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 b01 plr-120222-10 date date legend taxpayer ------------------------------------ agencies --------------------------------------------------------- dear --------------- this is in reply to a letter dated date and subsequent correspondence requesting rulings that the exchange certificates described below to be issued by the exchange trust described below will qualify as interests in stripped coupons or stripped bonds within the meaning of sec_1286 of the internal_revenue_code assuming that all exchange certificates issued by an exchange trust are not held by one person and the exchange trust’s exchange mechanism including the ability to exchange fixed rate remic certificates for floating and inverse floating rate exchange certificates will not cause the exchange trust to fail to be classified as a fixed_investment_trust under sec_301_7701-4 the regulations facts taxpayer structures a variety of mortgage-backed_securities offerings pursuant to multi- class mortgage-backed_securities programs maintained by agencies in each case qualified mortgages are conveyed to a_trust remic trust pursuant to the terms of a_trust agreement in exchange for several classes of mortgage-backed pass-through certificates each such certificate other than the residual class is referred to herein as a remic certificate plr-120222-10 in certain agency transactions the owner of a remic certificate has the right to deposit the remic certificate in a supplemental trust each such supplemental trust is an exchange trust in exchange for a proportionate interest in newly issued classes of pass-through certificates issued by the exchange trust the exchange certificates taxpayer intends to contribute all or a portion of a single class of remic certificates to an exchange trust in exchange for exchange certificates the exchange trust only holds remic certificates of the same class as the remic certificates contributed by the taxpayer all distributions made with respect to remic certificates held by the exchange trust are immediately distributed in respect of the exchange certificates there will never be any reinvestment activity although an exchange trust can accept additional deposits of remic certificates over time the subsequent deposits of remic certificates must be the same class of remic certificates as is already held by the exchange trust the exchange certificates will represent collectively a percent beneficial_ownership interest in the exchange trust they will be issued in multiple classes that will be separately assignable thus exchange certificates may provide for principal and interest principal only or interest only moreover the exchange certificates’ interest distributions may be based on fixed rates floating rates or inverse floating rates for interest-only exchange certificates there is no right to receive principal but interest payments are based upon a notional_principal_amount each exchange certificate within a class will be entitled to a pro_rata portion of payments allocated to the class additionally the exchange certificates issued by the exchange trust will have the same maturity taxpayer represents that any exchange trust will not be an obligor of debt instruments with two or more maturities within the meaning of sec_7701 and sec_301_7701_i_-1 exchange certificates can be deposited in the exchange trust in exchange for a proportionate interest in the original remic certificates or for different classes of exchange certificates each exchange including the initial contribution of the remic certificate or portion thereof in exchange for the exchange certificates will be for matching amounts in that the actual principal_amount of exchange certificates or remic certificates deposited in the exchange trust will equal the actual principal_amount of exchange certificates or remic certificates received from the exchange trust the aggregate pass-through rate on exchange certificates or remic certificates deposited in the exchange trust will equal the aggregate pass-through rate on exchange certificates or remic certificates received from the exchange trust and exchange certificates or remic certificates received from the exchange trust will although the exchange trust is not a remic taxpayer represents that the floating and inverse floating rates paid on exchange certificates will be of the type described in sec_1_860g-1 and a which permits remics to issue regular interests at floating and inverse floating rates the formula used to compute interest on floating and inverse floating exchange certificates will not vary over the period that the exchange certificates are outstanding plr-120222-10 retain the same tax_attributes as the exchange certificates or remic certificates deposited in the exchange trust a certificate owner is charged a fee for each exchange generally based on a percentage of the principal_amount of the certificates exchanged taxpayer represents that the exchanges will not cause exchanging certificate holders or non-exchanging certificate holders to be entitled to a differing stream of aggregate payments from differing obligors the exchanges will have no effect on the rights to principal or interest of any exchange certificate holder not participating in the exchange law and analysis ruling_request the exchange certificates will qualify as interests in stripped coupons or stripped bonds within the meaning of sec_1286 of the internal_revenue_code sec_1286 provides rules governing the tax treatment of stripped bonds and stripped coupons sec_1286 treats a stripped_bond or stripped_coupon in the hands of a purchaser as if it were a newly issued debt_instrument issued at a price equal to the purchase_price sec_1286 provides rules governing the person stripping a bond including rules for allocating basis between stripped bonds or coupons that are sold and disposed of sec_1286 of the code defines the term bond to include a bond debenture note or certificate or other evidence_of_indebtedness sec_860b provides that in determining the tax under this chapter of any holder of a regular_interest in a remic such interest if not otherwise a debt_instrument shall be treated as a debt_instrument the remic certificates are evidences of indebtedness and therefore are bonds within the meaning of sec_1286 sec_1286 of the code defines the term coupon to include any right to receive interest on a bond whether or not evidenced by a coupon the exchange certificates that represent rights to receive interest on the remic certificates are rights to receive interest on a bond and therefore are coupons within the meaning of sec_1286 sec_1286 of the code defines the term stripped_bond as a bond issued with interest_coupons where there is a separation in ownership between the bond and any coupon that has not yet become payable sec_1286 defines a stripped_coupon as any coupon relating to a stripped_bond since taxpayer’s request contemplates that fixed rate remic certificates will be contributed into the exchange trust in exchange for exchange certificates including exchange certificates that pay interest at floating and inverse floating rates taxpayer considers the term separation of ownership under sec_1286 to include the stripping of fixed rate remic interest payments into floating rate and inverse floating rate exchange certificates such stripping does not merely separate principal from the interest payments as stated in the plr-120222-10 terms of the underlying loan but rather provides for future allocation of interest payments through an index or formula not found in the terms of the underlying loan taxpayer has represented that the index or formula for determining payments under floating and inverse floating rate exchange certificates will be a specified portion within the meaning of sec_1_860g-1 with startup_day being defined as the date of the exchange thus the referenced index or formula applicable to a floating- rate exchange certificate will not vary while the certificate is outstanding sec_1286 does not specifically address the stripping of fixed rate debt instruments into floating rate and inverse floating rate components the rules governing remics however do allow for the stripping of fixed rate interest payments into floating and inverse floating rate interest payments sec_860g of the code provides that a regular_interest issued by a remic must pay interest if at all based on either a fixed rate or a specified portion of the interest payments on qualified mortgages if such portion does not vary while such interest is outstanding sec_1 860g- a i c provides that a specified portion means a portion of the interest but only if it can be expressed as a fixed percentage of the interest that is payable at a fixed or variable rate a fixed number of basis points of interest or as interest payable at a fixed or variable rate in excess of a fixed number of basis points or a variable rate sec_1_860g-1 provides that if a remic interest consists of a specified portion of the interest payments on the remic’s qualified mortgages no minimum principal_amount need be assigned to that interest thus the definition of specified portion in sec_860g and the accompanying regulations allows for remic trusts to issue interests comprising rights to floating rate and inverse floating rate interest-only payments arising from qualified mortgages holders of floating rate and inverse floating rate interest-only remic regular interests are deemed to hold discrete debt instruments that they account for under the oid regime by applying the principles of sec_1272 see sec_1272 setting forth rules for computing oid for instruments subject_to prepayment 96_fsupp2d_850 s d ind treating remic regular_interest primarily comprising interest payments from underlying mortgage pool as oid instrument subject_to sec_1272 taxpayer has represented that the floating rate and inverse floating rate exchange certificates issued by the exchange trust will only comprise a specified portion of the interest payable from the remic certificates held within the exchange trust ie the exchange trust will only issue floating rate and inverse floating rate certificates that are otherwise allowable under sec_860g the exchange certificates represent partial ownership interests in remic certificates that are considered debt instruments remics may issue regular interests that provide for floating rates and inverse floating rates of interest without assigned principal and the rules governing remics treat such interests as discrete debt instruments taxpayer’s request is that the exchange certificates which are derived from remic certificates qualify as interests in stripped coupons under sec_1286 this yields the same tax result as would occur had the exchange certificates themselves been remic certificates in particular both remic regular plr-120222-10 interests and stripped coupons are treated as debt and application of sec_1286 to the exchange certificates would treat exchange certificates as newly-issued debt instruments when ownership of interest payments arising from remic certificates held within the exchange trust is separated from rights to principal accordingly we conclude that sec_1286 applies to the exchange certificates issued by the exchange trusts including the floating rate and inverse floating rate certificates therefore when the interest portion of a remic certificate is separated into a floating rate portion and an inverse floating rate portion through multiple classes of the exchange trust the basis between the two shall be allocated under sec_1286 and each of the interests represented by the exchange certificates will qualify as interests in stripped coupons or stripped bonds within the meaning of sec_1286 ruling_request the exchange trust’s exchange mechanism which includes the ability to exchange fixed rate interests for floating rate interests will not cause the exchange trust to fail to be classified as a fixed_investment_trust under sec_301_7701-4 for federal_income_tax purposes unincorporated entities such as exchange trust are classified as trusts partnerships or corporations see sec_301_7701-1 an entity formed as an investment_trust but having multiple classes of ownership will ordinarily be classified as a partnership or corporation under sec_301_7701-2 nonetheless investment trusts with multiple classes of ownership interests will still be considered trusts if i neither the trustee nor any other party has the power to vary the investment of the holders of beneficial interests in the trust and ii the trust is formed to facilitate direct investment in the assets of the trust and the existence of multiple classes of ownership interests is incidental to that purpose sec_301_7701-4 i whether the exchange mechanism creates a power to vary the exchange trust certificate holders’ investment taxpayer represents that the exchange trust will accept deposits of remic certificates in exchange for exchange certificates and the trustee will immediately distribute to holders of exchange certificates any distributions that the exchange trust receives with respect to the remic certificates that the exchange trust holds exchange certificates may pay at a floating rate based upon a formula or index but the trustee may not vary the referenced formula or index while the certificates are outstanding the assets held in the exchange trust do not vary insofar as the trustee has no power to sell and reinvest assets contributed to the trust nor may the trustee modify existing assets within the trust likewise contributions of additional assets into the trust must be identical to and in the same proportion as those already held within the exchange trust such that the additional contributions will not affect the economic position of existing certificate holders see 122_f2d_540 2d cir holding that entity with power to accept additional deposits of securities identical to those it already holds is taxable as a_trust lastly remic certificates deposited into plr-120222-10 the exchange trust will be exchanged for exchange certificates having the same aggregate rights to principal and interest and the exchange certificates will retain the same tax_attributes as the remic certificates likewise holders of exchange certificates may exchange their certificates for remic certificates possessing identical rights to principal and interest and having the same tax_attributes as the exchange certificates deposited in the exchange trust on the basis of taxpayer’s representations we conclude that there is no power to vary the investment of the exchange trust’s certificate holders ii whether the exchange trust’s multiple classes of beneficial_ownership facilitate direct ownership in underlying assets taxpayer represents that the exchange trust will issue multiple classes of certificates but maintains that those classes are incidental to the trust’s purpose of facilitating direct investment in the trust’s assets as noted sec_301_7701-4 provides that generally an investment_trust with multiple classes of ownership interests will not be taxable as a_trust the preamble to those regulations issued in addresses concerns regarding multiple class trusts as follows the existence of varied beneficial interests may indicate that the trust is not employed simply to hold investment_assets but serves a significant additional purpose of providing investors with economic and legal interests that could not be acquired through direct investment in the trust assets such use of an investment_trust introduces the potential for complex allocations of trust income among investors with correspondingly difficult issues of how such income is to be allocated for tax purposes these issues are properly foreign to the taxation of trust income where rules have not developed to accommodate the varied forms of commercial investment and no comprehensive economic_substance requirement governs the allocation of income for tax purposes t d 1986_1_cb_371 sec_301_7701-4 sets forth four examples of multiple class trusts to illustrate the meaning of the incidental exception example of the regulations illustrates the treatment of a_trust that is used to strip a portfolio of bonds example corporation n purchases a portfolio of bonds and transfers the bonds to a bank under a_trust agreement at the same time the trustee deliver sec_2 revrul_90_7 1990_1_cb_153 provides that a certificate holder in an investment_trust that has a single class of ownership interests and a fixed portfolio of stock does not recognize gain_or_loss when the certificates are exchanged for a proportionate share of the trust’s assets the reasoning of revrul_90_7 does not extend to multiple class structures where the certificate holder’s tax_attributes in the trust certificates differ from the holder’s tax_attributes in the trust assets received in exchange therefor plr-120222-10 to n certificates evidencing interests in the bonds these certificates are sold to public investors each certificate represents the right to receive a particular payment with respect to a specific bond under sec_1286 stripped coupons and stripped bonds are treated as separate bonds for federal_income_tax purposes although the interest of each certificate holder is different from that of each other certificate holder and the trust thus has multiple classes of ownership the multiple classes simply provide each certificate holder with a direct interest in what is treated under sec_1286 as a separate bond given the similarity of the interests acquired by the certificate holders to the interests that could be acquired by direct investment the multiple classes of trust interests merely facilitate direct investment in the assets held by the trust accordingly the trust is classified as a_trust we have concluded supra that the exchange certificates insofar as they represent rights to receive portions of principal and interest from the remic certificates contributed to the exchange trust qualify as interests in stripped bonds and stripped coupons for the purposes of sec_1286 once the certificate holder creates a separation of ownership by selling a portion of its exchange certificates to a third party with respect to exchange certificates that provide for floating and inverse floating rates of interest from a fixed rate remic certificate held by the exchange trust we note that remics are permitted to issue such interests to investors directly taxpayer represents that the floating and inverse floating rates will comply with the specified portion requirement of sec_1_860g-1 and -1 a and there exists in place a mechanism for accounting for such interests as separate bonds see sec_1272 insofar as separation of exchange trust principal from income may result in complex allocations as described in the preamble to the regulations such allocations are inherent in sec_1286 transactions generally and example expressly allows for fixed investment trusts to issue certificates that represent stripped coupons under sec_1286 thus the complexity in allocating principal and income among stripped interests is not the type of complexity contemplated in the preamble accordingly we conclude that the exchange trust if operated in accordance with the above representations will be taxable as a fixed_investment_trust for federal_income_tax purposes holdings ruling_request the exchange certificates to be issued by the exchange trust will qualify as interests in stripped coupons or stripped bonds within the meaning of sec_1286 of the internal_revenue_code assuming that all exchange certificates issued by an exchange trust are not held by one person though example describes certificate s represent ing the right to receive a particular payment with respect to a specific bond taxpayer’s representation that the floating and inverse-floating rates will comply with the specified portion_rules creates a clearly ascertainable allocation of the right to payments among the holders of exchange certificates such that the certificates can be accounted for under sec_1286 within the meaning of example plr-120222-10 ruling_request the exchange trust’s exchange mechanism including the ability to exchange fixed rate remic certificates for floating and inverse floating rate exchange certificates will not cause the exchange trust to fail to be classified as a fixed_investment_trust under sec_301_7701-4 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as 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 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 representative sincerely robert a martin robert a martin senior technician reviewer branch financial institutions products


t c memo united_states tax_court jack carson coleman petitioner v commissioner of internal revenue respondent docket no filed date jack carson coleman pro_se robert a varra for respondent memorandum findings_of_fact and opinion gerber judge respondent determined a deficiency in petitioner’s federal_income_tax in the amount of dollar_figure for the taxable_year the issues presented for our consideration are whether payments received by petitioner are income_in_respect_of_a_decedent and therefore includable in his gross_income under sec_691 and whether petitioner’s state_income_tax refund received during the taxable_year is includable in his gross_income findings_of_fact petitioner jack carson coleman resided in colorado springs colorado at the time his petition was filed petitioner’s father decedent died intestate on date before his death decedent sold grossmont animal hospital to another veterinarian as part of the sales transaction decedent signed a 10-year agreement not to compete agreement in consideration of monthly payments of dollar_figure as of the date of decedent’s death the unexpired portion of the agreement consisted of monthly payments and was included in decedent’s estate for estate_tax purposes the remaining payments were assigned a value of dollar_figure which reflected percent of their face value big_number x on date decedent’s estate was closed and petitioner received inter on the basis of petitioner’s failure_to_file a responding brief respondent moved for dismissal of this case for lack of prosecution petitioner filed an objection to the motion and requested a decision based on the hearing testimony and respondent’s brief we deny respondent’s motion and will decide this case on its merits all section references are to the internal_revenue_code in effect for the year at issue alia a one-third interest in the unexpired portion of the agreement during petitioner received payments totaling dollar_figure from grossmont animal hospital in accordance with the agreement petitioner did not report these payments on his federal_income_tax return on his federal_income_tax return petitioner claimed an itemized_deduction for state and local_taxes in the amount of dollar_figure during petitioner received a refund of state and local_taxes in the amount of dollar_figure he did not report the dollar_figure refund as income on his federal_income_tax return opinion this controversy concerns whether payments received by petitioner in connection with the agreement are income_in_respect_of_a_decedent ird and therefore includable in his gross_income a second issue concerns whether petitioner’s state_income_tax refund for his tax_year is includable in petitioner’s gross_income i income_in_respect_of_a_decedent as of the date of decedent’s death percent of the value of the unexpired portion of the agreement not to compete was included in decedent’s estate on the basis of petitioner’s testimony we interpret his arguments to be as follows as of the date of decedent’s death the basis in the unexpired portion of the agreement was stepped up to percent of its value and percent of the payments petitioner received in is includable in his gross_income conversely respondent asserts that pursuant to sec_691 the payments received by petitioner constitute ird and are includable in their entirety in petitioner’s gross_income sec_691 we first address whether the payments received by petitioner constitute ird a main principle underlying our system of income_taxation is that an item_of_gross_income becomes taxable when a taxpayer includes it in gross_income under his or her method_of_accounting sec_451 this principle should still apply in situations where an individual has a legal right to an item_of_gross_income but dies before reporting it 104_tc_1 affd 103_f3d_104 10th cir citing rollert residuary_trust v commissioner 80_tc_619 affd 752_f2d_1128 6th cir sec_691 promotes this principle by taxing property received after an individual’s death if the property would have been includable in gross_income had the individual lived kitch v commissioner supra pincite sec_691 provides that a taxpayer’s gross_income includes ird see also sec_61 ird consists of amounts of gross_income which the decedent was entitled to receive at the time of death but were not properly includable in the decedent’s gross_income under the decedent’s method_of_accounting before death and which were received by the taxpayer as the decedent’s successor_in_interest kitch v commissioner supra pincite see sec_691 sec_1_691_a_-1 income_tax regs ird must be included in the gross_income of a person who acquires from the decedent the right to receive the amount by bequest devise or inheritance if the amount is received after a distribution by the decedent’s estate of such right sec_691 see sec_1_691_a_-2 income_tax regs we conclude that the payments received by petitioner in accordance with the agreement constitute ird under sec_691 first payments received in accordance with an agreement not to compete are includable in gross_income see 58_tc_1038 revrul_69_643 1969_2_cb_10 second the agreement vested decedent with a legally enforceable right to receive monthly payments over a year period third the value of the unexpired portion of the agreement was not included in decedent’s gross_income before his death lastly decedent’s estate distributed and petitioner became a successor_in_interest to one-third of the unexpired portion of the agreement accordingly we hold that the payments received by petitioner constitute ird and are includable in petitioner’s gross_income for his tax_year the character of an item of ird to the successor is the same character as the item would have had in the decedent’s hands if the decedent had lived and received such amount sec_691 kitch v commissioner supra pincite payments received pursuant to an agreement not to compete are ordinary_income in the year of receipt see kinney v commissioner supra pincite- revrul_69_643 1969_2_cb_10 accordingly we hold that the character of the payments received by petitioner was that of ordinary_income we next address whether petitioner received a step-up_in_basis of percent of the value of the payments sec_1014 generally provides that the basis in property_acquired_from_a_decedent shall be stepped up to the fair_market_value of the property at the date of the decedent’s death however sec_1014 specifically excludes the application of sec_1014 to property representing ird under sec_691 because the payments received by petitioner constitute ird we accordingly hold that petitioner did not receive a stepped-up_basis of percent of the value of the payments see rollert residuary_trust v commissioner supra pincite ii state_income_tax petitioner deducted state_income_tax of dollar_figure on his federal_income_tax return during petitioner received a decedent’s estate did not pay estate_tax with respect to the inclusion of percent of the payments in decedent’s gross_estate therefore petitioner is not eligible for a deduction_for_estate_tax paid under sec_691 state_income_tax refund of dollar_figure which he did not report as income on his federal_income_tax return in controversy is whether petitioner’s refund of dollar_figure is includable in his gross_income the tax_benefit_rule dictates that refunds of state and local_taxes are includable in gross_income in the year received to the extent they reduced the taxpayer’s income_tax_liability for the prior year see 119_tc_317 kadunc v commissioner tcmemo_1997_92 petitioner received an itemized_deduction of dollar_figure with respect to his state_income_tax which reduced his federal_income_tax liability therefore pursuant to the tax_benefit_rule petitioner must include his dollar_figure refund of state_income_tax in his gross_income and we so hold in summary we hold that the payments received by petitioner constitute income_in_respect_of_a_decedent further because petitioner did not receive a step-up_in_basis with respect to the payments the full amounts of the payments are includable in petitioner’s gross_income and are ordinary in character lastly we hold that petitioner’s state_income_tax refund is includable in his gross_income to the extent not herein discussed we have considered all other arguments made by the parties and conclude that they are moot or without merit decision will be entered for respondent


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 ----------------------------------------------------- ----------------------------------------- telephone number -------------------- refer reply to cc psi b04 plr-118029-13 date november legend decedent spouse date date county court personal representative dear ------------ ---------------------------------------------------- -------------------------- ----------------------- ----------------------- -------------------------------------------- ---------------- this letter responds to your personal representative’s letter of date requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the election under sec_2010 of the internal_revenue_code code a portability election to allow a decedent’s surviving_spouse to take into account that decedent’s deceased spousal unused exclusion dsue amount the facts and representations submitted are summarized as follows decedent died on date survived by spouse date is a date after the effective date of the amendment to sec_2010 to provide for portability of a dsue amount to a surviving_spouse to obtain the benefit of portability of decedent’s dsue amount to spouse decedent’s estate was required to file form_706 united_states estate and generation-skipping_transfer_tax return on or before the date that is months after decedent’s date of death or the last day of the period covered by an extension decedent’s form_706 was due on date but the estate did not file a form_706 to make the portability election the estate discovered its failure to elect portability after the due_date for making the election plr-118029-13 county court appointed personal representative as the personal representative for the estate personal representative represents that the value of decedent’s gross_estate is less than the basic exclusion amount in the year of decedent’s death and that during her lifetime decedent made no taxable_gifts personal representative requests an extension of time pursuant to sec_301_9100-3 to elect portability of decedent’s dsue amount pursuant to sec_2010 law and analysis sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2010 provides that a credit of the applicable credit_amount shall be allowed to the estate of every decedent against the tax imposed by sec_2001 sec_2010 provides that the applicable credit_amount is the amount of the tentative_tax that would be determined under sec_2001 if the amount with respect to which such tentative_tax is to be computed were equal to the applicable_exclusion_amount on date congress amended sec_2010 effective for estates of decedents dying and gifts made after date to allow portability of a decedent’s unused applicable_exclusion_amount between spouses tax relief unemployment insurance reauthorization and job creation act of pub_l_no sec_303 124_stat_3296 sec_2010 provides that the applicable_exclusion_amount is the sum of the basic exclusion amount and in the case of a surviving_spouse the dsue amount sec_2010 generally provides that the basic exclusion amount is dollar_figure to be adjusted for inflation annually after calendar_year sec_2010 defines the dsue amount to mean the lesser_of a the basic exclusion amount or b the excess of -- i the applicable_exclusion_amount of the last deceased spouse of the surviving_spouse over ii the amount with respect to which the tentative_tax is determined under sec_2001 on the estate of such deceased spouse sec_2010 provides that a dsue amount may not be taken into account by a surviving_spouse under sec_2010 unless the executor of the estate of the deceased spouse files an estate_tax_return on which such amount is computed and makes an election on such return that such amount may be so taken into account the election once made shall be irrevocable no election may be made if such return is filed after the time prescribed by law including extensions for filing such return plr-118029-13 sec_2010 provides that the secretary shall prescribe regulations as may be necessary or appropriate to implement sec_2010 sec_6075 prescribes that returns made under sec_6018 relating to estate_taxes shall be filed within months after the date of the decedent’s death sec_6018 provides that in all cases where the gross_estate at the death of a citizen or resident exceeds the basic exclusion amount in effect under sec_2010 for the calendar_year which includes the date of death the executor shall make a return with respect to the estate_tax imposed by subtitle b of the code sec_6018 provides in part that the basic exclusion amount referred to in sec_6018 shall be reduced but not below zero by the sum of -- a the amount of the adjusted_taxable_gifts within the meaning of sec_2001 made by the decedent after date plus b the aggregate amount allowed as a specific exemption under sec_2521 as in effect before its repeal by the tax reform act of with respect to gifts made by the decedent after date sec_20_2010-2t a of the estate_tax regulations provides that to allow a decedent’s surviving_spouse to take into account that decedent’s dsue amount the executor of the decedent’s estate must elect portability of the dsue amount on a timely-filed form_706 sec_20_2010-2t a provides that an estate that elects portability will be considered for purposes of subtitle b and subtitle f of the code to be required to file a return under sec_6018 accordingly the due_date of an estate_tax_return required to elect portability is months after the decedent’s date of death or the last day of the period covered by an extension if an extension of time for filing has been obtained sec_20_2010-2t a provides that upon the timely filing of a complete and properly-prepared estate_tax_return an executor of an estate of a decedent survived by a spouse will have elected portability of the decedent’s dsue amount unless the executor chooses not to elect portability and satisfies the requirements for the election not to apply in sec_20_2010-2t a i sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that the term statutory election means an election whose due_date is prescribed by statute the term regulatory election means an election whose due_date is prescribed by a regulation published in the federal plr-118029-13 register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-2 and sec_301_9100-3 provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain statutory and regulatory elections sec_301_9100-3 provides for an extension of time for making regulatory elections that do not meet the requirements for an automatic_extension of time under sec_301_9100-2 a request for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election sec_2010 sec_6075 and sec_6018 when construed jointly prescribe a due_date for electing portability for those estates required to file an estate_tax_return under sec_6018 accordingly with respect to those estates the portability election is a statutory election as defined in sec_301_9100-1 however when an executor is not required to file an estate_tax_return under sec_6018 the code does not specify a due_date for an estate_tax_return filed for the purpose of making a portability election rather the regulations under sec_20_2010-2t a which are applicable to all estates electing portability specify that the portability election must be made on a timely-filed form_706 accordingly with respect to estates not required to file an estate_tax_return under sec_6018 the portability election is a regulatory election as defined in sec_301_9100-1 personal representative represents that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is not required to file an estate_tax_return under sec_6018 under these facts the commissioner has discretionary authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly we grant an extension of time of days from the date of this letter in which to elect portability under sec_2010 the election should be made by filing a complete and properly-prepared form_706 and a copy of this letter within days from the date of this letter to the cincinnati service_center at the following address internal_revenue_service cincinnati service_center stop cincinnati oh for purposes of plr-118029-13 electing portability a form_706 filed by decedent’s estate within days from the date of this letter will be considered to be timely filed in accordance with the power_of_attorney on file with this office we have sent a copy of this letter to your authorized representatives except as expressly provided herein we neither express nor imply any opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination if it is later determined that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is required to file an estate_tax_return pursuant to sec_6018 the commissioner is without authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely _________________________ james f hogan chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter


t c no united_states tax_court donald decleene and doris decleene petitioners v commissioner of internal revenue respondent docket no filed date p had operated his business on the m street property since in p purchased the unimproved l drive property as replacement_property in date p and wlc who wished to acquire m street agreed that m street and unimproved l drive were of equal value dollar_figure p quitclaimed title to l drive to wlc for a deferred cash consideration of dollar_figure to be paid at a second closing wlc agreed to build a building on l drive to p’s specifications and in date to reconvey l drive to p with the substantially completed building on it in exchange for m street these transactions closed as agreed while wlc held title to l drive p retained beneficial_ownership thereof and was responsible for all transaction costs and carrying charges construction was financed by a note and mortgage guaranteed by p that were nonrecourse as to wlc and p assumed personal liability for them at the second closing when wlc paid p the cash consideration of dollar_figure held the subject transactions were a sale of m street to wlc for dollar_figure as determined by r rather than a sale of unimproved l street followed by a reverse_like-kind_exchange of m street for improved l street under sec_1031 i r c as reported by p because p never divested himself of beneficial_ownership of l street p could not acquire improved l street as replacement_property in exchange for his relinguishment of m street to wlc held further p is not liable for the accuracy-related_penalty under sec_6662 i r c brian r mudd for petitioners michael j calabrese for respondent beghe judge respondent determined for the taxable_year that petitioners had a federal_income_tax deficiency of dollar_figure and were liable for a sec_6662 accuracy-related_penalty of dollar_figure the sole substantive issue for decision is whether the subject transactions gualified as a taxable sale of the lawrence drive property and a like-kind sec_1031 exchange of the mcdonald street property as petitioners reported them or was a taxable sale of the mcdonald street property as respondent unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure determined we uphold respondent’s determination that the transactions resulted ina sale of the mcdonald street property but we hold for petitioners on the penalty issue findings_of_fact some of the facts have been stipulated and are so found the stipulations of fact and the accompanying exhibits are incorporated herein by this reference petitioners are husband and wife who resided in green bay wisconsin at the time they filed their petition since petitioner donald decleene petitioner has owned and operated a trucking truck repair business in and petitioner purchased improved real_property located on mcdonald street green bay the mcdonald street property de used the mcdonald street property for his business operations in petitioners owned and worked as employees of decleene truck repair and refrigeration inc refrigeration petitioner served as president refrigeration installs and repairs truck refrigeration units and performs general truck repairs through date refrigeration rented the mcdonald street property from petitioner as its business_premises petitioner computed his adjusted_basis for the mcdonald street property including the depreciated cost of improvements as being dollar_figure at the time he disposed of that property on date in petitioner was looking for land to which he could move his business on date petitioner purchased dollar_figure acres of unimproved real_property on lawrence drive in de pere wisconsin the lawrence drive property a suburb of green bay petitioner described the lawrence drive property as a very good spot that he took advantage of petitioner promptly sold dollar_figure acres of the lawrence drive property to an unrelated corporation petitioner’s adjusted_basis of the lawrence drive property that he purchased and retained with allocated fees and other closing costs was dollar_figure petitioner partially financed the purchase of the lawrence drive property with a dollar_figure loan from bank one green bay bank one green bay received petitioner’s note and a mortgage on the lawrence drive property as security for its loan by petitioner was ready to move his business to a new_building to be constructed on the lawrence drive property after petitioner acquired the lawrence drive property the western lime and cement co wlc expressed interest in acquiring petitioner's mcdonald street property petitioner discussed wlc's interest in the mcdonald street property with his accountant the accountant suggested that petitioner could structure a like-kind_exchange in which he would gquitclaim the lawrence drive property to wlc after which wlc would convey back to petitioner the lawrence drive property with a new_building built thereon to petitioner's specifications in exchange for the mcdonald street property on date wlc made an offer---prepared by petitioner’s attorney--which petitioner accepted to purchase the lawrence drive property for dollar_figure petitioner’s acceptance contained an undertaking to transfer building permit to buyer on or before date on date petitioner gquitclaimed title to the lawrence drive property to wlc and wlc gave petitioner a fully nonrecourse noninterest bearing one payment note and mortgage on the lawrence drive the copy of the building permit included as exhibit 39-j in paragraph of the supplemental stipulation of facts replaces paragraph of the stipulation of facts which stated as follows prior to his date quit claim of title to the lawrence drive property to the western lime cement co a permit was obtained in donald decleene’s name for construction of a building on the lawrence drive property exhibit 39-j is a photocopy that bears a variety of dates it was originally submitted to and preliminarily approved by the city of depere building inspector on date it bears the signature of the owner agent michael decleene v p date it was recorded and bears the notation site plan approved by plan commission on the name of petitioner as owner his mailing address and telephone number appear on the line of the permit form provided for that information however the name mailing address and telephone number of wlc have been written in above those of petitioner on date green bay abstract title company inc the title company had issued a title commitment with wlc as the proposed insured on the owner’s policy in the insured amount of dollar_figure and bank one green bay as the proposed insured on the loan policy in the insured amount of dollar_figure property in the amount of dollar_figure on that same day petitioner assigned to bank one green bay the wlc dollar_figure note and mortgage the wlc dollar_figure note was due by its terms upon the closing of an exchange transaction between wlc and petitioner or months from the date of the note whichever is earlier on date wlc and petitioner also executed the exchange_agreement regarding the mcdonald street property and the lawrence drive property the exchange_agreement was drafted by petitioner’s attorney with input from wlc’s attorney paragraph of the exchange_agreement required petitioner to convey by warranty deed the mcdonald street property to wlc free and clear of all liens and encumbrances in exchange for wlc’s paying its dollar_figure note to petitioner and conveying the lawrence drive property back to petitioner by quitclaim_deed paragraph of the exchange_agreement provided that petitioner would pay all costs relating to the transfers of the mcdonald street and lawrence drive properties in paragraph of the exchange_agreement petitioner made comprehensive warranties to wlc with respect to the mcdonald street property but wlc expressly disavowed making any warranties to petitioner with respect to the lawrence drive property the exchange_agreement provided that wlc would construct a building on the lawrence drive property to petitioner's specifications the exchange_agreement provided that petitioner at the closing of the exchange would pay an amount representing the costs of the building on the lawrence drive property as well as insurance premiums real_estate_taxes interest and all other soft costs wlc might incur incident to the construction of the building petitioner in the exchange_agreement agreed to indemnify and hold wlc harmless against any damages sustained or incurred in connection with the construction and financing of the lawrence drive property petitioner and wlc intended to close on the exchange_agreement upon completion of construction of the building on the lawrence drive property but not later than date bank one green bay provided financing for the construction of the building on the lawrence drive property on date bank one green bay agreed to a construction loan of dollar_figure naming wlc as borrower and petitioner as guarantor this loan was nonrecourse as to wlc on the same day wlc executed a note and mortgage to bank one green bay which provided that wlc had no personal liability on the note secured_by the mortgage and that the lender would look solely to the lawrence drive property securing the mortgage petitioner guaranteed the dollar_figure construction loan bank one green bay considered petitioner the source of repayment of the date dollar_figure construction loan in connection with that loan bank one green bay never obtained any financial statements from wlc the check of the creditworthiness of wlc by the bank one green bay loan officer consisted of calling a branch bank to discuss wlc’s business reputation the dollar_figure note for the date bank one green bay construction loan required no interest or principal payments during the time that wlc was expected to be the named borrower on the note the note did not require payment of interest until date on date the following other events occurred petitioner gave bank one green bay a new mortgage on the mcdonald street property securing a total obligation of dollar_figure consisting of both his date dollar_figure note and the wlc nonrecourse note of dollar_figure that he had guaranteed wlc accepted the commitment of bank one green bay to provide a dollar_figure loan for financing construction of the building on the lawrence drive property wlc executed a corporate borrowing resolution authorizing it to borrow from bank one green bay wlc executed an application to bank one green bay for a standby_letter_of_credit in the amount of dollar_figure in favor of the title company which was delegated the task of making progress payments to the contractor under the construction_contract the bank issued its irrevocable standby credit in favor of the title company in that amount on date landmark building systems ltd landmark entered into a lump sum construction_contract in the amount of dollar_figure subject_to certain adjustments with wlc to construct the building on the lawrence drive property the contract named petitioner mike decleene petitioners’ son who works in the family business and or a representative of excel engineering as owner's representative as owner’s representative petitioner and mike decleene had general authority including the right to approve changes in design or construction to inspect and approve workmanship and materials to visit the construction site and to determine compliance with the contract although the standby_letter_of_credit and the construction_contract do not expressly so state progress payments to the contractor were to be made only with the approval of petitioner or michael decleene as owner’s representative excel engineering played a role in the design of the building but lacked actual authority to sign off as owner’s representative -- - the construction_contract called for substantial completion by date between september and date landmark worked on the construction of the building on the lawrence drive property and substantially completed the building to petitioner's specifications on date day prior to execution and closing of the assumption release and escrow agreement described below bank one green bay executed a satisfaction of mortgage for the mortgage given by wlc to petitioner that petitioner had assigned to the bank in connection with petitioner’s quitclaim of the lawrence drive property to wlc on date on date bank one green bay wlc and petitioner executed the assumption release and escrow agreement which provided that petitioner assumed and became personally obligated to the bank for all obligations of wlc arising out of the construction note and mortgage notwithstanding their nonrecourse language petitioner agreed to be responsible for completion of the construction_project and wlc agreed to pay petitioner dollar_figure for the mcdonald street property petitioner undertook to use dollar_figure of the dollar_figure received from wlc to pay a note due the bank in the amount of dollar_figure which had been secured_by mortgages on both the lawrence drive property and the mcdonald street property and to escrow the remainder with the bank to pay real_estate_taxes and any special_assessments on the mcdonald street property and to reduce the balance of the construction loan note and mortgage to dollar_figure with any surplus of the escrowed funds to be delivered to petitioner bank one green bay agreed to release any liens that it may have on the property located on mcdonald street on date petitioner formally assumed as borrower what had been wlc’s nonrecourse dollar_figure bank one green bay note of date petitioner conveyed the mcdonald street property to wlc by warranty deed wlc quitclaimed to petitioner its interest in the lawrence drive property wlc directly paid petitioner dollar_figure by check to petitioner’s order drawn on m i first national bank of west bend wisconsin petitioner endorsed this check pay only to the order of bank one-green bay petitioner and wlc had agreed in the exchange_agreement that the mcdonald street property including improvements and the unimproved lawrence drive property each had a value of dollar_figure the quitclaim_deed of the lawrence drive property from petitioner to wlc and the warranty deed of the mcdonald street property from petitioner to wlc each showed that real_estate transfer_tax of dollar_figure had been paid based on a value of dollar_figure the gquitclaim deed from wlc to petitioner of the title to the improved lawrence drive property showed that real_estate transfer_tax of dollar_figure had been paid based on a value of dollar_figure although petitioner had a general desire to complete his acquisition of the improved lawrence drive property as soon as possible he didn’t particularly care whether the closing occurred before or after date wlc wished to have the closing occur before date because it wanted the lawrence drive property removed from its books for insurance valuation purposes before the end of the year on their return petitioners treated the subject transactions between petitioner and wlc as a sale of the unimproved lawrence drive property and a 1like-kind exchange of the mcdonald street property for the improved lawrence drive property petitioners reported no gain_or_loss on the disposition of the mcdonald street property they reported a dollar_figure short-term_capital_gain dollar_figure gross_sales price less dollar_figure basis on their quitclaim transfer of the lawrence drive property to wlc which is described in schedule d of their return as a sale of investment land although these amounts do not computationally coincide in all respects with the transfer_tax figures shown on the buyer’s and seller’s closing statements those statements confirm that the transfer_taxes on the subject transactions were paid_by petitioner petitioners' return includes a form_8824 like-kind_exchanges which states that petitioners exchanged land and building for land and building the return discloses no other facts regarding the transactions between petitioner and wlc respondent used petitioner’s dollar_figure adjusted_basis figure for the mcdonald street property in computing the long-term_capital_gain on the sale of the mcdonald street property determined in the deficiency_notice however on audit of petitioners’ return an adjusted_basis of dollar_figure had been established respondent’s deficiency_notice did not back out the gain petitioners had reported on petitioner’s guitclaim transfer of the unimproved lawrence drive property to wlc notwithstanding that under respondent’s theory of the case the lawrence drive property has never been disposed of by petitioner on date bank one green bay wlc and petitioner executed an amendment to the assumption release and escrow agreement the amendment recites that the original of that agreement contained a scrivener’s error and recites that wlc would pay petitioner dollar_figure in satisfaction of the note and mortgage on the lawrence drive property that the lawrence drive property is exchanged per the exchange_agreement for the mcdonald street property that petitioner will use dollar_figure of the dollar_figure received from wlc to pay petitioner’s dollar_figure note to the bank and that the balance of dollar_figure will be escrowed with the bank to pay real_estate_taxes and any special_assessments on the lawrence drive property emphases supplied and to reduce the balance of the construction loan and mortgage to dollar_figure the amendment also sets forth a revision of the provision regarding release of liens by bank one green bay reading as follows the bank agrees to release any liens that it may have on the property located pincite lawrence drive de pere wisconsin that are the obligation of the company wlc and against macdonald sic street green bay wisconsin that are the obligation of decleene the terms of the foregoing transactions among wlc and petitioner and bank one green bay assured that wlc would pay no amounts thereunder until it received the mcdonald street property that wlc would have no personal liability with respect to the lawrence drive property or financing while the lawrence drive property was titled in its name or at any time thereafter and that all transaction and other costs with respect to the mcdonald street and lawrence drive properties would be paid_by petitioner opinion sec_1001 provides that the entire gain_or_loss on the sale_or_exchange of property shall be recognized section -- - a provides for nonrecognition_of_gain_or_loss on the exchange of certain types of like-kind_property including real_property held for productive use in trade_or_business or for investment sec_1031 in effect provides that if the property received in an exchange otherwise gqualifying for nonrecognition of gain under sec_1031 includes money or other_property boot then any gain to the recipient shall be recognized but not in excess of the boot was mcdonald street sold or exchanged the question posed by respondent’s determination is whether the subject transactions were a taxable sale to wlc of the mcdonald street property as respondent determined or instead were a taxable sale of the unimproved lawrence drive property to wlc followed months later by petitioner’s transfer of the mcdonald street property to wlc in a like-kind_exchange for wlc’s clearly the lawrence drive property in both its unimproved and improved states and the mcdonald street property were like-kind properties within the meaning of sec_1031 sec_1 a --1 b income_tax regs states definition of like_kind as used in sec_1031 the words like_kind have reference to the nature or character of property and not to its grade or guality the fact that any real_estate involved is improved or unimproved is not material for that fact relates only to the grade or quality of the property and not to its kind or class -- - reconveyance to petitioner of the lawrence drive property---now substantially improved---as petitioners reported the tax significance of the answer to the question stems from the disparity in the adjusted bases of the mcdonald street and lawrence drive properties in petitioner’s hands mcdonald street which petitioner purchased in had an adjusted_basis in his hands substantially lower than his cost of lawrence drive which he purchased in petitioner therefore reported as the taxable sale not his permanent relinquishment to wlc of the low-basis mcdonald street property but rather the first leg of the repo transaction that temporarily parked the high-basis lawrence drive property with wlc legal and administrative background the primary reason that has been given for deferring recognition of gain under sec_1031 on exchanges of like- kind property is that the exchange does not materially alter the taxpayer’s economic position the property received in the exchange is considered a continuation of the old property still unliquidated see eg 71_tc_54 however sec_1031 does not go so far in implementing this notion as to be a reinvestment rollover provision like sec_1033 or sec_1034 a sale of qualified_property for cash requires that gain_or_loss be recognized under the general_rule of sec_1001 such a sale does not become part of a qualifying exchange under sec_1031 even though the cash received on the sale is immediately invested in like property compare 320_f2d_333 4th cir with 44_tc_126 affd per curiam 377_f2d_534 9th cir petitioners remind us and we are well aware--as we stated in another sec_1031 exchange case in which we held against the taxpayer--that notwithstanding the familiar and long- standing rule that exemptions are to be narrowly or strictly construed sec_1031 has been given a liberal interpretation 94_tc_582 citing 69_tc_905 affd 632_f2d_1171 5th cir the courts have exhibited a lenient attitude toward taxpayers in like-kind_exchange cases particularly toward deferred exchanges see eg 602_f2d_1341 9th cir the commissioner has also played a facilitating role by issuing regulations that provide safe harbors for deferred exchanges see sec_1_1031_k_-1 income_tax regs under the statutory limitations imposed on such exchanges by sec_1031 as enacted by deficit_reduction_act_of_1984 publaw_98_369 sec -- - b 98_stat_596 these regulations with their provisions for use of third-party qualified intermediaries as accommodation titleholders who will not be considered the taxpayer’s agent in doing the multiparty deferred exchanges permitted by the regulations have encouraged the growth of a new industry of third-party exchange facilitators the subject transactions present a case of first impression in this court they reflect the effort of petitioner and his advisers to implement a so-called reverse exchange directly with wlc without the participation of a third-party exchange facilitator reverse exchanges have been described as transactions in which the taxpayer locates and identifies the replacement_property and acquires it or causes it to be acquired on his behalf by an exchange facilitator before he is ready to transfer the property to be relinguished in exchange the preamble to the deferred_exchange regulations sec_1_1031_k_-1l1 income_tax regs made clear the commissioner’s view that sec_1031 and the deferred-exchange regulations do not apply to reverse exchanges see t d 1991_1_cb_150 the commissioner has recently responded to industry and practitioner requests for guidance by publishing a revenue see eg american bar association section on taxation committee on sales exchanges and basis report on the continued procedure describing the commissioner’s conditions for qualifying reverse exchanges for nonrecognition of gain under sec_1031 see revproc_2000_37 2000_40_irb_308 like the deferred_exchange regulations that implement sec_1031 a the revenue_procedure provides for third-party qualified intermediaries as exchange accommodation titleholders in carrying out the qualified exchange accommodation arrangements whose use will qualify reverse exchanges for nonrecognition_of_gain_or_loss under sec_1031 like the deferred_exchange regulations the revenue_procedure provides a safe_harbor it states that the service recognizes that ‘parking’ transactions can be accomplished outside of the safe_harbor provided this revenue_procedure but that no inference is intended with respect to the federal_income_tax treatment of ‘parking’ transactions that do not satisfy the terms of the safe_harbor revproc_2000_37 2000_40_irb_308 because the revenue_procedure is prospectively effective it does not apply to the case at hand see id we therefore have continued application of sec_1031 to reverse exchanges j real est tax handler pricewaterhouse coopers forwards proposed guidance on reverse exchanges tnt doc date safe_harbor guidance for reverse like- kind exchanges to come soon irs official promises highlights and documents date - - recourse to general principles of tax law to answer the question posed by repondent’s determination analysis and conclusion in the case at hand petitioner did not just locate and identify the lawrence drive property in anticipation of acquiring it as replacement_property in exchange for the mcdonald street property that he intended to relinquish he purchased the lawrence drive property without the participation of an exchange facilitator a year or more before he was ready to relinguish the mcdonald street property and relocate his business to the lawrence drive property in the following year petitioner transferred title to the lawrence drive property subject toa reacquisition agreement---the exchange agreement---not to a third- party exchange facilitator but to wlc the party to which he simultaneously obligated himself to relinguish the mcdonald street property in forgoing the use of a third party and doing all the transfers with wlc petitioner and his advisers created an inherently ambiguous situation the ambiguity is exacerbated by the fact that petitioner and wlc agreed in the exchange_agreement that the mcdonald street property and the unimproved lawrence drive property were of equal value dollar_figure so when wlc paid petitioner dollar_figure--at the same time that he permanently relinguished the mcdonald street property to wlc--was the payment received by petitioner from wlc the sale price of the mcdonald street property at the december closing as respondent determined or was it the deferred purchase_price on petitioner’s september quitclaim transfer of title to the unimproved lawrence drive property which petitioner received back on december from wlc with the substantially completed building that had been erected on it in the intervening months as petitioner reported our approach to answering these questions is to determine for tax purposes whether wlc became the owner of the lawrence drive property during the 3-month period it held title to the property while the building was being built on it to petitioner’s specifications if petitioner remained the owner of the lawrence drive property during this period petitioner could not engage in a qualified like-kind_exchange of the mcdonald street property for the lawrence drive property and the dollar_figure payment received by petitioner would be deemed the sale price of the mcdonald street property a taxpayer cannot engage in an exchange with himself an exchange ordinarily requires a reciprocal transfer of property as distinguished from a transfer of property for a money consideration sec_1 d income_tax regs wlc did not acquire any of the benefits_and_burdens_of_ownership of the lawrence drive property during the 3-month period it held title to that property wlc acquired no equity_interest in the lawrence drive property wlc made no economic outlay to acquire the property wlc was not at risk to any extent with respect to the lawrence drive property because the obligation and security_interest it gave back on its purported acquisition of the property were nonrecourse wlc merely obligated itself to reconvey to petitioner prior to yearend the lawrence drive property with a substantially completed building on it that had been built to his specifications and that pursuant to prearrangement he was obligated to take and pay for the parties treated wlc’s holding of title to the lawrence drive property as having no economic significance the transaction was not even used as a financing device no interest accrued or was paid on the nonrecourse note and mortgage which assured that petitioner would get back the lawrence drive property after it had been improved wlc had no exposure to real_estate_taxes that accrued with respect to the property while wlc held the title all such taxes were to be paid_by petitioner no account was to be taken under the terms of the reacquisition agreement of any value that had been added to the property by reason of the building constructed in the interim the - - construction was financed by petitioner through the bank he was accustomed to dealing with petitioner through his guaranty and reacquisition obligation was at all times at risk with respect to the lawrence drive property wlc had no risk or exposure with respect to the additional outlay of funds required to finance construction of the building wlc had no potential for or exposure to any economic_gain_or_loss on its acquisition and disposition of title to the lawrence drive property the reality of the subject transactions as we see them is a taxable sale of the mcdonald street property to wlc petitioner’s purchase in of the lawrence drive property on which he intended to build a new facility for his business as the replacement for his mcdonald street property put him in the position of arranging to improve the lawrence drive property as well as to sell the mcdonald street property petitioner’s prior gquitclaim transfer to wlc of title to the unimproved lawrence drive property which petitioners try to persuade us was petitioner’s taxable sale amounted to nothing more than a parking transaction by petitioner with wlc which contractually bound itself to acquire from petitioner the mcdonald street property that petitioner was going to relinguish permanently as well as to reconvey to petitioner the lawrence drive property as soon as the facility to be built thereon to his specifications was substantially completed the reconveyance to petitioner of the lawrence drive property was not part of an exchange by petitioner of the mcdonald street property that reconveyance of the lawrence drive property to petitioner merely reunited in his hands the bare_legal_title to the lawrence drive property with the beneficial_ownership therein that he had continued to hold all along while the building that he obligated himself to pay for was being built to his specifications in support of their claim that petitioner exchanged the mcdonald street property for the improved lawrence drive property petitioners point out that the improved lawrence drive property was different from the unimproved lawrence drive property that he acquired in and whose title he transferred to wlc on date petitioners state petitioners sold unimproved land and reported the transaction and in the exchange got back improved real_estate they could continue their business operation in it’s true that unimproved property and improved property are different from each other they are not similar_or_related_in_service_or_use for the purpose of the sec_1033 rollover provision see sec_1_1033_a_-2 income_tax regs however the transformation of the lawrence - - drive property while title was parked with wlc does not gainsay our conclusion in substance petitioner never disposed of the lawrence drive property and remained its owner during the 3-month construction_period because the transfer of title to wlc never divested petitioner of beneficial_ownership having set forth our analysis and conclusion we now address the authorities cited by petitioners as favoring their position or as being distinguishable authority in the court_of_appeals for the seventh circuit the only case in the seventh circuit---the circuit to which any appeal would lie in the case at hand--that the parties have petitioners contend that their advisers relied on two private letter rulings in structuring the subject transactions priv ltr rul date which they characterize as nearly identical to the facts in our case and priv ltr rul date which they cite as virtually directly on point even goes farther than our case on how a transaction can be structured petitioners’ contentions are unavailing not only does sec_6110 provide that private letter rulings cannot be cited as precedent but unlike the case at hand the other party to the transaction in both private letter rulings had the risks of ownership during the relevant time period similarly revrul_75_291 1975_2_cb_333 and revrul_77_297 1977_2_cb_304 cited in priv ltr rul don’t help petitioners not only does this court regard published rulings as having no precedential value see 613_f2d_770 9th cir affg on this issue t cc intel corp consol subs v commissioner 102_tc_616 86_tc_243 but the facts of both rulings like priv ltr rul date are distinguishable from the case at hand in the same dispositive respect - - brought to our attention is 189_f2d_14 7th cir affg a memorandum opinion of this court dated date petitioners try to distinguish the bloomington coca-cola bottling co case but we find it highly instructive the taxpayer had originally reported the transaction in issue as a sale at a loss in the year it occurred but contended--for and excess_profits_tax purposes---that the transaction had been an exchange under the statutory predecessor of sec_1031 in which no loss had been recognized the taxpayer’s change in position was attributable to its desire not to reduce its excess_profits_tax base the taxpayer had outgrown its old bottling plant and hired a contractor to erect a new plant on the taxpayer’s land at an agreed cost of dollar_figure included in the consideration paid_by the taxpayer to the contractor was the old bottling plant and the parcel of land on which it was located at an agreed value of dollar_figure plus cash of dollar_figure the taxpayer reported on its income_tax return a loss of approximately dollar_figure on the sale of the old plant as this court pointed out in its memorandum opinion here the contractor was not the owner of the land upon which the new_building was constructed never owned the new_building and never conveyed the new_building to the petitioner the tax_court held--and the court_of_appeals affirmed--that the transaction was in effect the purchase of a new facility and not an exchange of unimproved property for improved property inasmuch as the taxpayer already owned the land on which the new plant was constructed the contractor could not be a party to an exchange with the taxpayer because the contractor was never the owner of the property that the taxpayer received in the so-called exchange the contractor was merely acting as a service provider in the construction of the new plant the only real_property to which the contractor acquired title was the land and old plant that it received as part payment for the construction services it provided the subject transactions are similar to those in bloomington coca-cola bottling co v commissioner supra in significant respects the taxpayer sold its old bottling plant petitioner sold the mcdonald street property to the only other party it was dealing with the contractor wlc the taxpayer hired a contractor to build a new facility on land that it owned in the case at hand petitioner’s conveyance of title to the unimproved lawrence drive property and the conveyance of that property back with a substantially completed building on it are to be disregarded wlc never acquired any of the benefits_and_burdens_of_ownership of the lawrence drive property wlc acquired no equity or beneficial_interest in the lawrence drive property no - - risk of loss or opportunity for gain no exposure to real_estate_taxes or other carrying charges no liability even for interest on its nonrecourse secured obligation during the interim period all we are left with as in bloomington coca-cola bottling co is that a building was built for petitioner according to his specifications on land that he owned and petitioner was obligated to pay for that building the taxpayer in bloomington coca-cola bottling co and petitioner also sold their old property to the party with whom they dealt in connection with the building of the new facility ’ authorities relied on by petitioners we now turn to the cases petitioners rely on to support their contention that petitioner exchanged the mcdonald street property for the substantially improved lawrence drive property 39_tc_608 coupe ’ we have found no other like-kind_exchange cases in the seventh circuit that bear on the issue in the case at hand however another seventh circuit case worth noting is 249_f2d_375 7th cir which applies the same analysis as the line of sixth circuit cases culminating in 467_f2d_1098 6th cir which hold that repo transactions in tax-exempt_bonds are to be treated as secured loans so that the purchaser in form is treated as a lender not entitled to exclude the tax- exempt bond interest from its income this is because the original_seller remains the owner of the bonds for tax purposes see also 367_f2d_823 7th cir affg tcmemo_1965_272 commercial capital corp v commissioner tcmemo_1968_186 compare revrul_74_27 1974_1_cb_24 repurchase obligation with revrul_82_144 1982_2_cb_34 separately purchased and paid-for put - - v commissioner 52_tc_394 65_tc_6 69_tc_905 affd 632_f2d_1171 5th cir fredericks v commissioner tcmemo_1994_27 we preface our review of these cases by acknowledging that they all reflect to some degree the liberal interpretation in favor of taxpayers that this court and other courts have applied in cases under sec_1031 we also observe that none of these cases concerned a reverse exchange and that all of them are highly fact specific and therefore distinguishable from the case at hand petitioners have read these cases selectively emphasizing in each of them what the taxpayer got away with in so doing petitioners have lost sight of the cumulative adverse effect on their position of all the facts in the case at hand which have led to our conclusion that wlc never acquired beneficial_ownership of the lawrence drive property it would therefore be a sterile exercise to engage in a detailed recitation of the facts of these cases and a point--by-point refutation of their applicability to the case at hand a couple of highlights from j h baird publg co v commissioner supra will suffice petitioners try to make something of the fact that the court in j h baird publg co v commissioner t c pincite distinguished 189_f2d_14 7th cir on the ground that it was clear that the contractor did not own the other_property which it was claimed was transferred to the taxpayer in the exchange as already indicated we have found dispositive in the case at hand that wlc never acquired beneficial_ownership of the lawrence drive property wlc merely served as an accommodation party providing the parking place for legal_title to the lawrence drive property while petitioner remained the beneficial_owner before and after and throughout the 3-month focal period of the subject transactions when petitioner conveyed to wlc title to the lawrence drive property wlc became contractually bound to reconvey it and petitioner was bound to take it back prior to yearend not much more than months indeed under wisconsin law both parties were entitled to specific performance of the other party’s obligation see anderson v onsager n w 2d wis heins v thompson flieth l co n w wis it’s difficult to imagine commitments more binding than the reciprocal obligations of petitioner and wlc in the case at hand the conveyance and reconveyance of title to the lawrence drive we also observe that 39_tc_608 on which petitioners rely applied the concept of beneficial_ownership in the taxpayer’s favor petitioners have failed to persuade us that the concept of beneficial_ownership is an illegitimate importation into the tax law of qualified like-kind_exchanges --- - property must be disregarded as having no tax significance because at the end of the day petitioner ended up where he started with title to and beneficial_ownership of the lawrence drive property ’ computational questions petitioners point out that respondent’s deficiency_notice which made an upward adjustment of dollar_figure in long-term gain realized and recognized by petitioners on the disposition of the mcdonald street property which we have found to be the actual sale failed to back out the short-term gain of dollar_figure that petitioners reported on the transfer of title to the unimproved lawrence drive property petitioners’ point is well taken it should be addressed in the rule computation similarly other matters not completely resolved such as the calculation of additional costs paid_by petitioner in connection with the sale of the mcdonald street property as well as his adjusted_basis in that property should be addressed in the rule computation of the gain on the sale penalty question the subject transactions were structured by petitioner’s accountant and attorneys after petitioner presented them with the in so doing the subject transactions satisfy the requirements for application of what the court_of_appeals for the seventh circuit has characterized as the most restrictive and rigorous version of the step-transaction doctrine the binding_commitment_test 688_f2d_520 7th cir revg 76_tc_872 - - accomplished fact of his purchase of the lawrence drive property petitioners’ income_tax return prepared by petitioner’s accountant reported a taxable short-term gain of dollar_figure on the sale of investment land and reported a like-kind_exchange of land and building for land and building on form_8824 the disclosures were bare bones but adequate to trigger the audit that led to the deficiency_notice and the case at hand respondent determined that petitioners were liable for an accuracy-related_penalty under sec_6662 and b or sec_6662 imposes a 20-percent accuracy-related_penalty on the portion of an underpayment that is due to one or more causes enumerated in sec_6662 respondent relies on subsections b negligence or intentional disregard of rules or regulations or b substantial_understatement_of_income_tax petitioners argue they are not liable for the penalty petitioners point out that a certified_public_accountant outlined the subject transactions as they were carried out and prepared their return and that the deal was structured and the papers drawn by petitioners’ attorneys petitioners contend that they reasonably relied on professional advice in the preparation of their return and that they are entitled to relief under the exceptions that apply to a substantial_understatement negligence includes a failure to attempt reasonably to comply with the code see sec_6662 disregard includes a - - careless reckless or intentional disregard see id negligence is the failure to exercise due care or the failure to act as a reasonable and prudent person see 85_tc_934 no penalty is imposed for negligence or intentional disregard of rules or regulations or a substantial_understatement of income if the taxpayer shows that the underpayment is due to reasonable_cause and the taxpayer’s good_faith see sec_6664 sec_1_6662-3 sec_1_6664-4 income_tax regs reasonable_cause requires that the taxpayer have exercised ordinary business care and prudence as to the disputed item see 469_us_241 see also 110_tc_297 the good_faith reasonable reliance on the advice of an independent competent professional as to the tax treatment of an item may meet this requirement see united_states v boyle supra sec_1 b income_tax regs see also 125_f3d_551 7th cir affg tcmemo_1995_554 91_tc_396 affd without published opinion 940_f2d_1534 9th cir whether a taxpayer relies on advice and whether such reliance is reasonable depend on the facts and circumstances of the case and the law that applies to those facts and circumstances see sec_1_6664-4 income_tax regs a professional may render advice that may be relied upon reasonably - -- when he or she arrives at that advice independently taking into account among other things the taxpayer’s purposes for entering into the underlying transaction see sec_1_6664-4 i income_tax regs see also 414_f2d_749 4th cir affg tcmemo_1968_98 reliance is unreasonable when the taxpayer knew or should have known that the adviser lacked the regquisite expertise to opine on the tax treatment of the disputed item see sec_1_6664-4 income_tax regs in sum for a taxpayer to rely reasonably upon advice so as possibly to negate a sec_6662 accuracy-related_penalty determined by the commissioner the taxpayer must prove that the taxpayer meets each requirement of the following three-prong test the adviser was a competent professional who had sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment see ellwest stereo theatres inc v commissioner tcmemo_1995_610 see also rule a we conclude on the record before us that petitioners actually relied in good_faith on disinterested professional advisers who structured the transactions and prepared their return petitioners were justified in their reliance notwithstanding that we have upheld respondent’s determination -- - that the subject transactions did not qualify as a like-kind_exchange of the lawrence drive property accordingly we hold for petitioners on the penalty issue to give effect to the foregoing decision will be entered under rule