policy were approximately dollar_figure petitioners purchased the policy for the purpose of covering educational costs for katherine if and when she decided to pursue a college degree katherine graduated from high school in and thereafter enrolled at southwest missouri state university at the time of katherine’s graduation the cash_surrender_value of the policy was dollar_figure petitioners received two loans on the policy in the first loan for dollar_figure was received on date the second loan also for dollar_figure was received on date both loans carried an interest rate of approximately percent sometime in and precipitated by a downturn in petitioners’ business income caused by post-9 factors petitioners decided to cash_out the policy so as to pay katherine’s current school expenses and set_aside funds for the remainder of her college education northwestern mutual reported to respondent a gross distribution to petitioners in in the amount of dollar_figure with the taxable_portion of that amount being dollar_figure in addition to this distribution merrill lynch and commerce bank reported interest distributions in to petitioners in the amounts of dollar_figure and dollar_figure respectively petitioners reported neither the merrill lynch nor the commerce bank distribution on their return after the commissioner adjusted petitioners’ income to reflect receipt of these distributions petitioners’ income was increased to a point where they no longer qualified to take a tuition_and_fees_deduction in the amount of dollar_figure the combination of these circumstances resulted in the deficiency at issue discussion the commissioner’s determinations are presumed correct and taxpayers generally bear the burden of proving otherwise 290_us_111 petitioners did not argue that sec_7491 is applicable in this case nor did they establish that the burden_of_proof should shift to the respondent moreover the issue involved in this case inclusion of items in gross_income is a legal one to be decided on the record without regard to the burden_of_proof petitioners therefore bear the burden of proving that respondent’s determination in the notice_of_deficiency is erroneous see rule a welch v helvering supra pincite sec_61 provides that gross_income means all income from whatever source derived including interest and income from life_insurance sec_61 the sole exception to the inclusion of income from life_insurance lies in sec_101 which specifically excludes from gross_income amounts received under a life_insurance_contract if such amounts are paid_by reason of the death of the insured sec_101 sec_72 provides that gross_income includes any amount_received_as_an_annuity under a life_insurance_contract given these statutory predicates there is no authority upon which we may declare the distributions at issue in this case exempt from inclusion in gross_income and accordingly exempt from taxation we also note that petitioners conceded at trial that the distributions at issue were in fact received by them and should be included in their gross_income for after this concession and with respect to only the life_insurance distribution petitioners proffered three creative yet misguided arguments as to why the court should enter a decision in their favor for the foregoing reasons we decline to follow petitioners’ reasoning first petitioners argue that the northwestern mutual distribution should be excluded from their gross_income as it is not actually a life_insurance_policy but rather a custodial_account custodial accounts are investment accounts opened under the uniform transfer to minors act where the minor is the listed owner of the account and its assets and a custodian manages the account until the minor reaches the age of distribution for their state of residence earnings up to a certain amount are taxed at the minor’s income_tax bracket in this case the policy fails to satisfy the elements of a custodial_account the policy at issue was owned solely by petitioners and they did not substantiate that katherine had any ownership_interest in or control_over the policy petitioners mistakenly argue that because the policy was in katie’s name and they were its owners it should follow that the policy be regarded as a custodial_account the policy however was purchased on katherine’s life and not as petitioners contend in her name accordingly and even though it was petitioners’ intent to use the policy for katherine’s education it does not follow that the policy was akin to a custodial_account whole_life_insurance and custodial accounts are distinct and separate investment devices and one cannot be the other second petitioners argue that the northwestern mutual distribution should be treated as a long-term_capital_gain and were this treatment to apply petitioners’ carryover loss in dollar_figure would more than offset the taxable_portion of the distribution dollar_figure as to this argument petitioners rely on the reasoning that life_insurance falls within the definition of a capital_asset when a life_insurance_policy such as the one at issue is not a straight-term policy it will generally have a cash_surrender_value if the policy owner surrenders the policy the holder will then pay the cash_surrender_value in accordance with policy terms after withholding for any outstanding loans against the policy at the time of surrender under sec_1 d income_tax regs if the amount received by the holder is greater than the holder’s basis in the policy the owner will recognize income in the amount of the difference this income will then be treated as ordinary_income irrespective of the rather inclusive notion of what qualifies as a capital_asset since the surrender of the policy is not deemed as a sale_or_exchange as required for capital assets under sec_1211 accordingly we cannot accept petitioners’ reasoning that as a capital_asset the proceeds from the northwestern mutual distribution should be excluded from their gross_income third and finally petitioners argue that had they known that the northwestern mutual distribution would be included in their gross_income they would have certainly taken planning steps to eliminate this result namely by making tax-free gifts to katherine petitioners argue that the court should treat the distributions now as if they did in fact do this and accordingly exclude the entire distribution from their gross_income treat the entire distribution as transferred to their daughter and then allow either petitioners or their daughter to pay tax on the distribution at katherine’s applicable income_tax rate approximately percent simply put there is no authority under which we may provide such relief taxpayers are bound to the form in which they cast their transaction 417_us_134 accordingly we sustain respondent’s determination as to the amount in deficiency as to the second issue whether petitioners are liable for the accuracy-related_penalty arising from a substantial_understatement of tax under sec_6662 we start our discussion under sec_6662 which provides that taxpayers may be liable for a 20-percent penalty on the portion of an underpayment_of_tax attributable to negligence or disregard of rules or regulations or to a substantial_underpayment of tax sec_6662 and b and no penalty however is imposed under sec_6662 if there is reasonable_cause for the underpayment_of_tax and the taxpayer has acted in good_faith sec_6664 pursuant to sec_7491 respondent bears the burden of production with respect to the issue presented under sec_6662 in order to meet respondent’s burden of production respondent must come forward with sufficient evidence indicating that it is appropriate to impose the accuracy-related_penalty 116_tc_438 the burden_of_proof remains with petitioner with respect to the accuracy-related_penalty that respondent determined in the notice see rule a welch v helvering u s pincite higbee v commissioner supra pincite it is respondent’s position that petitioners’ underpayment for was attributable to negligence or disregard of the code and a substantial_understatement of tax for purposes of sec_6662 a substantial_understatement is equal to the excess of the amount of tax required to be shown in the tax_return over the amount of tax shown in such return sec_6662 and is substantial in the case of an individual if the amount of the understatement for the taxable_year exceeds the greater of percent of the tax required to be shown in the return for that taxable_year or dollar_figure sec_6662 the amount of the understatement is to be reduced by that portion of the understatement which is attributable to the tax treatment of any item by the taxpayer if there is or was substantial_authority for such treatment sec_6662 or any item if a the relevant facts affecting the item’s tax treatment are adequately disclosed in the return or in a statement attached to the return sec_6662 and b there is a reasonable basis for the tax treatment of such item by the taxpayer sec_6662 the accuracy-related_penalty under sec_6662 does not apply to any portion of an underpayment if it is shown that there was reasonable_cause for and that the taxpayer acted in good_faith with respect to such portion sec_6664 the determination of whether the taxpayer acted with reasonable_cause and in good_faith depends on the pertinent facts and circumstances including the taxpayer’s efforts to assess such taxpayer’s proper tax_liability the knowledge and experience of the taxpayer and the reliance on the advice of a professional such as an accountant sec_1_6664-4 income_tax regs petitioners at trial conceded that they should have reported on their return the respective distributions that northwestern mutual merrill lynch and commerce bank made to them during petitioners do not dispute that they received forms for each of the distributions at issue petitioners also concede that the understatement_of_tax on their return exceeds the greater of percent of the tax required to be shown in that return or dollar_figure see sec_6662 given petitioners’ concessions in this case we find that respondent has satisfied his burden of production with respect to sec_7491 and the accuracy-related_penalty in response petitioners contend that they are not liable for the accuracy-related_penalty with respect to the northwestern mutual distribution because they reasoned on a good-faith belief that the cash_surrender_value from the policy should be excluded from their gross_income in determining whether a taxpayer has acted in good_faith generally the most important factor is the extent of the taxpayer’s effort to assess the taxpayer’s proper tax_liability sec_1_6664-4 income_tax regs we are not convinced based on the record before us that petitioners took any steps prior to the filing of their return to assess the income_tax treatment of the northwestern mutual distribution moreover we note that it was only after they received their notice_of_deficiency that petitioners thought in earnest about how they could recharacterize that distribution so as to avoid its inclusion in their gross_income we note with emphasis that none of petitioners’ arguments to this end are based in the code or the regulations promulgated thereunder accordingly we find that petitioners did not act in good_faith with respect to any portion of the underpayment for their taxable_year see sec_6664 sec_1_6664-4 income_tax regs decision will be entered for respondent


internal_revenue_service department of the treasury index number u i l no washington dc person to contact telephone number refer reply to cc dom p si plr-102949-00 date date number release date legend company state shareholder a dear this letter responds to a letter dated date requesting a ruling on behalf of company under sec_1362 of the internal_revenue_code the information submitted discloses that company was incorporated on a in state company has one shareholder shareholder it is represented that company has intended to be an s_corporation since its incorporation believing itself to be an s_corporation company has operated accordingly since a after the end of its taxable_year beginning on a however company discovered that its s election had not been timely filed company requests a ruling that its sec_1362 election will be treated as timely made for its taxable_year that begins on a sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 explains when an s election will be effective generally if an s election is made within the first two and one half months of a corporation's taxable_year then that corporation will be treated as an s_corporation for the year in which the election is made sec_1362 provides that if an s election is made after the first two and plr-102949-00 one half months of a corporation’s taxable_year then that corporation will not be treated as an s_corporation until the taxable_year following the year in which the s election is made sec_1362 provides that if no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply applying the relevant law to the facts submitted and representations made we rule that company's sec_1362 election will be treated as timely made for its taxable_year that begins on a however this ruling is contingent on company filing form_2553 election by a small_business_corporation with an effective date of a with the appropriate service_center within days from the date of this ruling a copy of this letter should be attached to the form_2553 except as specifically set forth above we express no opinion concerning the federal tax consequences of the foregoing facts specifically we express no opinion on whether company otherwise qualifies as an s_corporation this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours william p o’shea chief branch office of the assistant chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes


internal_revenue_service index no number release date date cc dom p si - plr-122589-98 x a b d1 year dear this responds to your letter dated date submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated on d1 of year the shareholders of x are a and b a as x's president represents that it was the intent of x and the shareholders of x for x to be an s_corporation beginning with year its first taxable_year as reflected in the minutes of the organizational meeting of x’s board_of directors and in the form ss-4 application_for employer_identification_number filed by x with the service x and its shareholders timely completed and signed a form_2553 election by a small_business_corporation to be effective for x’s first taxable_year and relied on x’s attorney to timely file the form with the service however x’s attorney failed to file the form sec_1362 of the code provides that if-- a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation for x’s first taxable_year accordingly provided that x makes an election to be an s_corporation by filing a form_2553 with the appropriate service_center effective for its year taxable_year within days following the date of this letter then such election will be treated as timely made for x’s year taxable_year a copy of this letter should be attached to the form_2553 except as specifically ruled upon above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provisions of the code including whether x was or is a small_business_corporation under sec_1361 of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to x sincerely yours assistant to the chief office of the assistant chief_counsel passthroughs and special industries h grace kim branch enclosures copy of this letter copy for sec_6110 purposes


ltd david palmlund tax_matters_partner petitioner v commissioner of internal revenue respondent docket no filed date partnership p entered into a son-of-boss transaction this generated more than dollar_figure million in artificial losses which p’s partners claimed on their returns r adjusted various partnership items and determined a penalty under sec_6662 i r c for a gross-valuation misstatement of p’s inside_basis in an asset distributed by p p now contests only that penalty alleging it has a reasonable-cause-and-good-faith defense held the court has jurisdiction over the penalty in this partnership-level proceeding after 135_tc_581 because the penalty relates to an adjustment to inside_basis a partnership_item that results in a computational adjustment to the partner’s tax_return that can be assessed without a partner-level affected items proceeding held further we agree with the court_of_appeals for the seventh circuit in 583_f3d_471 7th cir that a partnership can assert its own reasonable-cause-and-good- faith defense in a partnership-level proceeding held further p cannot reasonably rely in good_faith on the tax_advice given by a promoter defined as an adviser who participates in structuring the transaction or who is otherwise related to has an interest in or profits from the transaction william a roberts and kyle r coleman for petitioner nancy b herbert richard hassebrock and jadie t woods for respondent holmes judge david palmlund bought into a bad deal to lose money but save on taxes he has since filed an amended_return and paid the tax he was trying to avoid but he con- tests the penalty that the commissioner asserts against him he argues that he relied in good_faith on professional advisers verdate 0ct date jkt po frm fmt sfmt v files 106ltd sheila united_states tax_court reports findings_of_fact i palmlund david palmlund started his professional life in upstate new york in he graduated with a dual degree in industrial engineering and management accounting from syracuse university then took a job in rochester with east- man kodak as a cost engineer after a year in the corporate world duty called he served in the army as an ordnance officer stationed at the aberdeen proving grounds but also spent time in vietnam with the state department on mat- ters he can’t talk about in asia then he returned to syra- cuse completed his m b a in and went back to east- man kodak but the draw of a larger city proved irresistible palmlund moved to new york to work for american cyanamid chem- ical company from to he started out as an oper- ations analyst-finding ways to improve the operations of subsidiaries-and moved up to become a budget analyst involved in major acquisitions his entrepreneurial spirit caught the attention of like-minded young men and together they formed a home-warranty company american home shield in as chief administrative officer palmlund set up american home shield’s operations developed the com- pany’s pricing model and hired the contractors who would perform the covered home repairs american home shield grew to be a successful dollar_figure million-a-year company palmlund then moved to merrill lynch in he eventu- ally became vice president and controller as well as ceo of several merrill subsidiaries at one of these merrill lynch realty palmlund had big_number employees under his direction working in new york and london he then returned to american home shield as chief operating officer in he took four months off to care for his wife and moved to dallas to be closer to her family palmlund contacted some of the executive recruiters he met while working for merrill-he got to know them well during the time he hired about one manager a week-to see what jobs there might be for him in dallas instead the recruiters recruited him to join their company palmlund wasn’t interested at first because he didn’t like the way recruiters operated but the recruiters replied fine come in verdate 0ct date jkt po frm fmt sfmt v files 106ltd sheila ltd v commissioner and change it he agreed to give it a try with the under- standing that he could do things his way for a while if it didn’t work out he would leave his way was based on personal contact he would meet each candidate face to face never offering anyone for a posi- tion whom he hadn’t met in person this was labor inten- sive-palmlund accumulated over million frequent-flyer miles-but his approach paid off he became a partner at his firm his firm became the world’s largest and he placed more senior executives than anyone else at it all of his place- ments stayed in their new jobs at least a year every other partner had to redo some palmlund’s success made his tax reporting complicated and for many years he relied on arthur andersen in the early ‘90s his firm hired a financial planner who rec- ommended setting up limited_partnerships living trusts and other entities to help palmlund meet his financial goals-and who also recommended as the lawyer to set it all up one joe garza palmlund ended up using garza off and on over the next years not only for the financial-planning-entity-cre- ation work but for all his legal needs garza in turn rec- ommended turner stone to palmlund as a more affordable alternative to arthur andersen for tax preparation but even at those lower rates palmlund was an active and frugal client who carefully reviewed every return-and noticed when one year turner stone nearly doubled its fee to dollar_figure he credibly testified that he moaned and groaned until it was reduced ii the transaction sometime early in garza called palmlund to briefly pitch an investment in foreign_currency palmlund dis- missed the idea because he didn’t have much experience in the field but he was no neophyte investor-he ran a real- estate investment_partnership actively picked stocks and formed a texas family limited_partnership named palmlund ltd with the stated business of investments he also had numerous personal bank and brokerage accounts that he actively managed his only experience was ordering his staff at merrill lynch’s london office to hedge against a threatened devaluation of the pound he did not personally implement the transaction verdate 0ct date jkt po frm fmt sfmt v files 106ltd sheila united_states tax_court reports palmlund says that he warmed up to the transaction after receiving a hot tip at a cocktail party in mid-2001 but this tip came from his business partner’s daughter who men- tioned that the yen is weak and is going to get weaker we do not think this is a credible explanation for palmlund’s interest in foreign-currency speculation and instead find that his interest was really sparked when garza resurfaced garza however was not really urging a speculative foray into foreign currency-he was pitching a particular trans- action that he explained had significant tax benefits the deal was a variation of the son-of-boss transaction that has produced so much litigation in recent years he tried to explain its basic structure though on this topic palmlund credibly testified that the explanation with its use of foreign- currency digital options and the super sweet spot -alleg- edly a way to make a large profit if the dollar-to-yen exchange rates worked out just right-was not entirely com- prehensible but garza’s tutorials never really got palmlund interested in the theory of how to make foreign-currency options trading profitable what got him interested-and we specifically find this based on the trial testimony-was the alluring tax_benefit palmlund ran garza’s suggestion by his accountants at turner stone the accountants gave him the green light telling him they themselves had used the same transaction and garza personally guaranteed the deal promising to cover any taxes penalties or litigation costs if the transaction blew up we lay out only the barest of bones because palmlund has conceded the tax and fights only the penalty very similar deals have been dissected elsewhere see eg 133_tc_1 for an explanation of son-of-boss deals see 128_tc_192 see also eg 133_tc_431 133_tc_112 olesen v commissioner tcmemo_2009_307 bergmann v commissioner tcmemo_2009_289 lvi investors llc v commissioner tcmemo_2009_254 utam ltd v commissioner tcmemo_2009_253 ti- gers eye trading llc v commissioner tcmemo_2009_121 napoliello v commissioner tcmemo_2009_104 fears v commissioner tcmemo_2009_62 son-of-boss deals come in different varieties but they all involve the transfer of assets along with significant liabilities to a partnership with the goal of increasing basis in that partnership the liabilities are not completely fixed at the time of transfer so the partnership ignores them in computing basis this results in high-basis assets that produce large tax-but not out-of-pock- et-losses son-of-boss transactions usually yield capital losses but palmlund offset ordinary_income because he attached the high basis to canadian dollars and on his original return took the position that certain foreign-currency transactions may produce an ordinary_loss see sec_988 sec_1_988-3 income_tax regs unless we say otherwise all section references are to the internal_revenue_code in effect for the year at issue verdate 0ct date jkt po frm fmt sfmt v files 106ltd sheila ltd v commissioner this was good enough for palmlund he directed garza to handle all the paperwork and told his secretary to forward any correspondence about the deal directly to garza here are the mechanics in date palmlund formed three entities llc llc llc llc and ltd the owners of were david palmlund percent and llc percent palmlund’s texas family limited_partnership palmlund ltd is also involved in this case its partners were david palmlund percent suzanne palmlund percent and the david channing palmlund trust percent also in date llc bought offsetting long and short foreign-currency options the termination_date for both options was date when they would expire out-of-the-money on date llc transferred both long and short options to on date llc bought candollar_figure for usdollar_figure on date llc transferred the canadian currency to as a capital_contribution on date tried to assign all of its canadian currency to palmlund ltd but actually distrib- uted only candollar_figure candollar_figure remained with until it sold the currency in date palmlund testified that he earned dollar_figure in two weeks deutsche bank paid out dollar_figure on the options and charged a dollar_figure net premium if these had been the only expenses involved the deal would have been profitable but palmlund doesn’t include garza’s fees in his profit calculation those fees shrink the dollar_figure profit to a loss of somewhere between dollar_figure and dollar_figure the premiums on the long and short option positions were dollar_figure million and dollar_figure respec- tively the exact amount of garza’s fee is unclear from the record it was either dollar_figure or dollar_figure and the dollar_figure net premium may or may not have been included in the fee assuming the low- est possible garza fee-dollar_figure with the net premium included-palmlund would have lost dollar_figure on the deal dollar_figure option payout less dollar_figure for garza’s fee at the other end of the spectrum-dollar_figure not including the net premium-palmlund would have lost dollar_figure dollar_figure option payout less the dollar_figure net premium and the dollar_figure garza fee verdate 0ct date jkt po frm fmt sfmt v files 106ltd sheila united_states tax_court reports iii reporting the transaction palmlund used turner stone to prepare hi sec_2001 return a critical part of that preparation was the opinion letter garza wrote which palmlund forwarded to them the opinion letter contains a 4-page introduction tailored to the deal but the remaining pages consist mostly of generic boilerplate on tax-law doctrines-running the gamut from partnership-basis rules treatment of foreign-currency con- tracts the step-transaction doctrine economic_substance dis- guised-sale provisions and partnership anti-abuse regula- tions in the letter garza concluded that the tax treatment he proposed would more_likely_than_not withstand irs scru- tiny to reach this conclusion garza had to clear a few hur- dles in the introductory pages he states that palmlund rep- resented that he independently reviewed the economics underlying the investment believed there was reasonable opportunity to earn a reasonable pre-tax profit in excess of all associated fees and costs and received t he foreign_currency and financial instruments as partnership liquidating distributions emphasis added here’s the first stumble-we find that palmlund did no such things but even if he had garza still didn’t get it right- he failed to customize the opinion letter to fit the facts of the transaction here are a few of the mistakes the foreign_currency was distributed to palmlund in liq- uidation of his partnership_interest no it wasn’t it was a nonliquidating_distribution in unrelated partners confirmed the partnership’s legit- all the partners were related-and palmlund controlled imacy them one factor to consider in determining whether the good-faith-reliance defense applies is the existence of an opinion of a professional tax advisor as to the treatment of the taxpayer under federal tax law sec_1_6664-4 income_tax regs in analyzing corporate tax_shelters citing the more_likely_than_not standard-defined as a greater than 50-percent likeli- hood that the tax treatment of the item will be upheld if challenged by the internal_revenue_service -is a necessary but not sufficient condition in such opinions sec_1_6664-4 income_tax regs since isn’t a corporation the more_likely_than_not conclusion might not strictly be necessary but garza still cited the standard in his opinion letter verdate 0ct date jkt po frm fmt sfmt v files 106ltd sheila ltd v commissioner palmlund doesn’t know if he will be called upon to satisfy his obligations under the sold digital option the options had already been terminated by the time the opinion was drafted relying on the opinion letter turner stone prepared returns for llc palmlund ltd and palmlund in they charged dollar_figure for return preparation palmlund didn’t complain he didn’t review the returns or ask any questions claiming that he wouldn’t even know what to ask about the returns the result was happy for a time-a noneconomic loss of about dollar_figure million flowed through to his personal return palmlund did get concerned when the irs sent him a copy of announcement 2004_1_cb_964 in date the announcement outlined terms of settlement for son-of- boss transactions palmlund met with garza and his accountants to figure out what he should do and what he decided to do was amend his personal return no one ever amended 106’s return turner stone finished the amended_return in date and palmlund signed it in september this return removed the dollar_figure million loss attrib- uted to the disallowed transaction and palmlund paid the taxes and interest he conceded were due the irs issued an fpaa to that adjusted various part- nership items including contributions and distributions to zero and asserted penalties palmlund a sec_106’s tax_matters_partner timely petitioned the tax_court in the course of preparing for trial the commissioner subpoenaed charles denson palmlund’s private banker denson was curious about the subpoena and set up a lunch with palmlund he asked about the case and palmlund explained that he got into a tax strategy and the intent was to lose money before trial began we issued two orders in the first we granted the commissioner partial summary_judgment on the issue of whether the asset distribution from was nonliquidating as a result the adjusted_basis for 106’s dis- tribution to palmlund ltd in is limited to the partner- ship’s adjusted_basis ie inside_basis in the canadian cur- rency see sec_732 ltd v commissioner tcmemo_2008_112 in our second order we granted the inside_basis is a partnership’s basis in property that it owns verdate 0ct date jkt po frm fmt sfmt v files 106ltd sheila united_states tax_court reports commissioner’s motion for partial summary_judgment on the issue of whether there was a gross-valuation misstatement in excess of percent on the return this second order required little more than a bit of math because 106’s assets were canadian dollars bought for usdollar_figure the partnership distributed some of those canadian dollars in so 106’s basis-the inside basis-in those distributed dollars was dollar_figure the return claimed a dollar_figure4 million basis in the dis- tribution which is significantly more than percent of dollar_figure and was reduced by the fpaa to zero because palmlund conceded the taxes related to the under- lying transaction the only remaining question is whether the partnership has a sec_6664 reasonable_cause good_faith defense-based upon reliance on garza and turner stone-to the percent gross-valuation-misstatement pen- alty the commissioner asserts under sec_6662 this penalty relates to inside basis-106’s overvaluation of its basis in the canadian dollars it distributed to palmlund ltd i jurisdiction opinion in date the d c circuit decided 591_f3d_649 d c cir affg in part revg in part vacating in part and remanding on penalty issues 131_tc_84 it held that the tax_court lacks jurisdiction in partnership-level proceedings to determine a partner’s basis in the partnership or whether penalties related to that basis apply id pincite after the d c circuit issued its opinion we asked the parties in this case to brief the question of whether we have jurisdic- tion and both tell us that we do at first glance petaluma seems strikingly similar to like the tax_shelter in petaluma the transaction has the for- eign-currency-option flavor of a son-of-boss deal accuracy- the parties did not dispute this calculation and holding was a tax equity and fiscal responsibility act of partnership without a principal_place_of_business when it filed its petition because it no longer existed any appeal therefore may go to the d c circuit see sec_7482 in date the federal_circuit followed petaluma in 598_f3d_1372 fed cir making essentially the same holding on almost identical facts we recently reanalyzed the problem in response to the d c circuit’s mandate in petaluma see 135_tc_581 verdate 0ct date jkt po frm fmt sfmt v files 106ltd sheila ltd v commissioner related penalties are at stake in both cases but there’s a key distinction-petaluma held that the tax_court had no juris- diction over penalties springing from an adjustment to a partner’s outside_basis but the parties here agree that out- side basis is not an issue in the fpaa that provoked this case the commissioner determined that the accuracy- related penalty under sec_6662 of the internal rev- enue code applies to all underpayments of tax attributable to adjustments of partnership items of emphasis added and the specific item at issue in this case i sec_106’s own basis in the canadian dollars that it distributed to its partners this kind of basis is inside_basis not the out- side basis that was at issue in petaluma and this is the kind of basis that the regulation defines as a partnership_item see sec_301_6231_a_3_-1 proced admin regs this is a key distinction-petaluma didn’t address our jurisdiction over penalties based on adjustments to inside_basis we also agree with the parties and hold that partner-level proceedings are not necessary to determine the gross-valu- ation-misstatement penalty in this case the parties have stipulated that the adjustment to inside_basis at the partner- ship level here allows a numerical adjustment at the partner level and agree that this is a flow through item to the palmlunds’ individual return stip par because it is possible to derive through such an adjustment alone the reduction in the claimed loss on the sale of the canadian dol- lars that distributed and the consequent increase in the reportable gain and resulting deficiency-all without any need for an affected-item deficiency_notice see petaluma t c pincite-we conclude that we do have jurisdiction over the penalty in this partnership-level case after petaluma partnership items specifically include the adjusted_basis to the partnership of distributed property sec_301 a - c iii proced admin regs under sec_6226 we outside_basis is an individual partner’s basis in his interest in the partnership itself as it is not clear from the opinion the record or the arguments before this court that the penalties asserted by the commissioner and ordered by the tax_court could have been com- puted without partner-level proceedings to determine the affected-items questions concerning outside bases we are unable to uphold the court’s determination of the penalty issues while it may be that some penalties could have been assessed without partner-level computations we cannot affirm a decision that has not yet been made 591_f3d_649 d c cir affg in part revg in part vacating in part and remand- ing on penalty issues 131_tc_84 verdate 0ct date jkt po frm fmt sfmt v files 106ltd sheila united_states tax_court reports have jurisdiction in a tefra proceeding to determine all partnership items and the applicability of any penalty addition_to_tax or additional_amount which relates to an adjustment to a partnership_item since the overvalued dis- tribution was a partnership_item the outside_basis of indi- vidual partners is of no consequence the only issue in dis- pute is whether had a sec_6664 reasonable-cause- and-good-faith defense for the gross-valuation misstatement that leads to the next question is the reasonable_cause good_faith defense available at the partnership level most courts that have addressed the issue think so see eg am boat co llc v united_states 583_f3d_471 7th cir court has jurisdiction in partnership-level proceeding to consider partnership defense to accuracy-related_penalty 129_tc_8 penalties relating to partnership-item adjustments generally deter- mined at partnership level santa monica pictures llc v commissioner tcmemo_2005_104 reasonable-cause defense a partnership-level determination on the other hand the court of federal claims recently held that the reasonable-cause defense to the gross-valuation misstatement penalty is exclusively a partner-level defense 87_fedclaims_509 that court interpreted sec_301_6221-1 proced admin regs to prohibit the reasonable-cause defense at the partnership level clearmeadow fed cl pincite the seventh circuit disagreed to the extent that the court’s holding in clearmeadow wholly forecloses a partnership from raising an entity-level reasonable_cause defense we disagree the court’s primary premise is correct a partner may not raise a partner-level defense during a partnership-level proceeding but we see nothing that would prevent a partnership from raising its own reasonable_cause defense the clearmeadow court relied on sec_301_6221-1 which defines a partner-level defense although the regulation cites sec_6664 as an example of a partner-level defense it does not foreclose a similar defense on behalf of the partnership it only states that whether the partner has met the criteria of sec_6664 is a partner- level defense sec_301_6221-1 the fifth circuit concluded that this language did not rule out a partnership-level reasonable_cause defense see klamath f 3d pincite and we agree am boat co f 3d pincite verdate 0ct date jkt po frm fmt sfmt v files 106ltd sheila ltd v commissioner we find the seventh circuit’s analysis more persuasive than clearmeadow’s and hold that may assert the reasonable- cause defense at the partnership level ii sec_6662 penalty and defense the gross-valuation-misstatement penalty can be rebutted by a showing of reasonable_cause and good_faith sec_6664 and a taxpayer will often argue as palmlund does that he had reasonable_cause and showed good_faith by relying on professional advice the regulation somewhat unhelpfully states that reliance on professional advice is 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 the caselaw more helpfully points to three factors to test whether a tax- payer properly relied on professional advice 115_tc_43 affd 299_f3d_221 3d cir first was the adviser a competent professional who had sufficient expertise to justify reliance second did the taxpayer provide necessary and accurate information to the adviser third did the taxpayer actually rely in good_faith on the adviser’s judgment a expertise of professional advisers both garza and turner stone were licensed and would have appeared competent to a layman at the time they pre- pared the return they would have appeared competent espe- cially to palmlund since garza had been his personal attorney for years and turner stone had prepared his returns for about years all without incident the commis- sioner doesn’t dispute their expertise in his brief and so we have no trouble finding these advisers to have at least an adequate level of expertise the parties have stipulated that only the gross-valuation misstatement penalty for is at issue so we do not decide whether other penalties eg negligence require analyzing adjust- ments to outside_basis or other partner-level facts verdate 0ct date jkt po frm fmt sfmt v files 106ltd sheila united_states tax_court reports b provision of necessary and accurate information we also find that palmlund provided both garza and turner stone with all the relevant financial data needed to assess the correct level of income_tax see sec_1 c i income_tax regs the commissioner doesn’t dis- pute this either c actual reliance in good_faith it’s the third point-the issue of palmlund’s actual good- faith reliance on garza’s and turner stone’s professional advice-that’s in dispute there are at least three factors to consider palmlund’s business sophistication and experience the sloppy opinion letter and whether garza and turner stone were promoters palmlund’s business sophistication and experience tend to make it harder to believe he didn’t know the transaction was improper even though he wasn’t a tax expert and was accustomed to relying on professional advisers for tax preparation it seems doubtful that he acted in good_faith in light of his experience knowledge and education see sec_1_6664-4 income_tax regs the mistake-ridden opinion letter is problematic as well the opinion didn’t accurately describe the transaction in this case and the actual transaction was different from the generic transaction described in the opinion in some key respects we don’t however always take a close look at opinion_letters when penalties are at issue see eg 112_tc_317 opinion letter mentioned but not scrutinized affd without published opinion sub nom schutter v commissioner 242_f3d_390 10th cir and the supreme court has touched on this issue as well to require the taxpayer to challenge the attorney to seek a second opinion or to try to monitor counsel on the provisions of the code himself would nullify the very purpose of seeking the advice of a presumed expert in the first place ordinary business care and prudence do not demand such actions 469_us_241 on the other hand at least one district_court found that an opinion letter wasn’t good enough only after taking a hard verdate 0ct date jkt po frm fmt sfmt v files 106ltd sheila ltd v commissioner look at it 330_fsupp2d_122 d conn opinion letter wasn’t based on all pertinent facts and circumstances and therefore didn’t protect against penalties affd 150_fedappx_40 2d cir one doesn’t need to look very hard to find problems with garza’s opinion sec_1_6664-4 income_tax regs warns taxpayers against relying on advice that itself unreasonably relies on the representations statements findings or agreements of the taxpayer garza’s opinion letter as we described in our findings_of_fact is filled with what appear to be but which were not in fact palmlund’s representations and many of these representations just weren’t true garza shouldn’t have relied on them and it’s hard to believe that someone as sophisticated as palmlund wouldn’t at least suspect something was amiss and palmlund also can’t rely on garza or turner stone if they were promoters of the transaction the caselaw is clear on this point-promoters take the good-faith out of good-faith reliance see eg neonatology associates t c pincite but what exactly makes a tax adviser a promoter has been less than clear a frequently cited promoter-reliance case explains that advice must generally be from a com- petent and independent advisor unburdened with a conflict of interest and not investment 440_f3d_375 6th cir affg tcmemo_2004_279 but this merely tells us what a promoter is not not what a promoter is from promoters of the tigers eye trading llc v commissioner tcmemo_2009_121 offers a more workable definition of promoter an adviser who participated in structuring the transaction or is otherwise related to has an interest in or profits from the transaction but there’s a catch this definition wasn’t relied on or applied to the facts of that case-it’s dictum in tigers eye we held only that we had jurisdiction in a partnership- level proceeding to determine whether a tax adviser was a promoter since the case was only at the summary-judgment stage we left for another day the question of whether the tax adviser there actually was a promoter id still the definition verdate 0ct date jkt po frm fmt sfmt v files 106ltd sheila united_states tax_court reports of promoter in that opinion was carefully crafted after con- sidering relevant precedent one might need to be careful in applying the definition to some kinds of transactions-a tax lawyer asked by a businessman for advice on how to sell the family business through a tax-favored stock_redemption might be said to have participated in structuring the transaction -but when the transaction involved is the same tax_shelter offered to numerous parties the definition is workable as we observed in 132_tc_347 a tax adviser is not a promoter of a trans- action when he has a long-term and continual relationship with his client does not give unsolicited advice regarding the tax_shelter advises only within his field of expertise and not because of his regular involvement in the transaction being scruti- nized follows his regular course of conduct in rendering his advice and has no stake in the transaction besides what he bills at his regular hourly rate we therefore adopt the tigers eye definition for cases like this one and apply it to garza and turner stone we find that both these advisers not only participated in structuring the transaction but arranged the entire deal garza set up the llcs provided a copy of the opinion letter and coordinated the deal from start to finish and both garza and turner stone profited from selling the transaction to tigers eye trading llc v commissioner tcmemo_2009_121 drew from the following cases for its definition of promoter 39_f3d_402 2d cir taxpayer could not reasonably rely on professional advice of someone known to be burdened with an inherent conflict of interest-a sales representative of transaction affg tcmemo_1993_480 990_f2d_893 6th cir reliance on promoters or their agents is unreasonable because such persons are not independent of the investment affg donahue v commissioner tcmemo_1991_181 982_f2d_163 6th cir finding negligence where taxpayer relied on person with financial interest in the venture affg tcmemo_1991_449 see also 471_f3d_1021 9th cir a taxpayer cannot negate the negligence_penalty through reliance on a trans- action’s promoters or on other advisors who have a conflict of interest affg tcmemo_2004_269 439_f3d_1243 10th cir to be reasonable the professional adviser cannot be directly affiliated with the promoter instead he must be more independent affg tcmemo_2004_275 301_f3d_714 6th cir courts have found that a taxpayer is negligent if he puts his faith in a scheme that on its face offers improbably high tax advantages without obtaining an objective independent opinion on its validity affg tcmemo_2000_339 verdate 0ct date jkt po frm fmt sfmt v files 106ltd sheila ltd v commissioner numerous clients garza charged a flat fee for implementing it and wouldn’t have been compensated at all if palmlund decided not to go through with it he wasn’t being paid to evaluate the deal or tweak a real business deal to increase its tax advantages he was being paid to make it happen and turner stone charged dollar_figure for preparing palmlund’s tax returns-dollar_figure more than usual the extra fees were not attributable to an extraordinarily complex return-palmlund’s returns were always complex due to his various business interests-but we find were the firm’s cut for helping to make the deal happen because palmlund’s advisers structured the transaction and profited from its implementation they are promoters palmlund therefore could not rely on their advice in good_faith even if the promoter issue was not in the picture palmlund would still have failed to establish his good-faith reliance palmlund’s conversation with denson-his private banker-also negates a finding of such reliance it doesn’t show good_faith to enter into a tax strategy with the intent to lose money we find denson to be credible and his testi- mony combined with letter and palmlund’s unusual level of experience knowledge and edu- cation demonstrates palmlund’s lack of good-faith reliance see sec_1_6664-4 income_tax regs the sloppy opinion decision will be entered for respondent f verdate 0ct date jkt po frm fmt sfmt v files 106ltd sheila


department of the treasury internal_revenue_service washington d c date cc dom fs proc uilc number release date internal_revenue_service national_office field_service_advice memorandum for from deborah a butler assistant chief_counsel field service cc dom fs subject veba litigation this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend a b c attorney attorney case case issue is district_counsel ethically constrained from conducting discussions with attorney conclusion district_counsel is not ethically constrained from conducting discussions with attorney facts there are numerous court cases pending involving voluntary employee beneficiary associations veba including case sec_1 and district_counsel was contacted by attorney regarding information that a this attorney’s new client might be willing to share with the internal_revenue_service service at the time of this contact this client’s identity was not known and attorney had yet to make an appearance in any of the court cases a had certain concerns regarding the cases a was upset with attorney who was the attorney of record in case sec_1 and because of that attorney’s representations and advice concerning discovery responses as a result a hired an expert to evaluate the veba transactions attorney advised that a was interested in sharing information regarding the discovery responses including the fact that attorney prevented a from fully and truthfully responding to discovery and sharing the expert’s report concluding that veba’s are scams in return a would settle the case treating the veba program as nonqualified_deferred_compensation deductible by the corporation and taxable to the shareholder employee but with a not being liable for additions to tax an acceptance of this offer by the government represents a full concession on the part of a except for the penalties this offer is identical to the offer currently available with appeals attorney has now made appearances in case sec_1 and on behalf of a b and c the court has granted attorney 2’s motions to withdraw from case sec_1 and law and analysis the relationship between a lawyer and a client is one of agent and principal in re artha management inc 91_f3d_326 2d cir there is a strong presumption that an attorney who enters a general appearance has his client’s authorization to do so 389_f2d_44 4th cir 73_tc_639 furthermore model rules of professional conduct rule provides the general_rule that an attorney is prohibited from ex_parte communications with the opposing party when that party is represented by counsel 104_tc_408 clearly district_counsel cannot directly contact any of the opposing parties in case sec_1 and given the fact that attorney is now the only attorney of record district_counsel can contact attorney concerning case sec_1 and finally we would advise attorney that the appeals’ settlement offer is still outstanding and is not conditioned upon a providing information to the service case development hazards and other considerations not applicable please call if you have any further questions tax practice procedure procedural branch richard g goldman special counsel