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 fip b03 plr-135927-10 date march legend trust ----------------------------------------------------------------------------- ------------------------------------------------- state city x city y city z year year month date a b c d -------------- -------------- -------------- ------------------ ------- ------- ------ ------------------- -------- --------------- --------------- -- plr-135927-10 dear ------------ this responds to a letter dated date submitted on behalf of trust trust requests rulings under sec_856 of the internal_revenue_code code facts trust is a publicly-traded reit that manages a diversified portfolio of real_estate properties comprising office industrial and service-oriented properties primarily in the city x metropolitan area trust has elected to be treated as a reit beginning with its year taxable_year in month year trust brought a claim for just compensation_for a acres of its properties in city y and city z in state collectively property which property was taken by state in year state paid trust dollar_figureb initial_amount for property at the time of the taking trust elected under the eminent_domain law of state to treat the initial_amount as an advance_payment while it pursued its claim trust invested the initial_amount into real_estate on date the court of claims of state court issued an opinion requiring state to pay trust an additional dollar_figurec additional_amount for property taken from trust by state in year under a provision of the eminent_domain law of state trust is entitled to statutory simple interest on the additional_amount at a rate not to exceed d per annum from the date of the taking until the date of payment interest court in its opinion agreed state improperly valued property and misapplied the requirement of the eminent_domain law of state that just compensation be determined based upon the highest_and_best_use and the probability that such use could have been achieved applying this standard court determined that there was a reasonable probability property would have been rezoned from light industrial use to a planned development district thereby resulting in the additional_amount awarded trust trust sought and was awarded reimbursement of attorney’s fees and costs costs claim is the initial_amount additional_amount interest and costs as of the date of its ruling_request neither the amount of claim nor the timing of its payment were known trust represents that in accordance with generally_accepted_accounting_principles gaap trust had not yet reported claim as part of its total assets on its financial statement plr-135927-10 law and analysis sec_856 provides that at least percent of a reit’s gross_income excluding gross_income from prohibited_transactions must be derived from dividends interest rents_from_real_property gain from the sale_or_other_disposition of stock securities and real_property including interests_in_real_property and interests in mortgages on real_property which is not property described in sec_1221 and certain other sources sec_856 provides that at least percent of a reit’s gross_income excluding gross_income from prohibited_transactions must be derived from rents_from_real_property interest on obligations secured_by mortgages on real_property or on interests_in_real_property gain from the sale_or_other_disposition of real_property including interests_in_real_property and interests in mortgages on real_property which is not property described in sec_1221 and certain other sources sec_856 provides that at the close of each quarter of its tax_year at least percent of the value of a reit’s total assets must be represented by real_estate_assets cash and cash items including receivables and government securities sec_856 of the code and sec_1_856-3 of the income_tax regulations regulatons defines the term real_estate_assets in part to mean real_property including interests_in_real_property and interests in mortgages on real_property and shares or transferable certificates of beneficial_interest in other reits that meet the requirements of sec_856 through sec_856 and sec_1_856-3 of the regulations provides that the term interests_in_real_property includes fee ownership and co-ownership of land or improvements thereon leaseholds of land or improvements thereon options to acquire land or improvements thereon and options to acquire leaseholds of land or improvements thereon but does not include mineral oil or gas royalty interests sec_1_856-2 of the regulations provides that in determining the investment status of a reit the term total assets means the gross assets of the reit determined in accordance with gaap sec_1_856-3 provides that real_property includes land or improvements thereon such as buildings or other inherently permanent structures thereon including items which are structural_components of such buildings or structures in addition the term real_property includes interests_in_real_property local law definitions will not be controlling for purposes of determining the meaning of real_property for purposes of sec_856 and the regulations thereunder plr-135927-10 sec_856 provides that for purposes of sec_856 and the term rents_from_real_property includes rents from interests_in_real_property charges for services customarily furnished or rendered in connection with the rental of real_property whether or not such charges are separately_stated and certain rents attributable to personal_property sec_1_856-4 of the regulations provides that the term rents_from_real_property generally means the gross amount received for_the_use_of or the right to use real_property of the reit sec_856 of the code and sec_1 b - of the regulations provide certain exclusions to the term rents_from_real_property including in part amounts received or accrued directly or indirectly with respect to any real or personal_property if the determination of such amount depends in whole or in part on the income or profits derived by any person from such property sec_856 which was added to the code by division c of the housing and economic recovery act of p l provides inter alia that to the extent necessary to carry out the purposes of part ii of subchapter_m the secretary_of_the_treasury is authorized to determine solely for purposes of this part whether any item_of_income or gain that does not qualify under sec_856 or sec_856 to satisfy the percent and percent reit gross_income tests may be considered as not constituting gross_income for purposes of sec_856 or sec_856 the staff of the joint_committee on taxation in its general explanation of the tax legislation enacted in the 110th congress describes sec_856 as follows the provision authorizes the treasury_department to issue guidance that would allow other items of income to be excluded for purposes of the computation of qualifying gross_income under either the percent or the percent test respectively or to be included as qualifying_income for either of such tests respectively in appropriate cases consistent with the purposes of the reit provisions footnote of the general explanation provides that income that is statutorily excluded from gross_income computations under the provision is not intended to be within the authority to include as qualifying_income joint_committee on taxation staff general explanation of the tax legislation enacted in the 110th congress cong 2d sess the legislative_history underlying the reit asset test in sec_856 indicates that the test is designed to give assurance that the bulk of the trust’s investments are in real_estate h_r rep no 86th cong 2d sess pincite 1960_2_cb_819 the legislative_history also indicates that congress intended to provide reits with tax treatment similar to the treatment accorded regulated_investment_companies rics in revrul_64_247 1964_2_cb_179 a ric recovered excess management fees from its investment manager the recovery was made as a result of legal action brought against the company’s former officers and directors who had owned the investment manager in revrul_74_248 1974_1_cb_167 a ric’s former investment_advisor paid the company an amount the advisor had improperly received for assigning plr-135927-10 its advisory contract the payment was made pursuant to a settlement agreement that was reached after the company’s shareholders filed a derivative action against the investment_advisor in both rulings the amounts in question were includible in the ric’s gross_income under sec_61 of the code those amounts were not however income from sources that at the time the rulings were published were described in sec_851 of the code the rulings hold nevertheless that the companies’ inclusion of the amounts in gross_income did not cause the companies to fail to meet the definition of a ric contained in sec_851 provided the companies in all other respects qualified for ric status for the tax_year in question revrul_64_247 and revrul_74_248 were rendered obsolete in part for purposes of sec_851 by revrul_92_56 1992_2_cb_153 which holds that if in the normal course of its business a ric receives a reimbursement from its investment_advisor and the reimbursement is included in the ric’s gross_income the reimbursement is qualifying_income under sec_851 however the prior revenue rulings remain instructive in determining how certain payments may be treated for ric or reit qualification purposes when the payment is not specifically described by the governing statute or underlying regulations under the facts of this case fund's claim is not specifically described by applicable code or regulations however trust represents it engaged in no active business activity to create claim and that claim is the amount_paid or to be paid trust for property real_estate taken from trust by state in year after court makes a final_determination of what is a fair price for such real_property trust also represents it has invested the initial_amount that portion of claim trust received from state at the time of the taking of property into real_property and plans to invest any further payments it will receive from state with respect to claim into real_estate_assets as defined in sec_856 public policy underlying the eminent_domain law of state which requires under the facts of this case state pay trust just compensation_for property taken from trust in year does not interfere with or impede the policy objectives of congress in enacting the reit qualification tests under sec_856 moreover there is nothing in the legislative_history or any statutory interpretation that would indicate that by imposing parameters on the sources from which reits and rics may derive income congress intended to discourage reits and rics from pursuing legal remedies from which damages may be collected based on the information submitted and the representations made we rule that i claim will not be considered in determining whether trust satisfies the reit asset tests under sec_856 and ii under sec_856 the interest and costs trust derives from claim will not be considered in determining whether trust satisfies the reit gross_income tests under sec_856 and sec_856 plr-135927-10 this ruling’s application is limited to the facts representations code sections and regulations cited herein no opinion is expressed with regard to whether trust otherwise qualifies as a reit under subchapter_m of the code this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that 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 your authorized representatives sincerely alice m bennett branch chief branch office of associate chief_counsel financial institutions products enclosures copy of this letter copy for sec_6110 purposes cc


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 b03 plr-149942-06 date date --------------------------------------- ----------------------- -------------- ----------------------- ------------------------------------------------ ----------------------- ---------------------------------------------------- ----------------------- legend x a b c d e country d1 dear ------------------------------------ correspondence submitted on behalf of x requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations for x to file an election this responds to a letter dated date and subsequent ------------------------------------ ----------------------- ----------------------- ---------------------------------------------- ------------------------- ----------------- plr-149942-06 under sec_301_7701-3 to be classified as an entity that is disregarded as separate from its owner for federal tax purposes effective d1 facts according to the information submitted x was formed as a limited_liability_company under the laws of country on d1 through tiers of wholly owned entities b c d and e a owns of x x is not classified as a corporation under sec_301 b or x intended to elect under sec_301_7701-3 to be classified as a disregarded_entity for federal tax purposes as of d1 but the election was not timely filed with the appropriate service_center law and analysis 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 an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with a single owner having limited_liability may elect to be treated as a disregarded_entity pursuant to the rules of sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 entity classification election and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or an announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards that the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides rules for requesting extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 plr-149942-06 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly x is granted an extension of time of days from the date of this letter to file form_8832 with the appropriate service_center to elect to be classified as an entity disregarded as separate from its owner for federal tax purposes effective d1 the election should be made by following the procedures set forth in form_8832 and a copy of this letter should be attached to the election a copy is enclosed for that purpose except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that 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 your authorized representative sincerely s william p o'shea associate chief_counsel passthroughs special industries enclosures a copy of this letter a copy for sec_6110 purposes


t c memo united_states tax_court abc rentals of san antonio inc et al petitioners v commissioner of internal revenue respondent docket nos filed date timothy p o'sullivan and john r gerdes for petitioners michael j o'brien for respondent this supplemental memorandum findings_of_fact and opinion supplements our prior memorandum opinion in the instant case abc rentals of san antonio inc v commissioner tcmemo_1994_601 revd and remanded 142_f3d_1200 10th cir 1cases of the following petitioners are consolidated herewith david r peters and diana l peters docket no and john p parsons and melba r parsons docket no supplemental memorandum findings_of_fact and opinion hamblen judge this case is before us on remand from the court_of_appeals for the tenth circuit 142_f3d_1200 10th cir revg and remanding tcmemo_1994_601 the issues for decision concern the proper election and proper application of the income_forecast_method_of_depreciation we previously determined in abc rentals of san antonio inc v commissioner tcmemo_1994_601 abc rentals i that petitioners failed to demonstrate that the consumer durables leased in their rent-to-own business constitute property which is properly depreciable under the income_forecast_method_of_depreciation the court_of_appeals concluded that sec_168 does not preclude use of the income forecast method for property like petitioners' rent-to-own inventory since we determined that petitioners' rental units could not be depreciated using the income forecast method and did not reach respondent's other arguments the court_of_appeals has directed us to determine on remand whether taxpayers made a proper election under sec_168 and if so whether they improperly applied the income forecast method because they did not accurately forecast the income expected over the life of the assets and did not make an adjustment for salvage_value 2all section references are to the internal_revenue_code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure abc rentals of san antonio inc v commissioner f 3d pincite findings_of_fact this case was submitted without a trial pursuant to rule the findings_of_fact are set forth in abc rentals i and are incorporated herein by this reference the stipulation and exhibits are also incorporated herein by this reference for convenience we shall repeat those facts as necessary to clarify the ensuing discussion we also set forth below certain supplementary findings_of_fact that were not set forth in our prior opinion but which are based on the record of the instant case and are relevant to issues decided on remand the individual petitioners petitioned this court contesting respondent's determinations of deficiencies in their federal_income_tax as follows abc rentals of san antonio inc --docket no tax period ended deficiency dollar_figure david r peters and diana l peters--docket no tax period ended deficiency dollar_figure john p parsons and melba r parsons--docket no tax period ended deficiency additions to tax sec_6661 dollar_figure big_number dollar_figure big_number respondent subsequently conceded the additions to tax pursuant to sec_6661 in docket no for the and taxable years in the amounts of dollar_figure and dollar_figure respectively during the tax periods in issue guaranteed rental systems inc guaranteed was an s_corporation not subject_to the unified_audit and litigation procedures of the tax equity and fiscal responsibility act of tefra publaw_97_248 96_stat_324 and all of guaranteed's adjustments flowed directly through to the shareholders' tax returns and are reflected in the deficiencies shown in docket nos and for the fiscal_year ending date abc rentals of san antonio inc abc was a c_corporation and the notice_of_deficiency in docket no relates to deficiencies during that fiscal_year only thereafter abc applied for and was granted s_corporation status for the tax period ending date and the tax_year ending date abc was a non-tefra subchapter_s_corporation and all of abc's adjustments flowed through to its sole shareholder john p parsons and are reflected in the deficiencies shown in docket no 3sec provides that the tefra provisions relating to the assessment and determination of partnership items are extended to the assessment and determination of subch s items sec_301_6241-1t c temporary proced admin regs fed reg date exempts small s_corporations defined as corporations with or fewer shareholders from the unified_audit and litigation procedures for taxable years the due_date of the return of which is on or after date on date these cases were consolidated these consolidated cases were submitted without a trial pursuant to rule at the time the petitions were filed in these cases guaranteed and abc hereinafter sometimes collectively referred to as the entities or individually referred to as an entity were corporations incorporated in the state of texas with their principal offices located in wichita kansas during the taxable periods in controversy guaranteed and abc were accrual basis taxpayers for the fiscal_year ending date abc timely filed its federal corporate_income_tax return abc timely filed a valid subchapter_s_election and the election was granted effective date guaranteed timely filed its federal corporate_income_tax return for an s_corporation for the calendar_year ending and abc timely filed its federal corporate_income_tax return for an s_corporation for the short taxable_period ending date guaranteed and abc timely filed their federal corporate_income_tax returns for s_corporations for the calendar_year guaranteed and abc operated commercial enterprises which rented consumer durables appliances furniture televisions stereos and video cassette recorders under rent-to-own leases to individuals both entities have been in the rent-to-own business for a number of years during the tax periods in controversy guaranteed and abc estimated that the total gross rental anticipated to be received on each rental unit except for initial rental contracts on rental unit purchases as transfers between companies as discussed below would be percent of its initial cost this method of determining the total gross rental anticipated to be received was consistent with the practice in the rent-to-own industry in determining the weekly or monthly rental rate as the case may be for each rental unit the entities divided such expected total gross rental by the total number of weeks or months as the case may be under the initial rental contract for such rental units whenever a rental unit either was picked up by an entity or returned to that entity prior to all payments being made under the initial rental contract due either to a failure of the customer to timely pay periodic rent or the exercise by the customer of the customer's rights to return the rental unit at any time normally a subsequent rental contract having the same provisions and weekly or monthly rental payment as the initial rental contract would be executed with another customer during the tax years in issue each entity periodically sold or 4the term of the subsequent rental contract would be adjusted when so required according to the entity's internal schedule this internal schedule might require a reduction in the term of the lease depending upon the number of days the rental unit had been previously rented in a small minority of circumstances the weekly or monthly rental payments also would be reduced under the subsequent rental contract on returned rental units which had sustained a diminished value beyond normal wear_and_tear normally this procedure would continue to be followed until a customer retained the rental unit for the full term of the rental contract purchased rental units to or from the other entity at the selling entity's book_value rental units ceased to be in an entity's depreciable rental inventory upon the occurrence of the following events customers' retaining rental units for the full term of the rental contract customers' electing the early purchase option thereunder selling or junking substantially damaged rental units which were returned to an entity by customers theft of the rental units and transfers between one entity and the other entity the vast majority of rental units ceased to be in an entity's inventory due to customers' retaining the rental units for the full term of the rental contract be it the initial rental contract or the subsequent rental contract if a customer retained the rental unit for the full term of the rental contract title to the rental unit vested in the customer at no additional cost provided the customer had paid all periodic rental payments when any of the units ceased to be in an entity's depreciable rental inventory the remaining basis was either charged off or used to determine gain_or_loss from the disposition 5the entities used the straight_line method_of_depreciation for book purposes with an 18-month useful_life to depreciate all of the rental units such transfers between entities were not made for tax reasons but for the purpose of transferring rental units to maximize their income potential the term of the rental contract of the rental units so purchased which had been previously rented by the selling entity was adjusted accordingly on their income_tax returns ending in and the entities continued to depreciate all rental units placed_in_service during prior tax years using the accelerated_cost_recovery_system acrs the recovery_period used by the entities to calculate the depreciation under acrs wa sec_5 years for federal_income_tax purposes the entities calculated depreciation on their rental units placed_in_service for tax years ending after using the income forecast method on rental units initially acquired by an entity through purchase from third parties and rented for the first time and for rental units rented by an entity on a subsequent rental contract each year's depreciation deduction was equal to the cost of the rental units multiplied by a fraction the numerator of the fraction was the current year's income from that rental unit the denominator of the fraction was percent of the rental unit's initial cost which was the amount of total gross rental that would be received if the initial rental contract on such rental went to term guaranteed attached statement to its tax_return for the taxable_year ending date the only information statement provided was that the type of property being depreciated was rental units the statement did not say that guaranteed made an election of the income forecast method or of 6under the income forecast method used by the entities a rental unit's depreciation deduction was based on the rent received on that rental unit consequently a depreciation deduction was not taken on a rental unit during any month in which it did not earn rental income any other method_of_depreciation rather the statement method column was left blank nor did it refer to sec_168 or to any other provision of the code statement did not provide the year the rental property was placed in service-- in the date acquired column statement says var in addition statement did not provide the unadjusted_basis of the rental property--the cost or basis column is blank the form_4562 filed with guaranteed's tax_return for its taxable_year ending date contains the heading on line property subject_to sec_168 election the instructions for this form provide that line should be used to report property that the taxpayer elects under sec_168 to depreciate by any method not based on a term of years furthermore the instructions provide that the depreciation deduction for the property should be entered in column f of line however guaranteed left column f of line blank rather it appears the depreciation deduction for the rental property has been included in column f of line other depreciation where a dollar_figure deduction is claimed guaranteed failed to indicate on its form_4562 that it was using the income_forecast_method_of_depreciation nothing in guaranteed's return indicates that it was electing the income_forecast_method_of_depreciation 7see infra pp abc did not attach a separate statement to its return for its taxable_year ending date abc did not include the year the rental property was placed_in_service nor did it include the unadjusted_basis of the rental property the form_4562 filed with abc's tax_return for the year ending date contains the heading on line property subject_to sec_168 election the instructions for this form provide that line should be used to report property that the taxpayer elects under sec_168 to depreciate by any method not based on a term of years furthermore the instructions provide that the depreciation deduction for the property should be entered in column f of line however abc left column f of line blank rather it appears the depreciation deduction for the rental property has been included in column f of line other depreciation where a dollar_figure deduction is claimed abc failed to indicate on its form_4562 or anywhere else on its return that it was using the income_forecast_method_of_depreciation the only methods of depreciation indicated on its return are acrs and ddb sec_168 is the predecessor to sec_168 and applies to property placed_in_service prior to date abc's tax_return for the year ended date contains depreciation_deductions for property placed_in_service from june through date which would be governed by the former sec_168 as well as property placed_in_service from jan through date which would be governed by sec_168 9see infra pp nothing in abc's return indicates it was electing the income_forecast_method_of_depreciation abc attached statement to its tax_return for its short taxable_period ending date statement provided that the type of property being depreciated was rental inventory and that a method of depreciation-- income forecasting --was used other than acrs or macrs the statement did not refer to sec_168 or any other code section statement provided the year the rental property was placed in service-- as well as the unadjusted or cost_basis of the rental property-- big_number for rental units placed_in_service by guaranteed and abc in respondent does not contest the form or timing of the election the parties have stipulated that the entities have filed elections pursuant to sec_168 to select the income_forecast_method_of_depreciation for the tax years ending date statement attached to guaranteed's income_tax return contained the following election to exclude property from acrs sec_168 by use of a method_of_depreciation not expressed in a term of years rental inventory name of taxpayer taxpayer i d year recovery_property placed_in_service various unadjusted_basis of recovery_property dollar_figure method_of_depreciation income forecasting guaranteed rental system inc statement attached to abc's income_tax return contained the following sec_168 election to exclude property from acrs by use of a method_of_depreciation not expressed in a term of years rental inventory name of taxpayer abc rentals of san antonio taxpayer i d year recovery_property placed_in_service various unadjusted_basis of the recovery_property dollar_figure method_of_depreciation income forecasting guaranteed and abc compiled detailed experience data with respect to their rental units during the and calendar years guaranteed and abc's business operations and surrounding market conditions have remained essentially unchanged from the years at issue throughout the years in which such experience data was derived due to such continuity the parties submit that assuming the actual data as to guaranteed and abc was available for the tax years in question the data if delineated would not vary materially from the experience data delineated from and each entity's and experience data indicates that per category of rental units the actual average total amount of gross rental the entities received under all rental contracts for a rental unit in such category was the product of the initial cost to an entity of such rental unit times the following delineated integer category integer guaranteed appliances televisions furniture stereos video cassette recorder sec_3_1 abc an integer of represents a gross return of percent of initial cost each entity's and experience data indicates that per category of rental units consisting of all rental units having the same initial term the actual average total amount of gross rental the entities received under all rental contracts for a rental unit in such category was the product of the initial cost to the entity of such rental unit times the following delineated integer initial term months integer guaranteed abc an integer of represents a gross return of percent of initial cost each entity's and experience data indicates that its percentage of sales proceeds derived from sales of rental units to third parties by category such percentage being equal to the ratio such total sales proceeds bore to the total initial purchase_price of all rental units in that category was as follows category percentage guaranteed abc appliances televisions furniture stereos video cassette recorder sec_2 less than less than less than less than less than the total initial cost of rental units acquired during the years and and which remained in guaranteed's rental inventory as of the end of the years was dollar_figure and dollar_figure respectively the total initial cost of rental units acquired during the tax periods ending date date and date and which remained in abc's rental inventory as of the end of the periods was dollar_figure dollar_figure and dollar_figure respectively opinion the u s court_of_appeals for the tenth circuit has directed us to determine whether petitioners made a proper election under sec_168 and if a proper election was made under sec_168 whether petitioners improperly applied the income forecast method because they did not accurately forecast the income expected over the life of the assets and did not make an adjustment for salvage_value abc rentals of san antonio inc v commissioner f 3d pincite we hold that guaranteed failed to make a proper election for its taxable_year ending date and that abc failed to make a proper election for its taxable_year ending date we hold further that abc made a proper election for its short taxable_period ending date since it substantially complied with the election requirements for this short taxable_period for rental units placed_in_service during taxable years ending in the parties have stipulated that both guaranteed and abc properly elected out of macrs under sec_168 furthermore in this particular case since the parties stipulated as to the estimate of income expected over the life of the rental property and this estimate approximated petitioners' experience and since they stipulated that data did not vary materially from the years in question we hold that in this situation petitioners did accurately forecast the income expected over the life of the rental property in addition since the salvage_value is inconsequential and since the parties stipulated that and data did not vary materially from and data we hold that petitioners did not have to make an adjustment to the rental units' costs for salvage_value i proper election the court_of_appeals has directed us to determine whether petitioners made a proper election under sec_168 for the and years before us abc rentals of san antonio inc v commissioner f 3d pincite under sec_168 taxpayers must make a proper election in the first taxable_year for which a depreciation deduction would be allowable for the rental unit sec_168 provides f property to which section does not apply --this section shall not apply to-- certain methods of depreciation --any property if-- a the taxpayer elects to exclude such property from the application of this section and b for the 1st taxable_year for which a depreciation deduction would be allowable with respect to such property in the hands of the taxpayer the property is properly depreciated under the unit-of-production method or any method_of_depreciation not expressed in a term of years other than the retirement-replacement-betterment method or similar method section dollar_figure of revproc_87_57 1987_2_cb_687 provides that the election under sec_168 must be made following the procedures set forth in section dollar_figure of the revenue_procedure section dollar_figure of revenue_procedure c b pincite provides dollar_figure time and manner for making elections under sec_5h a of the temporary regulations after date an election described in this revenue_procedure shall be made by the due_date taking extensions into account of the tax_return for the first taxable_year for which the election is to be made the tax_return must be accompanied by a statement identifying the election by reference to code or act section and identifying the property items for which the election is being made sec_5h temporary tax_reform_act_of_1986 election regs fed reg date effective date applies to sec_168 elections and sets forth the time and manner guidelines for elections made after date the election for sec_168 is available for property placed_in_service after date sec_5h a of the temporary tax_reform_act_of_1986 election regs fed reg date provides a time for making elections-- i in general except as otherwise provided in this section the elections specified in paragraph a of this section shall be made by the later of-- a the due_date taking extensions into account of the tax_return for the first taxable_year for which the election is to be effective or date in which case the election b generally must be made by amended_return sec_5h a provides a manner of making elections-- i in general except as otherwise provided in this section the elections specified in paragraph a of this section shall be made by attaching a statement to the tax_return for the taxable_year for which the election is to be effective if because of paragraph a i b of this section the election may be filed after the due_date of the tax_return for the first taxable_year for which the election is to be effective such statement must be attached to a tax_return or amended_return for the taxable_year to which the election relates except as otherwise provided in the return or in the instructions accompanying the return for the taxable_year the statement shall-- a b c contain the name address and taxpayer_identification_number of the electing taxpayer identify the election indicate the section of the code or if the provision is not codified the section of the act under which the election is made d specify as applicable the period for which the election is being made and or the property or other items to which the election is to apply and provide any information required by the relevant statutory provisions and any information necessary to show that the taxpayer is entitled to make the election e a guaranteed guaranteed did not meet the requirements for the tax_year ending date guaranteed did attach a statement-- statement 2--to its tax_return for the taxable_year ending date however the statement did not comply with the requirements of revproc_87_57 supra or sec_5h temporary tax_reform_act_of_1986 election regs supra the only item of information statement provided was that the type of property being depreciated was rental units the statement did not say that guaranteed made an election of the income forecast method or of any other method_of_depreciation nor did it refer to sec_168 or to any other provision of the code petitioners rely on sec_1_168-5 proposed income_tax regs fed reg date however we note that guaranteed did not even meet the less stringent requirements of sec_1_168-5 proposed income_tax regs supra assuming arguendo they were otherwise applicable sec_1 e provides manner of making elections except as provided in subparagraph form_4562 is provided for making an election under this paragraph and for submitting the information required the taxpayer must specify in the election-- the name of the taxpayer i ii the taxpayer's identification_number iii the year the recovery_property was placed_in_service or in the case of 15-year real_property the month the property was placed_in_service iv the unadjusted_basis of the recovery_property and v such other information as may be required an election will not be rendered invalid so long as there is substantial compliance in good_faith with the requirements of subparagraph statement did not provide the year the rental property was placed in service--in the date acquired column statement says var in addition statement did not provide the unadjusted_basis of the rental property--the cost or basis column is blank furthermore sec_1_168-5 proposed income_tax regs supra states that form_4562 depreciation and amortization is provided for making the election the instructions for this form provide the following guidance for line of section c other depreciation line --report property that you elect under sec_168 to depreciate by the units-of- production method or any other method not based on a term of years other than the retirement- replacement-betterment method on a separate sheet attach a description of the property and what depreciation method you elect that excludes the property from acrs and the depreciable basis cost or other basis reduced if applicable by salvage_value investment_credit and the sec_179 expense enter the depreciation deduction in column f the form_4562 filed with guaranteed's tax_return for its taxable_year ending date contains the heading on line property subject_to sec_168 election however guaranteed left column f of line blank rather it appears the depreciation deduction for the rental property has been included in column f of line other depreciation where a dollar_figure deduction is claimed thus guaranteed failed to indicate on its tax_return or on the accompanying statement and form_4562 that the rental property or any other of its property was subject_to the sec_168 election moreover guaranteed failed to indicate on its tax_return form_4562 or statement that it was using the income_forecast_method_of_depreciation rather the statement method column was left blank for the tax_year ending date guaranteed was not even in substantial compliance with the election requirements nothing in guaranteed's return or on the accompanying form or statement indicates that it was electing the income_forecast_method_of_depreciation 743_f2d_781 11th cir thus guaranteed did not substantially comply with the requirements of revproc_87_57 supra or sec_5h temporary tax_reform_act_of_1986 election regs supra nor did it substantially comply with sec_1_168-5 proposed income_tax regs supra or even with the instructions that came with form_4562 consequently we hold that guaranteed failed to make a proper election of the income forecast method for its taxable_year ending date b abc tax_year ending date abc did not meet the requirements for the tax_year ending date abc did not attach a separate statement to its return for its taxable_year ending date petitioners' argument that the service did not even publish revproc_87_57 supra until date which was subsequent to the filing_date of abc's tax_return for the tax_year ending date is without merit sec_5h temporary tax_reform_act_of_1986 election regs supra was effective date and set forth the time and manner guidelines for elections made after date moreover sec_5h temporary tax_reform_act_of_1986 election regs supra was published in the federal_register for date which was prior to date the date abc's tax_return for its taxable_year ending date was signed consequently abc should have complied with the requirements set forth in sec_5h temporary tax_reform_act_of_1986 election regs supra abc did not attach to its return a separate statement or otherwise comply with the requirements nor did abc comply with the requirements of sec_1 e proposed income_tax regs supra assuming they were applicable abc did not include on its return or on any other form or statement accompanying the return the year the rental property was placed_in_service nor did it include the unadjusted_basis of the rental property as indicated above sec_1_168-5 proposed income_tax regs supra states that form_4562 depreciation and amortization is provided for making the election the instructions for this form provide the following guidance for line of section c depreciation of nonrecovery property line --report property that you elect under sec_168 to depreciate by the units-of- production method or any other method not based on a term of years if you use the retirement- replacement-betterment method see sec_168 on a separate sheet attach a description of the property and what depreciation method you elect that excludes the property from acrs and the depreciable basis cost or other basis reduced if applicable by salvage_value half the investment_credit and the sec_179 expense enter the depreciation deduction for the property in column f the form_4562 filed with abc's tax_return for the year ending date contains the heading on line property subject_to sec_168 election however abc left column f of line blank rather it appears the depreciation deduction for the rental property has been included in column f of line other depreciation where a dollar_figure deduction is claimed thus abc failed to indicate that any of its property was subject_to the sec_168 election moreover abc failed to indicate on its form_4562 or on its return that it was using the income_forecast_method_of_depreciation the only methods of depreciation indicated on its return are acrs and ddb abc was not even in substantial compliance with the election requirements nothing in abc's return or on the attached form_4562 indicates it was electing the income_forecast_method_of_depreciation knight-ridder newspapers inc v united_states supra pincite thus abc did not comply with the requirements of revproc_87_57 supra or sec_5h temporary tax_reform_act_of_1986 election regs supra nor did it comply with sec_1_168-5 proposed income_tax regs supra or even with the instructions that came with form_4562 consequently we 10see supra note hold that abc did not make a valid election of the income forecast method for its taxable_year ending date taxable_period ending date abc did not comply literally with every one of the election requirements for its short taxable_period ending date however it did substantially comply with the election requirements abc attached statement to its tax_return for its short taxable_period ending date statement substantially complied with the requirements of revproc_87_57 supra and sec_5h temporary tax_reform_act_of_1986 election regs supra although it failed to identify the applicable code section statement recited that the type of property being depreciated was rental inventory and that a method of depreciation-- income forecasting --was used other than acrs or macrs in addition statement identified the year the rental property was placed in service-- as well as the unadjusted or cost_basis of the rental property-- big_number thus abc's return and attached statement indicated that an election of the income forecast method was being made see knight-ridder newspapers inc v united_states supra pincite consequently we hold that abc substantially complied with the election requirements for its short taxable_period ending date we hold as above set forth that guaranteed failed to make a proper election for its taxable_year ending date and that abc failed to make a proper election for its taxable_year ending date we hold further that abc made a proper election for its short taxable_period ending date since it substantially complied with the election requirements for this short taxable_period consequently we must determine whether the income forecast method was properly applied to rental units placed_in_service in and to abc's rental units placed_in_service during its short taxable_period ending date ii proper application the u s court_of_appeals for the tenth circuit has directed us to determine whether petitioners improperly applied the income forecast method because they did not accurately forecast the income expected over the life of the assets and they did not make an adjustment for salvage_value abc rentals of san antonio inc v commissioner f 3d pincite the income_forecast_method_of_depreciation requires the application of a fraction the numerator of which is the income from the rent-to-own equipment for the taxable_year and the denominator of which is the forecasted or estimated total income to be derived from the rent-to-own equipment during its useful_life revrul_60_358 1960_2_cb_68 this fraction is multiplied by the cost of the rent-to-own equipment which produced income during the taxable_year after appropriate adjustment for estimated salvage_value id a income forecast respondent contends that in applying the income_forecast_method_of_depreciation petitioners failed to forecast accurately the income to be received from the assets being depreciated in fact respondent contends that the income to be received from equipment placed_in_service was never forecast rather percent of the asset's cost was always used as the denominator of the fraction while the latter may be true the parties stipulated that petitioners estimated that the total gross rental anticipated to be received on each rental unit would be percent of its initial cost which was consistent with the practice in the rent-to-own industry each entity's and experience data indicates that per category of rental units the actual average total amount of gross rental the entities received under all rental contracts for a rental unit in such category was the product of the initial cost to the entity of such rental unit times the following delineated integer category integer guaranteed appliances televisions furniture stereos video cassette recorder sec_3_1 abc an integer of represents a gross return of percent of initial cost in addition each entity's and experience data indicates that per category of rental units consisting of all rental units having the same initial term the actual average total amount of gross rental the entities received under all rental contracts for a rental unit in such category was the product of the initial cost to the entity of such rental unit times the following delineated integer initial term month sec_12 integer guaranteed abc an integer of represents a gross return of percent of initial cost thus petitioners' experience indicates that the total amount of gross rental received on rental units approximated percent of their initial cost the percentage the parties stipulated that the total gross rental anticipated to be received on each rental unit would equal petitioners provided data only for the and calendar years since such data for the years at issue was not readily available without resorting to significant expense experience data derived from the and calendar years was utilized the parties stipulated that petitioners' business operations and surrounding market conditions remained essentially unchanged from the years at issue through the years in which such experience data was derived moreover the parties stipulated that due to such continuity the parties believe that if petitioners' actual data were available for the calendar years and the data if delineated would not vary materially from the experience data delineated for and consequently in this particular case since the parties stipulated as to the estimate of income expected over the life of the rental property and this stipulation approximated petitioners' experience and since they stipulated that data did not vary materially from the years in question we hold that in this situation petitioners did accurately forecast the income expected over the life of the rental property b salvage_value second the court_of_appeals has directed us to determine whether petitioners improperly applied the income forecast method because they did not make an adjustment for salvage_value abc rentals of san antonio inc v commissioner f 3d pincite under the income forecast method the fraction--reflecting the ratio of current income to lifetime income--is multiplied by the cost of the rent-to-own equipment which produced income during the taxable_year after appropriate adjustment for estimated salvage_value revrul_60_358 supra sec_1_167_a_-1 income_tax regs provides salvage_value is the amount determined at the time of acquisition which is estimated will be realizable upon sale_or_other_disposition of an asset when it is no longer useful in the taxpayer's trade_or_business or in the production of his income and is to be retired from service by the taxpayer in 90_tc_505 affd in part revd in part and remanded 909_f2d_1101 8th cir we stated an important factor in the determination of salvage_value is the taxpayer's experience and the particular circumstances of that experience industry experience is also a factor which may be given consideration in this case petitioners' experience indicates that the vast majority of rental units ceased to be in their inventory due to customers' retaining the rental units for the full term of the rental contract be it the initial rental contract or the subsequent rental contract if a customer retained the rental unit for the full term of the rental contract title to the rental unit vested in the customer at no additional cost provided the customer had paid all periodic rental payments in the carland case we determined the salvage_value of the taxpayer's property based on a percentage of salvage proceeds to original acquisition costs id pincite in this case each entity's and experience data indicates that its percentage of sales proceeds derived from sales of rental units to third parties by category such percentage being equal to the ratio such total sales proceeds bore to the total initial purchase_price of all rental units in that category was as follows category percentage appliances televisions furniture stereos video cassette recorders guaranteed less than less than less than abc less than less than thus petitioners' experience indicates that the salvage_value for their rental units was negligible--proceeds from the sales of rental units to third parties were for most rental units less than percent of their original acquisition_cost in such circumstances we conclude that petitioners were permitted to ignore such salvage_value in determining the depreciation deduction for their property sec_167 before repeal in by the omnibus budget reconciliation act of publaw_101_ sec a and 104_stat_1388 sec_1_167_f_-1 income_tax regs in 90_tc_558 affd in part vacated in part and remanded 912_f2d_44 2d cir we stated in discussing the application of the income forecast method to the taxpayer's contractual rights to films during the years in issue the values of these contract rights at the end of their anticipated useful lives were so negligible that salvage values need not be taken into account therefore since petitioners' salvage values were negligible it was proper under these circumstances for petitioners to depreciate the total cost of their rental units since the salvage_value is inconsequential and since the parties stipulated that and data did not vary materially from and data we hold that petitioners under these circumstances did not have to make an adjustment to the rental units' costs for salvage_value iii conclusion we hold that guaranteed failed to make a proper election of the income forecast method for its taxable_year ending date and that abc failed to make a proper election for its taxable_year ending date we hold further that abc made a proper election for its short taxable_period ending date since it substantially complied with the election requirements for this short taxable_period for rental units placed_in_service during taxable years ending in the parties have stipulated that both guaranteed and abc properly elected out of macrs under sec_168 furthermore in this particular case since the parties stipulated as to the estimate of income expected over the life of the rental property and this estimate was borne out by petitioners' experience and since they stipulated that data did not vary materially from the years in question we hold that in this situation petitioners did accurately forecast the income expected over the life of the rental property in addition since the salvage_value is inconsequential and since the parties stipulated that and data did not vary materially from and data we hold that under these circumstances petitioners did not have to make an adjustment to the rental units' costs for salvage_value to reflect the foregoing decisions will be entered under rule


o f f i c e o f t h e c h i e f c o u n s e l department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date ---------------- number release date conex uil the honorable robert hurt member u s house of representatives berkmar circle charlottesville va attention dear representative hurt i am responding to your inquiry on behalf of your constituent --------------------- employee’s individual_health_insurance policies on a tax-free basis an employer may reimburse employees for the medical_expenses of the employee and the employee’s family and exclude those amounts from the employee’s income and wages under sec_105 of the internal_revenue_code although the aca did not change the tax treatment of the reimbursement for employee medical_expenses the aca did enact certain market reforms that apply to group_health_plans the arrangements must satisfy the aca market reform rules which are under the joint jurisdiction of the departments of the treasury labor and health and human services together referred to in this letter as the departments these rules apply to employer-provided health coverage regardless of the size of the employer and regardless of whether the employer is subject_to the employer shared responsibility provision of sec_4980h one of the departments’ requirements for group_health_plans is they cannot impose an annual or lifetime dollar limit on essential health benefits under section of the public health service act an agreement by the employer to reimburse medical_expenses up to a fixed amount is a group_health_plan under which there is an annual wrote about the ability of employers to reimburse premiums for describes are considered to be group_health_plans and -------------------------------- ------------------ conex-105560-16 ------------------ limit on essential health benefits therefore it fails to comply with the prohibition on annual limits under section if an employer offers a group_health_plan that satisfies the market reform rules by providing coverage for essential health benefits without annual limits in addition to a separate arrangement to pay for other medical_expenses the group_health_plan and the separate arrangement generally may be combined to determine if together the combined arrangement satisfies the market reforms see notice_2013_54 i r b and notice_2015_87 i r b if the employer does not offer the employee a group_health_plan and the employee obtains other coverage such as when the employee is covered by an individual_health_insurance policy the separate arrangement cannot be combined with that other coverage to determine if it satisfies the market reform rules for group_health_plans consequently the arrangement to reimburse the individual health policy premiums would violate the market reforms as noted one option for an employer who does not want to offer coverage under a group_health_plan to its employees is to provide additional compensation to the employee that the employee may use for any purpose including the purchase of an individual health policy that amount would be taxable and the employer would not have a group_health_plan that fails to satisfy the market reforms ------------------- product allows employers to reimburse individual health policy premiums without violating the departments’ market reforms the arrangement and regardless we would not be able to provide a formal opinion on a particular arrangement however we have been made aware of a number of these schemes and in looking at the information we have been presented we disagree with the promoters’ claims that their product does not impose an annual_limit on essential health benefits consequently their product fails to meet the market reforms i hope this information is helpful if you have any questions please call me at -------------------- also notes a product some promoters market that alleges use of the did not include the specifics of -------------------- ------------------ ---------------- or at sincerely christine ellison acting chief health and welfare branch office of associate chief_counsel tax exempt and government entities


t c memo united_states tax_court austin l mitchell and rebecca a mitchell petitioners v commissioner of internal revenue respondent docket no filed date austin l mitchell and priscilla j lim specially recognized for petitioners thomas c pliske for respondent memorandum findings_of_fact and opinion kroupa judge respondent determined deficiencies in petitioners’ federal income taxes and that petitioners were liable for accuracy-related_penalties under sec_6662 a for and the years at issue for respondent determined a dollar_figure deficiency and dollar_figure accuracy-related_penalty for respondent determined a dollar_figure deficiency and dollar_figure accuracy-related_penalty for respondent determined a dollar_figure deficiency and dollar_figure accuracy-related_penalty there are two issues for decision the first is whether petitioner austin l mitchell petitioner conducted his farming activity for profit during the years at issue we hold he did not the second issue is whether petitioners are liable for the accuracy-related_penalty for their underpayments of tax in the years at issue we hold they are liable findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the accompanying exhibits are incorporated by this reference petitioners resided in salem missouri at the time they filed the petition petitioner petitioner’s family owned and operated a farm the family farm in the salem area for more than years petitioner grew 1all section references are to the internal_revenue_code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated 2references to petitioner’s wife are to mrs mitchell up on the family farm and worked on it during his childhood through his college years petitioner assumed greater responsibility for maintaining the family farm during his adolescence because of his father’s declining health petitioner worked with livestock and row crops the family farm was running bushel of corn to the acre under petitioner’s stewardship a prodigious result since petitioner has worked as an attorney and cpa in the salem area many of petitioner’s clients are farmers petitioner is a hard-working individual and has been financially successful as an attorney and cpa his chosen professions which he enjoys petitioner worked approximately big_number to big_number hours per year in those professional occupations in each of the years at issue the family farm petitioner’s mother owned the family farm until her death in date the family farm consisted of approximately acres of tillable bottom land to acres of pasture a 20-acre timber stand and a dwelling the timber stand consisted primarily of black walnut and white oak trees at different stages of maturity both types of trees can produce revenue for a landowner premature trees can be thinned and sold as pulpwood and mature trees can be harvested for board wood lumber from the time a sapling is planted it will be years before the tree reaches maturity black walnut trees also produce edible nuts that may be sold glen b harris harris has been planting harvesting and baling hay on the family farm since harris is petitioner’s brother-in-law resides near the family farm and is an experienced farmer harris worked on the family farm as a result of a two-part arrangement he had with petitioner’s mother first petitioner’s mother hired harris to perform work on the farm including haying second harris rented the pastures from petitioner’s mother to graze his cattle petitioners moved into the house on the family farm in date to care for petitioner’s elderly mother shortly thereafter in date petitioner’s mother passed away and petitioner inherited the family farm petitioner and harris adopted a two-part barter arrangement with respect to harris’s farming activities on the family farm after the inheritance harris could continue to hay on the family farm at his own expense and could keep all the hay harvested in exchange for taking general care of the land also harris could graze his cattle on the family farm pasture land in exchange for liming and fertilizing the hayfields petitioner and harris changed these arrangements in petitioner and harris changed the haying arrangement to custom baling on the shares custom baling on the shares is a common arrangement where one party does all the haying work on another’s land and each keep sec_50 percent of the hay petitioner and harris also changed the pasturing arrangement in petitioner agreed to pay harris to lime fertilize and maintain fencing and harris agreed to pay pasture land rental fees to petitioner the fees petitioner paid harris for his services exactly offset the pasture land rental fees harris paid petitioner during date petitioner selectively harvested his existing timber stand this resulted in big_number board feet of non-white oak lumber and big_number feet of white oak lumber which generated dollar_figure of revenue petitioner consulted a logging expert to advise him which trees to cut petitioner also spent significant time from through the years at issue working on the family farm each year he spent evenings and weekends from mid-april to september performing two kinds of tasks petitioner worked at converting acres of uphill pasture to timber by planting numerous white oak and black walnut seedlings petitioner also worked at weed control in various ways he cleared multiflora rose and native thistle from the pasture land and bottom land and mowed in the converted timber stand to facilitate tree growth in general petitioner enjoyed the hard physical labor he performed on the family farm and believed he might derive health benefits from it as well petitioner consulted with neighboring farmers since moving to the family farm petitioner did not have a written business plan for his farming activity nor did petitioner maintain a cash receipts book a general ledger or a separate checking account for the farming activity the family farm however is quite important to petitioner petitioner intended to build the farm and make it productive before leaving the farm to his children to date petitioner has lost approximately dollar_figure to dollar_figure as a result of conducting the farming activity petitioners’ income_tax returns and the deficiency_notice petitioners filed joint income_tax returns for the years at issue on form sec_1040 u s individual_income_tax_return which petitioner himself prepared petitioner reported net losses on schedules f profit or loss from farming of dollar_figure for dollar_figure for and dollar_figure for in petitioner reported no income from the farm and expenses of dollar_figure in petitioner reported dollar_figure of income from the farm and expenses of dollar_figure also in petitioner reported dollar_figure of income from the sale of timber on schedule d capital_gains_and_losses in petitioner reported dollar_figure of income from the farm and expenses of dollar_figure petitioner deducted the net losses from the farming activity against other income reported on the tax returns for the years at issue respondent increased petitioner’s gross_income by the amount of petitioner’s farm expenses in each of the years at issue in a deficiency_notice dated date the deficiency_notice respondent determined that petitioner did not conduct the farming activity with the intent to earn a profit under sec_183 respondent also determined that petitioner’s various undertakings on the family farm were not one activity for purposes of the sec_183 analysis finally respondent determined that petitioners were liable for the accuracy-related_penalty because petitioners’ underpayments of taxes were due to negligence or disregard of rules or regulations petitioners timely filed a petition seeking a redetermination of respondent’s determinations in the deficiency_notice opinion this is the third time that we have been asked to decide whether petitioner conducted the farming activity for profit we held petitioner did not conduct the farming activity for profit in and mitchell v commissioner t c summary opinion we similarly held that petitioner did not conduct the farming activity for profit in and mitchell v commissioner tcmemo_2001_269 a sec_183 generally sec_183 provides generally that if an individual engages in an activity and if such activity is not engaged in for profit no deduction attributable to such activity shall be allowed under this chapter except as provided in this section deductions that would be allowable without regard to whether the activity is engaged in for profit shall be allowed under sec_183 and deductions that would be allowable only if the activity is engaged in for profit shall be allowed under sec_183 but only to the extent that the gross_income from the activity exceeds the deductions allowable under sec_183 we begin with the burden_of_proof in general the commissioner’s determinations in the deficiency_notice are presumed correct and the taxpayer bears the burden of proving that the commissioner’s determinations are in error rule a 290_us_111 petitioner did not assert that the burden shifted to respondent under sec_7491 we therefore treat petitioner as having conceded this issue and find that the burden remains with petitioner we follow the court_of_appeals opinion squarely on point when appeal from our decision would lie to that court absent stipulation by the parties to the contrary 54_tc_742 affd 445_f2d_985 10th cir a taxpayer residing in the eighth circuit such as petitioner must prove he or she conducted the activity with an actual and honest objective of making a profit see 908_f2d_369 8th cir revg tcmemo_1988_468 91_tc_686 affd 893_f2d_656 4th cir 78_tc_642 affd without opinion 702_f2d_1205 d c cir the expectation of profit need not have been reasonable the taxpayer must have entered into the activity or continued it however with the profit_motive 91_tc_371 sec_1_183-2 income_tax regs whether a taxpayer has the requisite profit_motive is determined on the basis of all surrounding facts and circumstances dreicer v commissioner supra pincite sec_1_183-2 income_tax regs we give greater weight to objective facts than to a taxpayer’s statements of intent dreicer v commissioner supra pincite sec_1_183-2 income_tax regs before we address whether petitioner had the requisite profit_motive based on the facts and circumstances we first must address two threshold issues first whether petitioner’s tree planting mature timber harvesting and haying undertakings may be treated as one activity second whether petitioner is entitled to the presumption of a profit_motive whether the undertakings may be treated as one activity respondent argues that we may not aggregate petitioner’s tree- planting mature timber harvesting and haying undertakings as one activity we disagree multiple undertakings of a taxpayer may be treated as one activity if the undertakings are sufficiently interconnected sec_1_183-1 income_tax regs the most important factors in making this determination are the degree of organizational and economic interrelationship of the undertakings the business_purpose served by carrying on the undertakings separately or together and the similarity of the undertakings id the commissioner generally accepts the taxpayer’s characterization of two or more undertakings as one activity unless the characterization is artificial or unreasonable id we have considered these and other factors in determining whether the taxpayer’s characterization is unreasonable the factors so considered include a whether the undertakings are conducted at the same place b whether the undertakings were part of the taxpayer’s efforts to find sources of revenue from his or her land c whether the undertakings were formed as separate businesses d whether one undertaking benefited from the other e whether the taxpayer used one undertaking to advertise the other f the degree to which the undertakings shared management g the degree to which one caretaker oversaw the assets of both undertakings h whether the taxpayer used the same accountant for the undertakings and i the degree to which the undertakings shared books_and_records see 94_tc_41 tobin v commissioner tcmemo_1999_328 estate of brockenbrough v commissioner tcmemo_1998_454 hoyle v commissioner tcmemo_1994_592 de mendoza v commissioner tcmemo_1994_314 scheidt v commissioner tcmemo_1992_9 we find it is appropriate to treat petitioner’s various farming undertakings as one activity the undertakings are all agricultural and were performed at the family farm the undertakings all demonstrate petitioner’s efforts to generate revenue from the family farm the mature timber harvesting and the haying generated current revenue while the tree-planting may generate future revenue the undertakings were not formed as separate businesses the tree-planting undertaking benefited from the mature timber harvesting undertaking as mature timber harvesting made additional land available for tree-planting petitioner managed all the undertakings petitioner himself was the accountant for all the undertakings finally petitioner used one checking account to pay the expenses of and to deposit the revenues from the various undertakings after reviewing these factors and the facts and circumstances of this case we find that petitioner’s tree- planting mature timber harvesting and haying undertakings may be treated as one activity we therefore reject respondent’s determination in the deficiency_notice by treating the undertakings as one activity we note that petitioner reported dollar_figure from the sale of timber dollar_figure from the sale of hay and claimed farm expenses of dollar_figure in accordingly petitioner had a net profit from the farming activity in and we therefore do not sustain respondent’s disallowance of the claimed farm expenses as to furthermore we shall consider all petitioner’s farming undertakings as one activity in analyzing whether petitioner conducted the farming activity with an actual and honest objective of making a profit during and whether the sec_183 presumption applies we next address whether petitioner is entitled to the sec_183 presumption of a profit_motive petitioner contends that he qualifies for the profit_motive presumption under sec_183 for and by arguing that the gross_income derived from the farming activity exceeded the deductions attributable to the activity in and we disagree sec_183 presumes an activity is conducted for profit if the gross_income exceeds the attributable deductions for out of consecutive years the gross_income_test the 3we note that sec_1_183-1 income_tax regs has not been amended to conform to the statutory changes made in continued presumption applies only after the third profit year sec_183 because petitioner did not report gross_income in excess of attributable deductions from the farming activities in three or more of the years to petitioner is not entitled to the sec_183 presumption for either or b whether petitioner conducted the farming activity for profit during and we now address whether petitioner engaged in the farming activity with an actual and honest objective of making a profit considering all the pertinent facts and circumstances we structure our analysis around nine nonexclusive factors in determining whether petitioner had an actual and honest objective of making a profit from the farming activity during and see b income_tax regs the nine factors are the manner in which the taxpayer carries on the activity the expertise of the taxpayer or his or her advisers the time and effort expended by the taxpayer in carrying on the activity the expectation that the assets used in the activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar continued see tax_reform_act_of_1986 publaw_99_514 and 100_stat_2120 4a different gross_income_test applies for an activity that consists of the breeding training showing or racing of horses sec_183 second sentence activities the taxpayer’s history of income or loss with respect to the activity the amount of occasional profits if any which are earned the financial status of the taxpayer and whether elements of personal pleasure or recreation are involved id no one factor or set of factors is controlling nor is the existence of a majority of factors favoring or disfavoring a profit_motive necessarily controlling 32_f3d_94 4th cir affg tcmemo_1993_396 722_f2d_695 11th cir affg 78_tc_471 sec_1_183-2 income_tax regs the individual facts and circumstances of each case are the primary test keanini v commissioner supra pincite 72_tc_28 sec_1_183-2 income_tax regs c application of the factor sec_1 the manner in which the taxpayer conducts the activity we begin by examining the manner in which petitioner carried on the farming activity carrying on an activity in a businesslike manner may indicate a profit objective sec_1 b income_tax regs in determining whether a taxpayer conducted an activity in a businesslike manner we consider whether the taxpayer maintained complete and accurate books_and_records and also whether changes were attempted in an effort to earn a profit 72_tc_659 sec_1_183-2 income_tax regs petitioner did not present any documentary_evidence to prove the existence of complete and accurate books_and_records for the farming activity petitioner did not maintain a separate bank account for the farming activity instead he used one account for personal_use the farming activity and for his legal practice petitioner asserts that because he did not maintain a separate bank account for his law practice which petitioner operated with a profit_motive we should infer a profit_motive from petitioner’s lacking a separate bank account for the farming activity we disagree the lack of a separate bank account for petitioner’s farming activity coupled with the lack of complete and accurate books_and_records tends to show that petitioner did not carry on the farming activity in a businesslike manner cf kahle v commissioner tcmemo_1991_203 petitioner also had no written business plan nor offered any documentary_evidence showing he contemplated before beginning the farming activity how to make it profitable petitioner did not advertise the farming activity in an attempt to increase its profitability these facts lead us to conclude that petitioner did not carry on the farming activity in a businesslike manner sec_1_183-2 income_tax regs nor has petitioner attempted to make the farming activity profitable by changing his conduct over the years rather we find it remarkable how little petitioner has changed the farming activity despite years of operating losses petitioner primarily relies on the changes in his arrangement with harris made in as demonstrating his attempt to earn a profit we find that the change in the pasture land arrangement was just a change in form but not substance because the amounts of money exchanged offset each other we find however that the change in the haying arrangement with harris in was substantive because petitioner received half the hay after the change while before he received none of the hay this enabled petitioner to sell hay to generate revenues which he did we find that this one change does not outweigh the lack of complete and accurate books_and_records and the absence of other indicia that petitioner conducted the farming activity in a businesslike manner this factor favors respondent expertise of the taxpayer or his advisers we next consider petitioner’s expertise and that of his advisers preparing for an activity by extensive study on one’s own or by consulting with experts and conducting the activity in accordance with what has been learned indicates that the taxpayer had an actual and honest profit objective sec_1_183-2 income_tax regs petitioner contends that he had the necessary expertise in farming to operate a farm for profit he was born and raised on the family farm he had previous experience producing row crops hay and livestock he had conversations with other farmers in the area additionally he consulted with two expert advisers harris and a sawyer the record does not show however that petitioner knew how or intended to make a profit from his current farming undertakings he did not seek expert advice on how to operate his farm profitably he discussed farming with his farmer clients and farmer neighbors but there is no evidence that they gave him advice about farming for profit this factor favors respondent the taxpayer’s time and effort we next consider the time and effort petitioner expended in conducting the farming activity a taxpayer’s devotion of much time and effort to conducting an activity particularly if the activity does not have substantial personal or recreational aspects may indicate an intention to derive a profit sec_1_183-2 income_tax regs 5petitioner also testified that he consulted experts after stating the obvious petitioner could not possibly have carried on the farming activity during and in accordance with expertise garnered later this testimony is therefore irrelevant during the years at issue petitioners resided at the family farm they derived personal and recreational benefits from the situs of the farming activity petitioner devoted regular and substantial time and effort to the farming activity although he continued to work an average of more than hours per week as a lawyer and accountant petitioner did not explain how the work he performed on the family farm related to making it profitable this factor favors respondent the expectation that the assets used in the activity may appreciate in value we next examine the expectation that the assets used in conducting the activity may appreciate in value a taxpayer may intend despite the lack of profits from current operations that an overall profit will result when appreciation in the value of assets used in the activity is realized 45_tc_261 affd 379_f2d_252 2d cir sec_1_183-2 income_tax regs petitioner intends to give the family farm to his sons not sell it thus petitioner is not relying on the appreciation of the family farm’s assets to offset the losses sustained from his farming activity this factor favors respondent success in similar or dissimilar activities we next examine the success of petitioner in carrying on other similar or dissimilar activities if a taxpayer has previously engaged in similar activities and made them profitable this success may show that the taxpayer has a profit_motive for the activity at issue even though the activity is presently unprofitable sec_1_183-2 income_tax regs a taxpayer’s success in dissimilar activities may also indicate a profit_motive see daugherty v commissioner tcmemo_1983_ petitioner argued that his previous work on the family farm as a teenager indicates that he was previously successful in a similar activity petitioner did describe in detail how much corn was cropped due to his efforts but he did not prove that the family farm was financially successful during those years accordingly petitioner’s prior work on the family farm does not support a finding for petitioner petitioner is a licensed cpa and has a legal practice we find that petitioner is hard-working and dedicated to his professional pursuits petitioner’s success in a cpa and legal practice however does not equate with petitioner conducting the farming activity with an honest and actual objective of making a profit this factor favors respondent taxpayer’s history of income or losses we next examine petitioner’s history of income or loss with respect to the farming activity a history of substantial losses may indicate that the taxpayer did not conduct the activity for profit 72_tc_411 affd without published opinion 647_f2d_170 9th cir sec_1_183-2 income_tax regs petitioner generated revenue from the farming activity in and resulting in a net profit in but he incurred a net_loss in and despite the net profit petitioner has claimed losses between dollar_figure and dollar_figure from conducting the farming activity since this factor favors respondent amount of occasional profits if any we next consider the amount of occasional profits if any that petitioner earned through occasional profits the taxpayer earned from the activity in relation to the amount of losses_incurred the amount of the taxpayer’s investment and the value of the assets used in the activity may provide useful criteria in determining the taxpayer’s intent sec_1 b income_tax regs we consider the increasing size width volume and value of the taxpayer’s harvestable timber when we apply this factor to a tree-farming activity kurzet v commissioner tcmemo_1997_54 affd in part revd and remanded on other grounds 222_f3d_830 10th cir petitioner earned a profit from the farming activity in respondent contends that we should give little weight to the profit because it was partially due to selling mature timber that petitioner could have sold in other years we disagree petitioner received dollar_figure in exchange for mature timber harvested from the family farm in if petitioner had sold the timber in some other year he possibly would have had a net profit then from which we would have drawn the same favorable inference petitioner’s net profit in is not diminished because he could have realized it in another year petitioner also contends that this factor should favor him because he showed a net profit in and we place no weight on events that arose after this factor is neutral the taxpayer’s financial status we next examine petitioner’s financial status if a taxpayer does not have substantial income or capital from sources other than the activity in question it may indicate that the taxpayer engages in the activity for profit sec_1_183-2 income_tax regs conversely substantial income from sources other than the activity especially if the losses from the activity generate large tax benefits may indicate that the taxpayer is not conducting the activity for profit id substantial income is in this analysis income well in excess of that which is needed by the average taxpayer to meet ordinary living_expenses see bessenyey v commissioner t c pincite taxpayers with substantial income from other sources have a greater tax incentive to incur large expenditures in a hobby type of activity 59_tc_312 although petitioner was successful as an attorney and cpa petitioner did not earn income from these pursuits substantial enough to motivate him to incur losses from the farming activity cf jackson v commissioner supra bessenyey v commissioner supra the size of the farming activity losses claimed during and was small in whole dollar amounts given petitioners’ marginal income_tax bracket this factor favors petitioner elements of personal pleasure or recreation we finally consider whether elements of personal pleasure or recreation were involved in petitioner’s farming activity the presence of personal motives for or recreational elements associated with conducting the activity may indicate that the taxpayer does not have a profit_motive jackson v commissioner supra sec_1_183-2 income_tax regs petitioner grew up on the family farm and inherited it in while farming does involve hard manual labor petitioner enjoyed doing the work petitioners have resided on the family farm since an additional personal motive for engaging in the farming activity this factor is neutral conclusion the nine nonexclusive factors and the facts and circumstances of this case lead us to conclude that petitioner did not conduct the farming activity with an actual and honest objective of making a profit in or the net losses petitioner sustained conducting the farming activity are therefore not deductible from gross_income accordingly we sustain respondent’s determinations in the deficiency_notice for and d whether petitioners are liable for the accuracy-related_penalty we next consider whether petitioners are liable for the accuracy-related_penalty under sec_6662 respondent asserts that all or part of the underpayment_of_tax for the years at issue is due to negligence or disregard of rules or regulations we have found that there is no underpayment_of_tax for accordingly petitioners are not liable for the accuracy-related_penalty for a penalty applies to the portion of an underpayment of income_tax attributable to negligence or disregard of rules or regulations sec_6662 and b negligence is defined as any failure to make a reasonable attempt to comply with the provisions of the code sec_6662 negligence is the lack of due care or the failure to do what a reasonable and prudent person would do under the circumstances 85_tc_934 disregard encompasses any careless reckless or intentional disregard sec_6662 respondent has the burden of production regarding penalties and must come forward with sufficient evidence that it is appropriate to impose the penalty see sec_7491 116_tc_438 respondent relies on the two prior decisions this court issued holding that petitioner did not conduct the farming activity for a profit mitchell v commissioner tcmemo_2001_269 mitchell v commissioner t c summary opinion respondent argues and we agree that absent substantial changes in its operation the farming activity was not conducted for profit pursuant to sec_183 we find that respondent has met his burden of production regarding and the accuracy-related_penalty does not apply to any portion of an underpayment however if the taxpayer shows that there was reasonable_cause for and that the taxpayer acted in good_faith with respect to that portion sec_6664 sec_1 b income_tax regs petitioners have the burden of proving that the accuracy-related_penalty does not apply because of this exception see higbee v commissioner supra pincite the determination of whether the taxpayer acted with reasonable_cause and in good_faith depends upon the pertinent facts and circumstances we emphasize the taxpayer’s efforts to 6we note that mitchell v commissioner tcmemo_2001_269 was not issued until date which is after the due_date for filing a return for 7summary opinions should not be cited as authority sec_7463 we consider it here for the limited purpose of deciding whether respondent met his burden of production as to the accuracy-related_penalty for and assess the proper tax_liability considering the experience knowledge and education of the taxpayer sec_1_6664-4 income_tax regs petitioner is an accountant and lawyer he represents clients before the irs and is a member of this court’s bar he is conversant with sec_183 and the regulations despite all this petitioners deducted farm_losses even though petitioner still had not manifested an actual and honest objective of making a profit from the farm during and we find that petitioners did not act in good_faith in claiming schedule f farming losses and their underpayments were not due to reasonable_cause petitioners disregarded rules or regulations by deducting the net losses from the farm we conclude that petitioners are liable for the accuracy-related_penalty under sec_6662 for the underpayments of tax in and to reflect the foregoing decision will be entered for respondent for and and for petitioners for