t c memo united_states tax_court andrew k ludwick petitioner v commissioner of internal revenue respondent worth z ludwick petitioner v commissioner of internal revenue respondent docket nos filed date paul h roskoph for petitioners andrew r moore for respondent memorandum opinion halpern judge respondent determined deficiencies in federal gift_tax for for andrew k ludwick and worth z ludwick of dollar_figure and dollar_figure respectively petitioners owned a vacation home as tenants in common and the only issue for decision is the value of the interests therein that they separately transferred in trust to a so-called qualified_personal_residence_trust unless otherwise stated all section references are to the internal_revenue_code in effect for and all rule references are to the tax_court rules_of_practice and procedure we round all dollar amounts to the nearest dollar background some facts have been stipulated and are so found the stipulation of facts and accompanying exhibits are incorporated herein by this reference petitioners are husband and wife and they resided in california when they filed the petition in petitioners purchased unimproved real_property on a bluff on the north shore of hawaii’s big island by the end of they had improved the property by constructing a vacation home in they owned the improved property the property as tenants in common each having an undivided one-half interest therein in date petitioners executed agreements establishing separate qualified_personal_residence_trust arrangements in date petitioners transferred their undivided interests in the property pursuant to those trust agreements at the time of the transfers the property had a fair_market_value of dollar_figure million and an annual operating cost of approximately dollar_figure on their separate federal gift_tax returns petitioners each reported a gift resulting from the transfers in trust they valued their separate one-half interests in the transferred property at a discount of percent viz dollar_figure dollar_figure x dollar_figure x dollar_figure in determining the deficiencies in gift_tax respondent allowed a discount of only percent so that he computed dollar_figure to be the value of each undivided one-half interest that petitioners transferred on brief respondent argues for a discount of no more than percent which results in a value for each transfer of dollar_figure i introduction discussion as stated we must determine the fair_market_value of each petitioner’s undivided one-half interest in the property the standard for determining fair_market_value for purposes of the gift_tax is the price at which the property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or to sell and both having knowledge of the relevant facts sec_25_2512-1 gift_tax regs petitioners bear the burden_of_proof and do not argue otherwise see rule a we find that at the time of the transfer the fair_market_value of each undivided one-half interest in the property was dollar_figure for a discount of approximately percent we will explain the process by which we reach that result ii valuation of the gifts to support their respective valuations the parties have in part relied on the testimony of experts we have considered that testimony and have in part relied on it in reaching our conclusion a method of valuation the expert reports petitioners request that we value each undivided_interest by discounting half the fair_market_value of the property dollar_figure by percent to reflect the disadvantages of owning an undivided fractional interest in property respondent requests a broadly similar approach although he reaches a different conclusion regarding the size of the proper discount petitioners’ expert carsten hoffman an expert in the valuation of fractional interests in property relied on analyses of sales of undivided interests and partnership interests 1petitioners have not raised the issue of sec_7491 which shifts the burden_of_proof to the commissioner in certain situations we conclude that sec_7491 does not apply here because petitioners have not produced any evidence that they have satisfied the preconditions for its application respondent’s expert stephen bethel also an expert in the valuation of fractional interests in property relied on analyses of sales of undivided interests various surveys of brokers a review of tender offers for majority interests in public companies and lawyers’ estimations of the cost of partition we do not find the analysis of either expert convincing mr hoffman in his direct testimony compared the discounts from undivided_interest transactions between and he calculated the mean and median discounts for the set of all the transactions and for three subsets income-producing properties parcels of raw land and transactions involving undivided 50-percent interests he also provided the range of discounts for all the transactions and for each of those three subsets he provided no way for us to evaluate his analysis however he failed not only to explain how the discounts were calculated ie how did he calculate the underlying fair_market_value but also to provide any measure of the variability or dispersion of his data points eg their standard deviations most importantly he did not provide any of the data we do not know the specifics of any of the undivided_interest transactions we have no way to know how comparable those properties were to the one here in issue mr hoffman also compared petitioners’ property to real_property limited_partnerships yet petitioners’ property was never intended to produce income it was a private vacation home not a source of revenue the cashflow statements of the limited_partnerships which held for instance apartment buildings and mobile homes are not relevant mr bethel in his direct testimony in part relied on four sales of undivided interests between and yet all the sales involved commercial property in the eastern united_states we are not convinced that such data tells us much about the appropriate discount for a multimillion dollar vacation home in hawaii mr bethel also relied on three surveys of california brokers that his firm conducted in and the survey questions involved the discounts associated with fractional interests in property about brokers responded to each survey by providing a range of discounts and a brief explanation yet we have no way of evaluating or of reconciling the brokers’ responses because we have no information about the transactions on which the brokers based their opinions moreover the brief explanations are often so cryptic as to 2we ignore some responses for example one broker opined that the discount associated with the sale of a fractional interest would be percent he did not give a range yet the comment beside his estimate stated he has never sold a minority position in a tenancy_in_common but in his opinion there must be a discount for the position reveal almost nothing about the reasons behind the discount ranges the surveys provide little guidance mr bethel also relied on two surveys with brokers regarding so-called pooled public tenancy-in-common investments which are professionally managed investment properties with multiple owners fractional interests in those investments generally trade with almost no discount in his report mr bethel conceded that there are four critical differences between those investments and petitioners’ property yet he argued that those differences would only slightly increase the discount proper here mr bethel did not explain his conclusion and without any reasoning we are not convinced finally mr bethel relied on a professional review of tender offers for majority interests in public companies specifically he relied on transactions involving the change_of control of real_estate companies he calculated the discounts as follows if the market price were dollar_figure and a buyer tendered dollar_figure then the premium would be percent and the discount would be percent as mr bethel noted however the size of a control premium depends on many factors eg the buyer’s desire or need to acquire the company to complement hi sec_3pooled public tenancy-in-common investments are professionally managed and interests therein are readily marketable represent ownership in a diverse set of properties and have relatively steady income streams present operation that do not seem relevant to the discount appropriate here we find the tender offer analysis unhelpful partition at trial we asked both experts why a buyer of an undivided_interest in the property would consider the interest worth any less than a proportional share of the fair_market_value of the whole property reduced by the cost to the buyer of partition ie the cost to end joint_ownership involuntarily by a judicially mandated sale as a single residential property the property was unlikely to be divided into separate estates and to distribute the proceeds appropriately both convinced us that a buyer would also take into account marketability or liquidity risk ie the risk of being unable to sell an asset quickly at its fair_market_value downes goodman dictionary of finance and investment term sec_391 7th ed they disagreed however as to the size of the appropriate discount and as to whether partition would even be necessary although mr hoffman insisted that a buyer would consider more than just the cost of partition and the marketability risk he failed to convince us certainly a tenancy_in_common is not the ideal way for two strangers to own a vacation home that does not mean however that a buyer would discount an undivided_interest by any more than the cost of liquidating his investment and an additional_amount to reflect the risk occasioned by a less than immediate sale indeed mr hoffman testified and if you have the right to force a partition you will certainly consider that and if an investor were to come to me and say well i demand an percent discount because it’s an undivided_interest i would say well that doesn’t make sense because you can partition it for significantly less than that so why would you demand an percent discount the logic of that statement is that a buyer who had a right to partition could not demand a discount greater than the discount reflecting the cost and likelihood of partition and the discount representing the marketability risk because if he did another rational buyer would be willing to bid more that iterative process would drive the discount down to the discount reflecting the expected cost of partition and the marketability risk mr hoffman failed to convince us otherwise petitioners concede that hawaii law provides for partition of real_property see haw rev stat ann sec lexis nexis a buyer would thus be willing to pay an amount equal to the present_value of the fair_market_value of percent of the property upon sale less his costs of maintaining the property and his costs of selling the property perhaps including the cost of partition accordingly to determine the price that a buyer would be willing to pay we must figure the length of the partition process its costs including the cost of selling the property and the likelihood partition would be necessary the rate of return the buyer would demand and the value of percent of the property upon sale see estate of barge v commissioner tcmemo_1997_ b what a buyer would pay partition in partition suits hawaii courts may sell real_property where partition in_kind would be impracticable or greatly prejudicial to the interested parties see haw rev stat ann sec lexis nexis petitioners do not dispute that partition would result in a sale of the property mr hoffman testified that a contested partition would take to years to resolve and that its costs would include dollar_figure of appraisal costs and dollar_figure of litigation expenses mr bethel testified that a contested partition could take up to years to resolve and he estimated that its costs would include dollar_figure to dollar_figure to proceed with filings a brokerage fee of to percent and a closing fee of percent mr bethel concluded that the total cost of partition would range from to percent of the value of the property mr bethel testified that if partition were not necessary the property could be sold in less than a year we find that a contested partition would take years to resolve including year to sell the property and that the costs made necessary by the litigation would be percent of the value of the property that is dollar_figure petitioners however have failed to convince us that partition will always--indeed will often--be necessary in fact when respondent’s counsel suggested that partition was relatively unlikely mr hoffman seemed to agree nonetheless neither party suggested the likelihood of partition bearing heavily on petitioners who bear the burden_of_proof we find that a buyer would expect partition to be necessary percent of the time we find that the cost of selling the property which the sellers would bear in any case would be percent of the value of the property that is dollar_figure finally the annual operating cost of the property was approximately dollar_figure we assume that a buyer of a one-half undivided_interest in the property would expect to bear only half the costs described above the buyer would expect the remaining petitioner to bear the other half 4respondent’s argument is as follows suppose petitioner husband had sold his interest if the buyer then told petitioner wife that he wanted to sell the property what are the odds that she would object not only would he have a right to partition but also a court would ultimately order the property sold as opposed to divided petitioners have failed to explain what in that hypothetical petitioner wife would stand to gain by opposing partition cf estate of barge v commissioner tcmemo_1997_188 finding that in a case in which the property would have been divided not sold the other owners might resist partition to obtain an advantageous partition respondent however concedes that such opposition is possible and we accept that concession rate of return mr bethel testified that to account for the marketability risk a buyer would demand a return of percent mr hoffman testified that a buyer would demand a return of percent nonetheless he presented no evidence to support that conclusion petitioners have failed to prove that a buyer would demand a return greater than percent value of interest after partition the parties stipulated that in the property had a fair_market_value of dollar_figure million mr hoffman testified that the long-term sustainable growth rate of real_estate wa sec_3 percent annually accordingly at the end of year if partition were not necessary or years if it were the property would sell for dollar_figure or dollar_figure respectively iii fair_market_value accordingly to determine the value of an undivided one-half interest in the property we use a 10-percent rate of return discount rate a partition period of years including a selling period of year annual operating costs of dollar_figure possible partition costs of dollar_figure allocated equally to both years the cost of selling the property dollar_figure and a fair_market_value of dollar_figure or dollar_figure after a sale in year or years respectively we find that the fair_market_value of the gift that each petitioner made in was dollar_figure our calculations are as follows if partition is not necessary year operating costs selling costs sale proceeds total present_value dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure if partition is necessary operating costs partition and selling costs dollar_figure big_number dollar_figure big_number year total sale proceeds total present_value -- dollar_figure big_number dollar_figure dollar_figure big_number big_number we have found that a buyer would expect partition to be necessary percent of the time thus the buyer of an undivided one-half interest in the property would have been willing to pay the weighted average of the two present values calculated above that is dollar_figure decisions will be entered under rule


t c memo united_states tax_court michael e kohn and catherine k kohn petitioners v commissioner of internal revenue respondent docket no 16252-06l filed date michael e kohn and catherine k kohn pro sese michael w bitner for respondent memorandum findings_of_fact and opinion marvel judge pursuant to sec_6320 petitioners seek review of respondent’s determination that collection action could proceed with respect to petitioners’ unpaid federal income 1unless otherwise indicated all section references are to the internal_revenue_code and all rule references are to the tax_court rules_of_practice and procedure tax_liability we must decide whether respondent’s appeals_office correctly upheld the filing of a notice_of_federal_tax_lien with respect to petitioners’ federal_income_tax liability findings_of_fact some of the facts have been deemed established for purposes of this case in accordance with rule f we incorporate these facts into our findings by this reference petitioners resided in missouri when the petition was filed michael e kohn mr kohn was a tax attorney who held an undergraduate degree in history and business a law degree and a master of business administration degree from st louis university and a master of laws in taxation degree from new york university from to mr kohn worked as an associate junior partner and senior tax partner at a st louis missouri law firm after leaving the firm mr kohn practiced law on his own until he surrendered his license to practice law in 2on date respondent filed a motion to show cause why proposed facts and evidence should not be accepted as established under rule f and attached a proposed stipulation of facts petitioners filed a response to respondent’s motion accepting the facts and evidence set forth in pars through of respondent’s proposed stipulation as a result on date we made the order to show cause under rule f absolute and deemed established the facts and evidence set forth in pars through of respondent’s proposed stipulation of facts we also made the order to show cause under rule f absolute and deemed established the facts and evidence set forth in par of respondent’s proposed stipulation of facts because petitioners failed to respond regarding par as required by rule f in date mr kohn pleaded guilty to one count of attempting to interfere with the administration of internal revenue laws in violation of sec_7212 from date to date mr kohn was incarcerated on date petitioners jointly filed their form_1040 u s individual_income_tax_return return petitioners reported a tax due after withholding credits of dollar_figure but they did not remit a payment on date respondent assessed the reported tax_liability an addition_to_tax for failure to pay estimated_tax additions to tax for late filing and late payment and interest in date respondent filed a notice_of_federal_tax_lien with respect to petitioners’ assessed tax_liability and on date respondent sent petitioners a notice_of_federal_tax_lien filing and your right to a hearing under sec_6320 in response petitioners’ representative thomas l hoops timely submitted a form request for a collection_due_process_hearing on petitioners’ behalf petitioners’ case was assigned to settlement officer alois c hoog mr hoog 3mr kohn’s criminal conviction was unrelated to petitioners’ personal tax matters 4on date respondent assessed additional interest and an additional failure to pay addition_to_tax on date mr hoog held a hearing with mr kohn and his authorized representative michael fitzgerald at the hearing mr kohn submitted a collection_due_process_hearing memorandum in support of abatement of tax_lien and abatement of penalties with attached exhibits during the hearing and in the memorandum mr kohn raised the following issues petitioners had no unpaid tax_liability for because they had overpaid their federal_income_tax liability in years before additions to tax for failure_to_file a timely return should have been abated and interest assessments did not account for payments petitioners made and mrs kohn was not liable for the unpaid tax_liability under sec_6015 during the hearing mr kohn also contended that respondent did not credit to petitioners’ tax accounts dollar_figure in payments they supposedly made in and and that respondent credited to their tax account only dollar_figure of a dollar_figure payment on date respondent’s appeals_office mailed petitioners a notice_of_determination concerning collection action under sec_6320 sustaining respondent’s filing of the notice_of_federal_tax_lien in the notice_of_determination the appeals_office concluded the fact that penalties were abated in nondetermination years is not a basis for abating 5the record does not show whether mrs kohn attended the hearing petitioners’ tax_liability petitioners did not have reasonable_cause for failing to file a timely return mrs kohn was not entitled to relief under sec_6015 and petitioners did not produce sufficient evidence that they made the dollar_figure in payments or that the dollar_figure payment credited to their tax account was actually a dollar_figure payment petitioners filed a timely petition contesting respondent’s determination i collection hearing procedure opinion sec_6321 imposes a lien in favor of the united_states on all property and property rights of a taxpayer liable for taxes after a demand for the payment of the taxes has been made and the taxpayer fails to pay those taxes the lien arises when the assessment is made sec_6322 sec_6323 generally requires the secretary to file a notice_of_federal_tax_lien with the appropriate state office for the lien to be valid against certain third parties sec_6320 requires the secretary to notify the taxpayer in writing of the filing of a notice_of_federal_tax_lien and of the taxpayer’s right to an administrative 6in the petition petitioners challenged respondent’s determination that mrs kohn did not qualify for relief under sec_6015 but they did not argue this issue at trial or in their posttrial briefs petitioners also failed to produce any evidence on this issue at trial we conclude therefore that petitioners have abandoned this issue see 87_tc_56 hearing on the matter sec_6320 affords the taxpayer the right to a fair hearing before an impartial hearing officer sec_6320 requires that the administrative hearing be conducted pursuant to sec_6330 d other than paragraph b thereof and e at the hearing a taxpayer may raise any relevant issue including appropriate spousal defenses challenges to the appropriateness of the collection action and possible collection alternatives sec_6330 a taxpayer is precluded however from contesting the existence or amount of the underlying tax_liability unless the taxpayer failed to receive a notice_of_deficiency for the tax_liability in question or did not otherwise have an opportunity to dispute the tax_liability see sec_6330 114_tc_604 the phrase underlying tax_liability includes the tax_deficiency any penalties and additions to tax and statutory interest 115_tc_329 following a hearing the appeals_office must issue a notice_of_determination regarding the validity of the filed federal_tax_lien in making the determination the appeals_office is required to take into consideration verification presented by the secretary that the requirements of applicable law and administrative procedure have been met relevant issues raised by the taxpayer and whether the proposed collection action appropriately balances the need for efficient collection_of_taxes with a taxpayer’s concerns regarding the intrusiveness of the proposed collection action sec_6330 if the taxpayer disagrees with the appeals office’s determination the taxpayer may seek judicial review by appealing to this court sec_6330 our jurisdiction to review the commissioner’s determination extends to consideration of facts and issues in years not subject_to the notice_of_determination to the extent that the tax_liability for those years may affect the appropriateness of the collection action for the determination_year 125_tc_14 ii standard of review where the validity of the underlying tax_liability is properly at issue the court reviews the determination regarding the underlying tax_liability de novo sego v commissioner supra pincite 114_tc_176 where the validity of the underlying tax_liability is not properly at issue the court reviews the determination of the appeals_office for abuse_of_discretion sego v commissioner supra pincite goza v commissioner supra pincite respondent argues in his opening brief that in reviewing the notice_of_determination we should apply the abuse_of_discretion standard of review petitioners inexplicably contend that we should review the notice_of_determination under the abuse_of_discretion and de novo standards of review in response to petitioners’ contention respondent states in his reply brief that the notice_of_federal_tax_lien should be sustained regardless of the standard of review used by this court we agree with respondent that the standard of review does not affect our conclusion in this case under either standard we would reach the same result on the record in this case and consequently we need not decide which standard of review applies cf freije v commissioner supra pincite reviewing de novo whether the commissioner appropriately applied a payment to a year not subject_to the notice_of_determination iii petitioners’ challenges to the notice_of_determination a application of payments petitioners argue that respondent did not credit to their tax accounts dollar_figure in payments they supposedly made in and they also contend that they made a dollar_figure payment but that respondent credited only dollar_figure of that payment to their tax account during the collection hearing mr hoog asked petitioners for evidence of the dollar_figure in payments and the dollar_figure payment petitioners showed mr hoog copies of the fronts of checks but 7although the parties introduced into evidence petitioners’ memorandum in support of abatement of tax_lien and abatement of penalties with attachments as part of the administrative record the parties did not introduce the entire administrative record were unable to provide copies of the backs of the checks mr hoog concluded that the evidence petitioners presented was insufficient to substantiate the payments and requested further proof of payment petitioners did not provide proof of payment as requested before the notice_of_determination was issued at trial petitioners did not introduce into evidence copies of the checks representing the dollar_figure in payments or the dollar_figure payment consequently the record contains no evidence on which we can conclude that petitioners paid dollar_figure that respondent did not properly apply to their unpaid tax_liabilities or that a dollar_figure payment was improperly credited as a dollar_figure payment to petitioners’ tax account in addition petitioners argued at trial that respondent misapplied several payments made after to years before and that the misapplication of those payments distorted petitioners’ unpaid tax_liability specifically mr kohn argued that respondent should have applied the payments to the oldest liability first we disagree rev_proc 8although petitioners claim that they presented the checks to mr hoog during the collection hearing petitioners’ memorandum in support of abatement of tax_lien that attaches documents they presented during the collection hearing does not include copies of the checks 9at trial mr kohn indicated that he had reached an agreement with a collection officer that petitioners would make periodic_payments to be applied first to the oldest unpaid tax_liability however the record does not contain any such continued sec_3 2002_1_cb_746 provides that unless the taxpayer provides specific written directions as to the application of a payment the internal_revenue_service will apply the payment in a manner that will serve its best interest mr kohn conceded at trial that the checks did not make a designation and without specific written directions respondent may apply the payments in accordance with respondent’s best interest therefore we cannot conclude on the basis of the record that respondent misapplied any of the payments that were applied to years before b abatement of penalties and interest in years before petitioners argue that respondent abated certain penalties10 and interest in some but not all prior years and that if respondent had consistently abated the additions to tax in all prior years petitioners would have an overpayment credit that would offset their tax_liability in the attachment to the notice_of_determination respondent determined that respondent’s decision to abate additions to tax in years not subject_to the continued agreement nor did the collection officer testify at trial we therefore cannot conclude that petitioners had a binding agreement with respondent regarding the application of the periodic_payments 10references to penalties in the record and in petitioners’ briefs are to the addition_to_tax under sec_6651 for failure_to_file a timely return or under sec_6651 for failure to pay the amount of tax shown on petitioners’ return notice_of_determination was not a basis for abatement of the additions to tax included in the tax_liability we agree each taxable_year stands alone and any abatement of additions to tax in some years does not establish petitioners’ entitlement to an abatement of additions to tax in other years see 55_tc_28 elder v commissioner tcmemo_2007_281 moreover the record does not contain any credible_evidence to support a conclusion that the additions to tax in the prior years should be abated we thus sustain mr hoog’s determination with respect to the abatement of additions to tax in years before c additions to tax under sec_6651 and sec_6651 imposes an addition_to_tax for failure_to_file a timely federal_income_tax return unless the taxpayer can demonstrate that such failure is due to reasonable_cause and not due to willful neglect reasonable_cause for the failure_to_file a timely return exists if the taxpayer exercised ordinary business care and prudence but was unable to file the return within the time prescribed by law sec_301_6651-1 proced admin regs sec_6651 imposes an addition_to_tax for failure to pay the amount of tax shown on the taxpayer’s federal_income_tax return on or before the payment due_date unless such failure is due to reasonable_cause and not due to willful neglect a failure to pay will be considered due to reasonable_cause if the taxpayer makes a satisfactory showing that he exercised ordinary business care and prudence in providing for payment of his tax_liability and was nevertheless either unable to pay the tax or would suffer undue_hardship if he paid on the due_date sec_301_6651-1 proced admin regs respondent determined that petitioners were liable for additions to tax under sec_6651 and for the record shows that petitioners filed their return on date over years after its due datedollar_figure when they filed the return petitioners reported a tax due of dollar_figure but did not submit any payment with the returndollar_figure we thus conclude that respondent met his burden of producing evidence to demonstrate that the additions to tax under sec_6651 and are appropriate see 127_tc_200 affd 521_f3d_1289 10th cir 116_tc_438 petitioners argue that they are not liable for the additions to tax because they had reasonable_cause for failing to file a 11the due_date of petitioners’ return was date as they filed no request for an extension 12petitioners had a withholding_tax credit dollar_figure that was applied against their tax_liability as of date after they filed the return petitioners made several payments that were applied to their unpaid tax_liability timely return and to pay the tax shown on the returndollar_figure petitioners contend that they were unable to prepare and file a timely return because of the criminal investigation14 and incarceration of mr kohn we have previously held that incarceration alone does not constitute reasonable_cause for purposes of the addition_to_tax for failure_to_file see eg thrower v commissioner tcmemo_2003_139 krause v commissioner tcmemo_1991_13 mr kohn is a well-educated and experienced tax attorney who is very familiar with the filing deadlines and payment obligations imposed by the internal_revenue_code petitioners did not file timely returns for any of the years before and petitioners have not credibly explained why the criminal investigation and incarceration prevented them from filing their return and paying their tax_liability petitioners’ argument that the criminal investigation and incarceration of mr kohn constituted reasonable_cause for their failure_to_file a timely return and to pay the tax_shown_on_the_return is unconvincing 13respondent’s transcript of petitioners’ tax account shows that respondent also assessed an addition_to_tax under sec_6654 for failure to pay estimated_taxes petitioners do not challenge their liability for the sec_6654 addition_to_tax and they have not shown that they qualify for any exception under sec_6654 14the record does not establish the dates of the investigation we infer only that the investigation commenced sometime before mr kohn pled guilty in date we cannot conclude on this record that petitioners exercised ordinary business care and prudence with respect to filing their return and paying their tax_liability because petitioners have not established they had reasonable_cause for failing to file a timely return and to pay the amount shown on the return we sustain respondent’s determination not to abate the additions to tax we have considered all arguments raised by either party and to the extent not discussed we find them to be irrelevant moot or without merit to reflect the foregoing decision will be entered for respondent


t c no united_states tax_court people place auto hand carwash llc petitioner v commissioner of internal revenue respondent docket no filed date p is a limited_liability_company llc owned and operated by h and w when p filed this action for redetermination of employment status h and w were debtors in bankruptcy held because this proceeding concerns p’s employment_tax liabilities and not the tax_liabilities of h and w the automatic_stay provision of u s c a does not apply to this proceeding held further consideration of equitable relief pursuant to u s c sec_105 properly lies with the bankruptcy court rather than the tax_court larry conway a member for petitioner donna mayfield palmer for respondent opinion thornton judge this is an action for redetermination of employment status pursuant to sec_7436 and rule petitioner a limited_liability_company llc is owned and operated by larry and marilyn conway the conways who have filed chapter bankruptcy petitions the question presently before us is whether the automatic_stay provision of u s c sec_362 applies to these proceedings as discussed below we conclude that it does not background petitioner is a limited_liability_company ostensibly organized under tennessee law an llc is a legal entity with attributes of both a corporation and a partnership although not formally characterized as either one blakemore limited_liability companies and the bankruptcy code a technical review am bankr inst j date apparently the conways are petitioner’s only members on date petitioner filed its petition signed by larry conway for petitioner the petition states among other unless otherwise indicated section references are to the applicable versions of the internal_revenue_code rule references are to the tax_court rules_of_practice and procedure respondent has raised no issue as to whether larry conway has authority to represent petitioner in this proceeding in his rule f motion filed date respondent identifies larry conway as petitioner’s principal on the record presently before us it appears that larry conway is authorized continued things that petitioner is completely out of business with no assets attached to the petition is a notice_of_determination of worker classification dated date and addressed to petitioner in memphis tennessee in the notice_of_determination respondent determined that for purposes of federal employment_taxes specified individuals were to be classified as petitioner’s employees and as a consequence petitioner owed dollar_figure in additional employment_tax additions to tax and penalties with respect to calendar_year on date pursuant to rule f respondent filed a motion to show cause why proposed facts and evidence should not be accepted as established in its response petitioner stated that the conways are the whole owners and personally liable parties for this defunct business and action before the court is now involved in a chapter liquidation case in the u s bankruptcy court in memphis tennessee petitioner contended that this case should be stayed pursuant to the automatic_stay provision of u s c sec_362 continued to represent petitioner in this proceeding see rule b an unincorporated association may be represented by an authorized member of the association cf scenic wonders gallery llc v commissioner tcmemo_2000_64 holding that an alleged co- trustee of an llc’s tax_matters_partner failed to establish that he was authorized to act on behalf of the tax_matters_partner petitioner has not alleged that it is a party to the conways’ bankruptcy proceedings or has itself filed any petition in bankruptcy on date the court struck this case for trial from the date nashville tennessee trial session and calendared its date order to show cause for hearing at the same trial session the court ordered the parties to show cause in writing why the proceedings in this case should not be stayed pursuant to u s c sec_362 in his response respondent contended that the automatic_stay provisions of u s c sec_362 are inapplicable because petitioner has filed no petition with the bankruptcy court and is not a debtor therein respondent contended alternatively that if the automatic_stay is applicable to this proceeding then the petition was filed in violation of it and accordingly this case should be dismissed for lack of jurisdiction see eg 84_tc_645 petitioner filed no response to the court’s date order to show cause at the hearing on date in nashville tennessee there was no appearance by or on behalf of petitioner attached as exhibits to respondent’s response are copies of pacer service_center case printouts with respect to u s c ch petitions filed by larry and marilyn conway on date and date respectively discussion title of the u s code provides uniform procedures to promote the effective rehabilitation of the bankrupt debtor and when necessary the equitable distribution of the debtor’s assets see h rept pincite in furtherance of these goals u s c sec_362 provides automatic_stay protection for the debtor and the bankruptcy_estate the tit u s c sec_362 as in effect for relevant periods provides except as provided in subsection b of this section a petition filed under sec_301 sec_302 or sec_303 of this title or an application filed under sec_5 of the securities investor protection act of operates as a stay applicable to all entities of-- the commencement or continuation including the issuance or employment of process of a judicial administrative or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title or to recover a claim against the debtor that arose before the commencement of the case under this title the enforcement against the debtor or against property of the estate of a judgment obtained before the commencement of the case under this title any act to obtain possession of property of the estate or of property from the estate or to exercise control_over property of the estate any act to create perfect or enforce any lien against property of the estate any act to create perfect or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the continued automatic_stay provisions as set forth in paragraphs through of u s c sec_362 generally operate to temporarily bar actions against the debtor or property of the debtor or the bankruptcy_estate paragraph of u s c sec_362 as in effect for relevant periods specifically stays tax_court proceedings concerning the debtor continued case under this title any act to collect assess or recover a claim against the debtor that arose before the commencement of the case under this title the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor and the commencement or continuation of a proceeding before the united_states tax_court concerning the debtor the bankruptcy abuse prevention and consumer protection act of publaw_109_8 119_stat_23 amended u s c sec_362 to provide for a stay of-- the commencement or continuation of a proceeding before the united_states tax_court concerning a corporate debtor’s tax_liability for a taxable_period the bankruptcy court may determine or concerning the tax_liability of a debtor who is an individual for a taxable_period ending before the date of the order for relief under this title this amendment is effective with respect to petitions for relief under the bankruptcy code filed on or after date see id sec_1501 119_stat_134 consequently this amendment is inapplicable with respect to the bankruptcy cases filed by the conways the legislative_history describes the purpose of this amendment as follows continued as a general principle automatic_stay protection does not inherently extend to legal entities separate from the debtor 8_f3d_343 6th cir for this purpose formal distinctions between debtor-affiliated entities are maintained when applying the stay 959_f2d_1194 3d cir holding that the automatic_stay did not extend to claims against the debtor’s corporation see also in re palumbo bankr bankr s d fla holding that the automatic_stay did not extend to claims against a family limited_partnership in which the debtor held 97-percent general and limited_partnership interests adhering to these general principles at least one court has held that the automatic_stay is inapplicable to an action against an llc that is associated with a debtor in continued under current law the filing of a petition for relief under the bankruptcy code activates an automatic_stay that enjoins the commencement or continuation of a case in the united_states tax_court this rule was arguably extended in halpern v commissioner t c which held that the tax_court did not have jurisdiction to hear a case involving a postpetition year to address this issue sec_709 of the act amends sec_362 of the bankruptcy code to specify that the automatic_stay is limited to an individual debtor’s prepetition taxes taxes incurred before entering bankruptcy the amendment clarifies that the automatic_stay does not apply to an individual debtor’s postpetition taxes in addition sec_709 provides that the stay applies to both prepetition and postpetition tax_liabilities of a corporation so long as it is a liability that the bankruptcy court may determine h rept pt pincite bankruptcy but that is not itself a party to the bankruptcy in re calhoun bankr bankr n d iowa that case however did not involve the automatic_stay provision of u s c sec_362 we have discovered no authority addressing the question of whether a tax_court proceeding instituted by an llc should be viewed as concerning debtor members of the llc within the meaning of u s c sec_362 so as to trigger the automatic_stay for the reasons discussed below we conclude that the automatic_stay protection of u s c sec_362 does not extend to an llc merely because the llc’s members are debtors in bankruptcy legislative_history sheds little light on the meaning of concerning the debtor as that phrase is used in u s c sec_362 see 96_tc_895 reviewing the legislative_history of the automatic_stay provisions this court has construed concerning the debtor narrowly to mean that the automatic_stay should not apply unless the tax_court proceeding possibly would affect the tax_liability of the debtor in bankruptcy w reserve oil although the bankruptcy code does not expressly mention llcs it is generally accepted that an llc is a person that may qualify for relief as a debtor under the bankruptcy code see gilliam v speier in re krsm props llc bankr b a p 9th cir in re calhoun bankr bankr n d iowa in re iclnds notes acquisition llc bankr bankr n d ohio gas co v commissioner 95_tc_51 affd without published opinion 995_f2d_235 9th cir cf 88_f3d_821 9th cir revg tcmemo_1994_412 95_tc_388 madison recycling association v irs aftr 2d ustc par big_number e d ky affd 45_fedappx_497 6th cir durham farms v united_states in re w j hoyt sons mgmt co aftr 2d ustc par big_number bankr d or we note that this construction is also consistent with the recently amended language of u s c sec_362 which as previously noted refers to a tax_court proceeding concerning in 95_tc_51 affd without published opinion 995_f2d_235 9th cir the question was whether the automatic_stay provision of u s c sec_362 applied to a partnership action commenced in the tax_court pursuant to rule after the partnerships had filed petitions in bankruptcy id this court held that the automatic_stay did not apply reasoning that because partnerships are not subject_to federal_income_tax ultimately the partnership action affected only the income_tax_liability of the individual partners and so concerned only the partners and not the partnership the court stated to argue that the partnership proceeding requires the tax_court to make determinations with respect to the items of income gain loss or credit of the partnership rather than the individual partners and that a partnership proceeding involving a bankrupt partnership thus concerns the partnership not the partners is to exalt form over substance id pincite the tax_liability of a debtor rather than concerning a debtor the dispute in the instant case ultimately concerns petitioner’s liability for unpaid employment_taxes and not the conways’ own tax_liability as an llc petitioner is a separate legal entity from the conways for federal tax purposes an llc with more than one member generally is treated as a partnership unless the llc elects to be treated as an association ie a tennessee law provides that an llc is generally dissolved upon the occurrence of any of various specified events including the bankruptcy of any member tenn code ann sec a g tennessee law also contemplates however that a dissolved llc continues to exist for purposes of winding up its affairs and litigating claims against it see eg tenn code ann sec providing procedures to be followed by a dissolved llc in handling claims against it as part of the winding-up process tenn code ann sec providing that after a dissolved llc has been terminated any of its former managers governors or members may assert or defend in the name of the llc any claim by or against the llc cf in re midpoint dev llc bankr bankr w d okla holding that a dissolved oklahoma llc continued to exist for purposes of winding up its affairs and qualified as a debtor under the bankruptcy code we conclude that even if petitioner was dissolved or terminated pursuant to tennessee law consequent to the conways’ filing bankruptcy petitions petitioner continued to exist for purposes of challenging its liability for the employment_taxes at issue and engaging in this litigation relating to that liability otherwise the question would arise as to whether this case should be dismissed for lack of jurisdiction because of petitioner’s lack of capacity to engage in this litigation see rule respondent has not questioned petitioner’s capacity to engage in this litigation for essentially the same reasons just discussed on the basis of the present record we are satisfied that petitioner has the requisite capacity to engage in this litigation corporation see sec_301_7701-3 proced admin regs we infer that petitioner has made no such election and for tax purposes is to be treated as a partnershipdollar_figure such classification for tax purposes however has no effect on the legal status of the ownership of llc assets and provides no basis for disregarding petitioner’s separate identity from the conways’ see gilliam v speier in re krsm props llc bankr b a p 9th cir more fundamentally regardless of petitioner’s classification as a partnership for federal tax purposes petitioner is the employer within the meaning of sec_3403 accordingly the liability for the employment_taxes is petitioner’s and not the conways’ see 541_us_114 because petitioner is a separate_entity from the conways the imposition of employment_tax on petitioner cannot be viewed as equivalent to the imposition of employment_tax on its members see id accordingly the automatic_stay provision of u s c sec_362 is inapplicable to this case in unusual circumstances a bankruptcy court may properly stay a proceeding against a nonbankrupt third party if there is such identity between debtor and the third-party defendant that the debtor may be said to be the real party defendant and that a attached as an exhibit to respondent’s rule f motion is a form_1065 u s partnership return of income which respondent alleges petitioner filed for taxable_year judgment or finding against third-party defendant will in effect be a judgment against the debtor 788_f2d_994 4th cir see 423_f3d_567 6th cir 8_f3d_343 6th cir any such stay however would not arise pursuant to the automatic_stay provisions of u s c sec_362 but rather pursuant to the bankruptcy court’s equitable power to issue an order as necessary or appropriate to carry out the provisions of the bankruptcy code as provided by u s c sec_105 see amedisys inc v natl century fin enters inc supra r equests for such relief can only be presented to the bankruptcy court patton v bearden supra pincite accordingly consideration of any such relief lies beyond the purview of this court an appropriate order will be issued


internal_revenue_service number release date index number 468a ----------------------------- --------------------------------------- -------------------------------- ---------------------------- ---------------------------- legend parent department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc psi b6 plr-129958-06 plr-129965-06 plr-129949-06 plr-129962-06 plr-129968-06 plr-129972-06 date date -------------------------------- --------------------------------- -------------------------------------------------------- taxpayer a ------------------------------------------------------------ taxpayer b ------------------------------------------------------ --------------------------------- --------------------------------------- taxpayer c ------------------------------------------------------------ company state a plant director --------------------------------------------- ------ --------------------------------------------------- --------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- ------------------------ -------------------------------------------- ----------------------------------------------------- ------------------------------------------- -------------------------------------------- ------------------------ --------------------------------------- location commission a commission b commission c taxpayer d taxpayer e ------------------------------------------------------------ taxpayer f -------------------------------------------------------------------------------- ------------------------------------------------------------------------------ -------------------------- -------------------------- ------------------- plr-129958-06 ------------------------------------------------------------------------------------------------------- x y z dear ---------------- the tax consequences of the transaction described below under sec_468a of the internal_revenue_code this letter responds to your request dated date for various rulings on taxpayers represent the following facts and information relating to the ruling_request parent directly owns all of the outstanding common_stock of taxpayer b and taxpayer c taxpayer b is an electric public_utility company engaged in the generation transmission distribution and sale of electric energy in state a taxpayer b is subject_to the jurisdiction of commission a and commission b with respect to the nuclear decommissioning costs included in its cost of service for regulatory purposes taxpayer c is an electric public_utility company engaged in the generation transmission distribution and sale of electric energy in state a taxpayer c is subject_to the jurisdiction of commission a and commission b with respect to the nuclear decommissioning costs included in its cost of service for regulatory purposes taxpayer a is a newly-formed generation company and is a wholly-owned subsidiary of company which is wholly-owned by parent taxpayer b has an ownership_interest of----------- percent in the plant taxpayer c has a --------percent ownership_interest in the plant plant is situated at location taxpayers b and c are severally obligated to pay all expenditures_for the construction operation and maintenance of plant and are entitled to the proportionate share of the electric power produced thereby both taxpayer b and taxpayer c have obligations to decommission the plant and have established several funds for that purpose taxpayer b has established taxpayer d as a fund qualified under sec_468a as well as one or more nonqualified funds taxpayer c has established taxpayer e as a fund qualified under sec_468a as well as one or more nonqualified funds both taxpayer b and taxpayer c have received revised schedules of ruling amounts through ------- on x taxpayer b contributed the entire 12-month ruling_amount specified in its most recent schedule of ruling amounts to taxpayer d on x taxpayer c contributed the entire 12-month ruling_amount specified in its most recent schedule of ruling amounts to taxpayer e plr-129958-06 on y taxpayer b and taxpayer c transferred their interests in plant to taxpayer a taxpayer a assumed certain obligations with respect to plant including the obligation to decommission plant also on y taxpayer b transferred taxpayer d as well as all nonqualified decommissioning funds relating to the plant to taxpayer a and taxpayer c transferred taxpayer e as well as all nonqualified decommissioning funds relating to the plant to taxpayer a the assets in taxpayer d and taxpayer e were transferred to taxpayer f a fund established by taxpayer a and qualified under sec_468a the transfers of the interests in plant were approved by commission b and commission c as a result of the contributions of the entire ------- ruling amounts on x by taxpayer b to taxpayer d and by taxpayer c to taxpayer e excess_contributions were made to those funds on z taxpayer a withdrew from taxpayer f the excess_contributions made by taxpayer b and taxpayer c along with earnings on those excess_contributions from the day after x thru and including the day before z taxpayer has requested the following rulings requested ruling taxpayer b taxpayer c taxpayer a taxpayer d taxpayer e and taxpayer f will not recognize any gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfer of assets of taxpayer d and taxpayer e into taxpayer f and taxpayer f will have a basis in the assets received from taxpayer d and taxpayer e equal to the basis of those assets immediately prior to the transfer requested ruling no portion of taxpayer d or taxpayer e is disqualified by receipt of the excess_contributions from taxpayer b and taxpayer c respectively and that no portion of taxpayer f is disqualified by the withdrawal of such excess_contributions and the earnings thereon law and analysis requested ruling sec_1_468a-5 sets out the qualification requirements for nuclear decommissioning funds it provides in part that a qualified nuclear decommissioning fund must be established and maintained pursuant to an arrangement that qualifies as a_trust under state law sec_1_468a-5 provides that an electing taxpayer can establish and maintain only one qualified nuclear decommissioning fund for each nuclear power plant if a nuclear power plant is subject_to the ratemaking jurisdiction of two or more public plr-129958-06 utility commissions and any such public_utility commission requires a separate fund to be maintained for the benefit of ratepayers whose rates are established or approved by the public_utility commission the separate funds maintained for such plant whether or not established and maintained pursuant to a single trust agreement shall be considered a single nuclear decommissioning fund sec_1_468a-6 provides rules applicable to the transfer of an interest in a nuclear power plant and transfer of the qualified nuclear decommissioning fund where certain requirements are met specifically sec_1_468a-6 provides that sec_1_468a-6 applies if-- immediately before the disposition the transferor maintained a qualified nuclear decommissioning fund with respect to the interest disposed of and immediately after the disposition-- i the transferee maintains a qualified nuclear decommissioning fund with respect to the interest acquired ii the interest acquired is a qualifying interest of the transferee in the nuclear power plant iii either a proportionate amount which could include all of the assets of the transferor’s qualified nuclear decommissioning fund is transferred to a qualified nuclear decommissioning fund of the transferee or the transferor’s entire qualified nuclear decommissioning fund is transferred to the transferee provided in the latter case or if the transferee receives all of the assets in the transferor’s qualified nuclear decommissioning fund but not the transferor’s qualified nuclear decommissioning fund that the transferee acquires the transferor’s entire qualifying interest in the plant and iv the transferee continues to satisfy the requirements of sec_1_468a-5 which permits an electing taxpayer to maintain only one qualified nuclear decommissioning fund for each plant sec_1_468a-6 provides that a disposition that satisfies the requirements of sec_1_468a-6 will have the following tax consequences at the time it occurs neither the transferor nor the transferor’s qualified nuclear decommissioning fund will recognize gain_or_loss or otherwise take any income into account by reason of the transfer of a proportionate amount of the assets of the transferor’s qualified nuclear plr-129958-06 decommissioning fund to the transferee’s qualified nuclear decommissioning fund or by reason of the transfer of the transferor’s entire qualified nuclear decommissioning fund to the transferee for purposes of the regulations under sec_468a this transfer or the transfer of the transferor’s qualified nuclear decommissioning fund will not be considered a distribution of assets by the transferor’s qualified nuclear decommissioning fund neither the transferee nor the transferee’s qualified nuclear decommissioning fund will recognize gain_or_loss or otherwise take any income into account by reason of the transfer of a proportionate amount of the assets of the transferor’s qualified nuclear decommissioning fund to the transferee’s qualified nuclear decommissioning fund or by reason of the transfer of the transferor’s entire qualified nuclear decommissioning fund to the transferee for purposes of the regulations under sec_468a this transfer or the transfer of the transferor’s qualified nuclear decommissioning fund will not constitute a payment or a contribution of assets by the transferee to its qualified nuclear decommissioning fund transfers of assets of a qualified nuclear decommissioning fund to which this section applies do not affect basis thus the transferee’s qualified nuclear decommissioning fund will have a basis in the assets received from the transferor’s qualified nuclear decommissioning fund that is the same as the basis of those assets in the transferor’s qualified nuclear decommissioning fund immediately before the distribution under sec_1_468a-6 the service may treat any disposition of an interest in a nuclear power plant occurring after date as satisfying the requirements of the regulations if the service determines that such treatment is necessary or appropriate to carry out the purposes of sec_468a sec_468a and sec_1_468a-2 provide that a taxpayer that elects the requested ruling application of sec_468a may deduct in the taxable_year the election is made any payments made by the taxpayer to a qualified nuclear decommissioning fund in that year of sec_1_468a-2 the amount that a taxpayer may pay into a qualified nuclear decommissioning fund for any taxable_year shall not exceed the lesser_of the amount of nuclear decommissioning costs allocable to the fund which is included in the taxpayer's cost of service for ratemaking purposes for the taxable_year or the ruling_amount applicable to fund for that the taxable_year sec_1_468a-2 provides further that if the amount of cash payments made or deemed made to a qualified nuclear former sec_468a and sec_1 468a- b provide that for purposes plr-129958-06 decommissioning fund during any taxable_year exceeds the limitation of sec_1 468a- b the excess is not deductible by the electing taxpayer sec_1_468a-5 prohibits a nuclear decommissioning fund from accepting sec_1_468a-5 defines an excess_contribution for purposes of section any contribution for which a deduction is not permitted under sec_468a and sec_1_468a-2 sec_1_468a-5 provides that if at any time during a taxable_year of a nuclear decommissioning fund the fund does not satisfy the requirements of sec_1_468a-5 the service may in its discretion disqualify all or any portion of the fund as of the date that the fund does not satisfy the requirements of sec_1_468a-5 sec_1_468a-2 provides that the amount of any cash payment made by an electing taxpayer to a qualified nuclear decommissioning fund on or before the 15th day of the third calendar month after the close any taxable_year shall be deemed made during that taxable_year if the electing taxpayer irrevocably designates the amount as relating to that taxable_year on its timely filed federal_income_tax return for that taxable_year 468a-5 c as the amount by which cash payments made or deemed made to a qualified nuclear decommissioning fund during any taxable_year exceed the payment limitation in former sec_468a and sec_1_468a-2 sec_1_468a-5 provides that a qualified nuclear decommissioning fund will not be disqualified under sec_1_468a-5 by reason of an excess_contribution or the withdrawal of that excess_contribution by an electing taxpayer if the amount of the excess_contribution is withdrawn by the electing taxpayer on or before the date prescribed by law including extensions for filing the return of the fund for the taxable_year for which the excess_contribution relates contribution as defined in sec_1_468a-5 by an electing taxpayer pursuant to the rules of sec_1_468a-5 shall not be included in the gross_income of the electing taxpayer conclusions will not recognize any gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfer of assets of taxpayer d and taxpayer e into taxpayer f and taxpayer f will have a basis in the assets received from taxpayer d and taxpayer e equal to the basis of those assets immediately prior to the transfer taxpayer b taxpayer c taxpayer a taxpayer d taxpayer e and taxpayer f sec_1_468a-2 provides that the amount of a withdrawal of an excess plr-129958-06 with respect to the excess_contributions and the subsequent withdrawal of those excess_contributions the service will not disqualify any part of taxpayer d taxpayer e or taxpayer f as a result of these transactions the rulings contained in this letter are based upon information and representations submitted by the taxpayers and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as specifically determined above no opinion is expressed or implied concerning the federal_income_tax consequences of the transaction described above effective date amendments were made to sec_468a by the energy tax incentives act of publaw_109_58 119_stat_594 regulations based on these amendments are being developed but have not yet been proposed the discussion above is based on the law in effect prior to date however this ruling will be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in the letter_ruling see section dollar_figure of revproc_2007_1 2007_1_irb_1 however when the criteria in section dollar_figure of revproc_2007_1 2007_1_irb_50 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances this ruling is directed only to the taxpayers who requested it sec_6110 of the code provides it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer we are also sending a copy of this letter_ruling to the director pursuant to sec_1_468a-7 a copy of this letter must be attached with the required election statement to the taxpayers' federal_income_tax return for each tax_year if any in which the taxpayer claims a deduction for payments made to the fund sincerely peter c friedman senior technician reviewer branch passthroughs special industries


internal_revenue_service number release date index number ------------------------------------- --------------------- ------------------ ------------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-109470-09 date date legend x ----------------------- -------------------------------------------------- y -------------------------------------------------- ------------------------------------------- country date ---------- --------------------------- dear ------------------ this responds to a letter dated date submitted on behalf of x requesting that the service grant x an extension of time under sec_301_9100-3 of the procedure and administration regulations to elect to be treated as a disregarded_entity the information submitted states that x was formed as a company under the laws of country and is wholly-owned by y x was eligible to elect to be treated as a disregarded_entity effective date however x inadvertently failed to timely file form_8832 entity classification election sec_301_7701-3 of the income_tax regulations provides that an eligible_entity with at least two members may elect to be classified as either an association and thus a corporation under sec_301_7701-2 or as a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner plr-109470-09 sec_301_7701-3 further provides that so long as a business_entity is not classified as a corporation under sec_301_7701-2 or an eligible_entity it may elect its classification for federal tax purposes sec_301_7701-3 provides that except as provided in sec_301_7701-3 unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides that for purposes of sec_301_7701-3 a member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to seventy-five days prior to the date the form is filed or up to twelve months after the date on which the form is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides 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 based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of sixty days following the date of this letter to file form_8832 and to elect to be treated as a disregarded_entity for federal tax purposes effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose plr-109470-09 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 this ruling is directed only to the taxpayer requesting 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 sent to x’s authorized representative sincerely curt g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court abraham j george petitioner v commissioner of internal revenue respondent docket no filed date jeffrey b melcer for petitioner marissa j savit for respondent memorandum opinion lauber judge this case is before the court on cross-motions for sum- mary judgment under rule for the taxable_year the internal revenue all statutory references are to the internal_revenue_code code in effect for the tax_year in issue and all rule references are to the tax_court rules_of_practice and procedure we round all monetary amounts to the nearest dollar service irs or respondent determined a deficiency in petitioner’s federal_income_tax of dollar_figure and an accuracy-related_penalty of dollar_figure under sec_6662 respondent has conceded the penalty the principal issue remaining for decision is whether petitioner may exclude from gross_income under sec_104 as damages received on account of personal physical injuries or phys- ical sickness proceeds of dollar_figure that he received under a settlement agreement with his former employer we must also decide the proper tax treatment of the legal fees that petitioner paid to his lawyer there are no disputes of material fact and we largely agree with respondent’s legal analysis we will accordingly grant his summary_judgment motion and deny petitioner’s background the following facts are based on the parties’ pleadings and motion papers including the attached exhibits and affidavits see rule b petitioner resided in texas when he petitioned this court during and petitioner was employed as a car salesman at dana motors ltd dana a new york automobile dealership petitioner alleges that he was repeatedly harassed by his coworkers because of his national origin alleged- ly because of this harassment he left dana’s employ at the end of he subse- quently secured employment with another automobile dealership in petitioner filed a complaint against dana and two of his former co- workers in the u s district_court for the eastern district of new york his com- plaint sought money damages to remedy dana’s discrimination in employment against petitioner based upon national origin allegedly in violation of the civil rights act of u s c secs 2000e-1 et seq and comparable pro- visions of the new york human rights law his complaint also sought relief un- der new york labor laws to remedy dana’s failure to pay compensation owed he alleged that he had suffered psychological and physical harms and been constructively discharged from dana by virtue of a hostile work environment caused by the alleged discrimination he requested compensatory_damages puni- tive damages and liquidated_damages in date the parties entered into a confidential settlement and general release agreement settlement agreement petitioner thereby agreed in ex- change for a payment of dollar_figure to release all claims against the defendants in- cluding claims for back pay bonuses commissions separation allowance bene- fits severance_pay pension and health benefits as well as any other claims for compensation with respect to the employment relationship and termination there- of the settlement agreement did not mention any physical or emotional injury suffered by petitioner nor did it state that any portion of the dollar_figure was being paid in consideration of claims for physical or emotional harm zurich american insurance co zurich issued to petitioner’s attorney a check for dollar_figure pursuant to the settlement agreement in date petitioner’s attorney issued him a check for dollar_figure retaining dollar_figure as the agreed-upon legal fees zurich issued petitioner for a form 1099-misc miscellaneous income reporting the payment of dollar_figure as settlement proceeds petitioner timely filed his tax_return for but reported no income from the settlement agreement on date the irs timely issued to him a notice_of_deficiency determining that the dollar_figure payment should have been in- cluded in gross_income the irs also determined an accuracy-related_penalty petitioner timely petitioned this court contending that the dollar_figure payment was excludable from gross_income under sec_104 respondent filed a motion for summary_judgment disputing that contention and petitioner filed a cross-motion for summary_judgment in his motion respondent conceded the accuracy-related_penalty and conceded that petitioner is entitled to a deduction for his legal fees assuming that this would be a miscellaneous deduction on schedule a itemized_deductions respondent computed a revised deficiency of dollar_figure for respondent also agrees that petitioner is entitled to a net operat- ing loss carryback from to this will reduce by dollar_figure petitioner’ sec_2012 balance due in the event we rule for respondent a summary_judgment standard discussion the purpose of summary_judgment is to expedite litigation and avoid costly time-consuming and unnecessary trials rule a fla peach corp v com- missioner 90_tc_678 a motion for summary_judgment will be granted only if it is shown that there is no genuine dispute as to any material fact and that a decision may be rendered as a matter of law see rule b 118_tc_226 the parties agree on all questions of basic fact and have expressed that consensus by filing cross-motions for summary_judgment we conclude that the question presented is appropriate for summary adjudication b settlement proceeds sec_61 defines gross_income as all income from whatever source derived this definition has broad scope and exclusions from gross_income must be narrowly construed 515_us_323 348_us_426 309_us_331 proceeds from litigation settlements consti- tute gross_income unless the taxpayer proves that the proceeds fall within a specific statutory exclusion schleier u s pincite save v commissioner tcmemo_2009_209 98_tcm_218 the exclusion_from_gross_income upon which petitioner relies appears in sec_104 it provides that gross_income does not include the amount of any damages other than punitive_damages received whether by suit or agree- ment on account of personal physical injuries or physical sickness con- gress intended this exclusion to cover all damages that flow from a physical injury or physical sickness see h_r conf rept no pincite 1996_3_cb_741 for this purpose emotional distress shall not be treated as a physical injury or physical sickness sec_104 penultimate sentence when damages are received under a settlement agreement the nature of the claim that was the actual basis for the settlement determines whether the damages are excludable under sec_104 504_us_229 the nature of the claim is typically determined by reference to the terms of the agreement see 349_f2d_610 10th cir aff’g tcmemo_1964_33 23_tcm_182 102_tc_116 aff’d in part rev’d in part and remanded on another issue 70_f3d_34 5th cir if the settlement agreement does not ex- plicitly state which claims the payment was made to settle the intent of the payor is critical longoria v commissioner tcmemo_2009_162 98_tcm_11 the intent of the payor may be determined by taking into consideration all of the facts and circumstances including the amount_paid the circumstances lead- ing to the settlement and the allegations in the injured party’s complaint 507_f3d_857 5th cir aff’g tcmemo_2005_250 90_tcm_436 87_tc_236 aff’d 835_f2d_67 3d cir t he nature of the underlying claims cannot be deter- mined from a general release of claims that is broad and inclusive ahmed v commissioner tcmemo_2011_295 102_tcm_607 citing con- nolly v commissioner tcmemo_2007_98 t c m cch aff’d 498_fedappx_919 11th cir although petitioner’s complaint included a general allegation of psycho- logical and physical harms he did not allege with any specificity that he had suf- fered actual physical injury or physical sickness his cause of action was based on the civil rights act of comparable provisions of the new york human rights law and new york labor law his complaint sought compensation_for constructive discharge precipitated by a hostile working environment and dis- crimination based on national origin although these conditions likely caused petitioner emotional distress emotional distress shall not be treated as a physical injury or physical sickness for purposes of excluding damage awards from gross_income see sec_104 penultimate sentence the settlement agreement does not mention physical injury or physical sick- ness much less allocate any portion of the dollar_figure to settlement of claims there- for the only reference in the settlement agreement to petitioner’s claims is the general release petitioner thereby released all claims for back pay bonuses commissions separation allowance benefits severance_pay pension and health benefits as well as any other claims for compensation with respect to the em- ployment relationship and termination thereof there is no suggestion in this provision that petitioner had made or was releasing the defendants from any claims for damages on account of physical injury or physical sickness see molina v commissioner tcmemo_2013_226 106_tcm_371 petitioner contends that his constructive discharge from dana caused him no economic harm because he earned more income from his new employer in than he had earned from dana in or petitioner accordingly concludes that dana’s settlement payment must have been made on account of physical in- jury or sickness but the conclusion does not follow from the premise the alleged lack of economic harm has no bearing on the intent of the payor longoria t c m cch pincite petitioner’s complaint sought lost wages his economic circumstances in shed no light on whether dana intended to compensate him for lost wages and even if petitioner suffered no economic harm this fact creates no inference that he was being compensated for physical injuries or physical sick- ness as opposed to being compensated for violation of his civil rights as his com- plaint alleged finally petitioner contends that the federal tax treatment of the settlement proceeds should be governed by new york law in advancing this contention he relies on section of the settlement agreement captioned governing law juris- diction and dispute resolution it provides that t he rights and obligations of the parties hereunder shall be construed and enforced in accordance with and shall be governed by the laws of the state of new york without regard to prin- ciples of conflict of laws section goes on to provide that any dispute regarding the agreement shall be resolved by arbitration petitioner asserts that this provi- sion operates to make new york tort law applicable to characterize his claims he further contends that under new york tort law settlement proceeds are presumed to exclude compensation_for economic loss and awards for harassment are treated as personal injuries resulting from physical harm respondent vigorously disputes petitioner’s characterization of new york law on these points but we need not resolve this state law question the determi- nation of whether an item_of_income is taxable for federal_income_tax purposes is governed by federal_law see eg 327_us_280 783_f2d_966 10th cir 709_f2d_31 9th cir aff’g tcmemo_1981_659 42_tcm_1662 although state law determines what rights a per- son has vis-a-vis a particular item of property the proper characterization of those rights for federal_income_tax purposes is governed by the internal_revenue_code see 472_us_713 the proper characterization of settlement payments under sec_104 is determined by the analysis set forth above that analysis makes clear that the dollar_figure dana paid petitioner under the settlement agreement was not paid on account of personal physical injuries or physical sickness this amount was thus includible in petitioner’s gross_income for c deduction for attorney’s fees sec_62 allows an above-the-line deduction for attorney’s fees and court costs paid_by a taxpayer in connection with any_action involving a claim of unlawful_discrimination sec_62 defines unlawful_discrimination to in- clude among other things acts that are unlawful under sec_703 sec_704 or of the civil rights act of u s c 2000e-2 2000e-3 or 2000e- these sections refer to unlawful employment discrimination on account of race color religion sex or national origin the amount of the deduction cannot exceed the amount includible in the taxpayer’s gross_income for the taxable_year on account of a judgment or settlement resulting from such claim sec_62 last sentence respondent properly concedes that petitioner is entitled to a deduction for his legal fees but we think he erred in assuming that this would be a schedule a miscellaneous itemized_deduction petitioner’s complaint alleged discrimination on account of national origin and referenced the relevant provisions of the civil rights act the settlement agreement specifically stated that it applied to claims for compensation with respect to the employment relationship and termi- nation thereof we conclude that petitioner paid legal fees to secure a settlement of his claim for unlawful employment discrimination and sec_62 thus entitles him to an above-the-line deduction of dollar_figure for his legal fees to reflect the foregoing decision will be entered under rule


number release date id office uilc cca_2009051208454037 -------------- from ------------------- sent tuesday date am to -------------------- cc ------------------------------------------------- subject re aar ----- 872-f the form 872-f is only valid for the second year which was open when the form was executed invalid for the first year which had already expired for assessment purposes when the form was executed - you can't extend an expired assessment statute it is not necessary to get the form reexecuted for the second year only as you suggest since a new form 872-f would not give you anything more than you already have as you note you already have years to issue a refund for the first year but that year period run sec_2 years from the date of the settlement under section c b not years from the aar under section a it is the form is only valid for the partner who executed it the tmp cannot execute this form on behalf of any other partner