t c summary opinion united_states tax_court sherman l and daisy spivey petitioners v commissioner of internal revenue respondent docket no 12198-06s filed date sherman l and daisy spivey pro sese bradley plovan for respondent goldberg special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code 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 years in issue and all rule references are to the tax_court rules_of_practice and procedure on date respondent mailed petitioners a notice_of_deficiency with respect to their taxable_year sec_2002 and in that notice respondent determined the following deficiencies additions to tax for late filing and accuracy- related penalties year deficiency addition_to_tax sec_6651 sec_6662 penalty dollar_figure dollar_figure dollar_figure big_number big_number dollar_figure dollar_figure dollar_figure dollar_figure these deficiencies resulted from respondent’s disallowance of the following expenses disallowed expense taxable years schedule e--supplemental income and loss--rental real_estate schedule c--profit or loss from business schedule a--itemized deductions--job expenses and other miscellaneous deductions dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number the schedule a job expenses and other miscellaneous deductions shown above comprised two categories of expenses as follows expense category taxable years unreimbursed employee business_expenses tax preparation fees total before 2-percent reduction1 dollar_figure dollar_figure dollar_figure big_number big_number big_number sec_67 reduces miscellaneous itemized expenses by percent of adjusted_gross_income petitioners attached forms 2106-ez unreimbursed employee business_expenses to their income_tax returns for the years in issue the forms 2106-ez summarized the unreimbursed employee business_expenses that petitioners deducted on their schedules a itemized_deductions as shown below taxable_year sec_2002 business_expenses parking fees other business_expenses meals and entertainment expense sec_1 big_number big_number big_number multiplied by deduction rate2 x x x deduction for meals big_number big_number big_number big_number big_number big_number dollar_figure dollar_figure dollar_figure big_number big_number big_number total expense sec_1petitioners included cellular phone expenses in the meals and entertainment category sec_274 allows a deduction for meal and entertainment_expenses at a 50-percent rate however sec_274 increases that rate gradually to percent during to for employees who are subject_to department of transportation dot limitations on hours_of_service petitioners claimed the higher dot rate at trial the court received into evidence petitioners’ exhibit entitled miscellaneous statements that purportedly detailed their unreimbursed employee business_expenses for each year petitioners offered no other documentation or records to substantiate the amounts on the miscellaneous statements as the figures below show petitioners’ calculations for meals and cellular phone expenses in and and their calculation of other expenses in do not agree with the amounts that petitioners claimed on the forms 2106-ez attached to their tax returns petitioners did not explain the differences taxable years expenses per miscellaneous statements parking fees dollar_figure x months dollar_figure dollar_figure dollar_figure meals and cellular phone expenses meals dollar_figure x trips dollar_figure x trips dollar_figure x trips cellular phone dollar_figure x months total meals and cellular phone expenses other expenses union dues new uniforms jackets shirts pants ties hats and sweaters uniform maintenance dollar_figure x weeks safety shoes dollar_figure x pairs safety glasses pairs per year grooming dollar_figure x weeks dollar_figure x weeks dollar_figure x weeks dollar_figure dollar_figure dollar_figure big_number big_number big_number dollar_figure dollar_figure dollar_figure supplies briefcase security locks laptop calculators pens total other expenses -0- big_number big_number big_number big_number petitioners brought to trial receipts and records that supported some of the disallowed deductions respondent stated that if given time to review the records and discuss the adjustments with petitioners the parties might reach a settlement on many of the items the court agreed the parties met and afterwards the parties filed a supplemental stipulation according to the supplemental stipulation the parties resolved all issues related to the schedule e rental property they also resolved all issues regarding the schedule c business_expenses except one whether petitioners are entitled to deduct depreciation on two computers they had purchased in prior years petitioners had not claimed a deduction in the years at issue however at trial they asserted they were entitled to depreciation related to schedule a job expenses respondent allowed union dues of dollar_figure dollar_figure and dollar_figure for and respectively but continues to disallow deductions for the remainder of petitioners’ unreimbursed employee business_expenses for the years in issue and tax_return preparation fees for and thus in summary after concessions the issues for decision are whether petitioners are entitled to deduct depreciation expenses for and for two computers they purchased in prior years for use in their schedule c business entitled to deduct unreimbursed employee business_expenses for the years in issue in addition to union dues that respondent has already conceded and entitled to deduct tax_return preparation fees for and background some of the facts have been stipulated and are so found the stipulations of facts and the attached exhibits are incorporated herein by this reference at the time they filed their petition petitioners resided in maryland in petitioner wife ms spivey started a computer education and training business called small bytes she operated small bytes out of their home and provided computer instruction to children enrolled at daycare centers and afterschool programs near petitioners’ home in ms spivey bought a laptop computer for dollar_figure from compusa inc for use in her business ms spivey promptly began using the computer for small bytes and continued to use the laptop for small bytes during the taxable years in issue in ms spivey purchased another laptop computer for use in her business this one was from best buy where she paid approximately dollar_figure again she promptly began using the computer and continued to use it during the years in issue ms spivey did not claim a depreciation expense on schedule c with respect to her business for or during the years at issue petitioner husband mr spivey served as a railroad passenger conductor1 for amtrak and maryland area regional commuter service marc on the penn line at the time of the trial he had worked as a conductor for years he started with penn central in and later that year when amtrak took over penn central’s passenger service mr spivey became an amtrak employee in mr spivey worked mainly on amtrak’s washington d c --new york new york route he also worked on the entire length of the marc penn line route that runs with intermediate stops from washington union station to baltimore penn station and on to perryville station maryland during and the primary responsibility of a railroad conductor is to make sure passengers have paid for their travel a conductor may sell punch or collect tickets the number of conductors on amtrak and marc trains varies depending on the number of cars that make up the train a supervising or senior conductor may also be on board under an operating_agreement between marc and amtrak amtrak provides engineers conductors and repair and maintenance personnel to marc for the penn line commuter trains between perryville baltimore penn station union station and intermediate stations when working on amtrak trains personnel wear amtrak insignia on their uniforms and while on marc trains they wear marc insignia mr spivey increased the number of his work trips on the marc line while decreasing his trips on amtrak when mr spivey was working his amtrak schedule his workday would last to hours he would begin the day by driving his car from his residence in maryland and parking at the baltimore washington international airport bwi station he paid dollar_figure per month for a parking pass he would then take a train from the bwi station to union station in washington d c which was his duty station and where his workday would begin he worked a daily not overnight round trip route between union station and new york penn station for example he might depart on an a m train from union station and arrive into penn station in new york at approximately a m after turning in the money and tickets he had collected to the amtrak penn station office mr spivey was released from his work duties since he usually arrived near lunchtime mr spivey would often join other conductors for lunch in one of the nearby restaurants he did not bring meals from home mr spivey would also spend a good part of his time in the amtrak employee lounge employees called the lounge the quiet room though it did not have a suitable place where employees could sleep mr spivey typically did not engage in substantial sleep or rest during his layover in new to determine the total hours of work per day we excluded the number of hours for mr spivey’s personal commuting time between his residence and his duty station york after the layover which lasted for sometime sec_1 but usually around to hours mr spivey would work on a return train from new york to union station he would then return home by reversing his morning commute ie he would take a train from union station to bwi station and then drive his car to catonsville when mr spivey was working his marc schedule his workday might last from to hours he would drive from his home in catonsville to baltimore penn station which was his duty station parking for marc employees was free at baltimore penn station mr spivey would typically work two round trip routes each day no overnight trips he began with a round trip between baltimore penn station and union station in washington d c after a short layover in washington union station he would return to baltimore where he could have around a 2-hour layover at the conclusion of each leg of the trip mr spivey would turn in the money and tickets he had collected to the local amtrak office which under an agreement served as an agent for marc both baltimore’s penn station and washington’s union station had quiet rooms for employees mr spivey did not normally sleep during his layovers in baltimore or washington in the afternoons mr spivey would work the round trip route from baltimore penn station to washington union station on occasion he might work on a train that was going from union station to the perryville station which was approximately miles northeast of baltimore he would then return to baltimore penn station on a marc train once back in baltimore penn station he would end his workday and commute by car to his residence in catonsville to compute his meals deduction for the years at issue mr spivey used a per_diem rate of dollar_figure for meals when working on the amtrak trains and a per_diem of dollar_figure when working on marc trains the dollar_figure figure represented mr spivey’s understanding of the federal per_diem_allowance for meals for transportation workers the dollar_figure was apparently mr spivey’s attempt to reduce the per_diem for the shorter time of his marc layovers neither amtrak nor marc reimbursed mr spivey for his meals amtrak and marc each required mr spivey to wear their uniform insignia and emblems when working on their trains to accomplish this mr spivey would merely remove his amtrak insignia and emblems and replace them with marc insignia and emblems amtrak’s uniform requirement which also applied to marc employees included a provision that employees maintain their uniforms through professional laundering and pressing while amtrak provided an allowance for uniforms amtrak deducted from mr spivey’s pay an amount for uniform items that mr spivey decided to purchase in excess of the allowance or any items that he had to purchase because of loss or excessive wear in addition to his uniform amtrak required mr spivey to wear safety glasses amtrak contracted with a specialty vendor who sold the glasses to rail workers at union station the glasses had safety lenses with protective shields which when worn protected the entire upper half of the wearer’s face mr spivey paid dollar_figure per year to purchase two pairs of glasses during each year at issue although neither amtrak nor marc required mr spivey to purchase any other supplies for his work and they did not require him to carry a cellular phone for business on occasion mr spivey would purchase various items such as pens and calculators to use in his job as a conductor additionally mr spivey belonged to a union and amtrak deducted union dues from his paycheck in the taxable years at issue petitioners completed most of the work involved in filling out their tax returns however they hired a tax preparer to complete the returns they paid dollar_figure dollar_figure and dollar_figure in tax preparation fees for and respectively discussion in general the commissioner’s determination set forth in a notice_of_deficiency is presumed correct and the taxpayer bears the burden of showing that the determination is in error rule a 290_us_111 deductions are a matter of legislative grace and the taxpayer bears the burden of proving entitlement to any deduction claimed on a return see 503_us_79 wilson v commissioner tcmemo_2001_139 pursuant to sec_7491 the burden_of_proof as to factual matters shifts to the commissioner under certain circumstances petitioners have neither alleged that sec_7491 applies nor established their compliance with the requirements of sec_7491 and b to substantiate items maintain records and cooperate fully with respondent’s reasonable requests petitioners therefore bear the burden_of_proof with respect to penalties and additions to tax sec_7491 places the burden of production on the commissioner sec_162 allows a deduction for all ordinary and necessary expenses_incurred during the taxable_year in carrying_on_a_trade_or_business generally the performance of services as an employee constitutes a trade_or_business 54_tc_374 a taxpayer must maintain records sufficient to substantiate the amounts of the deductions claimed sec_1_6001-1 income_tax regs for such expenses to be deductible the taxpayer must not have the right to obtain reimbursement from his employer see 788_f2d_1406 9th cir affg tcmemo_1984_533 if a taxpayer establishes that an expense is deductible but is unable to substantiate the precise amount we may estimate the amount bearing heavily against the taxpayer whose inexactitude is of his own making 39_f2d_540 2d cir the taxpayer must present sufficient evidence for the court to form an estimate because without such a basis any allowance would amount to unguided largesse 245_f2d_559 5th cir 85_tc_731 sec_274 overrides the cohan_rule with regard to certain expenses sec_1_274-5t temporary income_tax regs fed reg date sec_274 requires stricter substantiation for travel meals and listed_property such as computers sec_274 requires taxpayers to provide adequate_records or sufficient other evidence establishing the amount time place and business_purpose of the expense to corroborate the taxpayer’s statements even if such an expense would otherwise be deductible sec_274 may still prohibit a deduction if the taxpayer does not have sufficient substantiation sec_1_274-5t temporary income_tax regs supra for employees in the transportation industry the internal_revenue_service service publishes an annual revenue_procedure that offers a per_diem exception to the above substantiation rules for meals and incidental_expenses m ie see revproc_2002_63 sec_4 2002_2_cb_691 under the exception transportation industry employees may deduct their meals using the published m ie rate in lieu of claiming actual expenses and maintaining records id for context the rate for meal and incidental_expenses was dollar_figure per day for the first part of id sec_4 keeping in mind these well-established principles we now turn to decide whether the spiveys may deduct the disputed business_expenses i schedule c depreciation expense for computers following concessions reflected in the supplemental stipulation of facts ms spivey maintains that she is entitled to a depreciation deduction for two laptop computers she purchased for use in her business small bytes ms spivey’s laptop computers are an ordinary_and_necessary_expense under sec_162 for her computer training business that entails visiting clients at offsite locations the definition of transportation industries employees relevant here includes workers who a directly move people by train and b who regularly travel away from home revproc_2002_63 sec_4 2002_2_cb_691 sec_167 allows as a depreciation deduction a reasonable allowance for the exhaustion wear_and_tear of property used in a trade_or_business the purpose of the deduction for depreciation is to allow the taxpayer to recover over the useful_life of the property its cost or other basis unites states v ludey 274_us_295 pursuant to sec_168 taxpayers determine the depreciation deduction by using the applicable_depreciation_method applicable convention and the applicable_recovery_period the period for depreciation of an asset begins when the taxpayer first places the asset into service sec_1 a - b income_tax regs deductions for depreciation must be taken in the year in which depreciation occurs and cannot be recouped in subsequent years by reason of a taxpayer’s failure to deduct the depreciation allowance in prior years sec_1 a - a income_tax regs generally depreciation is computed by using the cost of the property as its basis sec_167 sec_1011 sec_1012 sec_1_167_g_-1 income_tax regs computers used exclusively in a trade_or_business are depreciable using the modified accelerated_cost_recovery_system macrs over a 5-year life for such 5-year_property macrs uses an accelerated_depreciation schedule for the first years converting to straight-line for the last years macrs also uses a half-year_convention computing depreciation for a half year in year and a half year in year sec_280f d a subjects computers to special substantiation requirements of sec_274 as listed_property however sec_280f provides an exception subject_to certain requirements for computers that taxpayers use exclusively in their business whalley v commissioner tcmemo_1996_533 on the basis of ms spivey’s uncontroverted testimony and the nature of her business a computer training service we believe that ms spivey used the computers exclusively in her business further ms spivey presented credible_evidence through the receipts from compusa inc and best buy to adequately substantiate her bases see sec_6001 thus to the extent sec_168 allows depreciation expense deductions for the laptop computers in the years at issue we hold that petitioners are entitled to deduct the allowable_depreciation expenses for and ii schedule a--unreimbursed employee business_expenses for unreimbursed employee business_expenses the initial bar is whether the taxpayer received reimbursement or had the right to receive reimbursement from his employer orvis v commissioner f 2d pincite in other words a taxpayer may not deduct unreimbursed expenses if the employer maintains a reimbursement plan and the employee fails to seek reimbursement for work-related expenses 85_tc_798 mr spivey did not receive reimbursement and was not eligible to receive reimbursement we now discuss the specific categories of mr spivey’s unreimbursed expenses a parking fees mr spivey deducted dollar_figure per year during to park in a garage at the bwi station on the days he worked for amtrak he would drive from his residence park at bwi and then continue his commute to washington d c union station where he reported to work he would reverse the commute on his way home mr spivey claimed that he paid the parking fees by check but did not produce any receipts or canceled checks thus mr spivey did not satisfy the substantiation requirements of sec_274 moreover parking fees similar to the cost of driving to and from work are personal expenses and therefore are not deductible sec_262 326_us_465 sec_1_162-2 income_tax regs b meals purchased while away from home as noted above mr spivey was correct in that the service permits employees in the transportation industries to use a per_diem rate see revproc_2002_63 sec_4 however before we discuss the amount we must first decide the threshold issue of whether mr spivey’s meals qualify for a deduction sec_162 allows taxpayers to deduct traveling expenses including meals if the taxpayer is away from home while traveling for a trade_or_business the reason for mr spivey’s travel was his job which required him to work on railroad passenger cars traveling between cities as a result the sole issue is whether mr spivey was away from home when he purchased his meals overnight nonlocal business travel normally fits easily into the definition of away from home see 286_f2d_333 5th cir however mr spivey’s travel was not overnight he worked long days compounded by a long commute but he completed his trips within day sec_262 prohibits deductions for personal expenses which include meals workers buy during a workday sec_262 commissioner v flowers supra pincite sec_1 e income_tax regs therefore the key is determining under what circumstances taxpayers who travel away from home on business for shorter than overnight may nonetheless deduct their meals on this point the commissioner’s position is found in revrul_75_170 1975_1_cb_60 the service allows railroad revrul_75_170 1975_1_cb_60 updates and restates revrul_61_221 1961_2_cb_34 which the commissioner based on the division in 286_f2d_333 5th cir where the court_of_appeals for the fifth circuit concluded that the sleep_or_rest_rule was the correct rule see williams also for excellent histories of the development of continued employees to deduct the cost of their meals when a layover requires substantial sleep or rest because although the absence is less than hours the employees have in effect met the away from home requirement for deducting traveling expenses under sec_162 revrul_75_170 supra conversely the service will disallow a deduction when a layover is of sufficient time to eat but too brief to require substantial sleep or rest because such intervals are not the equivalent of traveling away from home id these principles are known as the sleep_or_rest_rule in 389_us_299 the supreme court determined that the commissioner’s sleep_or_rest_rule detailed in revrul_61_221 1961_2_cb_34 provided substantial fairness and objectivity and avoided wasteful litigation in part by placing 1-day travelers on a footing similar to that of intracity travelers and commuters who do not have the advantage of a business_expense deduction to help pay for their meals the court noted that when treasury regulations and interpretations continue substantially unchanged for a long time such as this one the rules take on the imprimatur of congressional approval and therefore have the effect of law id pincite the court concluded that while one could imagine continued the statutory away from home requirement and the commissioner’s sleep_or_rest_rule improvements to the rule the courts are not responsible for perfecting tax_administration id pincite rather congress delegated that authority to the commissioner id pincite the proper role of the judiciary is to determine whether a regulation falls within the congressional mandate which the court found this rule did id in the years since that opinion the judiciary has not changed its approval of the commissioner’s rule congress has not amended the statute and the commissioner has not altered his stance accordingly we find that the commissioner’s sleep_or_rest_rule is a legitimate promulgation that governs mr spivey’s situation this court has held that a railroad employee who claimed meal deductions on facts similar to mr spivey’s circumstances was not entitled to the deductions stevens v commissioner tcmemo_1985_16 in stevens the taxpayer worked as a railroad engineer on two separate round trip schedules on the first schedule mr stevens worked one round trip that required a 5-hour workday including an 8-hour layover his second schedule necessitated two round trips between the same two cities as his one round trip the two round trips aggregated to an 3-hour workday which included various layovers the longest being hours regarding the first schedule we found that the 8-hour layover was due to the combination of the railroad’s business schedule and federal regulations and not due to any need for substantial sleep or rest regarding the more arduous two-a- day round trips we likewise found that the schedule did not require substantial sleep or rest and that in actuality mr stevens did not engage in substantial sleep or rest we concluded that both of mr stevens’s work schedules were in effect no different than those of many other workers whose jobs require long hours but whose meals remain personal expenses addressing mr spivey’s facts we find that mr spivey also worked two separate schedules one with amtrak that required one round trip for the day and the other with marc that usually required two round trips the amtrak route encompassed a to 4-hour run from washington d c to new york penn station a sometimes 1-hour but more typically a to 4-hour layover followed by a to 4-hour return run to washington d c mr spivey did not claim that he rested and we find that his workday did not require substantial sleep or rest even though mr stevens worked a longer day than mr spivey and as a railroad engineer mr stevens had greater public safety responsibilities we still found that mr stevens’s long day was a result of the railroad company’s scheduling convenience and not of mr stevens’s need for substantial sleep or rest likewise or even more so we find that mr spivey’s workday was not so long or arduous and did not involve public safety to an extent that required substantial sleep or rest additionally the fact that mr spivey did not engage in substantial sleep or rest is significant as is the fact that on some days he was able to complete the return trip with only a 1-hour layover in new york thus we find mr spivey’s layover was for his employer’s scheduling convenience and not for mr spivey’s needs his meals are clearly personal expenses and not deductible meals purchased when traveling away from home on business further mr spivey’s facts closely match the hypothetical in united_states v correll supra pincite where the court noted the obvious inequity of permitting a taxpayer to deduct the cost of his lunch simply by making a quick trip from new york to washington and returning in time for dinner in summary regarding mr spivey’s employment with amtrak we find that he did not satisfy the sleep_or_rest_rule and therefore we hold that he is not entitled to deduct his meal expenses when he traveled for amtrak because he does not satisfy the away from home requirement of sec_162 regarding mr spivey’s meal expenses during his two-a-day round trips for marc we also find that he did not satisfy the sleep_or_rest_rule for marc mr spivey’s main layover was at baltimore penn station and the layover lasted for at most hours in stevens v commissioner supra mr stevens similar to mr spivey also had a separate two-a-day round trip schedule even though we found that the two-a-day schedule was more arduous than a one-a-day schedule we still found that mr stevens’ layovers the longest being hours were too brief to allow substantial sleep or rest ultimately we concluded that the breaks were not more than a mere pause in the engineer’s daily work routine likewise for mr spivey his marc trip layovers were too brief and did not require substantial sleep or rest and he did not engage in substantial sleep or rest thus we conclude for marc similar to amtrak that mr spivey’s travel did not satisfy the sleep_or_rest_rule consequently he was not away from home for purposes of sec_162 and therefore may not deduct his meal expenses c cellular phone expenses in certain circumstances the taxpayer must meet specific substantiation requirements in addition to sec_162 see sec_274 sec_274 applies to the use of listed_property as defined in sec_280f which includes cellular phones to deduct these types of expenses the taxpayer must provide evidence that through adequate_records corroborates the taxpayer’s testimony as to the amount of the expenditure or use and the business relationship of the taxpayer to each expenditure or use sec_274 to satisfy the adequate_records requirement of sec_274 a taxpayer must maintain records and documentary_evidence that in combination are sufficient to establish each element of an expenditure or use sec_1_274-5t temporary income_tax regs fed reg date although a contemporaneous log is not required corroborative evidence to support a taxpayer’s reconstruction of the elements of the expenditure or use must have a high degree of probative value to elevate such statement to the level of credibility of a contemporaneous record sec_1_274-5t temporary income_tax regs fed reg date mr spivey testified that he deducted his entire cell phone bill dollar_figure per month as a business_expense he provided no records or receipts showing actual expenses to support these cellular phone expenses since mr spivey failed to meet the strict substantiation requirements of sec_274 with respect to his cellular phone we sustain respondent’s disallowance in full regarding the cellular phone expenses for the years in issue d other business_expenses with respect to the remaining unreimbursed employee business_expenses at issue we discuss their deductibility below new uniforms - taxpayers may deduct expenses for articles of clothing under sec_162 only if the clothing is required in the taxpayer’s employment is not suitable for petitioners included mr spivey’s cellular phone expenses for all years as other unreimbursed employee business_expenses general or personal wear and is not worn for general or personal purposes 30_tc_757 on his tax returns mr spivey claimed deductions of dollar_figure dollar_figure and dollar_figure for new uniforms that he purchased in and respectively however mr spivey did not provide support for those amounts and at trial he testified that he actually spent dollar_figure dollar_figure and dollar_figure on purchasing new uniforms in and respectively we find that the uniforms amtrak shirts jackets and pants were not suitable for general wear and were directly connected with or pertaining to the taxpayer’s trade_or_business sec_1_162-1 income_tax regs accordingly we hold that petitioners are entitled to business_expense deductions for mr spivey’s new uniforms of dollar_figure dollar_figure and dollar_figure for and respectively uniform maintenance - petitioners multiplied dollar_figure per week time sec_38 weeks to arrive at a deduction of dollar_figure for uniform maintenance for each year at issue however petitioners did not testify or provide receipts to substantiate the cost or frequency of professional cleaning we find that amtrak required such maintenance but the unsubstantiated amounts that petitioners claimed seem overstated since the record is silent regarding the amounts of these expenses we allow petitioners under cohan v commissioner f 2d pincite a deduction of dollar_figure per week multiplied by weeks per year to arrive at a deduction for uniform maintenance of dollar_figure for each year and safety shoes - the record is devoid of evidence that mr spivey’s employment required safety shoes that the shoes were not suitable for general or personal wear and that he did not wear the shoes for general or personal purposes although mr spivey testified that his shoes permitted him to feel the ballast the stones on train tracks between the ties during a stop mr spivey provided no evidence that he was in fact required to wear a specific type of shoe in his work under cross-examination mr spivey stated that the shoes were not steel toe and were not resistant to chemicals we conclude that petitioners are not entitled to a deduction for mr spivey’s safety shoes for or safety glasses - on the basis of mr spivey’s thorough description of the uniqueness of the glasses and the fact that amtrak-marc required him to use them we conclude that these expenses were necessary appropriate and helpful to his business welch v helvering u s pincite mr spivey’s testimony as to the cost and quantity of glasses he purchased was also credible thus under cohan we permit petitioners to deduct the expense of purchasing two pairs per year for a total annual cost of dollar_figure for year sec_2002 and grooming - the court has long held that grooming expenses are inherently_personal and are nondeductible 52_tc_842 we are unconvinced that mr spivey’s particular grooming regime was directly connected with or pertaining to the taxpayer’s trade_or_business sec_1_162-1 income_tax regs we acknowledge that his employment required him to maintain a general level of proper grooming however we do not find any element of this requirement to be so extraordinary as to permit mr spivey to deduct grooming as an ordinary or necessary trade_or_business expense accordingly we sustain respondent’s disallowance in full regarding mr spivey’s claimed grooming expenses supplies - petitioners claimed a dollar_figure deduction for supplies mr spivey purchased in petitioners’ supporting schedule noted that mr spivey’ sec_2002 supplies purportedly included expenses for a laptop computer which during testimony mr spivey acknowledged was a mistake removing the computer and relying on cohan we find dollar_figure is a reasonable estimate of the other supplies mr spivey purchased during iii tax_return preparation fees sec_212 permits a deduction for expenses paid in connection with the determination collection_or_refund_of_any_tax thus payments by taxpayers for preparation of their returns are deductible sec_1_212-1 income_tax regs petitioners claimed on their returns and testified uncontrovertedly that they paid a preparer dollar_figure dollar_figure and dollar_figure to assist with their returns for and a preparer’s name was printed on the returns for those years and we find it unlikely that a preparer would list a deduction for tax preparation fees that petitioners did not pay moreover respondent allowed the deduction for and appears to have disallowed it for and only by mistake we therefore hold that petitioners may deduct the disputed tax_return preparation fees for and iv accuracy-related_penalty and addition_to_tax for late filing as a final comment we note that respondent determined that for each year at issue and petitioners are liable for an accuracy-related_penalty under sec_6662 and an addition_to_tax under sec_6651 for late filing although the commissioner bears the burden of production with respect to a penalty or an addition_to_tax in this case petitioners failed to raise the penalties or the additions as issues in their petition or at trial see sec_7491 116_tc_438 these issues are thereby deemed conceded see rule b 118_tc_358 to reflect our disposition of the issues decision will be entered under rule


t c memo united_states tax_court nancy louise field petitioner v commissioner of internal revenue respondent docket no filed date john m mooney jr for petitioner marshall r jones and john f driscoll for respondent memorandum opinion thornton judge this case is before us on respondent’s motion for summary_judgment respondent determined a dollar_figure deficiency in petitioner’s federal_income_tax and a dollar_figure accuracy-related_penalty under section a the issues for decision are whether petitioner is entitled to a tax_credit for adoption_expenses under sec_23 and whether she is liable for the sec_6662 penalty background the record reveals or the parties do not dispute the following on date petitioner and her husband who is petitioner’s counsel of record were married they did not live apart during the last six months of on her federal_income_tax return petitioner claimed a status of married filing separate and claimed that under sec_23 she was entitled to a qualified adoption_expense_credit of dollar_figure which exactly offset her reported tentative_tax of the same amount in his notice_of_deficiency respondent’s disallowance of petitioner’s claimed qualified adoption_expense_credit resulted in a dollar_figure deficiency respondent also determined that pursuant to sec_6662 petitioner was liable for an accuracy-related_penalty of dollar_figure unless otherwise indicated all section references are to the internal_revenue_code in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure monetary amounts have been rounded to the nearest dollar discussion summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trials fla peach corp v commissioner 90_tc_678 summary_judgment may be granted where there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law rule b the moving party bears the burden of proving that there is no genuine dispute as to any material fact and factual inferences will be read in a manner most favorable to the party opposing summary_judgment 98_tc_518 aff’d 17_f3d_965 7th cir when a motion for summary_judgment is made and properly supported the adverse_party may not rest upon mere allegations or denials of the pleadings but must set forth specific facts showing that there is a genuine dispute for trial rule d sec_23 allows a credit against an individual’s income_tax for qualified_adoption_expenses paid_or_incurred by the taxpayer if the taxpayer is married at the close of the taxable_year this credit is generally allowed only if the taxpayer and his or her spouse file a joint_return for that taxable_year joint filing requirement sec_23 because petitioner was married as of the close of there are certain exceptions to the general_rule see sec_23 cross- referencing sec_21 and petitioner has not alleged and the record continued but did not file a joint_return she is not entitled to any credit under sec_23 in opposing respondent’s motion for summary_judgment petitioner contends that the joint filing requirement violates her equal protection rights under the fifth_amendment to the u s constitution she alleges that before she married in she adopted children that her husband has never adopted any of these children and that for all practical purposes she has been their only support petitioner contends that the effect of the joint filing requirement is to penalize her for having married in she contends that in this unique situation of hers she should be treated as unmarried the fifth_amendment as applied to federal legislation encompasses the equal protection requirements of the fourteenth amendment 420_us_636 n the supreme court recently reiterated its longstanding holding that ‘a classification neither involving fundamental rights nor proceeding along suspect lines cannot run afoul of the equal protection clause if there is a rational relationship between the disparity of treatment and some legitimate governmental purpose ’ see armour v city of continued does not show that any of these exceptions applies in this case indianapolis __ u s __ __ 132_sct_2073 quoting 509_us_312 petitioner appears to suggest that the joint filing requirement imposes an impermissible classification on the basis of marital status the effects if any that the joint filing requirement has had on petitioner’s right to marry or her familial relationships are incidental burdens and do not rise to the level of an impermissible burden necessitating a heightened standard of review by this court cf 434_us_374 stating that although the right to marry is of fundamental importance the state may legitimately impose reasonable regulations that do not significantly interfere with decisions to enter into the marital relationship 434_us_47 explaining that social_security classifications that had a tangential impact upon a marital decision did not violate due process see also 58_tc_556 upholding different tax_rates for married and single taxpayers aff’d per curiam 474_f2d_1399 2d cir rather the complained-of classification is at most what the supreme court has labeled a tax classification armour __ u s at __ s ct pincite a tax classification is constitutionally valid if ‘there is a plausible policy reason for the classification the legislative facts on which the classification is apparently based rationally may have been considered to be true by the governmental decisionmaker and the relationship of the classification to its goal is not so attenuated as to render the distinction arbitrary or irrational ’ id at __ s ct pincite quoting 505_us_1 there is deemed to be a plausible policy reason if ‘there is any reasonably conceivable state of facts that could provide a rational basis for the classification ’ id at __ s ct pincite quoting fcc v beach commc’ns inc 508_us_307 moreover because the classification is presumed constitutional the ‘burden is on the one attacking the legislative arrangement to negative every conceivable basis which might support it ’ id at __ s ct pincite1 quoting doe u s pincite the joint filing requirement is very similar to a requirement under former sec_214 which allowed a deduction for child care expenses for married taxpayers but only if they filed joint returns this court held that requirement to be valid under the equal protection clause and its holding was affirmed by the court_of_appeals for the fifth circuit to which any appeal of this case would lie see sec_7482 69_tc_505 cash v commissioner tcmemo_1977_405 aff’d per curiam 580_f2d_152 5th cir with respect to the joint filing requirement under sec_23 as with the joint filing requirement under former sec_214 congress could reasonably assume that spouses who live together share the cost of maintaining the household so as to justify the joint filing requirement for this purpose it is immaterial whether the assumption might have proved erroneous in petitioner’s situation as she alleges furthermore we believe that plausible administrative considerations provide a rational basis for the joint filing requirement see armour __ u s at __ s ct pincite ordinarily administrative considerations can justify a tax- related distinction for instance the joint filing requirement plausibly mitigates administrative concerns against married taxpayers’ claiming duplicative adoption credits for the same child on separate returns petitioner suggests that respondent has allowed her to claim adoption tax_credits for under the same format which we understand to mean with respect to a return that she filed separately she contends that respondent’s alleged lack of consistency denies her equal protection under the law petitioner’s argument is without merit each tax_year stands on its own and must be separately considered see 394_us_678 the commissioner is not required for any given year to allow a tax_benefit permitted for a previous or subsequent year see eg lerch v commissioner f 2d n 7th cir aff’g tcmemo_1987_295 113_tc_158 we conclude and hold that the joint filing requirement does not violate the equal protection clause finding no genuine issue of material fact requiring a trial in this case with regard to the disallowance of the tax_credit under sec_23 we further hold that respondent is entitled to summary_judgment on that issue respondent also determined that petitioner is liable for an accuracy-related_penalty pursuant to sec_6662 respondent bears the burden of production with respect to this penalty see sec_7491 to meet this burden respondent must produce evidence establishing that it is appropriate to impose this penalty once respondent has done so the burden_of_proof is on petitioner to show that the penalty does not apply see 116_tc_438 sec_6662 and b and imposes a penalty equal to of the portion of the underpayment_of_tax attributable to among other things negligence or disregard of rules or regulations or any substantial_understatement_of_income_tax negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws and the term disregard includes any careless reckless or intentional disregard of rules or regulations sec_6662 negligence is the lack of due care or failure to do what a reasonable and ordinarily prudent person would do under like circumstances see eg 925_f2d_348 9th cir aff’g 92_tc_1 85_tc_934 a substantial_understatement_of_income_tax is defined in sec_6662 as an understatement that exceeds the greater of of the tax required to be shown on the return or dollar_figure petitioner’s dollar_figure understatement exceeds dollar_figure which is greater than of the tax required to be shown on her return accordingly respondent has met his burden of production to show that petitioner has a substantial_understatement_of_income_tax respondent having met his burden petitioner must come forward with persuasive evidence that the determination is incorrect see rule a higbee v commissioner t c pincite taxpayers can meet this burden by showing that they acted with reasonable_cause and in good_faith sec_6664 sec_1 a income_tax regs petitioner asserts that she acted with reasonable_cause and in good_faith because there is a genuine dispute as to the material facts with respect to this issue respondent is not entitled to summary_judgment on this issue accordingly we will grant in part respondent’s motion for summary_judgment to reflect the foregoing an appropriate order will be issued


internal_revenue_service departmen he treasury index number dollar_figure washington dc person to contact telephone number refer reply to cc dom it a plr-106418-98 ate jul legend taxpayer x y state city state act state statute agreement q r s proposal m n year year year year year year year year year dear t e t m a t h a e t w w e w w k d o h this responds to taxpayer's request for a private_letter_ruling dated march specificaily taxpayer has requested a ruling that the termination of taxpayer's power purchase agreement ppa pursuant to the agreement constitutes a compulsory or involuntary_conversion of its ppa and its facility within the meaning ab of sec_1033 and sec_1231 of the internal_revenue_code code taxpayer has also requested a ruling that the amount of any gain_or_loss required to be recognized by taxpayer in connection with the conversion of its ppa and its facility is a sec_1231 gain or sec_1231 loss conclusions the termination of the ppa pursuant to the agreement constitutes a compulsory or involuntary_conversion of the ppa and the facility within the meaning of sec_1033 and sec_1231 the amount of any gain_or_loss required to be recognized by taxpayer in connection with the conversion of its ppa and its facility will be treated as a sec_1231 gain or sec_1231 loss in accordance with the provisions of sec_1231 facts x is a regulated_public_utility furnishing electricity to various parts of state taxpayer is an independent power producer ipp that was organized in year for purposes of developing financing constructing and operating a q megawait coal- fired cogeneration_facility facility at city in state the facility was placed_in_service in year and is a certified as a qualifying_facility ‘qf’ under the public_utility regulatory policies act of u s c 824a as amended purpa and the implementing ferc regulations c f_r purpa requires electric utilities to purchase electricity from and enter into legally enforceable obligations with qfs n addition state enacted parallel provisions to purpa that obligated regulated public_utilities such as x to enter into long-term_contracts to purchase electricity from and granted additional rights to entities such as taxpayer that qualified under the state act as co-generation facilities or alternate energy production facilities the prices paid for electricity under these statutorily-mandated contracts were based upon projections of the costs that the regulated_public_utility otherwise would incur to meet its service requirements avoided costs these avoided costs were composed of in all cases variable costs associated with producing electricity and in some cases fixed costs associated with developing and constructing a facility if the regulated_public_utility did not have the generation capacity to meet the demand for electricity in year x entered into a ppa with y who assigned the ppa to taxpayer in year that was priced to reflect both the fixed and variable costs of producing electricity required to be purchased under the agreement for the majority of the output of taxpayer's facility x was obligated to pay an amount determined by reference to the higher of a s per kilowatt hour or b x's avoided costs as - calculated at the time electricity is delivered taxpayer projected that the payments to be made to it under the ppa would cover both the fixed costs associated with the development construction maintenance and operation of the facility as well as certain other costs such as fuel and fuel transportation costs and variable operation and maintenance_costs associated with the production of electricity at the time that the ppa was executed the price x was to pay for electricity was agreed to by taxpayer and x and was believed to be a fair price based on x's projections of the costs it would otherwise have incurred over the term of the ppa however by mid-year x had projected that it had excess electric production capability and thus its new avoided costs rates and accordingly the prices it was required to pay new projects for electricity were substantially less than its year thus the price paid_by x pursuant to taxpayer's ppa has for some time rates exceeded the state public service commission's psc current approved rates initially x was able to recover its costs for electricity produced by and due to the disparity between actual market purchased from taxpayer and other ipps under its state psc-approved tariffs which included a fuel adjustment clause however x's electricity rates are much higher than in other areas of the united_states electricity prices and the price paid for electricity under taxpayer's ppa and other ppas the state psc and consumers pressured x to reduce its rates and move toward a competitive market as early as march year the state psc began to investigate methods to create competitive opportunities for state electricity consumers including x’s customers and requested that the utilities do the same pursuant to the state psc’s request x commenced negotiations with taxpayer and other ipps to reduce its cost for electricity purchased under those ppas as of april year renegotiated ppa agreements with of ipps that had ppas x had in an attempt to reduce its costs x sought to have rules adopted by the state in april psc which would permit x to curtail purchases of electricity from the ipps year x petitioned the state psc suggesting that such rules were necessary and stating that the currently available settlement opportunities with the ipps had been exhausted although the state psc did not adopt a formal curtailment plan in year to develop a it continued its efforts to encourage regulated public_utilities including x competitive electric market for state in response in october year x submitted a proposal entitled proposal to the state psc for reducing its electric rates to its customers stating that the differences with the ipps had not been resolved the proposal set forth several alternative ways to restructure the ppas including the taking by eminent_domain of the ipps’ electricity generating facilities and the curtailment of x’s obligations to purchase electricity generated by the ipps emphasizing that it was essential to the creation of a competitive market that ppas with a significant number of the unregulated ipps be restructured such that those generating units become independent suppliers competing in the wholesale spot market or become suppliers to customers directly in the proposal x stated that if negotiations with the ipps failed to produce the necessary cost savings it proposed to utilize its power of eminent_domain to acquire the generating units owned by the ipps with which it has ppas and subsequently resell them at auction in order to increase competition in the wholesale power market it also stated that it would soon initiate the process necessary to exercise its power of eminent_domain by filing a petition with the state psc taxpayer believed that x would institute an eminent_domain proceeding against the facility unless x was otherwise able to reduce its payments to a significant number of ipps with which it had ppas after the proposal was made public x and certain of the ipps entered into negotiations x took no further action towards exercising its eminent_domain powers because of progress with the negotiations with the ipps during these negotiations x ‘s counsel stated to one of the ipps that if the negotiations were not successful x would have no way to restructure its markets and reduce its costs other than by commencing eminent_domain proceedings in may year the state psc issued an order describing its goals and strategies for restructuring state's electric utility industry and stated that all possible efforts to reduce electric rates should be continued including efforts to reduce utility commitments under ipps contracts that include obligations for payments well above current wholesale prices restructure these contracts voluntarily it would pursue policies to mitigate the impact of such contracts on rates subsequently in july year the state psc stated publicly that the ppas with the ipps were a major hurdle to lowering electric rates in state and achieving a competitive electric market two weeks after this public statement x made an offer to ipps to buy out their ppas those ipps retained an investment banking firm to evaluate x's offer it further stated that if the parties were unwilling to active negotiations between x and the pps continued until december year in december year the administrative law judge when the negotiations stalled considering x's request for curtailment of purchases from the ipps recommended that state utilities be allowed to curtail purchases although taxpayer's ppa prohibits x's curtailment of purchases taxpayer was still concerned that some action by x or government authorities could result in curtailment of electricity purchases to some degree in march year taxpayer and other ipps made a counterproposal to the x's offer which became the basis for further negotiations in may year the state the power of eminent_domain was delegated to x pursuant to state statute which provides that ajn electric corporation shall have the power and authority to in the acquire such real_estate as may be necessary for its corporate purposes manner prescribed by the eminent_domain procedure law a f psc approved but did not issue a curtailment order which allowed x to reduce the quantity of electricity that it was required to purchase from certain ipps the ipps believed that the approval of the curtailment order was intended to place additional pressure on the negotiations with x in july year taxpayer and the other ipps signed the agreement which was subsequently amended four times on june year the transaction was consummated in accordance with the terms of the amended agreement pursuant to the amended agreement consideration in the aggregate of dollar_figure m cash and n shares of x common_stock would be available for ipps to elect from taxpayer has elected to take cash in consideration for terminating its ppa taxpayer's ppa will be terminated but it will have the right to maintain its status as a state qf the right to wheel its output to third parties and the right to have x act as an agent for sales of its electricity to the state electric power pool taxpayer represents that x had threatened during negotiations to pursue eminent_domain actions against the ipps’ facilities including taxpayer's facility if the restructuring negotiations were not successful in november year x informed the state psc that it had not pursued the exercise of its power of eminent_domain due to the progress in negotiations with the ipps but that it would take necessary measures including exercise of it power of eminent_domain if the restructuring pursuant to the agreement was not effected based on x's actions taxpayer states that it had a reasonable belief that a threat_or_imminence_of_condemnation existed against its facility taxpayer further represents that if x had condemned its facility the ppa would have been unenforceable and wholly worthless and that it could not have sold electricity to x pursuant to the terms of the ppa taxpayer represents that the ppa was site-specific because that the ppa is fimited to the purchase and sale of electricity produced and delivered by the facility referenced in the ppa thus if taxpayer's facility were taken by x pursuant to its eminent_domain powers taxpayer could not sell electricity to x pursuant to the terms of the ppa nor could it assign its ppa to a third party for value because the third party could not sell electricity to x pursuant to the terms of the ppa taxpayer further represents that one of the requirements for qf status is that the facility must be owned by a person not primarily engaged in the generation or sale of electric power other than electric power solely from cogeneration facilities or small power production facilities thus once x an electric utility acquired the facility the facility would lose its qf status which is required by the ppa to be maintained if the of status is not maintained x has the option of terminating the ppa and it would have terminated the ppa it is also represented that if x had acquired taxpayer's facility it would have auctioned the facility and the new owner of the facility could not have sold power to x pursuant to the ppa but would have to abide by new pricing protocols in the competitive market taxpayer abandoned its facility in august year because the termination of its ppa severely restricted or eliminated the economic viability of operating the facility under then current market conditions taxpayer's ppa has a term of years and was amended three times the ppa requires x to take and pay for up to s megawatts of electricity produced by taxpayer's facility the ppa can be assigned to a third party by taxpayer with x's consent which consent cannot be unreasonably delayed or conditioned taxpayer has treated the ppa as a separate and distinct asset on its books_and_records costs associated with acquiring the ppa such as attorney's_fees and other related costs have been capitalized and amortized over the life of the ppa taxpayer represents that its federal_income_tax and accounting treatment of the sale of electricity pursuant to the ppa is consistent with treating such sale as a sale of inventory law and analysis whether the termination of taxpayer’s ppa pursuant to the agreement constitutes a compulsory or involuntary_conversion of its ppa and its facility within the meaning of sec_1033 and sec_1231 sec_1033 provides in part that if property as a result of its destruction in whole or in part theft seizure or requisition or condemnation or threat or imminence thereof is compulsorily or involuntarily converted into money the gain if any shall be recognized except to the extent hereinafter provided in this paragraph sec_1033 provides that if a taxpayer during the period specified in sec_1033 for the purpose of replacing the property so converted purchases other_property similar_or_related_in_service_or_use to the property so converted then at the taxpayer's election the gain shall be recognized only to the extent that the amount_realized upon such conversion regardless of whether such amount is received in one or more taxable years exceeds the cost of such other_property sec_1 a of the income_tax regulations provides in part that an involuntary_conversion may be the result of the destruction of property in whole or in part the theft of property the seizure of property the requisition or condemnation of property or the threat or imminence of requisition or condemnation of property revrul_63_221 1963_2_cb_332 establishes the criteria necessary for the existence of a threat_or_imminence_of_condemnation based on the taxpayer's reasonable belief generally the threat_or_imminence_of_condemnation exists when a property owner is informed either orally or in writing by a representative of a governmental body or public official authorized to acquire property for public use that ohe such body or official has decided to acquire the owner's property and the owner has reasonable grounds to believe from the information conveyed to him by such representative that the necessary steps to condemn the property will be instituted if a voluntary sale is not arranged revrul_74_8 1978_1_cb_200 modifying revrul_63_221 provides that a threat_or_imminence_of_condemnation may exist where the purchaser a public_utility lacked actual condemnation authority prior to or at the time of the sale but it generally could readily obtain the power to condemn by application to the appropriate state official authority in the event that a voluntary sale was not arranged and there was no reason to believe that such power to condemn the land purchased would be denied revrul_59_361 1959_2_cb_183 recognized the economic unit theory of 30_tc_741 acq 1959_2_cb_5 the taxpayer in masser owned a freight terminal and the parking lots across the street from the terminal that were necessary for its operation the parking lots were condemned and the taxpayer being unable to secure adequate replacement lots in the same vicinity sold the freight terminal the proceeds of the sale of the freight terminal together with the proceeds from the condemnation of the parking lots were reinvested in a similar terminal and parking facilities suitable for the taxpayer's business the court allowed involuntary_conversion treatment for the terminal proceeds and the parking lot proceeds on the theory that the two properties were used as an economic unit accordingly the service stated that where all the facts and circumstances show a substantial economic relationship between the condemned property and the other_property sold by the taxpayer so that together they constituted one economic property unit such as existed in the masser case involuntary_conversion treatment for the proceeds of the voluntary sale will be permitted revrul_82_147 1982_1_cb_190 held that the sale of the taxpayer's fishing resort due to an act of congress declaring the area in which it is located a boundary waters canoe area wilderness constituted an involuntary_conversion prohibited the use of motorboats with motors of greater than horsepower on the lake the restriction on horsepower of motorboats effectively denied the taxpayer the former economic use of its resort to require the government to purchase the resort at its fair_market_value without regard to the restriction the restriction together with the provision authorizing purchase effectively constituted a taking of the property upon payment of fair compensation the act gave an affected resort owner the option the act the actions of the state psc and x with regard to the establishment of a competitive electricity market for state provide notice to taxpayer as well as a reasonable basis for taxpayer to conclude that x would pursue its threat to condemn taxpayer's facility if taxpayer did not renegotiate its ppa further it is clear that x had the authority under state statute to commence eminent_domain proceedings against taxpayer's facility okoted taxpayer's representations regarding the relationship between its ppa and its facility establish that the property converted the ppa bears a substantial economic relationship to the threatened property the facility against which x has taken actions that constitute a threat_or_imminence_of_condemnation further if x were to condemn the facility this action would damage completely the value of the ppa to taxpayer thus although x's threat of condemnation was made to taxpayer's facility because the facility and the ppa form an economic unit the termination of taxpayer’s ppa pursuant to the agreement constitutes an involuntary_conversion made under a threat_or_imminence_of_condemnation by x of the ppa and the facility whether the amount of any gain_or_loss required to be recognized by taxpayer in connection with the conversion of its ppa and its facility is a sec_1231 gain or sec_1231 loss sec_1231 prescribes in part the treatment of certain gains from involuntary_conversions sec_1231 provides that the term sec_1231 gain means any recognized gain from the compulsory or involuntary_conversion as a result of destruction in whole or in part theft or seizure or an exercise of the power of requisition or condemnation or the threat or imminence thereof into other_property or money of property used in a trade_or_business or any capital_asset which is held for more than year and is held in connection with a trade_or_business or a transaction entered into for profit see also sec_1231 losses under sec_1231 if sec_1231 gains for the year exceed sec_1231 losses they are treated as long- term capital_gains_and_losses if sec_1231 losses exceed sec_1231 gains they are treated as ordinary gains and losses the provisions in sec_1231 that deal with involuntary_conversions provide a statutory_sale or exchange for such transactions so that they may qualify for potential capital_gain treatment depending on the netting of gains and losses under sec_1231 these provisions were added by congress in part to supplement what is now sec_1033 and are generally interpreted in a similar manner see h_rep_no cong 2d sess 1942_2_cb_372 conf_rep no cong 2d sess 1942_2_cb_701 cf rev_rul 1953_2_cb_36 treatment of severance_damages under sec_1231 accordingly any gain_or_loss recognized by taxpayer in connection with the conversion of its ppa and its facility will be treated as a sec_1231 gain or sec_1231 loss se ee based on taxpayer's representations and the above analysis we rule as follows the termination of the ppa pursuant to the agreement constitutes a compulsory or involuntary_conversion of the ppa and the facility within the meaning of sec_1033 and sec_1231 a3 i the amount of any gain_or_loss required to be recognized by taxpayer in connection with the conversion of its ppa and its facility will be treated as a sec_1231 gain or sec_1231 loss in accordance with the provisions of sec_1231 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this fetter this ruling is directed only to the taxpayer s requesting it sec_61 j of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely assistant chief_counsel income_tax accounting by senior téchnician reviewer branch income_tax accounting ole