internal_revenue_service national_office technical_advice_memorandum december third party communication none date of communication not applicable number release date index uil no case-mis no ------------------------------------------ -------------------------------------------------------------------------------------------- tam-129412-04 cc psi b06 taxpayer's name taxpayer's address taxpayer's identification no years involved date of conference ------------------------------------------------- -------------------------- ------------------------------- ---------------- ------- ------------------- legend taxpayer ------------------------------------------------- issues whether the tangible_personal_property land improvements and non-residential real_property used in connection with ------------------ operations is includible in macrs asset guideline cla sec_80 theme and amusement parks as described in revproc_87_56 1987_2_cb_674 for depreciation purposes if the tangible_personal_property land improvements and non-residential real_property used in connection with ------------------ operations are not properly includible in macrs asset guideline cla sec_80 how should the assets be treated for depreciation purposes tam-129412-04 conclusions the tangible_personal_property land improvements and non-residential real_property used in connection with ------------------ operations are not includible in macrs asset guideline cla sec_80 theme and amusement parks as described in revproc_87_56 for depreciation purposes the tangible_personal_property used in connection with ------------------ operations is includible in macrs asset guideline cla sec_79 recreation for depreciation purposes the ------------------ as well as other structures and land improvements used in connection with ------------------ operations are excluded from asset cla sec_79 and are land improvements described in macrs asset_guideline_class land improvements or if they meet the definition of a building set forth in sec_1_48-1 of the income_tax regulations nonresidential_real_property facts taxpayer owns or operates --- ---------- live entertainment venues or ------------------ facilities within the united_states of which --- are at issue in this memorandum a list of the ------------------- at issue herein is attached as exhibit a the average size of these facilities is approximately ------------- and the ------------------- themselves can generally seat --------------------patrons patrons generally have access to the entire grounds by paying for admission to the attraction the attraction is usually entertainment typically a musical or comedy performance but the ------------------- are also used for seasonal entertainment ------------------------------------------------------------------- ------------------------------------------------------------------------------------- patrons at an ---------- ------------------ event generally may purchase either reserved or general admission seating reserved seating is closer to the stage and is generally under cover and general admission seating is situated directly behind the reserved seating on a ------------ ---------------------------------------------------------- most ------------------- have a majority of their entertainment performances between ----------------------- the premises surrounding the ----------------- include large mown grass areas open concourse areas and areas where in addition to the musical attraction patrons can eat browse through kiosks and stands typically depending on the attraction and participate in or view other activities -------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------ each ------------------ has multiple dining and eating areas including food and beverage concessions vending carts and picnic areas at some ------------------- there are ponds or other waterways the permanently situated assets at issue include but are not limited to ------ seating and related costs concrete with removable bench or individual seating --------------------- reserved seating stage landscaping site lighting paving sidewalks fences parking lots and exterior decorative lighting also included are assets that provide other tam-129412-04 support functions including but not limited to food and beverage retailing souvenir vending ticket booths facades and special purpose structures such as dressing rooms restrooms smoking lounges vip structures and catering buildings law and analysis sec_167 of the internal_revenue_code provides a depreciation allowance for the exhaustion wear_and_tear including a reasonable allowance for obsolescence of property used in a trade_or_business or held_for_the_production_of_income the depreciation deduction provided by sec_167 for tangible_property placed_in_service after generally is determined under sec_168 this section prescribes two methods_of_accounting for determining depreciation allowances one method is the general depreciation system in sec_168 and the other method is the alternative_depreciation_system in sec_168 under either depreciation system the depreciation deduction is computed by using a prescribed depreciation method recovery_period and convention for purposes of either sec_168 or sec_168 the applicable_depreciation_method and recovery_period are determined by reference to class_life or by statute the term aclass life is defined in sec_168 as meaning the class_life if any that would be applicable with respect to any property as of date under sec_167 determined without regard to sec_167 and as if the taxpayer had made an election under sec_167 as in effect on the day before the date of enactment of the revenue reconciliation act of former sec_167 provided that in the case of a taxpayer who elected the asset_depreciation_range_system of depreciation the depreciation allowance would be computed based on the class_life prescribed by the secretary that reasonably reflected the anticipated useful_life of that class of property to the industry or other group sec_1_167_a_-11 provides rules for classifying property under former sec_167 property is included in the asset_guideline_class for the activity in which the property is primarily used sec_1_48-1 defines a abuilding as any structure or edifice enclosing a space within its walls and usually covered by a roof the purpose of which is for example to provide shelter or housing or to provide working office parking display or sales space the term includes for example structures such as apartment houses factory and office buildings warehouses barns garages railway or bus stations and stores the class lives of property subject_to depreciation under sec_168 are set forth in revproc_87_56 this revenue_procedure divides assets into two broad categories asset classes dollar_figure through that consist of specific depreciable assets used in all business activities and asset classes through that consist of depreciable assets used in specific business activities an asset that falls within both an asset category that is asset classes dollar_figure through and an activity category that is asset classes through is classified in the asset category see 111_tc_105 the business activity asset classes described below are set forth in revproc_87_56 asset class land improvements includes improvements directly to or added to land whether such improvements are sec_1245 property or sec_1250 property provided such improvements are depreciable examples of such assets might include sidewalks roads canals waterways drainage facilities sewers not including municipal sewers in cla sec_51 wharves and docks bridges fences landscaping shrubbery or radio and television transmitting towers does not include land improvements that are explicitly included in any other class and buildings and structural_components as defined in sec_1_48-1 of the regulations excludes public_utility initial clearing and grading land improvements as specified in revrul_72_403 1972_2_cb_102 asset cla sec_79 recreation includes assets used in the provision of entertainment services on payment of a fee or admission charge as in the operation of bowling alleys billiard and pool establishments theaters concert halls and miniature golf courses does not include amusement and theme parks and assets which consist primarily of specialized land improvements or structures such as golf courses sports stadia race tracks ski slopes and buildings which house the assets used in entertainment services asset cla sec_80 theme and amusement parks includes assets used in the provision of rides attractions and amusements in activities defined as theme and amusement parks and includes appurtenances associated with a ride attraction amusement or theme setting within the park such as ticket booths facades shop interiors and props special purpose structures and buildings other than warehouses administration buildings hotels and motels includes all land improvements for or in support of park activities eg parking lots sidewalks waterways bridges fences landscaping etc and support functions eg food and beverage retailing souvenir vending and other nonlodging accommodations if owned by the park and provided exclusively for the benefit of park patrons theme and amusement parks are defined as combinations of amusements rides and attractions which are permanently situated on park land and open to the public for the price of admission this guideline_class is a composite of all assets used in this industry except transportation equipment general purpose trucks cars airplanes etc which are included in asset guideline classes with the tam-129412-04 prefix assets used in the provision of administrative services asset classes with the prefix and warehouses administration buildings hotels and motels asset cla sec_80 was introduced in revproc_74_32 1974_2_cb_487 prior to that revenue_procedure cla sec_79 described those activities now encompassed within cla sec_80 and was entitled recreation and amusement former cla sec_79 was described in revproc_72_10 1972_1_cb_721 as including assets used in the provision of amusement or entertainment services on payment of a fee or admission charge as in the operation of bowling alleys billiard and pool establishments theatres concert halls amusement parks and miniature golf courses former cla sec_79 specifically did not include such assets which consist primarily of specialized land improvements or structures such as golf courses sports stadia racetracks ski slopes or buildings which house bowling alleys as mentioned previously under former sec_167 a taxpayer depreciated an asset based on the class_life prescribed by the secretary which reasonably reflects the anticipated useful_life of that class of property to the industry or other group similarly when sec_168 was enacted as part of the tax_reform_act_of_1986 congress gave permission to the secretary except in the case of residential_real_property or non- residential_real_property to prescribe a new class_life for any property or modify the class_life for any assigned_property and instructed that any class_life or assigned_item prescribed or modified under this authority shall reasonably reflect the anticipated useful_life and the anticipated decline in value over time of the property to the industry or other group the anticipated useful_life of the property was linked to the industry or other group because it was expected that taxpayers in the same business activity would have similar experiences in the present case the initial issue raised is whether the activity conducted by the taxpayer at its ------------------- is within that activity described in cla sec_80 application of cla sec_80 is limited to theme and amusement parks defined in cla sec_80 as combinations of amusements rides and attractions which are permanently situated on park land and open to the public for the price of admission while the description of cla sec_80 in revproc_87_56 contains a listing of the assets included within that class this definition is the starting point for determining whether the activity under consideration is within cla sec_80 the ------------------- at issue here have few if any amusements rides or other attractions that are permanently situated on park land while the taxpayer does point out the comfort of both the reserved and general admission seating and makes reference to the vip structures and smoking lounges such facilities are not amusements or attractions within the meaning of cla sec_80 rather the taxpayer’s attraction is the entertainment or other event offered at the ------- ------------------ none of these attractions or events is permanently situated on park land rather they are ever-changing appearing at the ------------------ temporarily and moving on to the next venue after a short time similarly the assets used in connection with ---- -------------other activities are not permanently situated at the park some of these tam-129412-04 assets are owned by third parties and therefore are not eligible for depreciation by the taxpayer while the vip structures and smoking lounges and the kiosks or other structures from which the concession sales are made may be permanently situated on park land they are not representative of the types of attractions and amusements that define the class rather these structures are the types of assets referred to in cla sec_80 as appurtenances associated with a ride attraction amusement or theme setting within the park when such assets are used in connection with a theme or amusement park activity this language makes clear that these assets are includible in cla sec_80 without this specific language such assets would be classified as buildings or land improvements and would not be includible in the class however these types of assets are not unique to theme and amusement parks and their presence does not compel a cla sec_80 characterization as previously discussed cla sec_80 defines theme and amusement parks in terms of amusements rides or other attractions permanently situated on park land the appurtenance assets are not part of the definitional component of the class in contrast the traditional theme or amusement park has rides and other attractions that remain at the park site until replaced due to economic or physical obsolescence when asset cla sec_80 was established by the treasury_department a relatively short recovery_period was provided for a mixture of assets that included certain buildings and land improvements as indicated above this short recovery_period was reflective of the anticipated useful_life experience of assets used in the theme and amusement park industry because of the nature of this industry continuous capital expenditures are incurred to replace assets before economic and physical obsolescence of the assets such replacement is necessary in order to attract returning customers see generally a study of the theme and amusement park industry office of industrial economics date the taxpayer in the present case is not subject_to the same experience because its customers are attracted by the ever-changing events provided at the taxpayer’s venues the mere presence of a park-like setting such as that surrounding the ---------------------- ----------------------------------------------------------------------------------------------------------------- at issue is not sufficient to transform the taxpayer’s activity into a theme or amusement park activity an amusement park may not have a park-like setting having concluded that the activity at issue is not included within cla sec_80 we will now consider the proper classification of that activity cla sec_79 drafted more broadly than cla sec_80 includes assets used in the provision of entertainment services on payment of a fee or admission charge as in the operation of theatres concert halls and miniature golf courses the class clearly encompasses both indoor and outdoor venues however the class specifically excludes specialized land improvements and structures such as golf courses sports stadia race tracks ski slopes and buildings which house the assets used in providing the entertainment services thus cla sec_79 encompasses assets used to provide entertainment services but not the land improvements and buildings used in providing those services assets tam-129412-04 encompassed within cla sec_80 by contrast include associated structures and most buildings excepting only warehouses administration buildings hotels and motels for example assets such as audio visual equipment used to provide musical and other entertainment services in a concert hall or theatre are included within cla sec_79 while the actual concert hall or theatre is not in the present case the entertainment and other events offered at taxpayer’s ------------- ------------------- are entertainment services and the assets used to provide those entertainment services are included within cla sec_79 the fact that taxpayer presents such entertainment and attractions in a venue at which most of the seating is uncovered and is surrounded by a park-like setting does not change the fundamental nature of the activity however the ------------------ assets to the extent included in the definition of buildings or structural_components as set forth in sec_1_48-1 and land improvements described in class are specifically excluded from cla sec_79 the specific exclusion of land improvements and buildings from cla sec_79 does not indicate that those assets were moved to cla sec_80 when that class was created out of former cla sec_79 the separate exclusion contained within the description of cla sec_79 for amusement and theme parks describes the sum of the assets moved from former cla sec_79 to cla sec_80 accordingly land improvements associated with a cla sec_79 activity are included in asset class buildings associated with a cla sec_79 activity are depreciated as nonresidential_real_property if they meet the definition of a building set forth in sec_1_48-1 under the rules in sec_168 and sec_168 caveat a copy of this technical_advice_memorandum is to be given to the taxpayer sec_6110 of the code provides that it may not be used or cited as precedent


t c memo united_states tax_court jeremy ray summers petitioner v commissioner of internal revenue respondent docket no filed date jeremy ray summers pro_se brandon a keim doreen marie susi and rachael j zepeda for respondent memorandum findings_of_fact and opinion lauber judge the internal_revenue_service irs or respondent deter- mined a deficiency of dollar_figure in petitioner’s federal_income_tax for the sole question for decision is whether petitioner is liable for the additional tax imposed by sec_72 on early distributions from a qualified retirement plan petitioner claims an exception from this additional tax under sec_72 which applies to a distribution made to an alternate_payee pursuant to a qualified_domestic_relations_order qdro although we have great sympathy for petitioner’s position we are unable to conclude that he satisfied the technical requirements that congress placed in the statute we accordingly have no alternative but to sustain the deficiency determination findings_of_fact the parties filed a stipulation of facts with attached exhibits that is incor- porated by this reference petitioner resided in arizona when he filed his petition during petitioner jeremy ray summers jeremy then age was employed by intel corp as a manufacturing technician he was married to karie rae summers karie and they had four young children jeremy and karie con- cluded that their marriage had irretrievably broken down and decided to separate to their credit they were determined to do this in the least acrimonious manner possible and to minimize costs they decided to accomplish their divorce without involving lawyers 1all statutory references are to the internal_revenue_code in effect for the tax_year in issue and all rule references are to the tax_court rules_of_practice and procedure we round all monetary amounts to the nearest dollar jeremy and karie reached an agreement concerning child custody visitation rights child_support spousal maintenance and division of property on date jeremy filed a petition for dissolution of marriage incorporating these agreements in the superior court of arizona maricopa county at that time he had an individual_retirement_account ira administered by edward d jones co that he believed should be split with karie his petition for divorce accordingly requested that t he proceeds of ira should be divided to petitioner and to respondent karie did not work outside the home and had several debts with the di- vorce petition pending she was eager to simplify her financial affairs in order to get a fresh_start to accommodate her wishes jeremy agreed to split the value of the ira before the divorce decree became final in late date jeremy withdrew the total_proceeds of the ira dollar_figure on date he deposited a check in that amount in a bank of america checking account that he and karie jointly held the next day he wrote a check for dollar_figure to pay off karie’s obligation on a car loan he later transferred another dollar_figure to her to ensure that she received her full interest in the ira on date the arizona trial_court entered a consent decree of dissolu- tion of marriage this decree incorporated substantially_all of the agreements set forth in jeremy’s march petition however since he and karie had already divided up the ira the decree provided in an attached exhibit captioned property and debts that n either party has a retirement pension deferred_compensation sec_401 plan and or benefits jeremy timely filed a form_1040 u s individual_income_tax_return for claiming head-of-household filing_status on this return he properly re- ported the dollar_figure distribution from his ira as a taxable_distribution however he did not report on line any additional tax attributable to the fact that it was an early distribution the irs received from edward d jones co a form 1099-r distribu- tions from pensions annuities retirement or profit-sharing_plans iras insur- ance contracts etc reporting the dollar_figure distribution as an early distribution no known exception this triggered a document-matching audit on date the irs issued jeremy a timely notice_of_deficiency determining that he was liable for the additional tax under sec_72 he timely petitioned this court to challenge that determination opinion a burden_of_proof the irs’ determinations in a notice_of_deficiency are generally presumed correct though the taxpayer can rebut this presumption rule a 290_us_111 because sec_72 imposes an addi- tional tax as opposed to a penalty or an addition_to_tax within the meaning of sec_7491 jeremy bears the burden of production see 144_tc_140 in certain circumstances the burden_of_proof on factual issues may shift to respondent see sec_7491 rule a jeremy does not contend that this provision applies here b analysis sec_72 imposes a additional tax on early distributions from qualified_retirement_plans a qualified_retirement_plan includes an ira see sec_408 sec_4974 114_tc_259 sec_72 lists various types of distribution that are excepted from this additional tax such as the exception concededly inapplicable here for a distribution to a taxpayer age or older see sec_72 the exception on which jeremy relies appears in sec_72 it ap- plies to a distribution that is made to an alternate_payee pursuant to a qualified domestic_relations_order within the meaning of sec_414 sec_414 defines an alternate_payee as any spouse former spouse child or other dependent of a participant who is recognized by a domestic_relations_order as having a right to receive all or a portion of the benefits payable under a plan with respect to such participant sec_414 defines a domestic_relations_order as a judgment decree or order relating to the provision of child_support alimony payments or marital property rights that is made pursuant to a state domestic relations law karie indirectly received half the value of jeremy’s ira account and re- spondent readily agrees that the transaction could likely have been organized so as to entitle jeremy to a sec_72 exception for her share jeremy concedes that he erred in claiming this exception for his own share as it is respondent contends persuasively that jeremy does not qualify for this exception for two reasons first the ira distribution was made directly to jeremy and he deposited the check into a bank account that he and karie jointly held he subsequently transferred to karie or for her benefit an amount equal to half of the proceeds but while she ultimately received those proceeds the distribution itself was made to jeremy not to a former spouse who is recognized by a domestic_relations_order as having a right to receive a share of the proceeds see sec_414 second the distribution was not made pursuant to a qualified domestic re- lations order although jeremy’s petition for dissolution of marriage requested a division of the ira any judicial action on that request was pretermitted by his well-intentioned decision to divide the ira with karie a month before the di- vorce decree was entered that decree accordingly recited that n either party has a retirement pension deferred_compensation sec_401 plan and or benefits the ira distribution was not made pursuant to that order or any other judicial de- cree we have held that a taxpayer must strictly comply with the requirements of sec_72 in order to be entitled to the exception it provides see hartley v commissioner tcmemo_2012_311 104_tcm_553 stating that in order for a distribution to qualify for this exception the distribution must be made directly in response to a qualified_domestic_relations_order bougas v commissioner tcmemo_2003_194 wl at stating gener- ally that the requirements of the qdro provisions must be rigidly observed because they relate to the substance or essence of the statute we have con- siderable sympathy for petitioner’s position in effect his willingness to help minimize stress on his soon-to-be ex-wife disabled him from satisfying the statutory requirements but we are not at liberty to add equitable exceptions to the statutory scheme that congress enacted and we thus have no alternative but to sustain the additional tax that respondent has determined to implement the foregoing 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 --------------------- id no ------------- telephone number --------------------- refer reply to cc corp b04 plr-139915-07 date date legend taxpayer old lossco old lossco group entity a entity b entity c entity d ------------------------- ------------------------------- ----------------------- ---------------------------------------------- -------------------------- ------------------------------- ----------------------- ---------------------------------------------- ---------------------------------------------- -------------------------- ------------------------------- -------------------------------------- ------------------------------------------------ -------------------------------------------- ------------------------------------------------ ------------------------------------ ------------------------------------------------ plr-139915-07 entity e entity f entity g individual a business x date date date date date date date date plan state a b c d e f ----------------------------------------- --------------------------------- ---------------------------------------- ----------------------- --------- ------------- --------------------------- --------------------------- --------------------------- ------------------------- --------------------- ------------------------- --------------------- -------------------------------------------------------------------------------- --------------------------------------------------------------- -------- ----------------- ------ ---- --------------- -------------- ----------- ---- ------------- ---- plr-139915-07 g h i dear ----------------- this letter responds to your letter dated date requesting rulings regarding sec_382 of the internal_revenue_code the relevant information provided in that letter and in later correspondence is summarized below the rulings contained in this letter are based upon facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process summary of facts taxpayer is the common parent of an affiliated_group_of_corporations that files a consolidated federal_income_tax return taxpayer and its consolidated subsidiaries collectively the taxpayer group are engaged in business x taxpayer has only common_stock outstanding which stock is publicly traded and widely held ---------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------- the events leading to taxpayer’s current structure are as follows on date old lossco and the majority of its domestic subsidiaries collectively the debtors filed voluntary petitions for relief under chapter of the u s bankruptcy code the petitions were filed in the united_states bankruptcy court for the ------------------------------ ------- bankruptcy court on date old lossco formed taxpayer on date taxpayer filed a chapter petition for bankruptcy on date old lossco filed with the bankruptcy court its plan providing that old lossco would be reorganized into taxpayer on date the bankruptcy court confirmed the plan on date substantially_all of the debtors emerged from chapter bankruptcy pursuant to the plan old lossco i transferred substantially_all of its assets to taxpayer in exchange for taxpayer’s common_stock -------------------and the assumption by taxpayer of certain old lossco liabilities----------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------- and iv liquidated the plr-139915-07 reorganization as a result of the reorganization taxpayer became and continues to be the common parent of the old lossco group the old lossco group had net_operating_loss carryovers as of date pre- change losses the reorganization resulted in ownership changes on date of old lossco and the old lossco group under sec_382 and sec_1_1502-92 respectively taxpayer’s 5-percent shareholders pursuant to sec_1_382-2t taxpayer relies on filings of schedules 13d and 13g with the securities_and_exchange_commission sec to identify any 5-percent shareholders or first-tier entities within the meaning of sec_382 whose ownership interests must be tracked and thus to determine whether it sustained an ownership_change subsequent to date the percentage of taxpayer common_stock owned by each public_group or other 5-percent_shareholder is calculated based on information reported in schedules 13d or 13g filed with the sec during the period from date until the date of this ruling letter the relevant period during the relevant period certain schedules 13g and d filing and filing identify reporting persons that held percent or more of taxpayer common_stock for sec purposes filing on date entity a filed its schedule 13g pursuant to rule 13d-1 b filing1 providing that it was an investment adviser within the meaning of rule 13d-1 b ii e as the reporting person entity a reported that it had sole voting and dispositive power over a shares of taxpayer common_stock which represented b percent of the taxpayer stock outstanding in response to item of the schedule 13g ownership of more than five percent on behalf of another person entity a reported that all securities reported in the filing were owned by its advisory clients and that to the best of its knowledge none of those clients owned more than percent of the stock of taxpayer entity a expressly disclaimed beneficial_ownership interest in such securities entity a further provided that it was not a member of a group formed for the purpose of acquiring holding or disposing of shares of the taxpayer common_stock filing on date individual a entity b entity c and entity d as reporting persons jointly filed schedule 13g filing individual a controlled_entity b entity c and entity d and reported shared voting power over d shares of taxpayer common_stock which represented g percent of the taxpayer stock outstanding entity b and entity c reported that they managed investments owned by entity e and entity f in their capacity as investment managers entity b and entity c each reported shared voting power over h shares of taxpayer common_stock which represented i percent of the taxpayer stock outstanding the schedule 13g filing did not identify the portion of the plr-139915-07 h shares of taxpayer stock owned by each of entity e and entity f the stock managed by entity b and entity c for entity e and entity f was less than percent of taxpayer’s stock entity d reported that it was an investment manager to entity g a wholly-owned subsidiary of entity e entity d reported shared voting power over e shares of taxpayer common_stock which represented c percent of the taxpayer stock outstanding less than percent of taxpayer’s stock the taxpayer stock indirectly owned by entity e through entity g in combination with the taxpayer stock owned directly by entity e and entity f was greater than percent ------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------- ---------------- --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- entity e entity f and entity g collectively would be treated as owning an amount of stock representing less than percent of the outstanding taxpayer common_stock for purposes of sec_382 representations a b c d e taxpayer is a loss_corporation as defined in sec_382 taxpayer’s only class of outstanding_stock during the relevant period is the common_stock --------------------------------------------------------------------------------------------------------- --------------- --------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- entity e entity f and entity g collectively would be treated as owning an amount of stock representing less than percent of the outstanding taxpayer common_stock for purposes of sec_382 with the exception of the filings of schedules 13d or 13g or the absence thereof taxpayer has no actual knowledge regarding ownership of the taxpayer common_stock by any of entity a individual a entity b entity c entity d entity e entity f and entity g during the relevant period rulings based solely on the information submitted and the representations set forth above we rule as follows plr-139915-07 taxpayer may rely on the existence or absence of schedules 13d and 13g and may rely on the accuracy of the information reported therein to identify all persons who directly own percent or more of the taxpayer common_stock entity a is not a 5-percent_shareholder for purposes of sec_382 because such entity does not have the right to receive or the power to direct the receipt of the dividends from and proceeds from the sale of the reported taxpayer common_stock economic ownership -------------------------------------------- are not treated as exercised under sec_1_382-4 in determining whether each of entity e and entity g is a 5-percent_shareholder for purposes of sec_382 each of individual a entity b entity c entity d entity e entity f and entity g is not a 5-percent_shareholder for purposes of sec_382 taxpayer may rely on the absence of the filing of a schedule 13d or 13g by the economic owners of taxpayer common_stock to determine that the economic owners are not members of a group that constitutes an entity within the meaning of sec_1_382-3 unless taxpayer has actual knowledge to the contrary caveats no opinion is expressed about the tax treatment of the transactions under other provisions of the code or regulations or on the tax treatment of any conditions existing at the time of or effects resulting from the transactions that are not specifically covered by the above rulings in particular no opinion is expressed regarding the treatment of -- ---------------------------------------------------------------------------------------- the application thereto of the constructive_ownership rules of sec_382 procedural statements this ruling letter is directed only to the taxpayer who requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent a copy of this ruling letter should be attached to the federal_income_tax return of each taxpayer involved for the taxable_year in which the transactions covered by this ruling letter are completed alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the ruling letter plr-139915-07 under the power_of_attorney on file in this office a copy of this letter is being sent to your authorized representatives sincerely _____________________________ marie c milnes-vasquez senior technician reviewer branch corporate


internal_revenue_service number info release date index number ---------------------- ------------------------------------ ------------------------- ------------------------------------ department of the treasury washington dc person to contact --------------------- id no telephone number --------------------- refer reply to cc psi b1 - genin-128286-04 date aug ---------------------- ---------------------- taxpayer taxpayer dear -------------------- this responds to your letter of date in which you requested that we rescind taxpayer’s recent revocation of its election to be an s_corporation sec_1362 of the internal_revenue_code states that an election to be an s_corporation for federal tax purposes may be terminated by revocation sec_1_1362-6 provides that revocation occurs when a corporation files a statement that it revokes its election to be an s_corporation with the service_center where the election was originally filed under sec_1_1362-2 a revocation made before the 16th day of the third month of the taxable_year is effective on the first day of the taxable_year and revocation made after the 15th day of the third month of the taxable_year is effective for the following tax_year there are no provisions in the internal_revenue_code authorizing the rescission of a timely filed revocation of an s_corporation_election if you believe that before the intended effective date of the revocation you provided the service_center with notice that you intended not to revoke your s_corporation_election a certified mail receipt dated prior to the stated effective date of the revocation or a letter from the service_center indicating that they received such correspondence prior to the stated effective date of the revocation is sufficient proof under sec_1362 a small_business_corporation that revokes its s_corporation_election or any successor to such a corporation may not elect to be an s_corporation for any taxable_year before its fifth taxable_year beginning after the year for which the revocation was effective without obtaining the permission of the secretary sec_1_1362-5 provides that the corporation has the burden of establishing that under the relevant facts and circumstances consent should be granted for a new s_corporation_election the fact that more than percent of the stock of the corporation is owned by persons who did not own any stock in the corporation on the date of the termination tends to establish that consent should be granted in the absence of this fact consent ordinarily is denied unless the corporation can show that the event causing termination was not reasonably within the control of the corporation or shareholders having a substantial interest in the corporation and was not part of a plan on the part of the corporation or of such shareholders to terminate the election the secretary’s permission is obtained in the form of a letter_ruling the procedures for requesting a private_letter_ruling are set out in revproc_2004_1 copy enclosed in addition revproc_2004_1 requires taxpayers to submit a user_fee along with their ruling_request the standard user_fee for a private_letter_ruling is dollar_figure however taxpayers with gross_income of less than dollar_figure million on their tax_return for the most recent 12-month taxable_year qualify for a reduced user_fee in the amount of dollar_figure if you qualify for the reduced fee you must include a statement certifying your gross_income for the last 12-month taxable_year otherwise the higher fee will apply if you decide to submit a formal request for a private_letter_ruling please review appendix b of revproc_2004_1 and be certain to include all required procedural statements also include the proper user_fee and any documents that substantiate your intent to be an s_corporation from inception please refer your request to our office by adding the following to the address attn cc pa lpd du p o box ben franklin station washington dc direct to cc psi room we hope that this information is helpful to you if you have additional questions please contact --------------------- at --------------------- sincerely enclosure revproc_2004_1 dianna k miosi chief branch office of the associate chief_counsel passthroughs and special industries


internal_revenue_service number release date index number -------------------------- ------------------------------------------------ -------------------------------- -------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------- id no ----------------- telephone number --------------------- refer reply to cc psi b01 plr-129020-13 date date legend x ------------------------------------------- --------------------------------------- y ------------------------- a -------------------------------------------- ----------------------------------- b -------------------------------------------- ----------------------------- trust ------------------------------------------- ------------------------------------------- date1 ------------------- date2 ---------------- date3 ------------------- date4 ----------------------- date5 ----------------- year state ------- -------- plr-129020-13 dear ---------------- this responds to a letter dated date submitted on behalf of x by x’s authorized representative requesting relief under sec_1362 of the internal_revenue_code facts according to the information submitted x is a successor_corporation of y y made an election to be treated as an s_corporation in year on date1 y performed a reorganization whereby it was reorganized as x a general_partnership under the laws of state x continued the s election of y with an effective date of date2 on date3 a a shareholder of x died pursuant to a’s will a’s x shares were transferred to trust on date4 trust was an ineligible shareholder of x causing x’s s election to terminate on date4 as of date4 x represents that trust was intended to be treated as a qualified_subchapter_s_trust qsst x represents that the terms of trust did not meet the requirements to be treated as a qsst and that the executor of the estate was instructed to hold the x shares until a court order amending the terms of trust was received x assumed the executor would follow these instructions the executor however transferred the x shares to trust on date4 therefore causing x’s s_corporation_election to terminate as of date4 a court order amending the terms of trust was granted on date5 x represents that the circumstances surrounding the termination of x’s s election and the failure to qualify as a qsst on the date the x shares were transferred to trust were inadvertent and were not motivated by tax_avoidance or retroactive tax planning x and its shareholders represent that x has consistently been treated as an s_corporation x its shareholders and b represent that trust has been consistently treated as a qsst further x and its shareholders have agreed to make such adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary law and analysis sec_1361 of the code provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 defines a small_business_corporation as a domestic_corporation which is not an ineligible_corporation and which does not a have more than plr-129020-13 shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than class of stock sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under subpart e as owned by an individual who is a citizen or resident_of_the_united_states may be a shareholder of an s_corporation sec_1361 provides that a_trust may be an s_corporation shareholder with respect to stock transferred to it pursuant to a will but only for the 2-year period beginning on the day on which such stock is transferred to it sec_1361 provides that in the case of a qsst with respect to which a beneficiary makes an election under sec_1361 the trust is treated as a_trust described in sec_1361 and for purposes of sec_678 the beneficiary of the trust is treated as the owner of that portion of the trust which consists of stock in a s_corporation with respect to which the election under sec_1361 is made sec_1361 provides that the term qualified_subchapter_s_trust means a_trust a the terms of which require that i during the life of the current income_beneficiary there shall be only income_beneficiary of the trust ii any corpus distributed during the life of the current income_beneficiary may be distributed only to such beneficiary iii the income_interest of the current income_beneficiary in the trust shall terminate on the earlier of such beneficiary’s death or the termination of the trust and iv upon the termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to such beneficiary and b all of the income within the meaning of sec_643 of which is distributed or required to be distributed currently to individual who is a citizen or resident_of_the_united_states a substantially separate and independent share of a_trust within the meaning of c shall be treated as a separate trust for purposes of this subsection and subsection c sec_1362 provides in relevant part that if an election under sec_1362 by any corporation was terminated under sec_1362 or or sec_1361 the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such termination steps were taken so that the corporation for which the termination occurred is a small_business_corporation and the corporation for which the termination occurred and each person who was a shareholder in such corporation at any time during the period specified pursuant to sec_1362 agrees to make the adjustments consistent with the treatment of such corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such termination such corporation shall be treated as an s_corporation during the period specified by the secretary plr-129020-13 conclusion based solely on the facts submitted and the representations made we conclude that x’s s_corporation_election terminated on date4 we further conclude that the termination of x’s s election on date4 was inadvertent within the meaning of sec_1362 pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation as of date4 and thereafter provided that b files a qsst election for trust with an effective date of date4 with the appropriate service_center within days from the date of this letter and x’s s_corporation_election is not otherwise terminated under sec_1362 a copy of this letter must be attached to the qsst election except as specifically ruled upon above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code specifically we express or imply no opinion regarding x’s eligibility to be an s_corporation this ruling is directed only to the taxpayer who requested it according to sec_6110 this ruling may not be used or cited as precedent pursuant to the power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative sincerely laura c fields laura c fields senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes cc


department of the treasury internal_revenue_service washington d c number release date uil no date memorandum for district_director indiana district attn chief examination_division from chief cc dom fi p subject legend withdrawal of form_3115 application_for change in accounting_method cam-108900-98 taxpayer this is to notify you in accordance with a of revproc_2000_1 2000_1_irb_4 that taxpayer has withdrawn its application_for a change in accounting_method any legal analysis and conclusions contained herein are not binding upon examination or appeals this document is not to be cited as precedent in its form_3115 taxpayer requested effective for the tax_year ended date permission to change its method_of_accounting for premiums received prior to a contract’s effective date advance premiums taxpayer has informed us that as a result of td 2000_4_irb_365 promulgating final regulations under sec_832 of the internal_revenue_code it has decided to withdraw its application_for a change in accounting_method td provides an automatic change_of method procedure for advance premiums for the taxable_year ending date taxpayer has represented that its method_of_accounting for determining premiums was not an issue under consideration within the meaning of section dollar_figure of revproc_99_49 as of date under this representation if taxpayer changes its accounting_method for advance premiums as provided in sec_1 a ii of the income_tax regulations the service will not except as provided in section dollar_figure of revproc_99_49 1999_52_irb_725 or in the appendix of revproc_99_49 require taxpayer to change its method_of_accounting for this item for a taxable_year prior to the year_of_change cam-108900-98 please direct your questions concerning this matter to branch s mark s smith cc


t c summary opinion united_states tax_court john francis o’rourke petitioner v commissioner of internal revenue respondent docket no 8691-07s filed date john francis o’rourke pro_se jon d feldhammer for respondent panuthos chief special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by 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 any other court and this opinion shall not be treated as precedent for any other case respondent determined deficiencies of dollar_figure and dollar_figure respectively in petitioner’s and federal income taxes the issue for decision is whether petitioner is entitled to exclude income earned working at the u s embassy in mexico city background some of the facts have been stipulated and we incorporate the stipulation and the accompanying exhibits by this reference petitioner lived in california when he filed the petition during and the years in issue petitioner resided in mexico city mexico and worked continuously and exclusively for the u s drug enforcement agency dea as an administrative unit secretary in the dea’s offices in the u s embassy the u s department of state paid petitioner for the work he performed for the dea at the embassy petitioner worked 8-hour days days a week on a regular schedule prescribed by the dea the u s government provided petitioner with the equipment and supplies required to perform his job petitioner’s duties included typing travel orders and job postings making hotel and food reservations arranging moves and securing housing for dea employees and entering requests for money into a proprietary dea computer system that determined whether the requested funds could be issued petitioner and the government executed a contract which referred to petitioner as a contractor and provided for an hourly rate of pay five 8-hour days per week and annual and sick leave earned at the rate of hours every weeks the contract also stated that the government would withhold an amount from the u s citizen contractor’s gross salary for federal withholding and fica_taxes under the contract either party could terminate the contract on days’ notice and the government could terminate without advance notice upon petitioner’s failure to fulfill any terms of the contract petitioner’s work for the dea did not provide any opportunity for profit or loss outside the income and benefits enumerated in the contract the u s embassy distinguished between local hire contractors who received limited benefits and direct hire employees who were dea employees from the united_states with the full panoply of federal employee_benefits the embassy also instructed its local hire contractors not to present themselves as u s government employees petitioner did not pay any taxes to the mexican government on his income from the dea for or petitioner timely filed u s individual income_tax returns for and on the contracting officer of the u s embassy in mexico city mexico executed the contract on behalf of the u s drug enforcement agency those returns petitioner reported his income from the dea as wages included forms 2555-ez foreign_earned_income_exclusion excluded all of his income and claimed refunds for all federal income taxes withheld respondent issued a notice_of_deficiency disallowing petitioner’s foreign_earned_income_exclusion on the grounds that his payments from the u s department of state were not foreign_earned_income but rather income from a u s source in his petition and at trial petitioner asserted that because he was a contractor and not a regular employee of the u s government he is entitled to the foreign_earned_income_exclusion discussion in general the commissioner’s determinations set forth in a notice_of_deficiency are presumed correct and the taxpayer bears the burden of proving that these determinations are in error rule a 290_us_111 pursuant to sec_7491 the burden_of_proof as to factual matters shifts to the commissioner under certain circumstances petitioner has neither alleged that sec_7491 applies nor established his compliance with its requirements petitioner therefore bears the burden_of_proof as the facts are not in dispute the burden_of_proof does not play a role in our findings or conclusions every citizen_of_the_united_states is subject_to u s income_tax on his worldwide income sec_1 sec_1_1-1 income_tax regs sec_911 permits u s citizens residing and working abroad to elect to exclude foreign_earned_income from u s income_taxation however foreign_earned_income does not include amounts paid_by the united_states or an agency thereof to an employee of the united_states or an agency thereof sec_911 there is no dispute that petitioner worked for an agency of the united_states in and when he was a secretary in mexico city for the dea and paid_by the department of state thus if petitioner was an employee he is not entitled to exclude this income we must decide whether petitioner worked as an independent_contractor or as a contract employee sec_911 does not define employee accordingly we apply common_law rules to determine whether a taxpayer is an employee see 331_us_704 907_f2d_1173 d c cir affg 92_tc_351 weber v commissioner 103_tc_378 affd 60_f3d_1104 4th cir whether an individual is an employee must be determined on the basis of the specific facts and circumstances involved 89_tc_225 affd 862_f2d_751 9th cir 64_tc_974 relevant factors include the degree of control exercised by the principal over the details of the work the relationship the parties believe they are creating whether the work is part of the principal’s regular business which party invests in the facilities used in the work the individual’s opportunity for profit or loss the permanency of the relationship and the right to discharge and the provision of benefits typical of those provided to employees nlrb v united ins co 390_us_254 weber v commissioner supra pincite profl executive leasing inc v commissioner supra pincite no one factor is determinative rather all the incidents of the relationship must be assessed and weighed nlrb v united ins co supra pincite degree of control exercised by the dea although no single factor is dispositive the test usually considered fundamental is whether the alleged employer has the right to control the activities of the individual whose status is in issue weber v commissioner supra pincite profl executive leasing inc v commissioner supra pincite an employer can retain the requisite control_over the details of an employee’s work even without standing over the employee and directing every move he makes weber v commissioner supra pincite profl executive leasing inc v commissioner supra pincite simpson v commissioner supra pincite it is clear that petitioner performed his administrative support work in the dea’s offices in the u s embassy following dea’s procedures and guidelines and that the dea dictated the days and hours petitioner worked we conclude that the dea exercised the requisite control_over petitioner and this factor supports a finding that petitioner was an employee of the government the relationship the parties believed they were creating the contract petitioner signed with the dea labels petitioner the contractor for the purposes of that document petitioner relies upon that label and the convention at the embassy to distinguish between the local hire contractors and direct hire workers petitioner explained that even though he was a u s citizen he was in many respects on the same level as the mexican contract employees finally he relies on instructions he received not to refer to himself as a u s government employee the label used in the contract is contractor not independent_contractor the contract specifies that the government would withhold federal income and employment_taxes from petitioner’s gross pay such withholding is inconsistent with the assertion that the parties intended petitioner to be an independent_contractor for u s income_tax purposes this factor supports a finding that petitioner was a contract employee ie an employee operating under a contract whether the work is part of the principal’s business petitioner supported dea operations by providing administrative support in the dea’s offices in the embassy this support was in furtherance of the dea’s mission and this factor supports a finding that petitioner was an employee investment in facilities used in the work the dea and the embassy provided the office tools and supplies required for petitioner to provide the administrative support for which he contracted petitioner did not provide any facilities or equipment this factor supports a finding that petitioner was an employee petitioner’s opportunity for profit or loss petitioner’s opportunity for profit was limited to the hourly wage specified in the contract this factor supports a finding that petitioner was an employee the permanency of the relationship and the right to discharge petitioner argues that his having a contract that expired annually and would be renewed only if the budget permitted and his not having the chance of promotion to direct hire status made him an independent_contractor and not an employee the contract provided for renewal for additional periods at the government’s option and with the contractor’s concurrence the contract also stated that either party could terminate the agreement on days’ notice and that the government could terminate without advance notice upon the contractor’s failure to fulfill any terms of this contract the permanency of a relationship indicates an employer- employee relationship while a transitory relationship does not levine v commissioner tcmemo_2005_86 hathaway v commissioner tcmemo_1996_389 additionally the right to discharge a worker and the worker’s right to quit at any time indicate an employer-employee relationship levine v commissioner supra this factor supports a finding that petitioner was an employee the provision of benefits typical of those provided to employees the government trained petitioner and provided him with annual leave sick leave and paid holidays these benefits are typical of those an employer provides an employee the dea did not provide petitioner secure housing health care access to the embassy health unit or certain other_benefits provided to its direct hire workers nevertheless this factor supports a finding that petitioner was an employee conclusion despite the fact that petitioner was treated differently from direct hire employees the record overwhelmingly supports a finding that petitioner was an employee of the u s government accordingly petitioner’s earnings from working for the dea are not foreign_earned_income sec_911 petitioner is not entitled to exclude those wages for and and respondent’s determination is sustained to reflect our disposition of the issue decision will be entered for respondent because petitioner did not pay income taxes to the government of mexico in or and he seeks to exclude his compensation from federal income taxes as well our comment in matt v commissioner tcmemo_1990_209 is equally apt here finally we note that the exclusion of foreign_earned_income was designed to prevent united_states government employees from escaping taxation on their income by both the united_states and the foreign governments 88_tc_1024 affd without published opinion 842_f2d_1292 4th cir congress was concerned that sec_911 not provide an unjustifiable windfall for those individuals who paid neither federal nor foreign_income_taxes see 77_tc_1181 affd 701_f2d_807 9th cir petitioner's position is precisely that which congress sought to preclude by enacting sec_911 that is she paid no foreign_income_taxes in on her compensation from usaid and seeks to avoid the payment of federal income taxes as well by excluding that compensation from her gross_income


office_of_chief_counsel internal_revenue_service memorandum number release date cc ita -------------------- postn-104559-09 uilc date date to joyce l sugawara media and entertainment industry counsel cc lm ctm la from branch chief branch cc ita income_tax accounting subject definition of goodwill for purposes of sec_1031 exchanges on date the office of associate chief_counsel income_tax accounting issued technical_advice tam concluding that the registered trademarks and trade names of a business_entity could not be of like_kind to the trademarks and trade names of another business_entity because they were closely related to if not a part of the goodwill or going_concern_value of a business under sec_1_1031_a_-2 of the income_tax regulations the goodwill or going_concern_value of a business is not of like_kind to the goodwill or going_concern_value of another business using the rationale set forth in tam the industry counsel for media large mid-size business issued advice on date irs nsar 20074401f concluding that like the trademarks and trade names discussed in tam newspapers' mastheads advertiser accounts and subscriber accounts were closely related to if not a part of the goodwill and going_concern_value of the newspapers consequently the exchanged intangibles were not of like_kind under sec_1_1031_a_-2 and the gain from the exchange was not eligible for deferral under sec_1031 of the internal_revenue_code in reaching the conclusion irs nsar 20074401f reasons that 507_us_546 which holds that an intangible asset is not goodwill for purposes of the depreciation rules if it can be separately described and valued apart from goodwill is not relevant to the determination of whether intangibles are of like-kind under sec_1031 postn-104559-09 upon further consideration the office of associate chief_counsel income_tax accounting has concluded that the analysis of newark morning ledger co applies in determining whether intangibles constitute goodwill or going_concern_value within the meaning of sec_1_1031_a_-2 accordingly intangibles such as trademarks trade names mastheads and customer-based intangibles that can be separately described and valued apart from goodwill qualify as like-kind_property under sec_1031 in our opinion except in rare and unusual situations intangibles such as trademarks trade names mastheads and customer-based intangibles can be separately described and valued apart from goodwill of course to qualify as like-kind_property under sec_1031 the property must satisfy all other requirements of sec_1031 including the nature and character rules of sec_1_1031_a_-2 accordingly the service should not follow the position in tam and irs nsar 20074401f on this issue we are available to assist should you have questions on whether intangibles are of like_kind under sec_1_1031_a_-2 please call if you have any questions about this memorandum


internal_revenue_service department of the treasury washington dc number release date index number telephone number refer reply to cc psi b01-plr-142052-02 date sept person to contact x date dear this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts x was formed on date the shareholders of x desired that x elect s_corporation treatment effective on date but the election to be treated as an s_corporation was not timely filed accordingly x requests a ruling that it will be treated as an s_corporation effective date law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under sec_1362 however if an s election is made after the first two and one-half months of a corporation's taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed plr-142052-02 sec_1362 provides that if no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply x did not file an election to be treated as an s_corporation under sec_1362 x has however established reasonable_cause for not making a timely s election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and the representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an s_corporation effective date within days from the date of this letter x should submit a properly completed form_2553 effective date with a copy of this letter attached to the relevant service_center except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transaction described above under any other provision of the code specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes this ruling is directed only to the taxpayer s 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 s dianna k miosi sincerely dianna k miosi chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court daniel j culnen petitioner v commissioner of internal revenue respondent docket nos filed date the issues for decision are whether p had sufficient basis with respect to an s_corporation to permit him to deduct his pro_rata share of that corporation’s ordinary losses for the years in guestion and whether a the corporation suffered a sec_1231 i r c loss from the disposition of property in one of those years and b p had sufficient basis to permit him to deduct his pro_rata share of that loss held p established that he had sufficient basis for all years held further p established that the s_corporation suffered only a portion of the sec_1231 i r c loss claimed held further p had sufficient basis to deduct his portion of the loss suffered frank agostino for petitioner steven w ianacone for respondent memorandum findings_of_fact and opinion halpern judge these consolidated cases involve the following determinations by respondent of deficiencies in additions to and penalties on petitioner's federal_income_tax additions to tax penalties year deficiency sec_6651 a sec_6661 sec_6662 sec_6663 dollar_figure dollar_figure dollar_figure -- -- big_number big_number -- --- dollar_figure big_number big_number --- dollar_figure -- 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 after concessions the issues for decision are whether petitioner had sufficient basis with respect to an s_corporation for his taxable calendar years and to permit him to deduct his pro_rata share of the corporation’s ordinary losses for those years in the amounts of dollar_figure dollar_figure and dollar_figure respectively and whether a the corporation suffered a sec_1231 loss from the disposition of property in and b petitioner had sufficient basis to permit him to deduct his pro_rata share dollar_figure of that loss findings_of_fact some facts have been stipulated and are so found the stipulation of facts with attached exhibits is incorporated herein by this reference at the time the petitions were filed petitioner resided in totowa new jersey wedgewood associates inc during the years in issue wedgewood associates inc a new jersey corporation wedgewood was an s_corporation see sec_1361 making its return of income on the basis of a calendar_year wedgewood was in the restaurant business in or before petitioner became a shareholder in wedgewood beginning in and ending in petitioner owned the following percentages of wedgewood’s shares year percentage dollar_figure dollar_figure dollar_figure dollar_figure wedgewood was unsuccessful in the restaurant business it ceased doing business sometime in and on or about date by deed of assignment for the benefit of creditors the deed it conveyed its property for the benefit of those creditors attached to the deed is a statement of assets which lists restaurant fixtures equipment and furnishings subject_to liens of dollar_figure a liquor license cash on hand accounts_receivable and liquor inventory only the liquor license and liquor inventory are shown to have a value dollar_figure and dollar_figure respectively ’ culnen hamilton inc during the years in issue culnen hamilton inc culnen hamilton was an insurance producer licensed by the state of new jersey during those years petitioner was the sole shareholder of culnen hamilton culnen hamilton made its return of income on the basis of a fiscal_year ending on january from date through date culnen hamilton was an s_corporation after date culnen hamilton was a c_corporation see sec_1361 wedgewood’ s payments on occasions from date through date culnen hamilton made payments by check and on one of those occasions by wire transfer to wedgewood without distinction the checks in amounts totaling dollar_figure the the record is unclear with regard to the total value of the liquor license and liquor inventory while they were the only assets listed as having value the statement of assets listed the total value of assets as dollar_figure not dollar_figure the amounts for each year are as follows year amount sdollar_figure dollar_figure dollar_figure continued checks were issued to wedgewood on behalf of petitioner the payments represented by the checks were shown on the books of culnen hamilton as shareholder loans the checks were deposited into a bank account of wedgewood and their receipt was shown on the books of wedgewood as indebtedness to petitioner at some point during the years in issue there was a reduction of dollar_figure in the total amount of dollar_figure shown on the books of both wedgewood and culnen hamilton to reflect partial repayments on occasions from date through date culnen hamilton issued checks in payment of expenses of wedgewood’s in amounts totaling dollar_figure the checks the payments represented by the checks were shown on the books of culnen hamilton as officer loans and on the books of wedgewood as indebtedness to petitioner on six occasions from date through date culnen hamilton issued checks in payment of or with respect continued dollar_figure total dollar_figure the amounts for each year are as follows year amount dollar_figure dollar_figure dollar_figure dollar_figure total dollar_figure to petitioner’s purchase from a dr nagel of dr nagel’s interest in wedgewood in amounts totaling dollar_figure the six checks the payments represented by the six checks were shown on the books of culnen hamilton as officer loans on eight occasions from date through date culnen hamilton paid certain other_amounts at least some of which related to petitioner’s investment in wedgewood in amounts totaling dollar_figure the eight payments the payments represented by the eight payments were shown on the books of culnen hamilton as officer loans for through wedgewood recorded on its books interest due to petitioner in the amounts of dollar_figure dollar_figure and dollar_figure respectively for a total of dollar_figure the amounts for each year are as follows year amount dollar_figure dollar_figure dollar_figure total dollar_figure the amounts for each year are as follows year amount dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure total dollar_figure wedgewood’ s income_tax returns wedgewood’s federal_income_tax returns for through show the following balance_sheet entries with respect to loans from shareholders year beginning balance ending balance dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number wedgewood’s federal_income_tax return for the return includes a form_4797 sale of business property which shows a disposition of furniture and fixtures acquired on date at a cost of dollar_figure and disposed of on date there is no gross_sales price shown and a loss is claimed in the amount of dollar_figure which is the acquisition price less depreciation the difference being wedgewood’s adjusted_basis in the property taking into account certain other entries on the form_4797 the net_loss reported on that form is dollar_figure the form_4797 loss a schedule_k-1 shareholder’s share of income credits deductions etc accompanying the return reports that petitioner’s share of the form_4797 loss is dollar_figure culnen hamilton’s income_tax returns culnen hamilton’s federal_income_tax returns for through show the following balance_sheet entries with respect to loans to stockholders year beginning balance ending balance dollar_figure dollar_figure big_number big_number big_number big_number petitioner’s income_tax returns on petitioner’s income_tax returns for and he claimed the following losses from wedgewood year loss dollar_figure big_number big_number on petitioner’s income_tax return he also claimed his share of the form_4797 loss in the amount of dollar_figure the dollar_figure loss opinion i introduction respondent disallowed petitioner’s pro_rata share of wedgewood’s ordinary losses for and because petitioner failed to convince respondent that he had an adequate basis with respect to his investment in wedgewood we must determine that basis respondent disallowed petitioner’s share of the form_4797 loss the dollar_figure loss for the same reason and because petitioner failed to convince respondent that wedgewood suffered the dollar_figure loss we must determine both his basis and whether wedgewood suffered any loss petitioner bears the burden_of_proof see rule a ii petitioner’s basis with respect to wedgewood a principal statutory provisions sec_1366 provides that a shareholder of an s_corporation shall take into account his pro_rata share of the s corporation’s items of income loss deduction or credit for the s corporation’s taxable_year ending in the shareholder’s taxable_year sec_1366 however imposes a limit on the amount of such losses and deductions without distinction losses that a shareholder may take into account for any taxable_year he may not take into account an aggregate amount of such losses exceeding the sum of his adjusted_basis in the stock of the s_corporation and his adjusted_basis in any indebtedness of the s_corporation to the shareholder collectively his s_corporation investment see sec_1366 any losses so disallowed may be carried forward indefinitely see sec_1366 in the statutory_notice_of_deficiency respondent sets forth numerous grounds for disallowing the dollar_figure loss on brief respondent’s principal argument other than that petitioner lacks sufficient adjusted_basis in his investment in wedgewood is that petitioner has failed to show that wedgewood realized any loss we assume that respondent has conceded any other grounds -- - b disagreement between the parties to deduct his pro_rata share of wedgewood’s losses petitioner must prove that he had sufficient adjusted_basis in his s_corporation investment with respect to wedgewood petitioner’s wedgewood investment generally cost defines an sdollar_figurecorporation shareholder’s initial basis in his s_corporation investment acquired for cash see sec_1012 adjusted_basis is determined by making certain adjustments to cost_basis see sec_1016 sec_1367 provides additional special rules with respect to adjusting basis in an s_corporation investment the disagreement between the parties concerns only petitioner’s cost_basis in his wedgewood investment the parties disagree as to whether petitioner’s cost_basis in his wedgewood investment includes the various payments represented by the checks the checks the checks and the payments collectively the wedgewood payments respondent denies that the wedgewood payments represent petitioner’s cost in obtaining his wedgewood investment respondent insists that the wedgewood payments constitute an investment by culnen hamilton not petitioner in wedgewood ’ petitioner insists that the wedgewood payments although respondent denies that the wedgewood payments represent petitioner’s cost in obtaining his wedgewood investment respondent agrees with our finding that for through petitioner’s percentage ownership in wedgewood increased from dollar_figure to percent petitioner testified continued represent petitioner’s cost in obtaining his wedgewood investment cc petitioner’s burden to prevail petitioner must prove that he not culnen hamilton invested in wedgewood see eg 59_tc_172 estate of which taxpayer was executrix and sole beneficiary advanced funds to s_corporation of which she wa sec_50 percent shareholder t he key question is whether or not the debt of the corporation runs ‘directly to the shareholder ’ to prove that petitioner invested in wedgewood he must prove that the wedgewood payments created indebtedness on the part of wedgewood to him see 117_f3d_270 5th cir true obligor on bank line of credit extended to s_corporation was shareholder in his individual capacity and not on behalf of corporation revg on another issue tcmemo_1995_326 prashker v commissioner supra pincite a shareholder could borrow the money personally and then loan the money to the corporation in that event the corporation’s debt would run directly to the shareholder continued credibly that all of his investment in wedgewood was reflected in the wedgewood payments we cannot reconcile respondent’s agreement that petitioner owned a substantial portion of wedgewood’s shares with his argument that the wedgewood payments constitute an investment by culnen hamilton in his brief respondent heads one of his arguments that petitioner did not have sufficient basis in his wedgewood investment as follows the fact that all payments to wedgewood associates inc came directly from culnen and hamilton precludes petitioner from claiming those amounts as his basis in wedgewood and thus the schedule e losses emphasis added if respondent is suggesting that the question of whether culnen hamilton lent those amounts to petitioner is irrelevant since as a matter of law direct payments by culnen hamilton to wedgewood establish culnen hamilton’s status as the investor in wedgewood he is wrong in 103_tc_711 in explaining the statutory requirement that the indebtedness of the s_corporation must run directly to the shareholder we made it clear that an indebtedness to an entity with passthrough characteristics that has advanced the funds to the s_corporation and is closely related to the taxpayer does not satisfy the statutory requirement see id pincite we did not say however that the fact that the borrowed funds originate with the closely related_entity precludes the indebtedness of the s_corporation from running directly to the shareholder certainly where there is a close relationship among the s_corporation the taxpayer and the related_entity we will scrutinize the relationships established with respect to the transfer of funds to ensure that those relationships comport with the statutory requirement respondent proposes 63_tc_468 affd 535_f2d_309 5th cir as a model for us to follow in this case in underwood the taxpayer’s s_corporation was indebted to a second corporation owned by him the taxpayer interposed himself between the two corporations by causing the corporations to substitute for the one-legged indebtedness running between the s_corporation and the second corporation a two-legged indebtedness running first from the s_corporation to him and second from him to the second corporation we concluded that the taxpayer had paid out no funds and would not until his note to the second corporation came due on that basis we were unable to distinguish his liability from that of a guarantor who makes no investment until he pays his obligation see id pincite we relied on a long list of cases for the proposition which we applied to the taxpayer that basis-giving indebtedness for the purposes of sec_1374 c b does not arise where a shareholder merely guarantees a subchapter_s corporation’s debt id pincite that is true but that is not the case here sec_1374 b as in effect at the time determined basis in indebtedness as of the close of the corporation’s year d discussion petitioner’s case petitioner called four witnesses including himself all of whom testified consistently that for many years including the years in question petitioner had used culnen hamilton as an incorporated_pocketbook having the corporation make payments on his behalf which payments were posted to culnen hamilton’s books as loans to petitioner robert levin one of those four witnesses had been petitioner’s accountant for more than years he also did accounting work for culnen hamilton he testified that from time to time petitioner would reduce the balance of his culnen hamilton loan account by liquidating investments he had made and paying the proceeds to culnen hamilton mr levin explained the rationale for that procedure as follows culnen hamilton was an s_corporation there was a lot of undistributed_taxable_income he petitioner wouldn’t take all the--he’d pay taxes on it and god knows he paid a lot of taxes over the years but he felt the money that was left in culnen hamilton because it was undistributed to him that he could spend and do what he wanted with so rather than write a check to himself and write a check to a third party he would just--if he wanted to buy a company or whatever he would just write it out----have beatrice the bookkeeper write it out of culnen hamilton charge it to his loan account okay and that’s the way he did business for the years that i’ve been his accountant although culnen hamilton was an s_corporation only until date mr levin’s testimony presents a credible explanation of petitioner’s relationship with culnen hamilton janet sacklow is a partner in the accounting firm of amsterdam sacklow acox that firm also did accounting work for culnen hamilton including preparing various financial records and its income_tax returns for the years in question ms sacklow testified that she treated the wedgewood payments as loans to petitioner for purposes of both culnen hamilton’s books_and_records and its income_tax returns she testified that the initial record of the wedgewood payments was made by culnen hamilton’s bookkeeper beatrice who would record the wedgewood payments on the corporation’s general ledger under the heading wedgewood the wedgewood entries beatrice made the wedgewood entries monthly ms sacklow testified that she was responsible for classifying the wedgewood entries as loans to petitioner she testified that she made that determination based on conversations with petitioner and because she believed that culnen hamilton had no association with wedgewood it was only because of dan culnen that the money was coming from that location ie from culnen hamilton the parties have stipulated a letter dated date from ms sacklow -- - to walter j pagano c p a the sacklow letter the sacklow letter states enclosed are the schedules of amounts loaned to wedgewood associates and dan’s acquisition costs for stock and partnership interests ms sacklow testified that she prepared those schedules the schedules from the books_and_records of culnen hamilton the first of the schedules relates to the checks and states that they were deposited into wedgewood associates accounts on behalf of daniel culnen the third of the schedules relates to the six checks and states daniel culnen’s purchase of dr nagle’s interest the final page of the schedules states summary net checks written to wedgewood from culnen and hamilton dollar_figure checks written from culnen and hamilton on behalf of wedgewood dollar_figure dan’s purchase of dr nagle’s interest dollar_figure other items dollar_figure interest accrued dollar_figure total sbig_number dollar_figure of this total dollar_figure is classified as capital stock in wedgewood associates and dollar_figure is dan’s cost of purchasing manning’s partnership_interest dollar_figure is dan’s cost for nagle’s interest in stock and partnership this leaves a balance of dollar_figure as a loan to the corporation by the stipulation respondent reserved the right to make a relevance objection to the sacklow letter but respondent waived all other evidentiary objections including an objection based on hearsay see fed r evid ms sacklow’s firm also did accounting work for wedgewood she would assist wedgewood’s employees in keeping wedgewood’s books and would prepare wedgewood’s end-of-the-year tax returns she testified that the wedgewood payments were shown as an indebtedness from wedgewood to petitioner on wedgewood’s books_and_records mr levin who prepared petitioner’s personal financial statements which showed wedgewood as an investment of petitioner’s believed absolutely that petitioner owned the shares of wedgewood individually respondent’s case respondent called no witnesses and introduced no exhibits other than those attached to the stipulation besides respondent’s argument which we have rejected that because of the wedgewood payments petitioner is precluded from claiming basis in his wedgewood investment respondent’s other argument is basically that the testimony of petitioner and his witnesses is unsupported and thus not to be believed petitioner mr levin and ms sacklow the witnesses all testified that the wedgewood payments were made by culnen hamilton to wedgewood on petitioner’s behalf the fact that the payments were made is beyond question indeed during the trial the court asked counsel for respondent mr ianacone is it a fact for purposes of this case that those checks the checks were written by culnen hamilton and deposited for the -- - benefit of mr culnen into the accounts of wedgewood is that a fact yes or no mr tanacone responded yes it is thus the only question subject_to proof is whether the wedgewood payments were made by culnen hamilton on behalf of petitioner while it is true that there are no original culnen hamilton accounting_records in evidence other than copies of its tax returns the sacklow letter is in evidence and it supports the testimony of the witnesses ms sacklow testified that she prepared the sacklow letter from the books_and_records of culnen hamilton and she traced the treatment of the wedgewood payments from the bookkeeper’s scheduling of them through her ms sacklow’s classification of them as loans to petitioner to their entry onto the books_and_records of culnen hamilton ’ while respondent may claim that the sacklow letter is not a substitute for the original books_and_records of culnen hamilton respondent cannot claim that petitioner has presented no evidence to support the witnesses’ testimony the sacklow letter is such evidence and moreover the sacklow letter isa joint exhibit respondent may also claim that he did not know what ms sacklow would say about the sacklow letter but he could have discovered that before he agreed to make it a joint exhibit since respondent stipulated the sacklow letter waiving any ms sacklow testified that consistent entries were made on the books_and_records of wedgewood hearsay objection we believe that petitioner justifiably concluded that the content of culnen hamilton’s books was not an issue in this case respondent’s claim that essentially the witnesses’ testimony should be disregarded because it is unsupported is not persuasive beyond respondent’s claim that petitioner’s witnesses’ testimony is unsupported respondent makes unsupported unpersuasive and offensive attacks on the credibility of petitioner and the ethics of his witnesses there are legitimate issues in this case but the ethics of petitioner’s witnesses are not among them respondent has here all too clearly relied on the tactic of trial by cross-examination and that tactic has failed a resort to name-calling is not an acceptable fallback position we disapprove of that tactic be conclusions we conclude and find that petitioner had adequate adjusted_basis in his wedgewood investment to deduct his pro_rata share of wedgewood’s losses for and and his share of the form_4797 loss if any i apparently respondent’s position is that none of the wedgewood payments add to petitioner’s adjusted_basis in his wedgewood investment but see supra note petitioner’s position is that all of the wedgewood payments add to petitioner’s adjusted_basis in his wedgewood investment we have not made specific findings as to the amount of petitioner’s adjusted_basis in his wedgewood investment for each of the years continued til the form_4797 loss a introduction petitioner reported his share of the form_4797 loss in the amount of dollar_figure principally the form_4797 loss resulted from wedgewood’s disposition of furniture fixtures restaurant equipment a liquor license and a liquor inventory the assets the assets were disposed of pursuant to the deed at least some of the assets were subject_to liens of secured creditors totaling dollar_figure the liens wedgewood’s adjusted_basis in the assets at the time of disposition was dollar_figure pursuant to the deed wedgewood received nominal consideration of dollar_figure and the disposition was part of a bankruptcylike proceeding carried_out_under the laws of new jersey see n j stat ann sec_2a to 2a west the disposition was to an assignee for the benefit of wedgewood’s creditors the assignee whose duty it was to liguidate the assets and apply the proceeds to reduce wedgewood’s indebtedness see in re gen assignment for benefit of creditors a 2d n j super ct b code and regulations in pertinent part sec_1001 provides that the loss from the disposition of property shall be the excess of the continued here in question because we believe that the parties are in agreement that we should make an across-the-board decision with respect to the wedgewood payments adjusted_basis in the property over the amount_realized as used in sec_1001 the term amount_realized is defined in sec_1001 in pertinent part that definition is the amount_realized from the sale_or_other_disposition of property shall be the sum of any money received plus the fair_market_value of the property other than money received sec_1_1001-2 income_tax regs addresses the discharge of liabilities in connection with the disposition of property paragraph a of sec_1_1001-2 income_tax regs provides the general_rule that the amount_realized from the sale_or_other_disposition of property includes the amount of liabilities from which the transferor is discharged as a result of the disposition paragraph a of sec_1_1001-2 income_tax regs provides that for purposes of that section the sale_or_other_disposition of property that secures a nonrecourse_liability discharges that liability paragraph b of sec_1_1001-2 income_tax regs provides that generally the fair_market_value of the security at the time of sale is not relevant for determining the amount of liabilities from which the taxpayer is discharged or treated as discharged c discussion respondent’s position is that wedgewood did not realize any loss petitioner’s position is that since wedgewood’s adjusted_basis in the assets exceeded the dollar_figure received pursuant to the deed of course it suffered a loss petitioner has failed to prove that dollar_figure was the full amount_realized on the disposition of the assets on brief petitioner states wedgewood’s liabilities greatly exceeded the fair_market_value of its assets that may be so nevertheless petitioner has failed to show that the indebtedness secured_by the liens was other than nonrecourse if it was nonrecourse then notwithstanding the fair_market_value of the assets subject_to those liens the amount_realized on the disposition of those assets included the amount of the liens dollar_figure we assume that the liguor license and liquor inventory were sold for dollar_figure petitioner has failed to argue that the amount_realized by wedgewood does not include any actual cash proceeds from the sale of assets not subject_to liens thus the amount_realized on the disposition of the assets was dollar_figure which is the sum of the indebtedness discharged the cash proceeds of dollar_figure and the nominal cash of dollar_figure since wedgewood’s adjusted_basis in the assets was dollar_figure wedgewood’s loss was dollar_figure dollar_figure dollar_figure - big_number according to wedgewood’s form_4797 for taxable_year the liquor license sold for dollar_figure we add to that amount the dollar_figure listed value of the liquor inventory from the deed for dollar_figure - - d conclusion we find that wedgewood realized a loss of dollar_figure on the disposition of the assets petitioner’s pro_rata share of that loss was dollar_figure ie percent of dollar_figure we have already found in section ii e supra that petitioner had sufficient basis to deduct his pro_rata share of the form_4797 loss dollar_figure decisions will be entered under rule