t c memo united_states tax_court nicholas carrie cozzens petitioners v commissioner of internal revenue respondent docket no 258-03l filed date nicholas and carrie cozzens pro sese michelle m lippert for respondent memorandum opinion chiechi judge this case is before the court on respon- dent’s motion for summary_judgment respondent’s motion we shall grant respondent’s motion 1although the court ordered petitioners to file a response to respondent’s motion petitioners failed to do so background the record establishes and or the parties do not dispute the following on or about date petitioners filed a federal_income_tax tax_return for each of their taxable years return and return in their return petitioners reported inter alia total income of dollar_figure taxable_income of dollar_figure total_tax of dollar_figure and tax due of dollar_figure petitioners did not remit any payment with their return in their return petitioners reported inter alia total income of dollar_figure taxable_income of dollar_figure total_tax of dollar_figure and tax due of dollar_figure petitioners did not remit any payment with their return on date respondent assessed petitioners’ tax as reported in each of their tax returns for and as well as additions to tax under sec_6651 and sec_6654 a and interest as provided by law for each of their taxable years and we shall refer to any such unpaid assessed amounts as well as interest as provided by law accrued after date as petitioners’ respective unpaid liabilities for and 2the record does not disclose petitioners’ residence or mailing address at the time they filed the petition in this case 3all section references are to the internal_revenue_code in effect at all relevant times all rule references are to the tax_court rules_of_practice and procedure on date respondent issued to petitioners a notice of balance due with respect to petitioners’ respective unpaid liabilities for and on date respondent issued to petitioners another notice of balance due with respect to such unpaid liabilities on date respondent issued to petitioners a notice_of_federal_tax_lien filing and your right to a hearing notice of tax_lien with respect to their taxable years and on or about date in response to the notice of tax_lien petitioners mailed form request for a collection_due_process_hearing form and requested a hearing with respondent’s appeals_office appeals_office petitioners attached a document to their form petitioners’ attachment to form that contained statements contentions arguments and requests that the court finds to be frivolous and or ground- less by letter dated date date letter a settlement officer with respondent’s appeals_office settlement 4petitioners’ attachment to form contained statements contentions arguments and requests that are very similar to the statements contentions arguments and requests contained in the attachments to respective forms filed with the internal_revenue_service by certain other taxpayers who commenced proceed- ings in the court see eg guerrier v commissioner tcmemo_2002_3 officer informed petitioners that he had scheduled a hearing appeals_office hearing with them on date with respect to the notice of tax_lien in response to the settlement officer’s date letter petitioners’ authorized representative sent a letter dated date date letter to the settle- ment officer the date letter stated in pertinent part i am in receipt of your letters dated and copies of those letters are attached as part of this letter also enclosed is a copy of the date letter i sent the irs concerning the various issues relating to the denial of my client’s right to record the hearing as authorized by sec_7521 in addition in my date letter i demanded that the irs appeals officer conducting the hearing and issuing the decision provide me with a copy of his pocket commission and a copy of the delegation of authority from the secretary_of_the_treasury autho- rizing him to conduct the hearing and issue the deci- sion you have not provided me with those documents in view of these facts then my clients have authorized me to advise you that they will not attend the hearing you propose to conduct on date in cincinnati ohio however you are hereby instructed to consider in your deliberations concerning the issues raised by my clients all of the papers which have been submitted to date concerning these matters including the date letter the date letter which insti- tuted the appeal the date letter and the date letter since the irs refuses to comply with the clear requirements of the law and the orders of the federal district_court we have no choice but to take these actions my clients have nothing to compromise or adjust they do not owe the taxes and penalties at issue because no law makes them liable for them as noted in our earlier letters petitioners refused to attend the appeals_office hearing that the settlement officer had scheduled on date however the settlement officer exchanged correspondence with petitioners and or their authorized representative and had telephonic discussions with them on date based upon such correspondence and discussions as well as inter alia certain other information including petitioners’ return and return the notice of tax_lien petitioners’ form petitioners’ attachment to form and respondent’s form_4340 certification of assessment and payments for each of their taxable years and the appeals_office issued to peti- tioners a notice_of_determination concerning collection action s under sec_6320 and or notice_of_determination that notice stated in pertinent part the determination of appeals is that the filed notice_of_federal_tax_lien was an appropriate collection action before you decide whether to petition this notice_of_determination you should know that the courts are empowered to impose monetary sanctions up to dollar_figure for instituting or maintaining an action before it primarily for delay or for taking a position that is frivolous or groundless pierson v commissioner t c no it is our view that the positions you have taken have no merit and are groundless an attachment to the notice_of_determination stated in pertinent part summary and recommendation are the taxpayers entitled to relief under sec_6320 from the filed notice of lien no the taxpayers did not provide any justification for withdrawal nor offer any collection alternatives brief background the income_tax return for was filed under filing_status married filing joint the return was signed and dated on by both taxpayers the return showed a balance due of dollar_figure at the time of filing the tax was the result of insufficient with- holding and failure to make estimated_tax payments the income_tax return for was filed under filing_status married filing joint the return was signed and dated on by both taxpayers the return showed a balance due of dollar_figure at the time of filing the tax was the result of insufficient with- holding and failure to make estimated_tax payments on the taxpayers called internal revenue to ask for an installment_agreement the request was for the year sec_12 and irs responded on by establishing an agree- ment for dollar_figure per month the taxpayers defaulted on their agreement and on the internal revenue gave formal notice of intent to terminate the agreement discussion and analysi sec_1 verification of legal and procedural require- ments liens sec_6321 provides for a statutory lien when a tax- payer neglects or refuses to pay after notice_and_demand to be made choate and valid against third parties a notice of lien must be recorded in the proper place for filing transcripts show that the taxes remain unpaid and a notice was recorded sec_6320 requires irs to give notice to a taxpayer in writing within 5-days after filing a notice of lien of the taxpayer’s right to request a hearing before an appeals officer the request is timely if made during the 30-days following the end of the 5-day notification period transcripts show a notice was issued and the taxpayer’s request for a hearing was timely therefore the office of appeals will affirm that under sec_6330 this settlement officer has had no prior involvement with respect to the unpaid tax under sec_6330 the requirements of any applicable law or administrative procedures have been met what were the issues raised by the taxpayer the hearing the taxpayers are represented by jerry jewett a face-to-face hearing was scheduled for in a letter of the representative stated the taxpayers would not attend the hearing nor was there a request for a rescheduled hearing therefore no hear- ing was held the issues discussed below are those presented form request for a collection_due_process_hearing issue number one the taxpayers did not agree with the filed notice_of_federal_tax_lien their stated reason the irs has not complied with applicable laws and administrative procedures the collection procedures are inappropriate and illegal and mr and mrs cozzens have no liability for the taxes and penalties at issue my comments notice_and_demand was sic made on for both balance due periods at issue the taxes remained unpaid subsequently a notice_of_federal_tax_lien was recorded on and the taxpayers notified of their right to a hearing administrative procedures were followed and the tax_liabilities remain unpaid furthermore sec_6323 gives the internal revenue the authority to withdraw a notice_of_federal_tax_lien under certain circumstances the taxpayers do not meet any of the criteria described in sec_6323 nor did they offer any relevant reason why the lien should be withdrawn there were no other issues raised by the taxpayer has the need for efficient tax collection been balanced with taxpayer’s concern that the proposed collection action be no more intrusive than necessary sec_6330 requires that the office of appeals consider whether any collection action balances the need for efficient collection_of_taxes with the taxpayers’ legitimate concern that any collection be no more intrusive than necessary our determination is to deny relief and sustain the filed notice_of_federal_tax_lien this determination was made because the taxpayers failed to raise any relevant issue offer a collection alternative or present any reason to justify withdrawal therefore the determination by appeals balances the need for efficient collection_of_taxes with the taxpayer’s legitimate concern that any collection action be no more in sic intrusive than necessary in response to the notice_of_determination petitioners filed with the court a petition with attachments that we consider to be part of the petition except for an argument under sec_7521 the petition and the attachments thereto contained statements contentions arguments and requests that the court finds to be frivolous and or groundless with respect to sec_7521 petitioners alleged that the appeals_office refused to allow them to make an audio recording of the appeals_office hearing that the settlement officer had scheduled on date and that that refusal was improper under that section discussion the court may grant summary_judgment where there is no genuine issue of material fact and a decision may be rendered as a matter of law rule b sundstrand corp v commissioner 5the frivolous and or groundless statements contentions arguments and requests in petitioners’ petition and the attach- ments to that petition are very similar to the frivolous and or groundless statements contentions arguments and requests in the respective petitions filed with the court by certain other taxpayers see eg guerrier v commissioner tcmemo_2002_3 98_tc_518 affd 17_f3d_965 7th cir we conclude that there are no genuine issues of material fact regarding the questions raised in respondent’s motion a taxpayer may raise challenges to the existence or the amount of the taxpayer’s underlying liability if the taxpayer did not receive a notice_of_deficiency or did not otherwise have an opportunity to dispute the tax_liability sec_6330 where the validity of the underlying tax_liability is properly placed at issue the court will review the matter on a de novo basis 114_tc_604 114_tc_176 where the validity of the underlying tax_liability is not properly placed at issue the court will review the determination of the commissioner of the internal revenue for abuse_of_discretion sego v commis- sioner supra goza v commissioner supra pincite respondent based the assessment with respect to each of petitioners’ taxable years and on the total_tax shown in petitioners’ return for each such year in the notice_of_determination the appeals_office concluded that petitioners took positions that have no merit and are groundless petitioners do not claim here that the amount of tax reported in their return for each of their taxable years and is not correct instead they advance statements contentions arguments and requests in the petition and the attachments to that petition that we have found to be frivolous and or groundless we turn now to petitioners’ argument under sec_7521 that the refusal by the appeals_office to permit petitioners to make an audio recording of the appeals_office hearing that the settlement officer scheduled on date was improper before they filed the petition in this case petitioners made statements and requests and advanced contentions and arguments that the court has found to be frivolous and or groundless in the petition and the attachments thereto peti- tioners persisted in advancing such frivolous and or groundless statements contentions arguments and requests consequently even though we held in 121_tc_8 that sec_7521 requires the appeals_office to allow a taxpayer to make an audio recording of an appeals_office hearing under sec_6330 we conclude that it is not necessary and will not be productive to remand this case to the appeals_office for a hearing under sec_6320 in order to allow petitioners to make such an audio recording see 117_tc_183 and it is not necessary or appropriate to reject respondent’s determinations to proceed with the collection action as determined in the notice_of_determination with respect to petitioners’ respective unpaid liabilities for and see id based upon our examination of the entire record before us we find that respondent did not abuse respondent’s discretion in determining to proceed with the collection action as determined in the notice_of_determination with respect to petitioners’ taxable years and although respondent does not ask the court to impose a penalty on petitioners under sec_6673 we now consider sua sponte whether the court should impose a penalty on petition- ers under that section sec_6673 authorizes the court to require a taxpayer to pay a penalty to the united_states in an amount not to exceed dollar_figure whenever it appears that a taxpayer instituted or maintained a proceeding in the court primarily for delay or that a taxpayer's position in such a proceeding is frivolous or groundless although we shall not impose a penalty under sec_6673 on petitioners in the instant case we caution them that they may be subject_to such a penalty if in the future they institute or maintain a proceeding in this court primarily for delay and or their position in any such proceeding is frivolous or groundless see 82_tc_403 72_tc_1126 we have considered all of petitioners’ statements conten- 6see kemper v commissioner tcmemo_2003_195 tions arguments and requests that are not discussed herein and to the extent we have not found them to be frivolous and or groundless we find them to be without merit and or irrelevant on the record before us we shall grant respondent’s motion to reflect the foregoing an order granting respondent's motion and an appropriate decision will be entered


steven yari petitioner v commissioner of internal revenue respondent docket no 13925-12l filed date r assessed a penalty under sec_6707a r issued a notice_of_intent_to_levy to collect this penalty p requested a collection_due_process_hearing challenging the collection action while the hearing was pending congress retroactively changed the manner in which sec_6707a penalties are calculated p requested that r recalculate the penalty using the amount of tax shown on subsequent amended returns r decided the penalty should not be changed and p appealed this decision the irs appeals_office agreed that the penalty amount should not be changed and r issued a notice of deter- mination sustaining the collection action p believes that the appropriate penalty calculation should use the actual tax due not the tax_shown_on_the_return on which he was obliged but failed to disclose the reportable_transaction p seeks to change the penalty from the current amount assessed dollar_figure to the minimum under the statute dollar_figure held we have juris- diction to consider the penalty held further the penalty is calculated by reference to the amount of tax_shown_on_the_return with respect to which the taxpayer had a disclosure obligation steven r mather for petitioner michael w tan for respondent opinion wherry judge this case is before us on a petition for review of a notice_of_determination concerning collection united_states tax_court reports action s under sec_6320 and or notice of deter- mination sustaining a notice_of_intent_to_levy with respect to a penalty assessed for the tax_year the case pre- sents an issue of first impression as to whether sec_6707a requires respondent to use the tax_shown_on_the_return giving rise to the disclosure obligation or whether respondent must use the tax as shown on subsequent amended returns we hold that respondent may calculate the amount of the penalty using the tax_shown_on_the_return giving rise to the violation of the disclosure obligation background this case was submitted fully stipulated pursuant to rule the parties’ stipulation of settled issues and stipulation of facts with accompanying exhibits are incorporated herein by this reference at the time he filed his petition petitioner resided in california petitioner formed topaz global holdings llc topaz global on date under the regulations topaz global was a disregarded_entity for federal_income_tax pur- poses see sec_301_7701-3 proced admin regs on date petitioner formed faryar inc a nevada corporation which elected to be treated as an s_corporation for federal_income_tax purposes faryar entered into agree- ments with topaz global and other companies to provide management services we refer to faryar’s relationship with these companies as the management fee transaction in petitioner opened a roth individual_retirement_account roth_ira with an initial contribution of dollar_figure the roth_ira acquired all of the faryar stock for dollar_figure making the roth_ira the sole shareholder of the s corpora- tion for the through tax years faryar reported a total net_income of dollar_figure in management fees and interest_income less deductions because faryar was an sec_1 all section references are to the internal_revenue_code code of as amended and in effect during the relevant period and all rule ref- erences are to the tax_court rules_of_practice and procedure unless oth- erwise indicated such a structure does not work for federal_income_tax purposes be- cause a roth_ira generally cannot be an eligible shareholder of an s cor- poration 133_tc_202 aff ’d 679_f3d_1109 9th cir yari v commissioner corporation this income was not taxed at the corporate level and because the shareholder was a nontaxable entity the income was not taxed at the shareholder level the practical effect of this transaction was twofold it allowed petitioner to effectively exceed the roth_ira contribution limits and decreased the amount of income petitioner otherwise would have reported from topaz global because topaz global deducted the amounts paid to faryar as management fees the internal_revenue_service irs has identified trans- actions such as the one petitioner engaged in as abusive roth_ira transactions notice_2004_8 2004_1_cb_333 the irs has also identified these transactions as listed transactions potentially subjecting taxpayers who did not disclose partici- pation in these transactions on their federal_income_tax returns to penalties petitioner and his wife signed and apparently filed a joint federal_income_tax return on date this return did not disclose petitioner’s participation in the roth_ira transaction respondent audited petitioner’s returns for and and following his marriage in peti- tioner and his wife’s returns for through and issued notices of deficiency to petitioner for hi sec_2002 and tax years and to petitioner and his wife for the through tax years in these notices respondent deter- mined that the management fee transactions were not valid business transactions and should result in an excise_tax under sec_4973 with respect to the tax_year respondent determined that petitioner and his wife should have included in income dollar_figure from the management fee transaction according to respondent’s calculations this inclusion along with corresponding computational adjust- ments increased petitioner and his wife’s tax_liability by dollar_figure petitioner his wife and respondent settled these deficiency cases and entered into a closing_agreement in the closing_agreement required petitioner to include in his income certain amounts for each of the tax years and pro- vided that petitioner and his wife were not liable for the sec_4973 excise_tax the court entered stipulated decisions in the deficiency cases that reflected the parties’ closing_agreement united_states tax_court reports information incorrectly transferred during the course of the audit petitioner determined that he had made a substantial error on his tax_return because he from a schedule_k-1 partner’s share of income deductions credits etc to that return petitioner and his wife prepared an amended_return first amended_return including dollar_figure of taxable interest dollar_figure of income as determined by respondent deductions of dollar_figure claimed on schedule e supplemental income and loss and dollar_figure in itemized_deductions the first amended_return resulted in a negative taxable_income petitioner and his wife filed a second amended_return for the tax_year during the pendency of the deficiency cases this second amended_return claimed a net_operating_loss_carryback from the tax_year of dollar_figure on both amended returns petitioner and his wife reported the dollar_figure from the management fee transaction as income the stipulated decision entered by the court for the tax_year reflected the adjustments made in the first and second amended tax returns respondent also assessed a sec_6707a penalty of dollar_figure for the tax_year based on his belief that peti- tioner had failed to disclose his participation in a transaction identified in notice_2004_8 supra as a listed_transaction respondent assessed this penalty on date respondent sent petitioner a final notice_of_intent_to_levy on date petitioner timely requested a collection_due_process cdp hearing during the pendency of the hearing on date congress amended sec_6707a to change the method of calculating the penalty small_business jobs_act of sbja pub_l_no sec_2041 sec_124 stat pincite this change was effective retro- actively for penalties assessed after date id sec_2041 and therefore the cdp hearing was suspended in date so respondent could reconsider the calcula- tion of the penalty respondent’s revenue_agent declined to change the penalty and petitioner requested review by the irs appeals_office appeals which also declined to modify the parties scarcely mention much less substantively discuss this midhearing time-out and apparent referral to the irs examination func- tion we therefore will not further comment on these events yari v commissioner the penalty petitioner did not request any collection alter- natives during the cdp hearing and counsel for petitioner requested that the settlement officer issue a notice of deter- mination consequently the settlement officer complied and issued the notice_of_determination sustaining the collection action petitioner concedes that the roth_ira transactions he engaged in were listed transactions under notice_2004_8 supra for the purposes of the sec_6707a penalty he admits that he is liable for a penalty but challenges the cal- culation of the penalty i jurisdiction discussion the parties assume we have jurisdiction over the penalty issue in this case but the court has an independent obliga- tion to determine whether it has jurisdiction over a case and the parties cannot simply stipulate jurisdiction or waive jurisdictional defects 546_us_500 121_tc_89 aff ’d 425_f3d_1203 9th cir therefore we begin our analysis with the jurisdictional ques- tion the tax_court is a court of limited jurisdiction and may exercise jurisdiction only to the extent authorized by con- gress 592_f3d_1050 9th cir aff ’g on other grounds 129_tc_97 but we have jurisdiction to determine whether we have jurisdic- tion 133_tc_424 in smith we also held that we did not have jurisdiction to redetermine sec_6707a penalties in a petition for redeter- mination of a deficiency id pincite because the sec_6707a penalty did not fit the statutory definition of a defi- ciency and because the commissioner could assess and col- lect the penalty without issuing a statutory notice of defi- ciency we lacked deficiency jurisdiction to redetermine the penalty id pincite we noted however that we would presumably have jurisdiction to redetermine a liability chal- lenge asserted by the taxpayers in a collection_due_process_hearing id pincite n we now turn presumption into conviction and aver our jurisdiction united_states tax_court reports we begin by noting that sec_6707a allows a taxpayer to request the commissioner to rescind all or part of the pen- alty that is imposed because of a violation with_respect_to_a_reportable_transaction other than a listed_transaction if rescission would promote compliance with the code and effective tax_administration sec_6707a congress explicitly denied taxpayers the ability to seek judicial review of the commissioner’s rescission decision sec_6707a the provision prohibiting judicial review applies only to sub- section d of sec_6707a and does not otherwise preclude our jurisdiction to review this penalty under sec_6330 see h_r rept no part pincite n stating that this provision contained in the american_jobs_creation_act_of_2004 ajca pub_l_no 118_stat_1418 does not limit the ability of a taxpayer to challenge whether a penalty is appropriate eg a taxpayer may liti- gate the issue of whether a transaction is a reportable trans- action and thus subject_to the penalty if not disclosed or not a reportable_transaction and thus not subject_to the pen- alty sec_6330 as amended by the pension_protection_act of pub_l_no sec_855 sec_120 stat pincite expanded the court’s review of collection actions to include collection actions where the underlying tax_liability consists of penalties not reviewable in a deficiency action see 131_tc_54 n 130_tc_44 in a cdp hearing a taxpayer may challenge the existence or amount of the underlying tax_liability for any_tax period if the person did not receive any statutory_notice_of_deficiency for such tax_liability or did not otherwise have an opportunity to dispute such tax_liability sec_6330 in his hearing peti- tioner challenged the amount of the underlying tax_liability that resulted from the sec_6707a penalty see callahan v commissioner t c pincite we have interpreted the phrase ‘underlying tax liability’ as including any amounts a taxpayer owes pursuant to the tax laws that are the subject of the commissioner’s collection activities petitioner has not had an opportunity to dispute the amount of the penalty and consequently we have jurisdiction to redetermine the amount of the penalty yari v commissioner ii standard of review ordinarily our review of the determinations in a cdp hearing is for abuse_of_discretion 114_tc_604 114_tc_176 but when the underlying tax_liability is properly at issue we review the determination de novo sego v commissioner t c pincite goza v commissioner t c pincite petitioner challenges respondent’s deter- mination as to the amount of the penalty and thus we review that determination de novo iii sec_6707a penalty sec_6707a imposes a penalty on a ny person who fails to include on any return or statement any information with_respect_to_a_reportable_transaction which is required under sec_6011 to be included with such return or state- ment the amount of the penalty before the sbja depended on whether the transaction was a reportable_transaction or a listed_transaction sec_6707a amended by sbja sec_2041 for reportable_transactions other than listed transactions it was dollar_figure for natural persons and dollar_figure for others and for listed transactions it was dollar_figure for natural persons and dollar_figure for others id the penalty applied regardless of whether the listed or reportable trans- action is respected for federal_income_tax purposes peti- tioner concedes he engaged in a listed_transaction and that he failed to properly disclose his participation the penalty for failing to disclose a listed_transaction on a return after enactment of the sbja is percent of the decrease in tax_shown_on_the_return as a result of such transaction or which would have resulted from such trans- action if such transaction were respected for federal_income_tax purposes sec_6707a in the case of individuals the statute prescribes minimum and maximum penalties for failing to disclose a listed_transaction of dollar_figure and dollar_figure respectively sec_6707a and the parties disagree as to what return and what amount of tax we should use in cal- culating the tax petitioner urges us to use the amended returns to determine the decrease in tax and respondent says we must look to the original return these disparate positions stem from a fundamental disagreement as to what united_states tax_court reports the phrase decrease in tax_shown_on_the_return as a result of the transaction means to resolve this dispute we must examine and interpret the statute the starting point for interpreting a statute is its plain and ordinary meaning unless such an interpretation would produce absurd or unreasonable results 110_tc_375 undefined words take their ordinary contemporary common meaning 139_tc_255 we interpret statutes ‘in their context and with a view to their place in the overall statutory scheme ’ fda v brown williamson tobacco corp 529_us_120 quoting 489_us_803 where the statute is clear and unambiguous we need not resort to other tools of statutory interpretation 541_us_176 if the statute is silent or ambig- uous we may employ ‘traditional tools of statutory construc- tion’ united_states v home concrete supply llc u s ll ll 132_sct_1836 quoting 467_us_837 n including legislative_history to ascertain congressional intent 481_us_454 134_tc_211 rev’d 650_f3d_691 d c cir vacated and remanded u s ll 132_sct_2120 petitioner urges us to interpret the statute as calculating the penalty using the tax savings produced by the listed transactions he says we should ignore the tax reported on the return with respect to which he was required to report the listed_transaction instead petitioner asks us to focus on the returns prepared years after the reporting obligation arose he urges us to look at the plain language of the statute its place in the statutory scheme and to the legisla- tive history respondent on the other hand says that the the regulations are of no help here as they merely parrot the statutory language sec_301_6707a-1 proced admin regs the irs released these final regulations in with the explicit proviso that the regula- tions do not give further guidance on how the amount of the penalty is computed and stated that it intended to provide guidance at a later time t d 2011_47_irb_785 yari v commissioner plain meaning of the statute does not support petitioner’s position and urges us to compute the tax with reference only to the tax shown on the original tax_return in his view we disregard the returns prepared during the audit the mis- takes on the prior return and the correct_tax owed by peti- tioner when calculating the penalty to be clear about the stakes if we adopt petitioner’s reading of the statute the penalty would be the statutory minimum or dollar_figure if we hold for respondent the penalty will stand as dollar_figure we think the statute is clear and unambiguous the pen- alty is calculated with reference to the tax_shown_on_the_return sec_6707a when we look to the penalty provi- sion as a whole it is clear that congress has penalized the failure to disclose participation in a listed or otherwise reportable_transaction on the return or other information statement giving rise to the disclosure obligation if the tax- payer fails to report the transaction on that return or information statement then the penalty is based on the tax shown on that return or information statement not some other later filed return or some hypothetical tax congress did not say that the penalty should be calculated by ref- erence to tax shown on a return it did not say to calculate the penalty using the tax required to be shown and it did not say to calculate the penalty using the decrease in tax resulting from participation in the transaction congress very clearly linked the penalty to the tax shown on a particular return-the return giving rise to the reporting obligation absent a ‘clearly expressed legislative intent to the con- trary’ we will regard the clear and unambiguous language of the statute as conclusive reves v ernst young we observe that the process of divining the legislative intent under- lying a statute’s language and structure while subject_to canons of con- struction and well-established methodologies is hardly an exact science compare eg 758_f3d_390 d c cir having found sec_36b unambiguous concluding that weight of legislative_history including overall congressional policy goals did not override stat- ute’s plain meaning which was that tax_credits were unavailable to par- ticipants in health insurance exchanges established by the federal govern- ment rehearing en_banc granted vacated by ll f 3d ll wl d c cir date with 759_f3d_358 4th cir having found sec_36b ambiguous concluding that leg- islative history did not support either plausible interpretation and defer- continued united_states tax_court reports u s quoting 452_us_576 the plain meaning of the statute does not support petitioner’s position petitioner also contends that the legislative_history sup- ports his position but he fails to point to any actual legisla- tive history in any event the documentary_evidence ref- erencing the penalty provision does not support petitioner’s position congress initially enacted sec_6707a with a flat penalty of dollar_figure for individuals with respect to listed transactions ajca sec_811 sec_118 stat pincite there was no variable minimum and no variable maximum and no of tax savings calculation congress added the current cal- culation as part of the sbja likely because of concern that an inflexible penalty would create harsh results see h_r rept no pincite unfortunately no direct legislative_history exists to explain the change what we do have is the rationale behind an almost identical amendment included in a bill that never became law h_r 111th cong sec_111 the house passed h_r partly out of concern for the poten- tial inequities an inflexible penalty may create h_r rept no supra pincite congress had heard from the national_taxpayer_advocate that the potential magnitude of the penalties had an overly harsh impact on individuals and small businesses id pincite the tax advisers may not have told these taxpayers of the reporting obligation and the penalties for an individual conducting business through an s_corporation could reach dollar_figure per year for a listed_transaction that yielded little or no tax_benefit see national_taxpayer_advocate annual report to congress vol one see also sec_6707a imposing a dollar_figure penalty on nonindividual tax- payers for failing to disclose a listed_transaction transactions that span multiple tax years magnify the effect as the reporting obligation exists for each return ring to agency’s determination that statute permitted tax_credits for par- ticipants in federal health insurance exchanges as consistent with overall congressional policy goals the only difference between the enacted and proposed amendments was the inclusion in the proposed amendment to sec_6707a of the ad- ditional words for any taxable_year between the words transaction and shall not exceed yari v commissioner national_taxpayer_advocate annual report to con- gress vol one supra pincite the house ways_and_means_committee explained that the new penalty calculation would provide a mechanism for establishing a penalty amount that will be proportionate to the misconduct to be penalized with- out discouraging compliance with the requirement to disclose reportable_transactions h_r rept no supra pincite petitioner believes other legislative_history inextricably links the penalty calculation to the tax savings he points to the joint_committee on taxation’s general explanation also known as the blue_book to bolster his position see staff of j comm on taxation general explanation of tax legisla- tion enacted in the 111th congress j comm print the joint_committee explained that congress desired to spare small businesses and individuals unconscionable hardship as a result of the magnitude of the penalty where the penalty exceed ed the tax savings claimed on these returns id pincite contrary to petitioner’s position the blue books are not legislative_history though they can sometimes be relevant if persuasive united_states v woods u s ll ll 134_sct_557 in any event we remain unconvinced that the combined import of the blue_book and the earlier bill override our prior conclusions as to the statute’s plain meaning it is clear that in the earlier bill congress intended to blunt the effect of sec_6707a for taxpayers who failed to disclose a transaction but nonetheless did not benefit much from that transaction but it is equally clear that congress was concerned with the tax reported on the participant’s income_tax return as a result of participation in the trans- action not the tax required to be shown h_r rept no supra pincite it is also clear that what congress intended to penalize is the failure to disclose participation not the tax savings produced by the transaction id pincite that congress linked the penalty to the tax savings does not change the fact that the culpable act here is the failure to see also staff of j comm on taxation general explanation of tax legislation enacted in the 108th congre sec_361 j comm print dis- cussing the american_jobs_creation_act_of_2004 pub_l_no sec_811 sec_118 stat pincite including r easons for c hange united_states tax_court reports disclose furthermore the change linked the penalty not to the tax savings calculated with the benefit of hindsight but rather to the tax savings as claimed on the tax_return in this vein even the blue_book fails to persuade as the joint_committee explained the change as aimed at achiev ing proportionality between the penalty and the tax savings that were the object of the transaction and not to the actual tax saved staff of j comm on taxation general explanation of tax legislation enacted in the 111th con- gress supra pincite we note also sec_6651 which imposes an addition_to_tax for failure to pay the amount shown as tax on any return specified by parts of the code at first glance this addition_to_tax would ignore the correct_tax liability and a taxpayer who reported a tax greater than the actual tax due would suffer but sec_6651 ameliorates this poten- tially harsh result by providing if the amount_required_to_be_shown_as_tax on a return is less than the amount shown as tax on such return subsections a and b shall be applied by substituting such lower amount congress obviously knows how to link a penalty or an addition_to_tax to the tax required to be shown on the return and has done so consequently the fact that it did not do so in sec_6707a tends to bolster our holding that the pen- alty applies to the amount shown on petitioner’s first filed return see marx v gen revenue corp u s ll ll 133_sct_1166 declining to read into u s c sec 1692k a a limitation on the ability of courts to award costs under rule of the federal rules of civil procedure in part because other s tatutes confirm that con- gress knows how to limit a court’s discretion when it we note that here petitioner amended his first filed return after the date prescribed for filing a return for the tax_year we do not express an opinion as to the result had he filed his first amended_return before that date see 65_tc_113 where taxpayers sought to avoid a credit’s recapture in a later year by amending the return on which the credit was claimed holding that the commissioner was entitled to reject the amended_return and recapture the credit in the later year but observing that courts had upheld the validity of amended returns in other circumstances such as where the amended returns were filed before the filing deadline for the subject tax_year yari v commissioner so desires congress did not do so in sec_6707a instead opting to impose the penalty as a percentage of the decrease in tax_shown_on_the_return as a result of such transaction or which would have resulted from such trans- action if such transaction were respected for federal tax pur- poses sec_6707a without a subsection analogous to sec_6651 we calculate the penalty by reference to the tax_shown_on_the_return and do not consider the amount required to be shown sec_6707a imposes a strict_liability penalty see h_r rept no supra pincite while it may be harsh in situations where a taxpayer mistakenly overstates his tax such is the result of the plain meaning of the statutory lan- guage legislative_history does not indicate a clear congressional intent to the contrary and we therefore find that the settlement officer did not err in the calculation of the penalty the court has considered all of petitioner’s contentions argument requests and statements to the extent not dis- cussed herein we conclude that they are moot irrelevant or without merit to reflect the foregoing decision will be entered for respondent f we note also that a net_operating_loss_carryback from a subsequent tax_year does not reduce the tax required to be shown on the return for pur- poses of calculating the sec_6651 addition_to_tax see vines v com- missioner tcmemo_2009_267 slip op pincite aff ’d 418_fedappx_900 11th cir a court’s obligation to avoid adopting statutory constructions with ab- surd results is well-established and can in rare cases override the literal meaning of unambiguous statutory language halbig v burwell f 3d pincite citing 491_us_440 see generally john f manning the absurdity doctrine harv l rev the statutory construction we adopt here does not in peti- tioner’s case yield ‘an outcome so contrary to perceived social values that congress could not have intended it ’ see halbig v burwell f 3d pincite quoting 594_f3d_883 d c cir different facts-such as for example a mere scrivener’s error in a decimal place resulting in tax_shown_on_the_return of or even times the facially correct amount-might entail a different analysis


patrick j wachter and louise m wachter petitioners v commissioner of internal revenue respondent michael e wachter and kelly a wachter petitioners v commissioner of internal revenue respondent docket nos filed date for through ps reported charitable_contributions that flowed to them from a partnership and an llc both of which were treated as partnerships for tax purposes for each year the llc reported charitable_contributions of cash and the partnership reported bargain sales of conservation ease- ments as charitable_contributions of property r issued notices of deficiency to ps disallowing all of the charitable contribu- tion deductions and determining accuracy-related_penalties r filed a motion for partial summary_judgment asserting that ps did not satisfy the contemporaneous written acknowledg- ment requirement for the cash contributions for the prop- erty contributions respondent asserted that the easements were not granted in perpetuity as a result of a north dakota state law that limits the duration of a real_property ease- ment held north dakota state law limits the duration of an easement to not more than years thus precluding a north dakota conservation_easement from qualifying as granted in perpetuity under sec_170 and a held further material facts remain in dispute regarding whether ps satisfied the contemporaneous written acknowledgment requirement of sec_170 f and sec_1_170a-13 f income_tax regs and thus summary_judgment is not appro- priate on this issue jon j jensen for petitioners david l zoss and christina l cook for respondent buch judge these cases are before the court on respond- ent’s motion for partial summary_judgment the issues for decision are whether a state law that limits the duration of an ease- ment to not more than years precludes petitioners’ con- servation easements from qualifying as granted in per- petuity under sec_170 or a we hold that it does and unless otherwise indicated all section references are to the internal_revenue_code code in effect for the years in issue and all rule ref- erences are to the tax_court rules_of_practice and procedure verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a wachter jamie wachter v commissioner the whether the documents petitioners provided to the irs satisfy contemporaneous written acknowledgment requirement of sec_170 and sec_1_170a-13 income_tax regs we hold that material facts remain in dis- pute and thus summary_judgment is not appropriate for this issue findings_of_fact the transactions at issue involve members of the wachter family and entities that they controlled michael and kelly wachter filed joint income_tax returns for all the years in issue through the same is true for patrick and louise wachter during the years in issue michael patrick and louise each held varying interests in two entities ww ranch a partnership and wind river properties llc wind river a limited_liability_company that is treated as a part- nership for tax purposes wind river at times operated under the name windsor storage for convenience we will refer to petitioners individually by their given names or to michael patrick and louise as owners of ww ranch and wind river collectively as the wachters farm and ranch lands protection program sec_2503 of the farm security and rural investment act of pub_l_no stat pincite author- ized the secretary of agriculture to purchase conservation easements in order to protect topsoil by limiting non- agricultural uses of certain lands and authorized funding for such purchases the united_states acting through the com- modity credit corporation ccc entered into cooperative agreements in order to implement the farm and ranch lands protection program and used the natural_resources conservation service nrcs of the department of agri- culture to administer the program the parties provided to the court a copy of a cooperative agreement between the ccc and the american foundation for wildlife afw with an attachment referencing land owned by ww ranch the cooperative agreement listed the requirements for such an easement including that the easement r un with the land in perpetuity or a minimum of thirty years where state law prohibits a permanent easement as a part of the verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a wachter jamie united_states tax_court reports cooperative agreement the nrcs listed its prerequisites for easement purchases before the federal government would release the federal funds to reimburse afw for up to of the easement purchase_price the cooperative agreement included a provision whereby a landowner could donate up to of the appraised fair_market_value of the easement and that such a donation may be considered as part of afw’s contribution to the purchase_price however in order for the landowner’s donation to be considered part of afw’s con- tribution afw was required to get a current appraisal of the contribution in the event the landowner made such a dona- tion nrcs required a copy of the landowner’s irs form_8283 noncash charitable_contributions before the nrcs would release the federal funds cash contributions on its returns for the years in issue wind river reported the following cash charitable_contributions which it allocated amongst its members dollar_figure big_number big_number on behalf of wind river michael and patrick signed an agreement dated date with north dakota nat- ural resource trust nrt agreeing to donate dollar_figure by date michael signed a check dated date from windsor storage payable to nrt for dollar_figure nrt provided a letter dated date to michael and patrick dba ww ranch acknowledging the cash gift and stating that nrt provided no goods or services in exchange for the donation michael signed a check dated date from windsor storage payable to nrt for dollar_figure the wachters provided the irs with a letter from nrt dated date to windsor storage acknowledging the cash gift and stating that nrt provided no goods or services in exchange for the donation the only copy of this letter in the record is unsigned someone prepared a check dated date from windsor storage payable to nrt for dollar_figure the only copy of this check in the record is unsigned but the parties do not verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a wachter jamie wachter v commissioner appear to dispute that the payment was made nrt provided a letter dated date to windsor storage acknowl- edging the cash gift and stating that nrt provided no goods or services in exchange for the donation bargain sale charitable_contributions on its partnership returns for the years in issue ww ranch reported bargain sales of conservation easements as charitable_contributions as follows dollar_figure big_number big_number for each year the parties to the transaction obtained two appraisals of the property that was to be contributed each appraisal valued the property according to a different land use and the wachters used the difference in appraised values to determine the value of the conservation_easement and thus the amounts of their charitable_contributions nrt obtained an appraisal of ww ranch’s sec_5 and parcel as of date determining a value of dollar_figure for use as agricultural property a second appraisal dated date was prepared for the sec_5 and parcel determining a value of dollar_figure for use as rural residential sites on date ww ranch sold a con- servation easement on its sec_5 and parcel to afw for dollar_figure of which dollar_figure was supplied by nrt the wachters subtracted the sale price of dollar_figure from the difference in value of the two appraisals of dollar_figure to arrive at their charitable_contribution_deduction of dollar_figure nrt obtained two appraisals of ww ranch’s section parcel as of date one for use as agricultural property determining a value of dollar_figure and one for full developmental value determining a value of dollar_figure on date ww ranch sold a conservation_easement on the section parcel to afw for dollar_figure of which dollar_figure was supplied by nrt the wachters subtracted the sale each parcel at issue is located in one or more sections of township north range west of morton county north dakota the parties refer to the properties at issue as the sec_5 and parcel the section parcel and the sections and parcels and we adopt their termi- nology verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a wachter jamie united_states tax_court reports price of dollar_figure from the difference in value of the two appraisals of dollar_figure to arrive at their charitable contribu- tion deduction of dollar_figure nrt obtained two appraisals of ww ranch’s sections and parcels as of date one subject_to a pro- posed conservation_easement determining a value of dollar_figure and one for rural residential development determining a value of dollar_figure on date ww ranch sold a con- servation easement on its section and parcels to afw for dollar_figure of which dollar_figure was supplied by nrt the wachters subtracted the sale price of dollar_figure from the dif- ference in value of the two appraisals of dollar_figure to arrive at their charitable_contribution_deduction of dollar_figure individual reporting patrick and louise reported charitable_contributions on their joint federal_income_tax returns as follows cash-wind river noncash-ww ranch cash noncash cash noncash dollar_figure big_number big_number big_number big_number big_number michael and kelly reported charitable_contributions on their joint federal_income_tax returns as follows cash-wind river noncash-ww ranch cash noncash cash noncash dollar_figure big_number big_number big_number big_number big_number on date respondent issued notices of deficiency to both couples disallowing the charitable_contribution deduc- tions related to ww ranch and wind river and determining accuracy-related_penalties under sec_6662 each couple timely filed a petition disputing their notice_of_deficiency and the court consolidated the cases for trial briefing and opinion respondent filed a motion for partial summary judg- ment and a memorandum of facts and law in support of his motion for partial summary_judgment the wachters filed a response and respondent filed a reply verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a wachter jamie wachter v commissioner opinion either party may move for summary_judgment regarding all or any part of the legal issues in controversy see rule a we may grant summary_judgment only if there are no genuine disputes of fact see rule b 85_tc_527 respondent as the moving party bears the burden of proving that no genuine dispute exists as to any material fact and that respondent is entitled to judgment as a matter of law see 98_tc_518 aff ’d 17_f3d_965 7th cir in deciding whether to grant sum- mary judgment the factual materials and the inferences drawn from them must be considered in the light most favor- able to the nonmoving party see 115_tc_554 100_tc_32 naftel v commissioner t c pincite when a motion for summary_judgment is made and properly supported the nonmoving party may not rest on mere allega- tions or denials but must set forth specific facts showing that there is a genuine dispute for trial see 477_us_317 sundstrand corp v commissioner t c pincite see also rule d respondent filed the motion for partial summary_judgment therefore we construe all factual disputes and draw all inferences in favor of the wachters a deduction is allowed for any charitable_contribution for which payment is made within the taxable_year if the con- tribution is verified under regulations prescribed by the sec- retary sec_170 the wachters claimed charitable con- tribution deductions for both cash and noncash contributions for each year we discuss each in turn noncash contributions generally a charitable_contribution_deduction is not allowed for a charitable gift of property consisting of less than the donor’s entire_interest in that property sec_170 however there is an exception for a qualified_conservation_contribution sec_170 a contribu- tion of real_property is a qualified_conservation_contribution if the real_property is a qualified_real_property_interest the contributee is a qualified_organization and the verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a wachter jamie united_states tax_court reports contribution is exclusively for conservation purposes sec_170 see also sec_1_170a-14 income_tax regs for the purposes of the motion for partial summary_judgment respondent argues that the state law restricting easements to years prevents the conservation easements from being qualified_real_property interests and prevents the conserva- tion easements from being exclusively for conservation pur- poses north dakota law we look to state law to determine the nature of property rights whereas federal_law determines the appropriate tax treatment of those rights 472_us_713 see also york acquisition llc v commissioner tcmemo_2013_266 at beginning in the united_states signed several trea- ties agreeing to protect migratory birds and their habitats see north 460_us_300 ndollar_figure aff ’g 650_f2d_911 8th cir between and the united_states acquired easements covering nearly million acres of land in north dakota for use as migratory bird refuges id pincite however cooperation between the federal government and the state of north dakota broke down such that in the state enacted a law which it amended in and requiring approval for all wetland acquisitions first by the board_of county commissioners and only then by the governor allowing the landowner to negotiate the terms of the ease- ment and ‘drain any after-expanded wetland or water area in excess of the legal description ’ and restricting all easements to a maximum of years id pincite n quoting n d cent code sec the united_states brought a declaratory_judgment action in the u s district_court for the district of north dakota seeking judgment that inter alia the state law was hostile to federal_law in certain respects and could not be applied id pincite the district_court granted the united_states summary_judgment and the united_states court_of_appeals for the eighth circuit affirmed id the supreme court determined that because of the migratory bird treaties and the ‘certainty and finality’ that we have regarded as ‘critical verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a wachter jamie wachter v commissioner when federal officials carrying out the mandate of con- gress irrevocably commit scarce funds’ the north dakota statute was hostile to federal interests and may not be applied to the easements for which the federal government had already received consent id pincite quoting 412_us_580 the supreme court in north dakota v united_states invalidated the 99-year restriction only insofar as it related to easements on wetlands for which the federal government had already received consent the supreme court did not invalidate the 99-year restriction in all situations in which the federal government is a party directly or indirectly to an easement purchase for the years in issue n d cent code sec supp provided in pertinent part real_property easements which become binding after date shall be subject_to the requirements of this section these requirements are deemed a part of any agreement for such interests_in_real_property whether or not printed in a document of agreement the duration of the easement on the use of real_property must be specifically set out and in no case may the duration of any interest_in_real_property regulated by this section exceed ninety-nine years both parties allege that the state law at issue here is unique because this is the only state that has a law that pro- vides for a maximum duration that may not be overcome by agreement the parties agree that by operation of state law the easements at issue will expire years after they were conveyed the parties do not draw a distinction where the donee of the easement is the federal government or an entity acting on behalf of the federal government nor do we see a distinction respondent asserts that the state law restriction prevents the easements from being granted in perpetuity which in turn prevents them from being both qualified_real_property interests under sec_170 and contributions exclu- sively for conservation purposes under sec_170 peti- tioners however assert that the 99-year limitation should be considered the equivalent of a remote future event or the retention of a negligible interest because at present the remainder is essentially valueless there are two separate verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a wachter jamie united_states tax_court reports and distinct perpetuity requirements and the failure to sat- isfy either of them will prevent the easements from being qualified conservation contributions see 140_tc_1 qualified_real_property_interest under sec_170 a qualified_real_property_interest means a restriction granted in perpetuity on the use which may be made of the real_property the wachters assert that the possibility that the land would revert back to them ww ranch or their successors in interest is the equivalent of a remote future event that will not prevent the easements from being perpetual sec_1_170a-14 income_tax regs provides remote future event -a deduction shall not be disallowed under sec_170 and this section merely because the interest which passes to or is vested in the donee organization may be defeated by the performance of some act or the happening of some event if on the date of the gift it appears that the possibility that such act or event will occur is so remote as to be negligible this court has construed so remote as to be negligible as ‘a chance which persons generally would disregard as so highly improbable that it might be ignored with reasonable safety in undertaking a serious business transaction’ 95_tc_156 quoting 224_f2d_26 1st cir or ‘a chance which every dictate of reason would justify an intel- ligent person in disregarding as so highly improbable and remote as to be lacking in reason and substance’ 140_tc_377 quoting 72_tc_646 aff ’d without pub- lished opinion 665_f2d_1051 9th cir a conserva- tion easement fails to be ‘in perpetuity’ if on the date of the donation the possibility that the charity may be divested of its interest in the easement is not so remote as to be negligible id pincite remote has various commonly accepted meanings for example remote can mean far distant in space secluded distant in time distant in relationship or slight or faint unlikely webster’s new universal unabridged dictionary 2d ed as is relevant here remote could refer to a temporal sense distant remote in time or in a probable verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a wachter jamie wachter v commissioner sense unlikely a remote possibility id see also the amer- ican heritage dictionary of the english language 4th ed both the regulation and our caselaw focus on the term remote in terms of likelihood as used in the regulation and as interpreted by our caselaw the event is not remote on the dates of the dona- tions it was not only possible it was inevitable that afw would be divested of its interests in the easements by oper- ation of north dakota law therefore the easements were not restrictions granted in perpetuity and were thus not qualified conservation contributions as a result we will grant respondent’s motion for partial summary_judgment insofar as the state law prevents a charitable_contribution_deduction for a conservation_easement conveyed under the state law cash contributions for any cash charitable_contribution of dollar_figure or more the taxpayer must obtain a contemporaneous written acknowl- edgment from the donee sec_170 sec_170 provides that the contemporaneous written acknowledgment must include the following b content of acknowledgement -an acknowledgment meets the requirements of this subparagraph if it includes the following informa- tion i the amount of cash and a description but not value of any prop- erty other than cash contributed ii whether the donee organization provided any goods or services in consideration in whole or in part for any property described in clause i iii a description and good_faith estimate of the value of any goods or services referred to in clause ii or if such goods or services consist solely of intangible religious benefits a statement to that effect we note that in isolated situations a long-term_lease may be treated as the equivalent of a fee simple interest see eg sec_1_1031_a_-1 sec_1_1033_g_-1 income_tax regs but unlike sec_170 those isolated situations address exchanges for like or similar_property and do not involve an express statutory requirement that an interest be in perpetuity we express no opinion on petitioners’ argument that at present the re- mainder is essentially valueless to do so would require that we resolve a question of fact regarding value verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a wachter jamie united_states tax_court reports sec_170 provides that a written acknowledg- ment is contemporaneous when the taxpayer obtains it on or before the earlier of the date the taxpayer files a return for the taxable_year of contribution or the due_date including extensions for filing that return respondent asserts that none of the letters the wachters provided to the irs constitutes a valid contemporaneous written acknowledgment respondent asserts that none of the letters was addressed to wind river the entity that made the cash contributions nrt provided goods or serv- ices to the wachters each year that were not mentioned in the letters and the values of the goods or services were not mentioned in the letters further respondent asserts the letter fails to qualify as a contemporaneous written acknowledgment because the letter is unsigned and it pre- dates the check by two days with respect to the assertion that the wachters received some benefit that was not disclosed or valued in the letters respondent has not proven on this record that the wachters expected or received a benefit in exchange for their cash donations if a taxpayer receives or expects to receive a ben- efit that is not disclosed in the contemporaneous written acknowledgment the entire cash contribution deduction is disallowed see 118_tc_528 aff ’d 374_f3d_881 9th cir see also viralam v commissioner 136_tc_151 averyt v commissioner tcmemo_2012_198 because the receipt of an expected or actual benefit is a material fact that remains in dispute summary_judgment is not proper on this issue the wachters assert that the checks and letters for each year as well as the agreement can be taken together to meet the requirements of a contemporaneous written acknowledgment in 139_tc_371 the court held that a series of documents may con- stitute a contemporaneous written acknowledgment and the wachters may yet be able to authenticate disputed docu- ments and provide additional documents to supplement those at minimum respondent asserts that the goods or services provided were the appraisals nrt obtained and the partial funding it supplied for the bargain sales respondent also contests the authenticity of this document verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a wachter jamie wachter v commissioner they have included with the stipulation of facts because we must construe all factual inferences in favor of the non- moving party we must deny summary_judgment regarding the cash charitable_contribution deductions conclusion we conclude that respondent is entitled to partial sum- mary judgment disallowing the charitable_contribution deductions for the bargain sales of the conservation ease- ments because north dakota law prohibits real_property easements from being granted in perpetuity thus a con- servation easement conveyed subject_to the statute cannot result in a charitable_contribution_deduction under sec_170 however because material facts remain in dispute as to whether the wachters expected to receive or actually received goods or services in exchange for their cash contributions and the wachters may yet be able to supple- ment the record to meet all of the requirements of a contem- poraneous written acknowledgment we will deny the motion for partial summary_judgment on the issue of the cash con- tributions to reflect the foregoing an appropriate order will be issued f verdate mar apr jkt po frm fmt sfmt v files boundv wit bv864a wachter jamie


number release date internal_revenue_service index numbers - ---------------------------------------- --------------------------------------- ------------------------- ------------------------- --------------------- department of the treasury washington dc person to contact ----------------------------------------------------- -------- telephone number -------------------- refer reply to cc psi - plr-100326-06 date date legend x --------------------------------------- --------- ----------- -- --- ---------- ------------------ d1 country dear -------------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations for x to file an election to be treated as a disregarded_entity under the laws of country was acquired by a single owner with limited_liability on d1 x intended to be treated as a disregarded_entity for federal tax purposes effective d1 however x did not timely file a form_8832 entity classification election according to the information submitted all of the interest in x an entity formed sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes under sec_301_7701-3 except as provided in sec_301 b unless it elects otherwise a foreign eligible_entity is classified as an association if all members have limited_liability sec_301_7701-3 provides that for purposes of sec_301_7701-3 a sec_301_7701-3 provides that an election under sec_301_7701-3 member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member will be effective on the date specified on form_8832 or on the date filed if no such date is specified on the form the effective date specified on form_8832 cannot be more than days prior to the date the form is filed and cannot be more than months after the date on which the form is filed sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 sets forth the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file form_8832 and elect to be treated as a disregarded_entity for federal tax purposes effective d1 a copy of this letter should be attached to the form_8832 based on the facts submitted and representations made we conclude that the except as specifically set forth above no opinion is expressed or implied as to the federal tax consequences of the transaction described above under any other provision of the code sec_6110 provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer on whose behalf it was requested in accordance with the power_of_attorney on file with this office a copy of this sincerely letter is being sent to x’s authorized representative enclosures copy of this letter copy for sec_6110 purposes heather c maloy associate chief_counsel passthroughs and special industries


internal_revenue_service number release date index number --------------------------------------- ----------------------------------------- -------------------------- ---------------------------- department of the treasury washington dc person to contact -------------------------- id no ------------- telephone number -------------------- refer reply to cc psi b02 - plr-106397-08 date date legend x ----------------------------------------- ------------------------------------ a -------------------------------------- -------------------------- state ------------ d1 ---------------------- year ------- a ---------------- dear ------------------- this responds to a letter dated date and additional correspondence submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated in state a the president and sole shareholder of x intended for x to be an s_corporation effective d1 however no form_2553 election by a small_business_corporation was timely filed for x for the period from d1 through year x filed forms 1120s u s income_tax return for an s_corporation under a an incorrect employer_identification_number ein sec_1362 provides that if -- a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for plr-106397-08 such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation effective d1 accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective d1 within days following the date of this letter then such election will be treated as timely made for x’s taxable_year beginning d1 a copy of this letter should be attached to the form_2553 x is not required as a condition for this relief to file amended returns for year and previous taxable years because of the use of a an incorrect ein but it must file the form_2553 and all subsequent returns using the proper ein except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being forwarded to x’s authorized representative sincerely michael a skeen acting chief branch associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


t c memo united_states tax_court zacarias lapid and ma delaila lapid petitioners v commissioner of internal revenue respondent docket no filed date gary r dettloff for petitioners gregory c okwuosah for respondent memorandum opinion holmes judge the petitioners zacarias and ma delaila lapid are an extremely hardworking couple who used some of their savings to buy five condominiums in florida and one house in nevada these investments were not profitable and the lapids contest the commissioner’s characterization and disallowance of the resulting losses as passive_activity_losses within the meaning of sec_469 the case turns on whether the lapids were material participants in their various real_estate ventures background the lapids were michigan residents when they filed their petition mrs lapid is a cardiac nurse on the graveyard shift at a hospital in troy michigan and mr lapid is a machinist at an engineering company there they both work exceptionally long hours throughout and mr lapid averaged between to hours a day and mrs lapid worked hours a night their work paid off and they saved enough money to become investors by the lapids owned five condominiums in florida four were units in two different condominium hotels near orlando--a day’s inn and a howard johnson condominium hotels look like any other hotel guests check in get a room have full run of the hotel and then check out the hotels have people manning the front desk and others working as housekeepers and janitors the major difference between condominium and regular hotels is that each room in a condo hotel is owned by an investor who typically is not affiliated with the hotel’s management company the brand name on the hotel eg day’s inn howard johnson is the management company’s not the section references are to the internal_revenue_code_of_1986 as amended investor’s so guests have no idea who owns their rooms onsite hotel management ran the day-to-day operations of the hotel condos these included checking in guests making routine repairs cleaning the units and preparing financial statements and summaries for the unit owners the companies kept a portion of the revenues collected as payment for their work the lapids’ other florida condominium was a unit in a complex named the hacienda del sol which they rented out to longer-term tenants mrs lapid first employed a manager whom she fired due to integrity problems the evidence does not show when and she has managed the property herself since then in late the lapids bought a house in henderson nevada to add to their portfolio mrs lapid also managed this property with the help of some of her nevada relatives she and her husband would periodically visit both the house and the condo to inspect them and to make small repairs though she contracted out larger ones even though mrs lapid was a full-time nurse she credibly testified that she was able to devote a great deal of time to her real_estate activities while her supervisors expected her to be available in case of an emergency they also needed her to be quiet so that her patients could sleep thus most of her time at the hospital was spent monitoring her patients by watching machines while at her station to allow the nurses to maintain a quiet atmosphere yet stay awake her supervisors encouraged them to read while on duty this enabled mrs lapid to spend two to three hours a night going over financial statements and summaries the management companies had sent her other hospital staff often joked about mrs lapid and her briefcase stuffed with paperwork and she introduced into evidence samples of what she reviewed these included owners’ summary reports maintenance reports condo associations’ audited financial statements inspection summaries condominium newsletters and condominium associations’ annual meeting and election materials petitioners filed joint returns in and in they claimed a total loss of dollar_figure from the florida properties in they claimed a total loss of dollar_figure from the florida and nevada properties combined respondent denied these losses and sent them a notice_of_deficiency petitioners filed a timely petition and their case was tried in detroit discussion the code allows taxpayers to deduct most business-related and profit-seeking expenses under sec_162 and sec_212 however sec_469 limits these deductions when they arise from passive activities passive activities include both trade_or_business activities where the taxpayer does not materially participate and rental activities sec_469 and the notice_of_deficiency that respondent sent the lapids disallowed their losses precisely because respondent called all their investments rental_activity and so per se passive petitioners argue that none of the lapids’ investments were rental activities and that the amount of time that mrs lapid poured into monitoring these investments made her a material participant--transforming what would ordinarily be a passive_activity into an active one this means they argue that the passive_activity rules do not apply and the lapids’ losses should be allowed respondent now agrees that at least the hotel condos were trade_or_business activities but he still asserts that most of mrs lapid’s time should not count toward whether she materially participated however the bulk of his argument now is metronomically twelve times in the fourteen pages of the reply brief calling mrs lapid’s testimony vague uncorroborated and self-serving the parties point us in the right direction at times but unlike them we divide this case in two first we analyze the lapids’ hotel condos as a trade_or_business we then decide whether what mrs lapid was doing counts as material_participation second we look at the lapids’ nonhotel condo and house to see whether the lapids’ losses on them were all passive our analysis shows that the problem with mrs lapid’s testimony is not that it’s self-serving but that it is testimony which even if credible doesn’t help either half of her case a the hotel condos the parties now agree that the hotel condos were rented to customers for periods averaging less than seven days and as petitioners point out under the regulations a rental_activity does not include an activity where the average period of customer use is seven days or less sec_1_469-1t temporary income_tax regs fed reg date see also scheiner v commissioner tcmemo_1996_554 we must treat the hotel condos as a trade_or_business whether a loss from a trade_or_business is a passive_activity_loss generally depends on whether the taxpayer claiming the loss materially participated in that trade_or_business we may not treat a taxpayer as a material participant unless his involvement is regular continuous and substantial sec_469 the regulations allow us to treat petitioners as material participants if but only if they meet one of seven tests listed in the regulation the lapids argue that they meet four participation in the activity for more than hours per year sec_1_469-5t temporary income_tax regs fed reg date participation in the activity for more than hours and a showing that no other individual participated in the activity more than the taxpayer sec_1 5t a temporary income_tax regs supra participation in the activity for more than hours plus participation in all significant trade_or_business activities that totals hours sec_1_469-5t temporary income_tax regs supra and participation in the activity on a regular continuous and substantial basis during the year sec_1 5t a temporary income_tax regs supra this last test is the one that most closely follows the language of sec_469 however in mordkin v commissioner tcmemo_1996_187 we concluded that sec_469's material_participation standard implied that materiality could be measured by time spent we thus upheld the secretary’s decision to build safe harbors letting taxpayers prove material_participation by showing they spent a particular number of hours on a particular activity id it is not obvious though whether a taxpayer in the lapids’ situation has to treat each property as a separate activity when arguing that he has spent the required number of hours participating in the activity so we first ask whether the lapids’ four hotel condos were four activities or only one or something in between the regulations make clear that taxpayers generally cannot combine trade_or_business activities with rental activities sec_1_469-4 income_tax regs as the hotel condos are trade_or_business activities and the nonhotel properties are rental activities we cannot combine them to measure whether mrs continued the regulations guide us by listing five factors i similarities and differences in types of trades_or_businesses ii the extent of common_control iii the extent of common ownership iv geographical location and v interdependencies between or among the activities sec_1_469-4 income_tax regs supra petitioners’ hotel condos are all part of a similar trade_or_business are owned by the same people and are all near each other in florida even though there does not seem to be much interdependence between them we assume that all four are one activity the key problem in petitioners’ case then is whether they can prove that they spent the required number of hours participating in the activity even if all the hotel condos together are a single activity the regulations state that taxpayers can prove the extent of their activity through any reasonable means sec_1_469-5t temporary income_tax regs supra pincite contemporaneous daily time reports logs or similar documents are not required if the extent of such participation may be established by other reasonable means id continued lapid spent the time required to claim the benefit of the safe harbors listed in the regulation however the same regulation also tells us not to count certain activities in deciding whether petitioners have spent enough time on their activity for their participation to be material the most important of these exclusions is time spent on investment activities which does not count unless the taxpayer is directly involved in the day-to-day management or operations of the activity sec_1_469-5t and b temporary income_tax regs supra pincite see also mordkin according to the regulations investment activity includes studying and reviewing financial statements or reports on operations of the activity preparing or compiling summaries or analyses of the finances or operations of the activity for the individual’s own use and monitoring the finances or operations of the activity in a non-managerial capacity sec_1_469-5t through temporary income_tax regs supra while mrs lapid testified that she spent many hours every night studying and tracking her investments the evidence she submitted shows that she was actually just reviewing financial statements and reports on operations because the regulation specifically defines such monitoring as investment activity we cannot include that time in calculating whether she met the material_participation standard in three of the safe harbors she is aiming for this is true despite our belief that mrs lapid did indeed spend a lot of time tracking her properties regardless of whether we believe mrs lapid’s testimony or think it vague uncorroborated and self-serving we cannot consider the vast majority of the hours she spent monitoring her investments in deciding whether she was a material participant unable to count the hours that mrs lapid spent on investment activity the petitioners’ claim to the loss on their hotel condos quickly collapses though we believe that the lapids did at least occasionally visit the condos the record is devoid of any evidence that they spent anywhere near hours doing so that the hotels did the routine onsite work of property management undermines the lapids’ ability to show any significant amount of time that would count as participation in the activity and they completely failed to compare the time they spent with the time spent by individuals actually onsite petitioners do claim based on all the facts and circumstances that mrs lapid participated in the activity on a regular continuous and substantial basis during the year see sec_1_469-5t temporary income_tax regs supra pincite the regulations state that the taxpayer’s hours spent on management can count under this test only if no other person i sec_3 while the regulations permit us to include mr lapid’s time on these activities sec_1_469-5t temporary income_tax regs supra pincite petitioners presented no evidence that he spent any time on them beyond performing minor repairs compensated for performing management services related to that property sec_1_469-5t temporary income_tax regs supra pincite the record before us however contains reams of evidence showing that the hotels withheld some of the lapids’ revenues as payment for providing services such as cleaning check-ins and the like so even if mrs lapid did substantially manage the hotel properties this catchall test provides no benefit to her for these reasons we must find that the petitioners did not materially participate in the trade_or_business of the hotel condos these activities were passive and so we reject petitioners’ challenge to the disallowance of their related loss deduction b the nonhotel properties the nonhotel condo and nevada house are both rental activities rather than a trade_or_business so we must analyze whether they are passive activities under sec_469 the material_participation standard ordinarily does not apply to rental activities sec_469 but it does become relevant when petitioners argue that one of them is a real_estate_professional petitioners did submit a proposed amended tax_return that changed mrs lapid’s occupation from r n to real_estate manager they failed to raise the point in their briefs however and we therefore conclude that they have abandoned it 117_tc_183 117_tc_117 n even if we didn’t the argument lacks merit to be a real_estate_professional under sec_469 the taxpayer must among other requirements have materially participate d in real_estate trades_or_businesses for at least hours in the tax_year sec_469 but material_participation has the same meaning here as described above see sec_1 b income_tax regs so the time mrs lapid spent on investment activities would still not count toward the 750-hour requirement we therefore find in the alternative that she is not a real_estate_professional for purposes of sec_469 as the petitioners brought up no other arguments we find that the nonhotel properties are a passive_activity and any and even if mrs lapid were a real_estate_professional for purposes of sec_469 we would have to consider each of her real_estate rental activities separately sec_469 unless she elected to combine them into a single activity sec_1_469-9 income_tax regs as we find that mrs lapid is not a real_estate_professional these rules do not apply and we need not consider whether she made the required election while petitioners brought up no other arguments respondent did mention sec_469 on brief this section allows a maximum dollar_figure deduction for passive_activity_losses connected with rental real_estate petitioners however fail to qualify for this deduction because their modified_adjusted_gross_income ie their adjusted_gross_income computed without regard to their claimed losses was too high related losses are not deductible sec_469 since the petitioners’ real_estate activities generated only passive losses a decision will be entered for respondent