intemal revenue service_department of the treasury index washington dc person to contact telephone number refer reply to cc dom eeng woo dear this responds to your ruling_request submitted on behalf of the taxpayer z rulings requested that z is required to file information returns under sec_6041 of the internal_revenue_code for trip awards it makes to noncorporate dealers if the value of a trip awarded is dollar_figure or more in any taxable_year that z is not required to file information returns under sec_6041 with respect to individuals designated by dealers to take the trips facts z is a domestic_corporation that manufactures products that it sells to independent dealers the dealers which are proprietorships partnerships and corporations in turn sell the products to the general_public each year z sponsors an incentive award program to encourage dealers to purchase the products manufactured by z the incentive awards are trips that include transportation accommodations and all other expenses the fair_market_value of each trip awarded is dollar_figure or more there are two categories within the incentive program one category is for long-term plr-117334-98 dealers who have consistently met yearly sales goals for z’s products the second incentive program offered to all dealers awards trips to a certain number of top dealers based on the wholesale purchase of z’s products by the dealer dealer that receives an award is entitled to designate two individuals to take the trip in both categories a only dealers are entitled to win trip awards and only dealers may designate the individuals who will take the trips the only requirement imposed by z on a dealer is that at least one of the individuals who takes the trip must be a principal officer or key_employee of the dealer the other individual may be a spouse or companion z provides an award-winning dealer with a form on which the dealer designates the names of the individuals who will take the trip after the dealer makes the designation all further arrangements for transportation accommodations and payment of other expenses are made by z law and analysis sec_6041 of the internal_revenue_code provides that persons engaged ina trade_or_business and making payment in the course of that trade_or_business to another person of rent salaries wages premiums annuities compensations remunerations emoluments or other fixed or determinable gains profits and income other than payments to which certain other code provisions apply of dollar_figure or more in any taxable_year must make a return of such payment the return must set forth the amount of the payment and the name and address of the recipient sec_1_6041-1 of the income_tax regulations states that amounts paid as prizes_and_awards that are required to be included in gross_income under sec_74 and sec_1_74-1 when paid in the course of a trade_or_business are required to be reported under sec_6041 under sec_1_6041-1 if any payment required to be reported is made in property other than money the fair_market_value of the property at the time of payment in general sec_1_6041-3 exempts is the amount to be included on the return payments to corporations from the reporting requirements of sec_6041 subject_to exceptions that are not relevant here sec_1_6041-1 provides that an amount is deemed to have been paid when it is credited or set apart to a person without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made and is made available so that it may be drawn upen at anytime and its receipt brought within the payee’s control and disposition sec_74 provides in general that gross_income includes amounts received as prizes_and_awards sec_1_74-1 states that prizes_and_awards that are plr-117334-98 includible in gross_income include but are not limited to awards in contests of all types as well as prizes_and_awards from an employer to an employee in recognition of some achievement in connection with his employment under sec_1_74-1 if the prize or award is not in money but is made in goods or services the fair_market_value of the goods or services is the amount to be included in income under the facts presented z awards prizes of trips to dealers for successfully meeting criteria established by z the individuals who take the trips cannot compete in z's incentive program only dealers can meet the criteria and be awarded prizes and they are the recipients of the trips awarded by z thus the trip is a prize or award includible in the recipient dealer's gross_income under sec_74 and it constitutes a payment of fixed or determinable income under sec_6041 however dealers that are corporations that receive trip awards are not the kind of corporations payments to which are subject_to the information reporting requirements of sec_6041 of course dealers whether they are proprietorships partnerships or corporations are subject_to information reporting requirements when they designate the individuals who will take the trips conclusions zis required to file information returns under sec_6041 for the trips it awards to noncorporate dealers if the fair_market_value of a trip awarded is dollar_figure or more in any taxable_year zis not required to file information returns with respect to the individuals designated by the dealers to take the trip caveats a copy of this letter must be attached to any income_tax return to which it is relevant except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter plr-117334-98 this ruling is directed only to the taxpayer s requesting it sec_6110 provides that it may not be used or cited as precedent sincerely jody j brewster assistant chief_counsel income_tax accounting robert a berkovsky chief branch enclosure copy for sec_6110 purposes


department of the treasury internal_revenue_service washington d c contact person id number telephone number number release date se t eo ra t pe date date no third party contact sin employer_identification_number legend b dear ------------------ pre-seed capital funding activities classified as a supporting_organization under sec_509 of the code you support b which is tax-exempt under sec_501 and classified as a non-private foundation under sec_509 and sec_170 b operates a community college b faces serious problems because of a lack of learning and teaching opportunities in its geographic area for college graduates b is located in a county with an unemployment rate well above the rest of the state and an economy dependent upon heavy industrial and manufacturing businesses which have been downsizing their workforces the geographic area has been determined to be economically depressed this has caused b great difficulty in maintaining and expanding its educational programs and providing few opportunities for highly qualified college graduates as a result of the high unemployment rate many graduates have difficulty finding opportunities within b’s geographic area and consequently b’s ability to accomplish its tax-exempt purposes you propose to establish a state-of-the-art high technology innovation center and resource hub b in to combat the serious economic problems that are affecting your geographic area this is in response to your ruling_request as to the tax consequences associated with you are a tax-exempt under sec_501 of the internal_revenue_code and is you have stated that to help solve both the educational and economic problems participation with the county chamber of commerce a sec_501 organization and the county government will operate the program which will be designed to support all facets of the start-up development and growth of enterprises the program’s objective is to grow jobs and spearhead economic growth in your geographic area which will be a crucial component of b’s ongoing mission to provide its faculty students and the community with the cutting-edge knowledge experience and skills needed to succeed in an increasingly high-technology innovation driven economy it is anticipated that the program will provide b’s students with contemporary entrepreneurial experiences and opportunities b believes it must provide its students with real-world experiences and opportunities to establish a clear path from the classroom to personal and career fulfillment by enabling faculty to show and students to learn how to translate ideas into useful products and services that support economic growth expanding businesses and new jobs caused by the shortage of opportunities for exposure to real-world businesses around its campus and in its geographic area the program is designed to provide training resources and experiences to b’s students and faculty from theoretical learning to practical business application the program will consist of a comprehensive innovation center and resource hub which will include a research and business incubator fellowships and internships advanced computer and communication systems and a pre-seed capital fund information systems office space administrative services and training in business and marketing these facilities will be located on the main campus of b and in a nearby industrial park owned by b the goals of the incubator are to increase real-world innovation and technology based experiences that advance the education of the college’s students to perfect the innovation and technology-based business acumen of its faculty and to attract develop and retain high-technology and innovation based industries in your county so that students faculty and staff have opportunities to continue their learning and skills in your geographic area incubator as a comprehensive regional innovation center and resource hub your program will be committed to give anyone including faculty who has an idea technology or business a free first-level assessment college faculty will also be involved as advisors in assessing and in providing resources and services to the incubator’s assisted and associated businesses the faculty will transfer ideas from the classroom into laboratories computer simulations and production facilities as well from such laboratories simulations and facilities to the classroom program will be offered to students in order to provide real-life learning experiences b’s students will be eligible for co-op as well as part-time employment opportunities with incubator companies and resource providers the program will also expand b’s available offerings to undergraduate students the you have stated that strong connections will be made between b’s faculty and the the research and business incubator will provide state-of-the-art computer and those involved in the program hope to attract entrepreneurs and businesses from across the spectrum of the emerging innovation-based businesses an insufficient number of companies in such industries have established operations in your geographic area thus limiting the number and depth of learning research and career opportunities for the students of b a component of the program is the development of advanced computer and communications systems to connect b with the community the incubator and the individuals and businesses that participate in the program’s activities the communication system will connect the incubator sites and the main campus of b with telephone video- conferencing distance learning and other communication facilities the final component of the program is a pre-seed capital fund that will be allocated to enterprises associated with the incubator for early-stage product development marketing and business planning efforts you desire to establish a separate fund under your control for monies donated for the purpose of eventual contribution toward this pre-seed fund with the fund pre-seed monies will be invested in qualifying businesses especially in the early stages of proving technical feasibility assessing the potential of inventions and underwriting the cost of new product development marketing and business planning by furnishing pre-seed capital successful entrepreneurs will be attracted to the incubator as a result you hope they will settle where the prerequisites for research education and business development prevail with regard to the pre-seed capital fund greater than average risk may be incurred to foster worthwhile start-ups developed at an early stage the start-ups will offer research educational and career opportunities to b’s students faculty and graduates you state that the pre-seed fund will not be motivated by profit yet will maintain a risk reward balance the fund will raise capital on a philanthropic basis the fund will then be distributed to qualifying entrepreneurs on a matching basis for a small equity_interest in the venture you have stated that the purpose of the equity exchange is not profit but as a mechanism to self-perpetuate the fund the fund will match dollar-for-dollar capital raised by the entrepreneur the primary purpose of the fund is to ensure that additional pre-seed capital is available to encourage innovation and entrepreneurial behavior in your geographic area you believe this supports both b and your geographic area as it promotes future economic growth funding of the pre-seed capital fund from contributions will not jeopardize your exempt status under sec_501 of the code contributing to the funding of the pre-seed capital fund will not jeopardize you status as a non-private foundation under sec_509 of the code contributions made to you are deductible charitable_contributions under sec_170 of the code you have requested the following rulings sec_170 of the code allows as a deduction any charitable_contribution as defined sec_170 defines a school as an educational_organization which sec_501 of the code provides an exemption from federal_income_tax for sec_1_501_c_3_-1 of the income_tax regulations provides that the term in subsection c made within the tax_year sec_170 defines charitable_contribution to include a contribution or gift to or for_the_use_of a corporation or foundation a created or organized in the united_states or under the law of any state b organized and operated exclusively for charitable or educational_purposes c no part of which inures to the benefit of any private_shareholder_or_individual and d is not disqualified for tax exemption under sec_501 by reason of attempting to influence legislation and does not participate in or intervene in any political campaign of any candidate for public_office normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where the educational activities are regularly carried on organizations described in sec_501 including organizations that are organized and operated exclusively for charitable educational or scientific purposes charitable is used in sec_501 of the code in its generally accepted legal sense such term includes relief of the poor and distressed or of the underprivileged advancement of education and promotion of social welfare by organizations designed to accomplish any of the above purposes or to combat community deterioration and juvenile delinquency the instruction or training of individuals for the purpose of improving or developing their capabilities or the instruction of the public on subject useful to individuals and beneficial to the community sec_509 of the code states that a private_foundation includes a sec_501 organization other than an organization which is organized and at all times thereafter operated exclusively for the benefit of to perform the functions of or to carry out the purposes of one or more specified organizations described in sec_509 and is operated supervised or controlled by or in connection with one or more organizations described in sec_509 and is not controlled directly or indirectly by one or more disqualified persons college students for internship programs providing work experience in various phases of government related to their studies while enabling them to contribute to the community qualifies for exemption under sec_501 of the code revrul_70_584 1970_2_cb_114 provides that a nonprofit organization that recruits revrul_74_587 1974_2_cb_162 provides that a nonprofit organization formed in sec_1_501_c_3_-1 of the regulations defines the term educational to include revrul_79_323 1979_2_cb_106 provides that an industrial commission revrul_76_419 1976_2_cb_146 provides that a nonprofit organization that revrul_75_284 1975_2_cb_202 provide that a nonprofit organization that was part to combat community deterioration through a program of financial assistance in the form of low cost or long term loans to or the purchase of equity interests in various business enterprises in economically depressed areas is exempt under sec_501 of the code the loans and purchases of equity interests were not undertaken for the purpose of profit but for the purpose of advancing the charitable goals of the organization and were not considered to be investments in a conventional business sense formed to provide high school graduates and college students with work experience for which they receive no compensation in selected trades or professions and that is financed by tuition and contributions from the general_public is an organization operated exclusively for charitable and educational_purposes and qualifies for exemption under sec_501 of the code purchases blighted land in an economically depressed community converts the land into an industrial park in order to provide employment opportunities for low income residents of the area in exempt under sec_501 of the code established by a state legislature to study the problems of industrial life in a particular geographic area is composed of representatives appointed by elected officials from each participating municipality and is authorized to provide for the housing of industries acquire land borrow money sell property issue bonds and establish a per capita assessment its activities are subject_to review by the state and member municipalities amount to be contributed to the commission are deductible charitable_contributions under sec_170 of the code investment_company licensed under sec_301 of the small_business investment act of which was formed to relieve poverty eliminate prejudice and discrimination reduce neighborhood tensions and combat community deterioration and that provide low -cost or long-term loans to businesses not able to obtain funds from conventional commercial sources with preference given to businesses that provide training and employment opportunities for the unemployed or under-employed residents of economically depressed areas may qualify for exemption under sec_501 of the code charitable purposes of b the educational opportunities created directly through pre-seed capital businesses located at the research and business incubator and associated with your program will contribute importantly to b’s teaching program your program will enhance the environment in which to instruct students and support the faculty for the purpose of improving and developing their capabilities see sec_1_501_c_3_-1 of the regulations and revenue rulings and supra you have stated that you will invest your pre-seed capital funds primarily in companies and ideas that further the the facts indicate that the program is operated to further the educational and revrul_81_284 1981_2_cb_130 provides that a nonprofit small_business the pre-seed capital fund is expected to assist in the promotion of professional educational mission of exposing students and faculty to cutting-edge innovative business endeavors you believe that any benefit to the companies in which you invest will be incidental to the purpose of advancing the educational_purposes of b your investments in these companies are viewed as a step along a continuum of activities from classroom studies through practical commercial application necessary to fulfill b’s educational mission the pre-seed capital fund contributes importantly and directly to carrying out your educational_purposes specialty occupations including high-technology and new-economy careers in b’s geographic area these careers will enhance the geographic area to attract new industry and provide useful products and services that support economic growth new jobs and expanding businesses which will foster the development of an innovation-oriented economy see sec_1_501_c_3_-1 of the regulations thus the educational program will improve the overall economic area and further social welfare purposes see revenue rulings and supra thus this activity will not jeopardize your exempt status under sec_501 of the code nor your non-private foundation status under sec_509 in addition any gift to you for the purposes discussed herein will qualify as a charitable_contribution under sec_170 see also revrul_79_323 supra accordingly based on all the facts and circumstances described above we rule funding of the pre-seed capital fund described herein fund will not jeopardize your tax-exempt status under sec_501 of the code funding of the pre-seed program described herein will not jeopardize your nonprivate foundation status under sec_509 of the code contributions made to you are deductible as charitable_contributions under sec_170 of the code these rulings are based on the understanding that there will be no material changes in the facts upon which they are based these rulings do not address the applicability of any section of the code or these rulings are directed only to the organization that requested them sec_6110 of the code provides that they may not be used or cited by others as precedent regulations to the facts submitted other than with respect to the sections described code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we this ruling will be made available for public inspection under sec_6110 of the please keep a copy of this ruling in your permanent records if you have any questions about this ruling please contact the person whose name intend to make available for inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice and telephone number are shown in the heading of this letter enclosure technical group lawrence m brauer acting manager exempt_organizations notice sincerely s


t c memo united_states tax_court lee d froehlich petitioner v commissioner of internal revenue respondent docket no filed date p p’s accountant and r’s counsel engaged in a pretrial conference the conference began with a discussion of settlement r’s counsel did not believe that settlement would be achieved and from his perspective he began what he believed to be a discussion of matters to be stipulated for trial p and his accountant who were not familiar with the pretrial procedures of this court believed that the settlement discussions had continued the matter discussed between r’s counsel p and p’s accountant involved whether there had been a duplication of a dollar_figure amount and whether p was entitled to losses that were capital or ordinary in character r at trial offered statements made by or on p’s behalf as admissions against p’s interest p contends that fed r evid prohibits r’s offer of admissions because the statements were made in the context of settlement negotiations held under fed r evid both offers of settlement and statements made during settlement negotiations are not admissible to prove liability or invalidity of a claim held further it was substantially unclear to p and his accountant that settlement negotiations had concluded any admissions made are not admissible under fed r evid held further p’s loss was capital in nature held further p is not liable for the accuracy-related_penalty under sec_6662 i r c for reasons stated herein steve mather for petitioner mark a weiner for respondent memorandum findings_of_fact and opinion gerber judge respondent determined a deficiency in petitioner's federal_income_tax in the amount of dollar_figure and an addition_to_tax pursuant to section in the amount of dollar_figure respondent also determined a deficiency in petitioner's federal_income_tax in the amount of dollar_figure and an accuracy- related penalty pursuant to sec_6662 of dollar_figure the principal controversy here is whether petitioner has established that his dominant motivation in guaranteeing the floor_plan line of credit was to secure or protect his trade_or_business of being an employee this in turn controls whether petitioner is entitled to deduct a dollar_figure payment made to a bank as a business_bad_debt pursuant to sec_166 if we all section references are to the internal_revenue_code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated determine that it is not deductible as a business_bad_debt then petitioner is entitled to claim the dollar_figure as a short-term_capital_loss ie a nonbusiness_bad_debt sec_166 and we also consider whether petitioner is liable for an accuracy-related negligence_penalty pursuant to sec_6662 for the taxable_year findings of fact3 lee d froehlich petitioner at the time of the petition in this case resided in simi valley california petitioner at various times has been engaged in the field of selling new and used automobiles petitioner's professional career has been in the retail automobile business including positions such as salesperson sales manager general manager and ultimately owner of a dealership for the relevant years petitioner was president and owner of fro enterprises inc an acura automobile dealership the auto dealership in petitioner was inducted into the u s army thus interrupting his college education at the university of nebraska in petitioner began developing skills and expertise selling automobiles in kansas city kansas petitioner also received management training during this particular interval from respondent has conceded that petitioner is not liable for the sec_6661 addition_to_tax for the taxable_year the parties' stipulations of facts and exhibits are incorporated by this reference through petitioner was employed by automobile dealerships in montana where he met mr jack robertson robertson who offered him a job selling honda automobiles petitioner was employed by robertson honda during through for the next year and a half petitioner was the manager of used-car sales at a ford dealership in petitioner returned to robertson honda and worked there until during the last several years of his employment in robertson honda petitioner was the general manager and he earned dollar_figure and dollar_figure for and respectively petitioner enjoyed an excellent working relationship with robertson however petitioner believed there was no room for further advancement within robertson honda also petitioner surmised that his position with robertson honda was precarious because he was making twice as much as other general managers in comparable employment petitioner believed that if he owned his own auto dealership he could earn several times his earnings at robertson honda which averaged dollar_figure annually in the years approaching petitioner believed that the general manager of the flagstaff dealership earned approximately dollar_figure to dollar_figure annually petitioner believed that the owner of his own dealership could earn dollar_figure annually petitioner understood that robertson initially earned dollar_figure per year but ultimately increased his salary to dollar_figure million petitioner desired to attain that level of compensation he also sought to work less hours and to pursue leisure activities such as golf thus petitioner wanted to own an auto dealership in order to maximize career and salary opportunities robertson assisted petitioner in obtaining an automobile dealership franchise from american honda motor co inc american honda american honda advised that honda dealerships were not available and suggested instead an acura dealership the acura dealership however could only be assigned to robertson because of american honda company rules that required preference be given to current dealers acura offered robertson a dealership in the san fernando valley in southern california on date the acura automobile division a subsidiary of american honda submitted a letter of intent to robertson that his application_for an acura automobile dealership had been tentatively approved robertson was assigned the area around woodland hills california the letter of intent contained the estimate that the land and building would cost approximately dollar_figure to conform to acura's requirements and that the facility was to be completed no later than date finally american honda notified robertson that as part of its marketing strategy another acura dealership would be opening in nearby van nuys california robertson sold petitioner the rights to the acura dealership for the nominal sum of dollar_figure petitioner submitted a business plan to american honda subsequently american honda issued the acura dealership to petitioner the auto dealership however was ultimately located in calabasas california as a prerequisite to obtaining the acura dealership american honda required petitioner to invest dollar_figure in capital assets at that time petitioner had no major financial obligations and he possessed financial resources of approximately dollar_figure petitioner expected to borrow the balance of the money needed to meet the dollar_figure capital threshold intially petitioner contributed dollar_figure in cash to the auto dealership of this amount dollar_figure was expended for deposits legal fees signs and logos office supplies office furniture ceremony expenses secretarial salaries public relations promotional expenses and transfers to business accounts petitioner also selected the location of the auto dealership as well as the design acquired approval from county and state authorities hired and trained staff and engaged in other preliminary matters in petitioner's auto dealership's financial statement his cash contribution was reflected as other in the category total current_assets petitioner also contributed two automobiles with a total value of approximately dollar_figure these items were placed in the auto dealership's used car inventory and were deemed to be assets on the company's books as part of the dollar_figure capital requirement petitioner executed a note in favor of the auto dealership for approximately dollar_figure at the end of the first year of the business petitioner paid off this note from a bonus of dollar_figure that he received from the auto dealership the additional dollar_figure needed to meet the dollar_figure capital requirement was to be borrowed from golden state sanwa bank sanwa bank in a date letter setting forth sanwa bank's terms and conditions for the capitalization loan cap loan petitioner is denominated as borrower and the auto dealership as the guarantor the stated purpose of the loan is for permanent working_capital on date sanwa bank entered into a business loan agreement with petitioner for the cap loan the dollar_figure promissory note contains the statement that the loan is to assist with investment in auto dealership to meet permanent working_capital needs of enterprise petitioner is shown as the borrower and his occupation is listed as owner of the dealership on the same date a sanwa bank corporate resolution reflects that the auto dealership guaranteed the repayment of petitioner's debt and petitioner is denominated as president of the corporate entity fro enterprises inc finally sanwa bank prepared two documents that were both entitled continuing guaranty the first one typewritten and dated date states that the cap loan of dollar_figure was made to the auto dealership in this document petitioner is denominated guarantor and the auto dealership debtor on the top front page of the first document is the word backwards in handwriting the second document bears a handwritten date of date the second document extends the cap loan to petitioner and the auto dealership is listed as the guarantor on top of the second document is handwritten dollar_figure cap loan to replace note signed backwards cap loans were common in the automobile industry typically these loans were made to the corporate entities petitioner's bank records however reflect that he deposited the dollar_figure cap loan proceeds into his personal account and then transferred the funds to the auto dealership the date dealer financial statement reflected petitioner's initial capital_contribution consisting of the dollar_figure cap loan and petitioner's other contributions of approximately dollar_figure on date petitioner obtained a dollar_figure floor_plan line of credit the auto dealership is listed as the borrower this particular loan was required to be renewed annually a floor_plan loan is intended to finance the purchase of new car inventory through the time they are sold under floor_plan loans the lender purchases automobiles that are received in the auto dealership's inventory each time an automobile is sold the dealership is required to pay the lender the cost of that automobile on date sanwa bank informed the auto dealership attention of petitioner that the floor_plan line of credit for dollar_figure had been increased to dollar_figure effective date the auto dealership represented by petitioner in an unsigned and undated document entitled certified corporate resolution to borrow sought to borrow up to dollar_figure from sanwa bank on date sanwa bank increased the floor_plan loan to dollar_figure million sanwa bank issued a promissory note entitled commercial optional advance promissory note petitioner's name is shown on the document as president of the auto dealership on the same date in a related document entitled continuing guaranty petitioner was listed as guarantor petitioner's auto dealership opened date and during the first years it was the number one acura dealer in the united_states in the middle of petitioner's auto dealership began experiencing financial reverses because of an economic downturn in the state of california and because of the introduction of another luxury_automobile lexus finally two other acura dealers in thousand oaks and van nuys california respectively opened sometime in when petitioner's auto dealership suffered financial reverses it fell out of trust on its floor_plan a floor_plan is out of trust when the remaining inventory of automobiles is insufficient to cover the floor_plan loan consequently there was a possibility that sanwa bank would not renew the floor_plan loan sanwa bank required petitioner to reduce the amount outstanding on the floor_plan in order to reduce the amount outstanding petitioner decided to sell his home and disburse a significant portion of the proceeds to sanwa bank petitioner was compelled to reduce the amount out of trust with respect to the floor_plan loan because he had personally guaranteed the entire amount and if sanwa bank chose not to renew the loan the auto dealership would have gone out of business on date the auto dealership entered into an agreement to extend and or modify a promissory note for the floor_plan in this agreement the maturity of the date promissory note was extended to date petitioner as president of the auto dealership signed the agreement as borrower on date petitioner irrevocably transferred a deed_of_trust for petitioner's home to sanwa bank the deed_of_trust states that sanwa bank as the beneficiary would receive payment of an indebtedness in the amount of dollar_figure on date sanwa bank presented the escrow company with a demand note as well as the original unrecorded deed_of_trust for petitioner's home it was sanwa bank's understanding that the escrow company would disburse dollar_figure to sanwa bank at the close of escrow on date petitioner's home was sold for dollar_figure and sanwa bank received dollar_figure from the sale proceeds sanwa bank applied the funds distributed from the escrow company toward the floor_plan loan ultimately however on date sanwa bank did not renew the floor_plan loan and instead foreclosed on petitioner's auto dealership and liquidated and sold the assets afterwards sanwa bank sought payment for the approximately dollar_figure million outstanding balance due on the floor_plan loan petitioner did not receive any of the foreclosure proceeds on the auto dealership's federal_income_tax returns for the through tax years it reported the following years gross_receipts gross_profit total income1 taxable_income dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure 1this column reflects gross_profits plus other income such as cash discounts miscellaneous income finance and insurance_income as well as service contracts petitioner reported on his federal_income_tax returns the following amounts of income salary years dollar_figure big_number 1big_number big_number big_number 2big_number big_number big_number big_number big_number 1this figure has been rounded off to the nearest dollar in that year petitioner obtained a salary of dollar_figure and received a bonus of dollar_figure the bonus went back to petitioner's auto dealership to pay off the dollar_figure note and a dollar_figure loan he received from the dealership 2petitioner received dollar_figure prior to the loss of his auto dealership as a dealer owner petitioner received a total of dollar_figure in income from the auto dealership while it was in business petitioner on schedule d of his federal_income_tax return claimed dollar_figure in capital losses under sec_1244 and an additional unspecified dollar_figure loss in addition the dollar_figure paid to sanwa bank from the foreclosure proceeds was claimed as a loss on petitioner's schedule c as personal guarante sic of loan from corporation after the termination of petitioner's auto dealership he worked almost months as the manager of a ford dealership in orange county california thereafter acura requested petitioner to assist a huntington beach california dealer petitioner worked in the huntington beach dealership for approximately year he then worked for a honda dealership in pasadena california for year as of the time of trial petitioner had been working for approximately years with a ford dealership in thousand oaks california petitioner's accountant jesse greenspan mr greenspan was not aware that petitioner had personally borrowed dollar_figure from sanwa bank petitioner's auto dealership's accountant judith rugh ms rugh worked for an accounting firm that provided services for approximately clients which were auto dealerships ms rugh believed that generally petitioner's business maintained a fairly accurate set of books ms rugh also believed that petitioner's salary for the calendar_year was probably low when compared to other auto dealers that she was familiar with on date respondent's representatives met with petitioner and his accountant the meeting lasted approximately hours respondent's counsel believed that the purpose of the meeting was to engage in preparation for trial petitioner and his accountant mr greenspan believed that it was a settlement conference concerning the dollar_figure capital_contribution claimed as a stock loss and whether that was a different amount from the dollar_figure bad-debt deduction petitioner and mr greenspan presented numerous documents to prove that there were two dollar_figure amounts involved in the questioned transactions these documents were photocopied by respondent's counsel and an assistant the conference began with a settlement discussion between petitioner and respondent's counsel the brief settlement discussion was followed by the consideration of the merits of respondent's legal stance during the conference respondent's counsel informed petitioner and his accountant about the tax court's stipulation requirement towards the end of the meeting respondent's counsel advised petitioner to obtain counsel after the meeting petitioner and respondent's counsel engaged in a series of telephone conversations discussing whether there were two separate dollar_figure amounts claimed in the federal_income_tax return or whether there had been a duplication of a dollar_figure amount prior to trial the counsel who represented respondent during the pretrial phase withdrew to enable him to testify about statements made by or on behalf of petitioner at the conference new counsel represented respondent at the trial opinion the primary issue for our consideration is whether petitioner's loss of dollar_figure resulting from his guaranty is deductible as ordinary or capital preliminary to considering the merits of the primary issue we consider an evidentiary matter a evidentiary matter at trial respondent proffered her counsel's testimony to offer admissions against interest made by or on behalf of petitioner see fed r evid d petitioner seeks to exclude all of respondent's counsel's testimony on the ground that it consisted of statements made in the course of settlement negotiations proceedings in this court are conducted in accordance with the federal rules of evidence sec_7453 rule rule of the federal rules of evidence provides as follows rule compromise and offers to compromise evidence of furnishing or offering or promising to furnish or accepting or offering or promising to accept a valuable consideration in compromising or attempting to compromise a claim which was disputed as to either validity or amount is not admissible to prove liability for or invalidity of the claim or its amount evidence of conduct or statements made in compromise negotiations is likewise not admissible this rule does not require the exclusion of any evidence otherwise discoverable merely because it is presented in the course of compromise negotiations this rule also does not require exclusion when the evidence is offered for another purpose such as proving bias or prejudice of a witness negativing a contention of undue delay or proving an effort to obstruct a criminal investigation or prosecution this proscription is limited to evidence of settlement negotiations and documents concerning the compromise of a claim in addition the limitation on using such evidence applies only when it is being offered to show liability or that some underlying claim is invalid id the legislative_history of rule of the federal rules of evidence indicates that the purpose thereof is to encourage settlements see 678_f2d_90 9th cir 676_f2d_939 7th cir 83_tc_663 the underlying premise is that without the rule settlement negotiations would be inhibited if the parties knew that statements made in the course of settlement might later be used against them as admissions of liability united_states v contra costa county water dist supra pincite central soya co v epstein fisheries inc supra pincite hulter v commissioner supra pincite petitioner contends that a meeting with respondent's counsel was a settlement conference and hence statements made by see also saltzburg redden federal rules of evidence manual 3d ed in most cases the court should decide against admitting statements made during settlement negotiations as impeachment evidence when they are used to impeach a party who tried to settle a case but failed the philosophy of the rule is to allow the parties to drop their guard and to talk freely and loosely without fear that a concession made to advance negotiations will be used at trial opening the door to impeachment evidence on a regular basis may well result in more restricted negotiations petitioner are within the ambit of rule of the federal rules of evidence petitioner primarily relies on the second sentence of rule of the federal rules of evidence which states evidence of conduct or statements made in compromise negotiations is likewise not admissible the exception contained within rule of the federal rules of evidence for evidence otherwise discoverable mitigates the general_rule where evidence is discoverable from a source independent of the settlement negotiations see hulter v commissioner supra pincite the purpose of this exception is to prevent parties from insulating evidence that is obviously damaging to them by incorporating the evidence in settlement discussions and or offers in general_rule of the federal rules of evidence states a broad proscription excluding statements made during settlement negotiations when offered to prove the validity or amount of a claim specifically this rule does not distinguish between offers to settle and admissions of fact made during settlement negotiations see 856_f2d_652 4th cir accordingly the issue here is not whether the statement was one that was made as an offer to settle but whether it was made during settlement negotiations thus we must inquire here as a factual matter whether petitioner's admissions were made during a settlement conference petitioner and mr greenspan believed that the case could be settled if it could be established that there were two distinct elements in petitioner's federal_income_tax return--the dollar_figure capital_contribution taken as a loss and the dollar_figure bad-debt deduction petitioner and mr greenspan brought records to substantiate this particular contention during this meeting the records were photocopied by respondent's counsel and his assistant this in addition to the obvious settlement discussion in the beginning of the meeting caused petitioner to believe that the entire session was for the purpose of settlement respondent's counsel who is sophisticated and experienced in such matters delineated between the initial settlement discussion and the beginning of the process of stipulating facts for trial petitioner and mr greenspan however were not sophisticated and experienced in such matters it was only toward the end of the meeting when respondent's pretrial counsel advised petitioner to obtain counsel that it could have become clear to them that the subject matter had turned to preparation for trial as opposed to settlement discussions in addition the subsequent telephonic discussions between petitioner and respondent's counsel concerned the question of duplicated dollar_figure amounts and could have given petitioner the impression that the possibility of settlement was still under discussion in sum the record does not persuade us that settlement discussions had ended prior to the purported admissions by petitioner examining the totality of the circumstances we believe it is consonant with the purpose of rule of the federal rules of evidence to decline to include the purported statements made by petitioner in the record hence petitioner's motion to exclude respondent's counsel's testimony will accordingly be granted b capital versus ordinary_loss petitioner guaranteed the auto dealership's floor_plan loan which was utilized to purchase automobiles from the manufacturer for inventory purposes three years later petitioner’s assets were used to make a dollar_figure payment to sanwa bank to fulfill the guaranty obligation which petitioner deducted as a business_bad_debt respondent contends that the bad_debt is a nonbusiness_bad_debt and may not therefore be used to generally reduce ordinary_income in other words respondent determined that petitioner is entitled to a short-term_capital_loss and petitioner bears the burden of establishing that respondent's determination is erroneous rule a 290_us_111 also deductions are a matter of legislative grace and petitioner has the burden of proving his entitlement to the claimed deductions see 292_us_435 generally sec_166 provides that a taxpayer may deduct a bad_debt in full in the year it becomes worthless under sec_166 worthless business bad_debts are fully deductible from ordinary_income on the other hand worthless nonbusiness bad_debts are treated as short-term_capital_losses sec_166 sec_1222 a nonbusiness_bad_debt is defined in sec_166 as a debt other than a a debt created or acquired as the case may be in connection with a trade_or_business of the taxpayer or b a debt the loss from the worthlessness of which is incurred in the taxpayer's trade_or_business when a taxpayer guarantees a debt in the course of his trade_or_business payment of part or all of the taxpayer's obligations as guarantor is treated as a business_bad_debt in the taxable_year in which the payment is made assuming the taxpayer's right of subrogation against the debtor is worthless if the guarantee was made in the course of the taxpayer's trade_or_business the loss can be used to reduce ordinary_income in the year of payment sec_1_166-9 income_tax regs however if the agreement guaranteeing the debt was entered into for profit but not in the course of the taxpayer's trade_or_business the loss is a short-term_capital_loss in the year in which the guarantor pays the debt weber v commissioner tcmemo_1994_ smartt v commissioner tcmemo_1993_65 brooks v commissioner tcmemo_1990_259 sec_1_166-9 income_tax regs whether a taxpayer is engaged in a trade_or_business is a question of fact 405_us_93 sec_1_166-5 income_tax regs to obtain a business bad-debt deduction the taxpayer must establish that he was engaged in a trade_or_business and the acquisition or worthlessness of the debt was proximately related to the conduct of such trade_or_business 66_tc_652 affd 601_f2d_734 5th cir sec_1_166-5 income_tax regs whether a particular guaranty is proximately related to the taxpayer's trade_or_business depends upon the taxpayer's dominant motivation for becoming a guarantor united_states v generes supra pincite 590_f2d_884 10th cir 487_f2d_1246 1st cir 66_tc_710 vacated on another issue 67_tc_643 weber v commissioner tcmemo_1994_307 smartt v commissioner supra in determining whether the taxpayer's dominant motivation was to protect his salary or to protect his investment the courts have compared the taxpayer's salary the value of his investment and other motivating factors at the time he guaranteed the loan united_states v generes supra pincite putoma corp v commissioner supra pincite n schwartz v commissioner tcmemo_1995_415 garner v commissioner tcmemo_1991_569 affd 987_f2d_267 5th cir also we may examine how the taxpayer would have benefited from the loan or guarantee had the loan not gone bad 674_f2d_570 6th cir affg tcmemo_1978_434 finally in determining the taxpayer's dominant motivation objective facts take precedence over unsupported statements of subjective intent 503_f2d_1291 10th cir when a guarantor of a corporate debt is a shareholder and also an employee mixed motives for the guaranty are often present and the critical issue becomes which motive is dominant united_states v generes supra pincite i nvesting is not a trade_or_business 373_us_193 an employee's motive for guaranteeing a loan may be to the court_of_appeals for the fifth circuit stated generes and its progeny have established objective criteria to aid courts in their search for dominant motive our investigation centers around three factors the size of the taxpayer's investment the size of his after-tax salary and the other sources of gross_income available to the taxpayer at the time of the guarantees 987_f2d_267 5th cir affg tcmemo_1991_569 citation omitted the court_of_appeals for the ninth circuit stated generally that generes stood for the proposition that the proper characterization of a worthless_debt as business or nonbusiness was a question of fact to be established by the individual circumstances of each case 615_f2d_1253 nn 9th cir protect one's employment or salary weber v commissioner tcmemo_1994_341 i t must be clear from the record that the primary reason for making the advances which gave rise to the debts was business related rather than investment related 60_tc_316 generally returns from investing result from appreciation and earnings on the investment rather than from personal effort or labor united_states v generes supra pincite conversely one's role or status as an employee is a business_interest it typically involves the exertion of effort and labor in exchange for a salary id see also 983_f2d_997 10th cir smartt v commissioner supra if the dominant motive was to increase the value of petitioner's stock in the auto dealership then the loan was a nonbusiness investment if the dominant motive was to increase or protect the taxpayer's salary then the loan was a business debt if both outcomes occurred then a consideration of all of the relevant facts emphasizing the objective factors and giving controlling weight to no one single factor the generes approach should be utilized litwin v united_states supra smartt v commissioner supra respondent has conceded that the dollar_figure business bad-debt deduction claimed on petitioner's federal_income_tax return arises from the dollar_figure payment on the floor_plan loan which is separate and distinct from any other dollar_figure amount ie the cap loan and the contributions separately respondent also concedes that petitioner was in the business of being an auto dealership employee however respondent does not agree that petitioner's dominant motive at the time of the guarantee was related to any trade_or_business respondent argues that the guarantee was made to protect petitioner's investment in the auto dealership a related issue concerns the appropriate timeframe within which to measure petitioner's motivation in guaranteeing the floor_plan loan respondent asserts that petitioner's dominant motivation should be measured from the time when he last negotiated for an extension and personally guaranteed an extension for the floor_plan loan in date petitioner contends that the correct time was when the business opened in date generally a taxpayer's motivation is determined as of the date upon which the taxpayer made the guarantee rather than the date upon which a payment in discharge of liability as guarantor is made harsha v united_states supra french v united_states supra smartt v commissioner tcmemo_1993_65 specifically the focus of inquiry on a taxpayer's dominant motivation is at the time the taxpayer incurs the obligation not when the payment is made french v united_states supra pincite smartt v commissioner supra modell v commissioner tcmemo_1983_761 cho v commissioner tcmemo_1976_318 petitioner personally guaranteed_payment of the entire floor_plan loan as early as date the last record of an extension of the guarantee on date however reflects that petitioner signed a promissory note to extend the floor_plan loan to date we are unable to view the extension s of the guarantee as a new commitment as its nomenclature indicates an extension merely continues the original obligation thus petitioner's motivation with respect to the floor_plan arrangement is measured as of date petitioner's investment--petitioner owned all the outstanding_stock of the corporate dealership his total contribution was composed of two amounts each approximating dollar_figure the first dollar_figure was comprised of petitioner's liquid_assets of dollar_figure and a dollar_figure note in attempting to minimize the relative size of his investment in the dealership petitioner argues that it would not the statute and the regulations do not tell us at what point in time we should look to determine proximity in a guaranty context case precedent holds that the time to determine proximity is the time when petitioner entered into his guarantee agreements cho v commissioner tcmemo_1976_318 have been reasonable for him to make multimillion dollar guarantees to protect a dollar_figure cash investment also he argues that his salary from his auto dealership matched his out- of-pocket contributions this contention misconstrues petitioner's stake in the auto dealership focusing on the second dollar_figure component of the dollar_figure the cap loan petitioner contends that he did not individually borrow that amount from sanwa bank the record however reflects that on date sanwa bank notified petitioner that he was approved for the cap loan in that letter petitioner is denominated borrower and the auto dealership guarantor also in the date business loan agreement petitioner is again shown as the borrower sanwa bank's corporate resolution confirming the parties' intentions regarding the cap loan also shows petitioner as borrower the two guaranty extension documents reflect sanwa bank's intention to hold petitioner personally liable for the cap loan although one of the documents shows petitioner as guarantor the sequence of events and documents demonstrate that the original guaranty was in error and in due time was corrected we also note that petitioner deposited the proceeds of the cap loan in his personal bank account and disbursed from that account the moneys to the auto dealership thereby exercising dominion and control_over the loan proceeds moreover by securing the cap loan petitioner was able to raise the money necessary for the opening of the auto dealership thus in total petitioner personally contributed approximately dollar_figure to the auto dealership this investment was substantial in nature at the inception of the auto dealership petitioner secured a dollar_figure million floor_plan arrangement to acquire inventory automobiles initially petitioner was not required to personally guarantee the floor_plan arrangement it was not until date that petitioner personally guaranteed the floor_plan loan by that time the floor_plan amount had increased significantly permitting the auto dealership to have an expanded inventory base the record generally reflects that petitioner's dominant motivation was as an investor his motivation in guaranteeing the floor_plan loan was to protect his investment in the business of the auto dealership as opposed to protecting his trade_or_business as an employee finally in sanwa bank was concerned that the floor_plan amount was out of trust and requested that petitioner decrease the outstanding loan in the process sanwa bank received a dollar_figure security_interest in petitioner's home sanwa bank received dollar_figure from the date sale proceeds from petitioner's home again petitioner's dominant motivation was to protect his equity_investment in the auto dealership without the floor_plan loan petitioner's auto dealership would have been critically impaired see tennessee sec inc v commissioner f 2d pincite overall petitioner invested and assumed_liabilities of almost dollar_figure and guaranteed several million dollars worth of inventory in contrast his total salary over the same years was dollar_figure in addition petitioner remained liable for the dollar_figure million debt due sanwa bank after the foreclosure these figures contradict petitioner's argument that his total salary comported with his exposure to liabilities petitioner's salary--petitioner contends that he was apprehensive about his position in robertson honda because his salary was higher than comparable general managers motivating him to acquire an automobile dealership although petitioner stated his beliefs as to general managers' salaries no comparable salaries of general managers were offered also petitioner had an excellent working relationship with the owner of robertson honda who assisted petitioner in obtaining an acura dealership franchise these factors undermine petitioner's contentions about the precarious nature of his salary and tenure with robertson honda petitioner asserts that he expected to make a salary ranging from dollar_figure to dollar_figure million his salary speculations were more anecdotal than factual we note that petitioner did not offer robertson's testimony or that of other auto dealers petitioner did offer the testimony of ms rugh the auto dealership's accountant ms rugh thought petitioner's salary was low when compared to other auto dealers with which she was familiar petitioner however did not provide a plausible explanation as to why his salaries were substantially less than he testified others were especially considering the exclusivity of his auto dealership's geographic market the san fernando valley for the first years in that regard petitioner's auto dealership was the number one acura dealership in the nation for its first years finally subsequent to the foreclosure of the auto dealership petitioner's salary level working for other dealerships was comparable to his earnings when he worked for his own dealership accordingly petitioner knew that with his experience and background in the automobile sales field he would be able to obtain employment and commensurate levels of compensation elsewhere other factors--during the first years petitioner's business was the number one acura dealership in the country his auto dealership demonstrated generally increases in gross_receipts of dollar_figure gross_profits of dollar_figure and total income of dollar_figure in compared to the year before despite these increases petitioner received a salary of dollar_figure in compared with dollar_figure in in spite of increased gross_profits for and petitioner's salary declined from dollar_figure in to dollar_figure in there is no indication that there was any limitation on petitioner's ability to pay himself a salary he was the sole owner and submitted a business plan to american honda this salary pattern suggests that petitioner wanted to protect his equity_interest we hold that petitioner expected returns primarily from appreciation and earnings on his investment rather than in the form of salary from personal effort or labor on his part united_states v generes u s pincite- accordingly if the auto dealership were successful petitioner's reward would be realized primarily through sale_or_other_disposition of his stock interest rather than his salary putoma corp v commissioner t c pincite accordingly petitioner's dominant motive in paying amounts pursuant to his guaranty of the floor_plan loan was to protect his investment in the dealership and accordingly the resulting loss was capital in nature deductible only as a nonbusiness_bad_debt accuracy-related_penalty under sec_6662 respondent determined that petitioner was liable for the accuracy-related_penalty pursuant to sec_6662 sec_6662 provides a penalty equal to percent of the portion of the underpayment in this case that is attributable to negligence or disregard of the rules or regulations sec_6662 and b the burden is on the taxpayer to show a lack of negligence rule a 58_tc_757 negligence is defined as the failure to exercise the due care that a reasonable and ordinarily prudent person would employ under the circumstances 85_tc_934 the question is whether a particular taxpayer's actions in connection with the transactions were reasonable in light of his experience and the nature of the investment or business see 60_tc_728 when considering the question of negligence we evaluate the particular facts of each case judging the relative sophistication of the taxpayers as well as the manner in which they approached their transactions and reporting position mcpike v commissioner tcmemo_1996_46 a taxpayer may avoid liability for negligence by relying on competent professional advice if it was reasonable to rely on such advice 469_us_241 89_tc_849 affd 904_f2d_1011 5th cir affd 501_us_868 reliance on professional advice standing alone is not an absolute defense to negligence but rather a factor to be considered in order for reliance on professional advice to excuse a taxpayer from the additions to tax for negligence the taxpayer must show that such professional had the expertise and knowledge of the pertinent facts to provide valuable and dependable advice on the subject matter 39_f3d_402 2d cir affg tcmemo_1993_480 freytag v commissioner supra kozlowski v commissioner tcmemo_1993_430 affd without published opinion 70_f3d_1279 9th cir whether petitioner properly deducted the dollar_figure involves a complex factual inquiry when a guarantor of a corporate debt is a shareholder and also an employee mixed motives for a guaranty may be present and the critical issue becomes in an objective sense which motive is dominant united_states v generes u s pincite in addition petitioner's accountant who maintained adequate books_and_records for petitioner agreed with his treatment of the losses petitioner on his federal_income_tax return reported that he was deducting dollar_figure in capital losses on his schedule d this stems from petitioner's cap loan the record also reflects that on petitioner's schedule c he reported dollar_figure in losses pursuant to personal guarante sic of loan from corporation we hold petitioner was reasonable in his reliance on advisers and in his reporting position and accordingly he is not liable for the accuracy-related_penalty under sec_6662 for the taxable_year to reflect the foregoing and due to concessions decision will be entered under rule