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 tege eoeg teb presp-148713-06 date date dear -------------- pursuant to sec_54 of the internal_revenue_code the code and notice_2005_98 2005_52_irb_1211 and after review of your application submitted on date including supplements thereto we have determined that the project described in appendix a attached hereto is qualified for purposes of sec_54 and will be owned by one or more qualified borrowers we allocate authority to ----------------------------------- --------------- the issuer a qualified issuer under sec_54 to issue up to dollar_figure----------- of clean renewable energy bonds crebs bonds issued pursuant to this allocation must be designated by the issuer as bonds for purposes of sec_54 for the project described in appendix a up to the amount allocated for each project described in appendix a bonds so designated must be issued on or before date please be aware that in order for bonds to be crebs the applicable_requirements of the code including without limitation sec_54 notice_2005_98 and notice_2006_7 2006_10_irb_559 must be met please note that creb proceeds may be used to reimburse capital expenditures paid_by qualified borrowers for qualified projects only if the provisions of sec_54 are met if you have any questions with respect to this allocation please contact --------------------- ------------------------------------------------------------------------------------------------------------------- - -------- or -----------------------------of the office of division counsel associate chief_counsel tax-exempt and government entities on --------------------- not a toll-free call except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter presp-148713-06 for purposes of the renewable_electricity_production_credit under sec_45 of the code no inference may be drawn from this allocation that any project listed in appendix a is a qualified_facility or that electricity to be produced at such project s is electricity from a qualified_energy resource at a qualified_facility within the meaning of sec_45 this determination is directed only to the applicant named above sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any form 8038-g information_return for tax- exempt governmental obligations filed for bonds issued pursuant to this allocation the allocation contained in this letter is based upon information and representations submitted by the applicant for the creb allocation and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the application_for an allocation it is subject_to verification on examination sincerely assistant chief_counsel exempt_organizations employment_tax government entities tax exempt government entities by timothy l jones senior counsel tax-exempt_bonds branch presp-148713-06 borrower name appendix a project type project location ------------------------------- wind facility --------------- -------------------------------- ----------------------------- amount allocated dollar_figure----------- ---------------------------------- ------------------------------------------------ ------------------------------------------------- -------------------------- -------------------------------------------- ---------------------------


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 tege eb hw plr-108972-09 date june legend county ------------------------------------ state plan trust ----------- ------------------------------------------------- ------------------------------------------------ dear --------------- facts county is a political_subdivision of state according to the information provided county adopted plan to provide medical benefits for eligible_employee retirees and their spouses and dependents as defined in sec_152 of the internal_revenue_code code additionally county provides medical benefits to a group of former employees who continue to participate in county’s pension_plan all medical benefits are insured benefits retirees may elect to continue the health plan if they are eligible for normal or early retirement and pay a premium as represented an eligible retiree is a retiree who has attained age has completed at least years of continuous service with county or has reached age with at least years of county service and has their share of plan premiums_paid by authorized after-tax deductions from monthly retirement check thus plan benefits for eligible retirees are funded by a combination of retiree post-tax contributions and county contributions benefit levels are determined by county through annual appropriations plr-108972-09 county represents that there are no cash-outs of unused amounts from plan there is no conversion of sick or vacation days into retiree health benefits and there is no salary reduction to fund retiree health benefits county created trust to provide a vehicle for funding post-employment benefits under plan the trust agreement allows the employees of county and certain government bodies affiliated with county to participate in trust trust income is derived from county contributions employee contributions and investment_income county will amend the trust agreement to provide in no case may an entity become a participating employer in trust unless it is a state a political_subdivision of a state or an entity the income of which is excluded from gross_income under sec_115 of the code and trust income is used exclusively to provide benefits to retirees their spouses and dependents and to pay administrative costs trust is governed by county retirement_plan board which has nine members three members are county employees who serve by virtue of their position one member is a county commissioner selected by the chairman of county commissioners one member is a member of the general_public selected by the county commissioners two members are county employees selected by a majority of county employees two members are retired county employees selected by a majority of retired county employees county’s governing board has exclusive authority to amend the trust agreement and to terminate trust upon termination trust assets are used to pay benefits and administrative expenses and any remaining assets will be distributed to county county proposes to amend trust to provide that upon termination of trust in no case will any remaining assets be distributed to an entity that is not a state a political_subdivision of a state or an entity the income of which is excluded from gross_income under sec_115 of the code law and analysis sec_115 of the code provides that gross_income does not include income derived from any public_utility or the exercise of any essential government function and accruing to a state or any political_subdivision thereof in revrul_77_261 1977_2_cb_45 income from an investment fund established under a written declaration of trust by a state for the temporary investment of cash balances of the state and its participating political subdivisions was excludable from gross_income for federal_income_tax purposes under sec_115 the ruling indicated that the statutory exclusion was intended to extend not to the income of a state or municipality resulting from its own participation in activities but rather to the income of a corporation or other entity engaged in the operation of public_utilities or the performance of some governmental function that accrued to either a state or municipality the ruling plr-108972-09 points out that it may be assumed that congress did not desire in any way to restrict a state’s participation in enterprises that might be useful in carrying out projects that are desirable from the standpoint of a state government and which are within the ambit of a sovereign properly to conduct in addition pursuant to sec_6012 and the underlying regulations the investment fund being classified as a corporation that is subject_to taxation under subtitle a of the code was required to file a federal_income_tax return each year in revrul_90_74 1990_2_cb_34 the service determined that the income of an organization formed funded and operated by political subdivisions to pool various risks casualty public liability workers’ compensation and employees’ health is excludable from gross_income under sec_115 of the code in revrul_90_74 private interests neither materially participate in the organization nor benefit more than incidentally from the organization trust provides health benefits to retired employees of county a political_subdivision of state providing health benefits to current and former employees constitutes the performance of an essential government function based upon revrul_90_74 and revrul_77_261 trust performs an essential_governmental_function within the meaning of sec_115 of the code the income of trust accrues to county no private interests participate in or benefit from the operation of trust any distribution of remaining funds in trust to participating retirees upon the dissolution of trust satisfies an obligation county has assumed with respect to providing benefits to their employees the benefit to participants is incidental to the public benefit see revrul_90_74 sec_61 of the code and sec_1_61-21 of the income_tax regulations provide that except as otherwise provided in subtitle a of the code gross_income includes compensation_for services including fees commissions fringe_benefits and similar items however sec_106 of the code provides that gross_income of an employee does not include employer-provided coverage under an accident_or_health_plan sec_1_106-1 of the regulations provides that the gross_income of an employee does not include contributions which his employer makes to an accident_or_health_plan for compensation through insurance or otherwise to the employee for personal injuries or sickness incurred by him his spouse or his dependents as defined in sec_152 the employer may contribute to an accident_or_health_plan either by paying the premium or a portion of the premium on a policy of accident_or_health_insurance covering one or more of his employees or by contributing to a separate trust or fund including a fund referred to in sec_105 which provides accident and health benefits directly or through insurance to one or more of his employees however if the insurance_policy trust or plr-108972-09 fund provides other_benefits in addition to accident or health sec_106 applies only to the portion of the contributions allocable to accident or health benefits coverage provided under an accident_and_health_plan to former employees and their spouses and dependents is excludable from gross_income under sec_106 see revrul_62_199 1962_2_cb_32 revrul_82_196 1982_2_cb_53 sec_105 provides that except as otherwise provided in sec_105 amounts received by an employee through accident_or_health_insurance for personal injuries or sickness shall be included in gross_income to the extent such amounts are attributable to contributions by the employer which were not includible in the gross_income of the employee or are paid_by the employer sec_105 provides that except in the case of amounts attributable to and not in excess of deductions allowed under sec_213 relating to medical_expenses for any prior taxable_year gross_income does not include amounts referred to in subsection a if such amounts are paid directly or indirectly to the taxpayer to reimburse the taxpayer for expenses_incurred by him for the medical_care as defined in sec_213 of the taxpayer his spouse and his dependents as defined in sec_152 of the code based on the information submitted and representations made we conclude as follows provided the amendments to the trust agreement as described above are adopted and as of the date the amendments are adopted the income of trust will be derived from the exercise of an essential_governmental_function and will accrue to a state or a political_subdivision thereof for purposes of sec_115 accordingly trust’s income will be excludable from gross_income under sec_115 of the code if trust is classified as a_trust for federal_income_tax purposes trust is not required to file an annual income_tax return under sec_6012 of the code contributions paid to plan and payments made from plan which are used exclusively to pay for the accident or health coverage of retired employees their spouses and dependents as defined in sec_152 are excludable from the gross_income of retired employees and retired employees’ spouses and dependents under sec_106 and sec_105 of the code no opinion is expressed concerning the federal tax consequences of plan or trust under any other provision of the code other than those specifically stated herein this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-108972-09 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely harry beker branch chief health and welfare branch office of division counsel associate chief_counsel tax exempt government entities


internal_revenue_service number release date index number ---------------------- ----------------------------- -------------------------------- ------------------------ ------------------------------------- department of the treasury washington dc person to contact ----------------- id no ------------- telephone number refer reply to cc psi b02 - plr-123794-06 date date -------------------------------- x -------------------------------------------------- y -------------------------------------------------- ---------------------------------- -------------------------- --------- ------------ ----------------------- -------------------------- z -------------------------------------------------- country country date date dear ----- ----------- requesting that the service grant x an extension of time under sec_301_9100-3 of the procedure and administration regulations to make an entity classification election x represents that x is a foreign_entity eligible to elect to be treated as an association_taxable_as_a_corporation x is a wholly-owned subsidiary of y a country limited_liability_company z a domestic_corporation acquired y and x through a subsidiary on date at the time of the acquisition x was intended to be treated as an association_taxable_as_a_corporation effective date due to inadvertence x failed to file a timely form_8832 entity classification election electing to treat x as an association_taxable_as_a_corporation effective date this letter responds to a letter dated date submitted on behalf of x the information submitted states that x was formed under the laws of country sec_301_7701-3 provides that a business_entity that is not classified as a plr-123794-06 corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes a business_entity is any entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the internal_revenue_code b unless the entity elects otherwise a foreign eligible_entity is-- a a partnership if it has two or more members and at least one member does not have limited_liability or b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides that except as provided in sec_301 sec_301_9100-1 through provide the standards the sec_301_9100-1 provides that the commissioner may grant a reasonable sec_301_7701-3 provides that to elect to be classified other than as provided in sec_301_7701-3 an eligible_entity must file form_8832 with the designated service_center sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to seventy-five days prior to the date the form is filed or up to twelve months after the date on which the form is filed extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin commissioner will use to determine whether to grant an extension of time to make the election making certain elections determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 sec_301_9100-2 provides the rules governing automatic extensions of time for sec_301_9100-3 provides the standards the commissioner will use to except as specifically set forth above no opinion is expressed concerning the plr-123794-06 with the appropriate service_center and elect to be treated as an association_taxable_as_a_corporation effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose federal tax consequences of the facts described above under any other provision of the code provides that it may not be used or cited as precedent being sent to x's authorized representative pursuant to a power_of_attorney on file with this office a copy of this letter is this ruling is directed only to the taxpayer requesting it sec_6110 sincerely enclosures copy of this letter copy for sec_6110 purposes heather c maloy associate chief_counsel passthroughs and special industries


internal_revenue_service number release date index number ---------------------- ------------------------------------------------ ------------------------------------------------------ ----------------- --------------------------------------- in re --------------------------------- -------------------------------------- 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 b05 plr-139447-14 date date legend taxpayer corp generator facility x power purchaser state dear ------------- -------------------------------------------------------------------------------------------- -------------------------------------- -------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- ------------------------ -------------------------------------------------------------------------------------------- ------------------------------------------ ---------------------------------------------------- ------------------------------------------------------ --------------------- this letter responds to a request for a ruling dated date and subsequent correspondence submitted on behalf of taxpayer by your authorized representative taxpayer requests a ruling under sec_118 of the internal_revenue_code the relevant facts as represented in your submission are set forth below facts taxpayer is a wholly owned subsidiary of corp and is located in state taxpayer is a regulated electric utility company with electricity distribution and transmission businesses the distribution business consists primarily of the delivery purchase and sale of electricity to customers within its franchise service territory the plr-139447-14 transmission business owns and maintains transmission facilities that are part of an interstate power transmission grid generator is unrelated to taxpayer generator owns and operates the facility a qualified_facility under the public_utilities regulatory policies act of for generator to wheel power produced by the facility to power purchaser in another state pursuant to a long-term power purchase contract the facility must interconnect with the distribution lines of x and the distribution lines and transmission grid of taxpayer power purchaser is unrelated to generator taxpayer and x generator agreed to pay the costs to interconnect the facility to the distribution lines of x and the distribution lines and transmission grid of taxpayer taxpayer represents a the intertie contributed by generator to taxpayer will become a permanent part of taxpayer’s electric system b the proposed contribution is not compensation_for electric supply services provided by taxpayer for generator but only represents reimbursement for the intertie to allow generator to move power onto the grid for sale to other unrelated parties c taxpayer will not include the costs of the intertie in its rate base and d taxpayer will hold legal_title to the intertie and operate the intertie as an integral part of its electric system generator represents a generator will reimburse taxpayer for all costs incurred in connection with the intertie b generator’s purpose for financing the intertie is so that generator can gain access to markets for the sale of electricity produced by the facility c no part of the intertie is being made for the primary purpose to enable x or any other utility to sell power to the facility d generator will depreciate its contribution for the intertie using 20-year straight_line depreciation and e the flow of power to the facility from the grid in all years will not exceed of the total power flows over the intertie ruling requested taxpayer requests a ruling that the amounts paid_by generator to reimburse taxpayer for the intertie are not a contribution_in_aid_of_construction ciac under sec_118 and are excludable from taxpayer's gross_income as a non-shareholder contribution_to_capital under sec_118 plr-139447-14 law and analysis sec_61 and sec_1_61-1 of the income_tax regulations provide that gross_income means all income from whatever source derived unless excluded by law sec_118 provides that in the case of a corporation gross_income does not include any contribution_to_the_capital_of_the_taxpayer sec_118 provides that the term contribution_to_the_capital_of_the_taxpayer does not include any contribution_in_aid_of_construction or any other contribution as a customer or potential customer sec_1_118-1 of the income_tax regulations provides that in the case of a corporation sec_118 provides an exclusion_from_gross_income with respect to any contribution of money or property to the capital of the taxpayer thus if a corporation requires additional funds for conducting its business and obtains such funds through voluntary pro_rata payments by its shareholders the amounts so received being credited to its surplus account or to a special account such amounts do not constitute income although there is no increase in the outstanding shares of stock of the corporation in such a case the payments are in the nature of assessments upon and represent an additional price paid for the shares of stock held by the individual shareholders and will be treated as an addition to and as a part of the operating capital of the company sec_118 also applies to contributions to capital made by persons other than shareholders for example the exclusion applies to the value of land or other_property contributed to a corporation by a governmental_unit or by a civic group for the purpose of inducing the corporation to locate its business in a particular community or for the purpose of enabling the corporation to expand its operating facilities notice_2016_36 2016_25_irb_1029 provides a safe_harbor for transfers of property from either an electricity generation or cogeneration_facility or an energy storage_facility to a regulated_public_utility used to facilitate the transmission of electricity over the utility’s transmission system to be treated as a contribution to the capital of a corporation under sec_118 and not a contribution_in_aid_of_construction ciac under sec_118 the safe_harbor provides that a contribution of an intertie including a dual-use intertie by a generator to a utility will not be treated as gross_income under sec_118 or a ciac under sec_118 if all of the following conditions are met first the generator may not purchase electricity from the utility unless the purchase satisfies the test the test provides that if in light of all information available to the utility at the time the intertie is contributed it is reasonably projected that during the ten taxable years of the utility beginning with the year in which the contributed intertie is placed_in_service no more than of the projected total power flows over the intertie will flow to the plr-139447-14 generator the test will be satisfied this projection must be supported by appropriate documentation total power flows mean power flows to or from the generator over the intertie power flows to a generator include power flows to a related_party of the generator if the transmission of power to the related_party has been facilitated by the contribution of the intertie for purposes of the test power flows in the taxable_year in which the transferred property is placed_in_service may at the option of the utility be ignored power purchases by the generator from parties other than the utility are not taken into account second in the case of electricity wheeled over the utility’s transmission system ownership of the wheeled electricity remains with the generator prior to its transmission onto the grid this ownership requirement is deemed to be satisfied if title to electricity wheeled passes to the purchaser at the busbar on the generator's end of the intertie third the cost of the intertie is not included in the utility’s rate base fourth the intertie will be used for transmitting electricity finally the cost of the intertie is capitalized by the generator as an intangible asset and recovered using the straight-line method over a useful_life that is treated as years a utility may not claim depreciation or amortization deductions with respect to the intertie however if the intertie is subsequently transferred or deemed transferred to the utility the utility may be allowed to take depreciation_deductions with respect to the intertie section viii of notice_2016_36 provides that the irs will not issue private letter rulings involving the safe_harbor under notice_2016_36 further section dollar_figure of revproc_2017_1 2017_1_irb_1 provides that generally the service will not issue a letter_ruling or a determination_letter if the request presents an issue that cannot be readily resolved before a regulation or any other published guidance is issued sec_3 of revproc_2017_3 provides that the service will not issue rulings or determination letters concerning whether a transfer of an intertie as defined in section iii b of notice_2016_36 meets all of the requirements under the safe_harbor provided by notice_2016_36 in this case taxpayer requested the private_letter_ruling before the project that led to publication of notice_2016_36 was opened and before the addition of this area to revproc_2017_3 in the interest of sound tax_administration and because the circumstances of this particular case warrant the issuance of a private_letter_ruling we are issuing this private_letter_ruling in the instant case the transfer of the intertie is subject_to the guidance set forth in notice_2016_36 and we conclude that the deemed contribution of the intertie by generator to taxpayer meets the safe_harbor requirements of notice_2016_36 therefore the deemed contribution of the intertie to taxpayer and all sums paid for construction of the intertie are not a ciac under sec_118 and are excludable from taxpayer's gross_income as a non-shareholder contribution_to_capital under sec_118 a change in a utility’s treatment of a transfer of an intertie including a change to or from the safe_harbor method_of_accounting provided in section iii of notice_2016_36 plr-139447-14 is a change in method_of_accounting to which the provisions of sec_446 and sec_481 and the regulations thereunder apply a utility that wants to change to the methods_of_accounting described in this notice must use the automatic change procedures in revproc_2015_13 2015_5_irb_419 or its successor taxpayer should follow the instructions under section dollar_figure of revproc_2016_29 2016_21_irb_880 with respect to the transaction described in this letter_ruling except as specifically set forth above no opinion is expressed or implied concerning the federal_income_tax consequences of the above described facts under any other provision of the code or regulations this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent this ruling is based upon information and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely nicole r cimino chief branch office of the associate chief_counsel passthroughs special industries enclosure copy of this letter for sec_6110 purposes cc


t c memo united_states tax_court james g lebloch and cathy michelsen lebloch petitioners v commissioner of internal revenue respondent docket no filed date james g lebloch for petitioners michael w berwind for respondent memorandum findings_of_fact and opinion laro judge petitioners petitioned the court to redetermine respondent’s determinations with respect to their and federal income taxes respondent determined the following deficiencies and sec_6662 accuracy-related_penalties for those years year deficiency accuracy-related_penalty dollar_figure dollar_figure big_number dollar_figure big_number dollar_figure the deficiencies and accuracy-related_penalties are primarily attributable to respondent’s determination of unreported income by way of bank_deposits analyses and to respondent’s disallowance of self-employment expenses for lack of substantiation following concessions we decide the following issues as to each subject year unless otherwise indicated section references are to the applicable versions of the internal_revenue_code rule references are to the tax_court rules_of_practice and procedure petitioners’ petition contains no allegation of error as to the accuracy-related_penalties included in the notices of deficiency nor does petitioners’ posttrial opening brief set forth any argument as to the accuracy-related_penalties or list that matter as an issue requiring decision we consider petitioners to have conceded their liability for the accuracy- related penalties see rule b 123_tc_213 see also 127_tc_118 n 123_tc_64 cf 118_tc_358 the commissioner’s burden of production under sec_7491 does not apply where the taxpayer concedes liability for an accuracy-related_penalty by failing to assign error to the commissioner’s determination of the accuracy-related_penalty we also consider petitioners to have conceded all other determinations set forth in the notices of deficiency that petitioners did not adequately pursue in their posttrial opening brief see palahnuk v commissioner supra pincite n harbor cove marina partners pship v commissioner supra pincite whether petitioners underreported their income we hold they did in the amounts set forth herein whether petitioners may deduct the disputed expenses we hold they may not a preface findings_of_fact some facts were stipulated or contained in the exhibits submitted therewith we find the facts accordingly petitioners were husband and wife from date through the end of the subject years and they filed joint federal_income_tax returns for those years when their petition was filed they resided in a 3-bedroom house residence in laguna beach california petitioners purchased the residence for dollar_figure each of them paying half of the downpayment and the interior of the residence measured approximately big_number square feet that square footage does not include a 2-car garage that measured approximately square feet at the time of trial petitioners were divorced and petitioner cathy michelsen lebloch michelsen lived in or around brisbane australia with respect to their household bills and other finances petitioners had an arrangement that they pay equally all common expenses eg mortgage property taxes utilities and that the the record does not establish whether the garage was attached to the residence spouse benefiting from any other expense pay that expense petitioners maintained separate financial accounts and did not own any financial_account jointly when one of them paid a common expense in full or paid an expense of the other the other one typically wrote contemporaneously a check to the payee for half of the expense in the case of a common expense or for the full expense b lebloch james g lebloch lebloch received a law degree from the university of illinois in and a graduate law degree in taxation from new york university in he worked for general motors corp from about through except for approximately months when he was earning his graduate law degree he worked as tax counsel for monsanto corp from about through and as a chief financial officer for seagate technology from through he worked from through as a senior attorney in respondent’s office_of_chief_counsel in los angeles california he has worked in private practice as a tax attorney since c nature’s touch michelsen formed and operated three retail gift shops known as nature’s touch from january through date she operated two of the shops as a sole_proprietor she operated the third shop as a sole_proprietor from its opening on date through date after date she operated the three shops as an officer and director of her wholly owned corporation nt inc nt michelsen formed nt in date and she has always been its sole officer sole director and sole shareholder michelsen opened one of the three nature’s touch shops in san juan capistrano california in date nineteen months later she opened the second shop in palm desert california the palm desert shop did not do well financially and michelsen moved the business of that shop to palm springs california in date michelsen’s lease of the vacated premises had not yet expired at the time of the move and she sublet those premises in exchange for dollar_figure on date michelsen opened the third nature’s touch shop in carlsbad california the approximate sizes of the shops in san juan capistrano palm springs and carlsbad were big_number big_number and big_number square feet respectively the nature’s touch shops sold mostly to different gift items eg fountains garden supplies stationery books michelsen purchased those items from approximately different vendors and displayed most of the items throughout the shops in wooden display cubes built by her and lebloch or on wall and ceiling hangers built by lebloch lebloch helped michelsen prepare each shop for its opening and he helped her maintain the shops by performing a variety of handyman services lebloch also advised michelsen initially in her capacity as a sole_proprietor and later in her capacity as an officer and director of nt on financial and legal matters related to the shops as well as on items to purchase as inventory for the shops lebloch routinely paid expenses for the shops out of his personal finances and he contemporaneously requested and obtained from the shops reimbursement for those payments through his submission to michelsen of written reports that listed the specific expenses that he paid on behalf of the shops accompanied by any related receipt during the subject years lebloch did not receive any compensation_for services that he performed for or on behalf of the shops each nature’s touch shop had a manager and three or four other year round employees the general duties of the managers with respect to the shops they managed was to monitor the shop’s inventory and report to michelsen the need or desire for any additional inventory to oversee and schedule employees to keep the shop clean and orderly and to prepare the shop’s receipts for weekly deposit in the bank michelsen’s main role in the shops was to oversee the work of the managers by speaking to them telephonically usually once a day while they were at the shop sec_4 the number of employees at each shop increased approximately threefold during the seasonal 2-month period beginning on november and she was at the residence about the status of the shops including whether any manager needed or desired any specific piece or pieces of inventory that michelsen had at the residence michelsen purchased inventory for all of the shops usually by calling the vendors and having most if not all of the merchandise shipped directly to the shops she aimed to coordinate a somewhat even distribution of inventory between the shops and when she visited the shops usually on a weekly basis she transported inventory in her car from the residence to the shops or from one shop to another michelsen also prepared and monitored the budget for the shops and she generally deposited the shops’ weekly receipts into the bank for the most part in michelsen also toured a few locations in southern california in search of a place to move the second nature’s touch store and a place to open the third nature’s touch shops inventory was displayed at the shops or to a lesser extent stored at the residence in either the garage or in the guest bedroom closet approximately square feet in size or at the michelsen also once or twice a year purchased inventory at retailer-only gift shows there petitioners and sometimes one or more employees of nature’s touch viewed various merchandise displayed by manufacturers usually on tables and ordered products for sale at the nature’s touch stores shops the record does not establish the specific pieces or amount of inventory that was stored at any of these places petitioners did not park automobiles in the garage but they used the garage to store items of inventory and for personal purposes such as storing shovels rakes and tools unrelated to the shops michelsen used another bedroom approximately square feet in size in the residence as an office where she performed some of her work related to the shops this bedroom was set up by petitioners as an office and it was not used for any other purpose eg it did not have any bedroom furniture the office had a computer which michelsen used mainly for budgeting and accounting purposes related to the shops michelsen did not record the income and expenses of the nature’s touch shops on paper eg in a ledger but recorded the information solely on a program on the computer the office also had a facsimile machine and a telephone with two lines the second line generally devoted to the facsimile machine during the nature’s touch shops experienced dire cashflow problems that required an immediate borrowing of cash on four occasions during that year michelsen informed lebloch that she needed cash to alleviate a cashflow problem of the shops and she asked lebloch to lend her the necessary cash on michelsen also kept in the guest bedroom closet old tapes and old credit card records date as a result of michelsen’s moving the shop to palm springs lebloch lent michelsen dollar_figure to use in the business on each of the days october and and date as a result of michelsen’s opening of the shop in carlsbad lebloch lent michelsen another dollar_figure each loan in was informal the parties thereto at the time living together as significant others understood that michelsen would repay the loans without interest in the near future when the shops’ cashflow allowed her to do so michelsen used all dollar_figure of the loan proceeds dollar_figure dollar_figure dollar_figure dollar_figure for the benefit of the nature’s touch shops on date michelsen repaid the entire dollar_figure the nature’s touch shops experienced additional cashflow problems in that required the borrowing of money on five occasions during that year michelsen informed lebloch that nt needed cash to alleviate a cashflow problem of the shops and she asked lebloch to lend nt the necessary cash in or around date michelsen on behalf of nt had purchased a lot of inventory for the holiday season and michelsen realized in date when the bills were coming due on these purchases that she would need additional money for the business michelsen on behalf of nt was also entering into a permanent lease for the shop in carlsbad and she needed money to pay the first and last months’ rent for those premises as well as an accompanying security deposit she also needed money to buy inventory for the newly opened shop in carlsbad as well as to pay for display units and fixtures such as counters shelving and special lighting on the respective days january and lebloch lent michelsen dollar_figure and dollar_figure for use in the business of nt on each of the days january and february and lebloch lent dollar_figure directly to nt each of these five loans was informal the principals thereto husband and wife understanding that michelsen with respect to the first two loans and nt with respect to the last three loans would repay the loans without interest in the near future when the shops’ cashflow allowed her or it to do so of the dollar_figure in loans made in dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure was repaid to lebloch in dollar_figure on date and dollar_figure on date and dollar_figure was repaid to lebloch in dollar_figure on date and dollar_figure on date michelsen or nt used all of the dollar_figure in loan proceeds in the business of the nature’s touch shops and as of the time of trial all of the dollar_figure had been repaid during petitioners traveled to australia and tahiti petitioners flew from los angeles california to sydney australia on date they stayed in sydney for nights and then rented a car and drove to brisbane on date they flew from brisbane to papeete tahiti they stayed in papeete for nights and returned to los angeles on date during those travels michelsen attended a gift trade fair in sydney where she found a single product that she ended up selling at the nature’s touch shops she also in or around brisbane purchased some other items which she displayed for sale in the nature’s touch shops petitioners incurred dollar_figure of expenses for the trip to australia and considered dollar_figure of that amount to be a business-related travel expense as discussed further below petitioners did not consider or report any of their expenses related to tahiti as business related d and schedules c for federal_income_tax purposes michelsen reported the income and expenses of the nature’s touch shops on a schedule c profit or loss from business filed as part of their return the schedule reported on the basis of an accrual_method of accounting that the shops for had gross_receipts of dollar_figure costs of goods sold of dollar_figure and total expenses of dollar_figure resulting in a net_loss of dollar_figure the schedule was accompanied by a form_8829 expenses for business use of your home reporting home operating_expenses of dollar_figure and home according to the schedule c the inventory of the shops was dollar_figure at the beginning of the year and dollar_figure at the end of the year depreciation of dollar_figure the form_8829 itemized the home operating_expenses as follows direct expenses repairs and maintenance dollar_figure utilitie sec_989 indirect expenses insurance repairs and maintenance big_number utilities big_number total big_number business-use percentage big_number total big_number petitioners did not deduct for any of either the reported home operating_expenses or the reported home depreciation but deducted all of those amounts for as a carryover to that year petitioners claimed on the form_8829 that percent of the residence was used exclusively for business purposes they stated on the form that they ascertained that percentage by dividing the area used regularly and exclusively for business or for storage of inventory reported as square feet by the total area of home reported as big_number square feet the schedule c itemized the total expenses of dollar_figure as follows advertising dollar_figure car and truck big_number depreciation big_number insurance other than health big_number legal and professional service sec_475 rent or lease other business property big_number the record does not reveal how petitioners ascertained either square footage supplies big_number travel big_number meals and entertainment after 50-percent reduction big_number utilities big_number wages big_number other expense sec_1 big_number total big_number the schedule c did not identify any of these other expenses for federal_income_tax purposes petitioners did not report the income and expenses of the nature’s touch shops on their personal income_tax return their personal return included a schedule c that reported the income and expenses of michelsen as board chairman of nt the schedule reported on the basis of the cash_receipts_and_disbursements_method of accounting that the reported business had a net profit of dollar_figure for resulting from gross_receipts of dollar_figure total expenses of dollar_figure and home business_expenses of dollar_figure the schedule was accompanied by a form_8829 reporting that percent of the residence was used exclusively for business purposes and that the dollar_figure of home business_expenses consisted of operating_expenses of dollar_figure inclusive of the dollar_figure carryover from and depreciation of dollar_figure inclusive of the dollar_figure carryover from the form_8829 itemized the home business_expenses as follows operating_expenses direct expenses utilities dollar_figure indirect expenses insurance repairs and maintenance big_number utilities big_number total big_number business-use percentage big_number carryover from big_number total big_number depreciation current depreciation big_number depreciation carryover from big_number total big_number total big_number we note petitioners’ dollar_figure adding mistake the schedule c itemized the total expenses of dollar_figure as follows supplies dollar_figure meals and entertainment after 50-percent reduction big_number total big_number for federal_income_tax purposes petitioners did not report the income and expenses of the nature’s touch shops on their personal income_tax return their personal return included a schedule c that reported the income and expenses of michelsen as corporate director consultant the schedule reported on the basis of an accrual_method of accounting that the although the schedule c lists the name of proprietor as james and cathy lebloch the return clarifies on schedule se self-employment_tax that the income reported on the schedule c is that of michelsen only reported business had a net profit of dollar_figure for resulting from gross_receipts of dollar_figure total expenses of dollar_figure and home business_expenses of dollar_figure the schedule was accompanied by a form_8829 reporting that percent of the residence was used exclusively for business purposes and that the dollar_figure of home business_expenses consisted of operating_expenses of dollar_figure and depreciation of dollar_figure the form_8829 itemized the home business_expenses as follows operating_expenses direct expenses utilities dollar_figure other expense sec_264 indirect expenses insurance repairs and maintenance big_number utilities big_number total big_number business-use percentage big_number total big_number current depreciation big_number total big_number we note petitioners’ dollar_figure adding mistake the schedule c itemized the total expenses of dollar_figure as follows depreciation dollar_figure legal and professional service sec_556 office expense rent or lease vehicles machinery and equipment big_number travel big_number meals and entertainment after 50-percent reduction big_number other expense sec_1 big_number total big_number the schedule c did not identify any of these other expenses e amended returns on their federal_income_tax return petitioners reported adjusted_gross_income of dollar_figure the dollar_figure consisted of the following reported items and amounts lebloch’s wages from irs dollar_figure interest big_number schedule c net profit big_number ira deduction big_number one-half of self-employment_tax big_number alimony paid big_number adjusted_gross_income big_number on their federal_income_tax return petitioners reported adjusted_gross_income of dollar_figure the dollar_figure consisted of the following reported items and amounts lebloch’s wages from irs dollar_figure michelsen’s wages from nt big_number interest and ordinary dividend sec_84 taxable refund sec_90 schedule c net profit big_number capital_gain one-half of self-employment_tax alimony paid big_number adjusted_gross_income big_number on or about date after the commissioner had begun his audit of the subject years and had proposed his adjustments increasing petitioners’ taxable_income to reflect the unreported income ascertained under the bank account analyses petitioners filed an amended federal_income_tax return claiming without further explanation that dollar_figure reported as compensation received from nt during was really a loan repayment at the same time petitioners also filed an amended federal_income_tax return claiming without further explanation that dollar_figure reported as compensation received from nt during was really a loan repayment each of these amended returns claimed a refund resulting from the claimed recharacterization of the originally reported compensation as loan repayments respondent did not grant either of those claims for refund f petitioners’ financial_account sec_1 overview throughout the subject years petitioners had bank or investment accounts collectively financial accounts nine of the financial accounts were in the name of lebloch the remaining four financial accounts were in the name of michelsen lebloch’s accounts lebloch had three financial accounts at the laire federal credit_union laire the first account a primary savings account laire was open from date through date the second account a checking account laire was open during all of and the third account a secondary savings account laire was open from june through date lebloch had three financial accounts at the postal federal employees credit_union pfe each of these accounts was open from date through date these accounts were a primary share account pfe sec_1 a subshare account pfe sec_2 and a reality checking account pfe s18 lebloch’s last three financial accounts were brokerage accounts one brokerage account was a merrill lynch investment account merrill lynch account which was open throughout the subject years another brokerage account was a paine webber investment account paine webber account which was open during all of the last brokerage account was a second account at paine webber this account was open during all of michelsen’s accounts michelsen’s four accounts were all at bank of america ba the first account a business checking account ba was open from january through date the second account another business checking account ba was open from april through date these two accounts were the checking accounts for the nature’s touch shops when operated through michelsen’s sole_proprietorship afterwards ba was the corporate bank account for nt the balance in ba was transferred to ba on date michelsen’s third account a checking account ba was open from january through date her fourth account another checking account ba was open from date through date the balance in ba was transferred to ba on date g notices of deficiency overview on date respondent issued to petitioners a notice_of_deficiency for and a notice_of_deficiency for and the notices of deficiency determined the following adjustments to amounts reported on petitioners’ federal_income_tax returns for and unreported rental income dollar_figure -0- -0- unreported interest_income big_number -0- dollar_figure unreported capital_gains income -0- dollar_figure -0- unreported schedule c income big_number big_number big_number total unreported income big_number big_number big_number self-employment_tax deduction big_number big_number big_number disallowed itemized_deductions big_number -0- big_number disallowed alimony expense big_number big_number disallowed schedule c expenses big_number big_number big_number total increases to income big_number big_number big_number the notices of deficiency itemized the disallowed schedule c expenses as follows insurance dollar_figure -0- -0- meals and entertainment big_number dollar_figure dollar_figure supplies big_number -0- travel big_number -0- big_number business use of home -0- big_number big_number rent or lease expense -0- -0- big_number office expense -0- -0- legal and professional -0- -0- depreciation -0- -0- big_number other expenses big_number -0- big_number total big_number big_number big_number respondent’s bank_deposits analyses respondent determined the amounts of unreported income listed in the notices of deficiency by performing bank_deposits analyses the total deposits including interest credited to accounts into petitioners’ financial accounts were as follows laire dollar_figure dollar_figure dollar_figure laire big_number big_number -0- laire -0- big_number -0- pfe sec_1 -0- big_number big_number pfe sec_2 -0- big_number big_number pfe s18 -0- big_number big_number paine webber account big_number -0- -0- merrill lynch account big_number -0- big_number ba big_number big_number big_number ba big_number -0- -0- ba big_number -0- -0- ba big_number -0- -0- total big_number big_number big_number as to those deposits respondent’s bank_deposits analyses characterized the following amounts as nontaxable interaccount transfers dollar_figure dollar_figure dollar_figure loan receipts big_number -0- -0- visa advances big_number big_number big_number sales_tax remittances jan to date big_number -0- -0- returned deposits big_number -0- -0- wedding gift -0- big_number -0- total big_number big_number big_number respondent’s bank_deposits analyses determined that the following deposits were reported on the subject federal_income_tax returns wages less withholdings dollar_figure dollar_figure dollar_figure interest big_number big_number dividends -0- -0- schedule c gross_receipts big_number big_number big_number schedule d sales big_number -0- -0- total big_number big_number big_number respondent’s bank_deposits analyses concluded that petitioners had unexplained bank_deposits as follows total deposits dollar_figure dollar_figure dollar_figure nontaxable items big_number big_number big_number reported amounts big_number big_number big_number unexplained deposit sec_1 big_number big_number big_number the parties do not explain the difference between the amounts of unexplained deposits and the amounts of the total unreported income set forth in the notices of deficiency a burden_of_proof opinion sec_7491 was added to the internal_revenue_code by the internal_revenue_service restructuring and reform act of publaw_105_206 sec c 112_stat_727 effective for court proceedings arising from examinations commencing after date while the burden_of_proof in this court is usually on a petitioning taxpayer see rule a sec_7491 provides that the burden_of_proof on certain issues affecting the liability of a taxpayer for tax shifts to the commissioner in specified circumstances we hold that sec_7491 does not apply to either issue before us because we find petitioners have not proven that they complied with the requirements of sec_7491 to cooperate fully with respondent’s reasonable requests for witnesses information documents meetings and interviews see also 121_tc_273 in fact we find from the record that petitioners did not cooperate with such reasonable requests by respondent during the course of the audit we hold that petitioners bear the burden_of_proof b unreported income gross_income includes all income from whatever source derived sec_61 and taxpayers are required to keep books_and_records sufficient to establish their federal_income_tax liability see sec_6001 see also sec_1_6001-1 income_tax regs where taxpayers have not maintained adequate business records to establish such liability the commissioner may reconstruct income by any method that the commissioner believes reflects income clearly see sec_446 94_tc_654 the commissioner’s method need not be exact however it must be reasonable see 348_us_121 the bank_deposits method for computing unreported income has long been sanctioned by the judiciary see 281_f2d_100 9th cir affg tcmemo_1958_94 96_tc_858 affd 959_f2d_16 2d cir bank_deposits are prima facie evidence of income see 87_tc_74 where an individual taxpayer has failed to maintain adequate_records as to the amount and source of his or her income and the commissioner has determined that the deposits are income the burden is on the taxpayer to show that the commissioner’s determination is incorrect petitioners argue that respondent’s use of the bank_deposits analyses was unjustified because they state they kept adequate_records establishing their income we disagree while petitioners may have used a computer_program to memorialize their income and expenses we are unable to find from credible_evidence in the record that petitioners ever gave to respondent before issuance of the notices of deficiency adequate_records to support their reported income for any subject year on the basis of the record at hand we hold that respondent’s use of the bank_deposits analyses was proper petitioners argue alternatively that respondent misapplied the bank_deposits analyses in that they argue respondent failed to recognize that most of the disputed deposits arose from nontaxable sources petitioners argue that respondent’s bank_deposits analyses should be adjusted as follows petitioners’ as additional as determined adjustments adjusted total deposits including interest dollar_figure -0- dollar_figure less adjustments interaccount transfers big_number dollar_figure dollar_figure loan receipts big_number -0- dollar_figure loan repayments -0- dollar_figure dollar_figure visa advances big_number dollar_figure dollar_figure sales_tax remittances big_number dollar_figure dollar_figure returned deposits big_number -0- dollar_figure expense report reimbursement -0- dollar_figure dollar_figure total big_number dollar_figure dollar_figure less reported income wages big_number dollar_figure dollar_figure interest big_number dollar_figure dollar_figure schedule c gross_receipts big_number -0- dollar_figure schedule d sales big_number -0- dollar_figure total big_number dollar_figure dollar_figure unexplained deposits big_number big_number big_number petitioners’ as additional as determined adjustments adjusted total deposits including interest dollar_figure -0- dollar_figure less adjustments interaccount transfers big_number dollar_figure dollar_figure loan repayments -0- dollar_figure dollar_figure visa advances big_number -0- dollar_figure gifts big_number -0- dollar_figure total big_number dollar_figure dollar_figure less reported income wages big_number dollar_figure dollar_figure interest big_number -0- dollar_figure schedule c gross_receipts big_number -0- dollar_figure total big_number dollar_figure dollar_figure unexplained deposits big_number big_number dollar_figure petitioners’ as additional as determined adjustments adjusted total deposits including interest dollar_figure -0- dollar_figure less adjustments interaccount transfers big_number dollar_figure dollar_figure loan repayments -0- dollar_figure dollar_figure visa advances big_number -0- dollar_figure total big_number dollar_figure dollar_figure less reported income wages big_number dollar_figure dollar_figure interest -0- dollar_figure dividend -0- dollar_figure schedule c gross_receipts big_number -0- dollar_figure total big_number dollar_figure dollar_figure unexplained deposits big_number big_number big_number we agree with petitioners to a large extent we discuss their requested additional adjustments seriatim interaccount transfers petitioners argue that respondent’s bank_deposits analyses for the respective years must be adjusted to reflect dollar_figure dollar_figure and dollar_figure of nontaxable transfers of funds between their accounts following respondent’s concession in brief that the record at hand supports adjusting the amounts shown in the bank_deposits analyses to reflect additional nontaxable transfers of funds between accounts the disputed items in this category are as follows date deposit of previously withdrawn funds dollar_figure date check drawn on laire and payable to michelsen dollar_figure date check drawn on laire and payable to michelsen dollar_figure date check drawn on laire and payable to michelsen dollar_figure date check drawn on paine webber account and payable to michelsen dollar_figure business deposit mistakenly deposited into michelsen’s personal account contemporaneously transferred to business account dollar_figure dollar_figure check from lebloch account at laire to michelsen for her payment of his personal expenses dollar_figure check from nt to michelsen in reimbursement of her payment of an expense of nt dollar_figure we agree with petitioner that all of these disputed items are nontaxable to them and should be reflected as such the largest amount dollar_figure reflects a business deposit that was mistakenly deposited into michelsen’s personal account and then contemporaneously transferred to the business account when michelsen discovered the mistake the next largest amount dollar_figure reflects funds that were withdrawn by lebloch and then redeposited into his account the dollar_figure deposit reflects a reimbursement that nt made to michelsen the remaining five amounts are simply transfers of cash from lebloch to michelsen loan repayments petitioners argue that respondent’s bank_deposits analyses for the respective years must be adjusted further to reflect dollar_figure dollar_figure and dollar_figure of nontaxable loan repayments deposited into one of lebloch’s financial accounts we agree case law establishes a two-part test for determining whether a transfer of money qualifies as debt first repayment of the transferred funds cannot be contingent upon a future event second the transfer must be made with a reasonable expectation belief and intent that it be repaid see 318_f2d_611 9th cir estate of trompeter v commissioner tcmemo_1998_35 whether a transfer is made with the requisite expectation belief and intent is factual see 326_us_521 our agreement with petitioners that lebloch’s transfers of money to michelsen and nt were loans flows from our findings_of_fact that petitioners regularly advanced funds to each other without formal documentation and without formal terms that the transfers in question were made with the expectation belief and intent that they be repaid that the transfers in question were made incident to the transferee’s need for operating funds and that the transfers in question were repaid by the transferee shortly after receiptdollar_figure lebloch lent dollar_figure for use and that was used in the business of the nature’s touch shops and of that amount dollar_figure was repaid in dollar_figure was repaid in dollar_figure was repaid in and dollar_figure was repaid after in addition petitioners had an informal understanding that either of them would advance funds to the other without formal terms and that the one for whose benefit the funds were advanced would repay them in fact as to lebloch it was not uncommon for him regularly to pay a common expense in full and then contemporaneously receive reimbursement from michelsen for her share of that expense nor was it uncommon for lebloch regularly to pay out of his personal funds expenses of a nature’s touch shop and then seek and obtain reimbursement from the shops because respondent makes no assertion that lebloch’s transfers were contributions of equity rather than loans we do not consider that question see 116_tc_211 for that payment we also note that petitioners never intermingled their funds in a joint account but kept their financial accounts separate and that petitioners’ relationship throughout the subject years was one in which they each understood that they were responsible for the payment of their share of the expenses we hold for petitioners on this itemdollar_figure visa advances petitioners argue that they are entitled for to an adjustment of dollar_figure for visa advances respondent concedes that this dollar_figure is not taxable_income to petitioners and we so hold sales_tax remittances petitioners argue that they are entitled for to an adjustment of dollar_figure for sales_tax remittances for october and date we agree michelsen operated the nature’s touch shops as a sole_proprietorship from january through date and she as a conduit collected sales_tax on the sales made at the shops during that time she deposited the collected sales_tax into the shops’ business account and later remitted that tax to the state of california respondent’s bank_deposits analysis for made an adjustment for sales_tax whereas we understand petitioners to request that we also hold that other_amounts reported as compensation from nt were actually loan repayments we decline to do so michelsen was the sole reported recipient of compensation from nt and petitioners make no assertion in this proceeding that michelsen lent money to nt remittances only through date on the basis of our review of the record we find that on date dollar_figure in sales_tax was remitted to the state of california on behalf of the nature’s touch shops and conclude that petitioners are entitled to their requested dollar_figure adjustment expense report petitioners argue that they are entitled for to an adjustment of dollar_figure for expenses report reimbursement in support thereof petitioners point the court to a date check drawn on the nt account payable to lebloch in the amount of dollar_figure the check states on its face that it is payment for loan and lebloch deposited the check into his regular savings account at laire petitioners point out that dollar_figure of the check was the loan repayment discussed herein and argue that the balance dollar_figure after taking into account the dollar_figure was for reimbursement of lebloch’s payment of michelsen’s share of a personal utility expense we agree with petitioners in that we find that the dollar_figure was paid to lebloch as reimbursement of expenses that he paid on behalf of nt and allow the requested adjustment wages petitioners argue that they are entitled for the respective years to adjustments of dollar_figure dollar_figure and dollar_figure for wages as petitioners see it their wages for each year should have been calculated by using the amounts shown on the forms w-2 wage and tax statement in other words the amount for each year that equals their reported gross wages less the sum of the reported amounts withheld for federal_income_tax social_security_tax and medicare_tax we conclude differently the bank_deposits analyses correctly reflect only the portion of his wages that was deposited into his account ie in addition to the reported amounts of tax withheld lebloch apparently had other_amounts taken out of his gross wages before those wages were deposited into his account those amounts are different from the amounts referenced by petitioners c home_office deduction for each subject year petitioners are generally precluded from deducting expenses_incurred in connection with the business use of the residence see sec_280a pursuant to sec_280a however petitioners may deduct expenses allocable to a portion of the residence if that portion was exclusively used on a regular basis as a principal_place_of_business as the place for meeting with customers clients or patients in the normal course of business or in the case of an unattached separate structure in connection with the businessdollar_figure see also sec_280a also does not apply to items allocable to space withing a dwelling_unit that is used on a regular basis for the storage of inventory held for use in the taxpayer’s trade_or_business of selling products at retail provided the dwelling_unit continued 506_us_168 890_f2d_1084 9th cir affg tcmemo_1988_293 cao v commissioner tcmemo_1994_60 affd without published opinion 78_f3d_594 9th cir petitioners argue that they are entitled to a deduction for each subject year attributable to their business use of a portion of the residence according to petitioners the office guest bedroom closet and garage collectively premises in or at the residence were used exclusively for business and the premises are approximately percent of the residence’s square footage we understand petitioners to argue that during each subject year michelsen stored inventory on the premises and used the premises to work on opening more nature’s touch stores we also understand petitioners to argue that michelsen also used the premises after the formation of nt to conduct her business as an officer of nt we do not believe that petitioners meet any of the three prongs underlying the just-referenced exception of sec_280a as to when michelsen operated the nature’s touch stores as a sole_proprietor the stores’ principal_place_of_business was not in any part of the residence nor are we continued is the sole fixed location of that business see sec_280a that provision is inapplicable here where the residence was not the sole fixed location of the nature’s touch shops persuaded that michelsen met there with customers clients or patients in the normal course of business nor does the record establish that any part of the residence including the garage was in an unattached separate structure we also are not persuaded that the exception was met for either remaining year in issue in order for a taxpayer to establish use on a regular basis the business use must be more than occasional or incidental see 76_tc_696 in order for a taxpayer to establish that use of a portion of a dwelling is exclusive the portion must be used only for business purposes see 88_tc_1532 hefti v commissioner tcmemo_1993_128 see also irwin v commissioner tcmemo_1996_490 see generally sec_1 280a-2 g proposed income_tax regs fed reg date the failure of a taxpayer to establish that the use of a portion of a dwelling is both regular and exclusive is fatal to the taxpayer’s claim that such use falls within the exception of sec_280a see sam goldberger inc v commissioner supra pincite7 although the record establishes that michelsen performed at the residence a lot of work for the nature’s touch stores petitioners have not offered sufficient evidence regarding the amount of time and nature of the work conducted anywhere in the premises so as to establish regular use nor have they established that any portion of the premises was used exclusively in a businessdollar_figure accord browning v commissioner supra we reject petitioners’ claim for home_office_deductions related to the residence d self-employment deductions other than home_office deduction sec_162 lets taxpayers deduct all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business under that section an expenditure is deductible if it is an expense an ordinary_expense a necessary expense paid in the case of a cash_method taxpayer or incurred in the case of an accrual_method taxpayer during the taxable_year and made to carry on a trade_or_business see 403_us_345 116_tc_374 in the case of personal travel_expenses a taxpayer also must meet two additional rules first the travel_expenses must arise from travel that is related primarily to the taxpayer’s business see sec_1_162-2 income_tax regs see also 35_tc_199 in fact michelsen by her own account acknowledged that the garage was not used exclusively for business purposes and contended that the only portion of the residence used exclusively for business was the room with the office while petitioners ask the court to find as to the office that michelsen spent much time there working on expanding the nature’s touch shops through the opening of additional shops we decline to find such a fact on the basis of the record at hand second the taxpayer must substantiate by adequate_records or other_sufficient_evidence corroborating his or her own statement each of the following elements the amount of each expenditure the time and place the expenditure was incurred the business_purpose of the expenditure and in the case of entertainment_expenses the business relationship to the taxpayer of the person entertained see sec_274 725_f2d_1183 9th cir johnston v commissioner tcmemo_1980_477 affd 696_f2d_1003 9th cir in the case of meals incurred while not traveling substantiation by sufficient evidence requires that the taxpayer establish the cost amount time place and date of the expenditure by direct evidence eg a detailed writing the taxpayer may establish business_purpose or business relationship by circumstantial evidence corroborating the taxpayer’s own statement sec_1_274-5t temporary income_tax regs fed reg date of the schedule c expenses disallowed for petitioners challenge only the expenses for travel to the extent of dollar_figure and other dollar_figure a travel petitioners argue that they have substantiated dollar_figure of expenses claimed as travel_expenses for through the introduction of exhibit 112-p we disagree exhibit 112-p was received into evidence through the parties’ stipulation that the exhibit reflects documents which petitioners contend pertain to business meals travel and lodging incurred in taxable_year exhibit 112-p has approximately pages and petitioners have not organized or presented the documents included therein mainly photocopies of receipts in a manner that persuades us that any of the expenses reflected in this exhibit are properly deductible by petitioners see romer v commissioner tcmemo_2001_168 nor do petitioners in their posttrial opening brief make any concerted attempt to persuade us that they have satisfied the requirements for deductibility petitioners’ entire argument on this point is that these travel_expenses are substantiated in exhibit 112-p and should be allowed we sustain respondent’s determination that petitioners are not entitled to deduct these claimed expensesdollar_figure we note that during respondent’s audit of the subject years michelsen prepared a travel expense record for and that this expense record was admitted into evidence as part of exhibit 135-p the expense record is an 8-page document that lists in single spaces each day in ie and so on to the right of some of the days is a brief statement by michelsen as to the business that she performed for the nature’s touch shops on the corresponding day continued b other expenses petitioners argue that they have substantiated the dollar_figure claimed as other expenses through the introduction of exhibits 119-p and 120-p we disagree exhibit 119-p was received into evidence through the parties’ stipulation that the exhibit reflects documents which petitioners contend pertain to other expense for taxable years exhibit 120-p was received into evidence through the parties’ stipulation that the exhibit reflects documents which petitioners contend pertain to the bank deposit analysis together exhibits 119-p and 120-p have approximately pages and the documents included therein mainly canceled checks bank statements and receipts do not persuade us that the expenses reflected therein are properly deductible by petitioners nor do petitioners in their posttrial opening brief persuade us that they have satisfied the requirements for deductibility petitioners’ entire argument in brief as to this point is as follows the deduction taken of dollar_figure has been adequately substantiated exh 119-p and 110-p natures touch as a sole_proprietorship during the first months of was an accrual taxpayer expenses budgeted to begin the carlsbad store location were accrued by the sole_proprietorship this is an issue that respondents continued as well as her statement of any purported business meal that she purchased on that day along with the identity of the person with whom she dined we give little weight to the expense record we note that the expenses reflected in many of the invoices in exhibit 112-p do not appear on michelsen’s expense record sic counsel may raise petitioners believe they should prevail we sustain respondent’s determination that petitioners are not entitled to deduct these claimed expenses except for dollar_figure that respondent concedes is deductible of the schedule c expenses other than home_office deduction disallowed for petitioners do not challenge any of those expenses of the schedule c expenses other than home_office deduction disallowed for petitioners challenge only the expenses for lease dollar_figure travel dollar_figure and meals dollar_figure a lease expense petitioners argue that the dollar_figure claimed as a lease expense was actually a legal expense that is deductible as such we do not find that any of that amount is deductible petitioners’ entire argument in brief as to this point is that the amount listed on schedule c for lease expense was misclassified the dollar_figure amount related to legal fees related to a tax litigation matter and should be fully deductible tr2-130 tr the reference to tr2-130 is to the following testimony by lebloch on direct examination there is a mistake on the schedule c attached to the sic return and the mistake is a misclassification there was listed an amount on the line that called for lease expense the amount was dollar_figure in reviewing workpapers that amount should have been classified as legal expense it related to the legal cost that cathy michelsen had incurred related to a tax_court proceeding dealing with taxable years through and paid to a law firm the joseph mudd law firm those proceedings related to tax_court docket the reference to tr is to michelsen’s direct testimony that she had a case in this court in the time frame and had received a bill from an attorney named joseph mudd for dollar_figure of legal fees we are unpersuaded that petitioners are entitled to deduct for the dollar_figure claimed for that year as a lease or as they claim now a legal expense b travel petitioners argue that they have substantiated the dollar_figure of expenses claimed as a business travel deduction through the introduction of exhibit 123-p and the testimony of michelsen that evidence petitioners conclude proves that they traveled to australia to attend the sydney gift show to search for a location in australia to open a fourth nature’s touch store and to identify merchandise to import into the united_states we disagree that petitioners are entitled to any of their reported travel_expenses for petitioners have simply not persuaded us that their trip to australia was related primarily to michelsen’s reported work for her sole_proprietorship during as a corporate director consultant nor have petitioners persuaded us as to the specifics of their day-to-day activities while in australia or more specifically the amount of time that they purportedly spent on business versus personal pursuits exhibit 123-p was received into evidence through the parties’ stipulation that the exhibit reflects documents which petitioners contend pertain to business related travel for taxable_year exhibit 123-p has approximately pages and petitioners have not organized or presented the documents included therein mainly photocopies of receipts in any manner that persuades us that any of the expenses reflected in this exhibit are properly deductible by petitioners nor do petitioners in their posttrial opening brief persuade us that they have satisfied the requirements for deductibility petitioners’ entire argument on this point is the trip had a clear business_purpose ms michelsen was actively pursuing a business expansion tr169 substantiated costs total dollar_figure exhibit 123-p only one-third of this expense was allocated to business a deduction of dollar_figure which was taken on the return should be allowed we sustain respondent’s determination that petitioners are not entitled to deduct these claimed expenses c meals petitioners argue that they have substantiated the dollar_figure of expenses claimed as a meals deduction for through the introduction of exhibit 124-p we disagree exhibit 124-p was received into evidence through the parties’ stipulation that the exhibit reflects documents which petitioners contend pertain to overnight business meal expense for taxable_year exhibit 112-p has approximately pages and petitioners have not organized or presented the documents included therein mainly photocopies of receipts in any manner that persuades us that any of the expenses reflected in this exhibit are properly deductible by petitioners as meals see romer v commissioner tcmemo_2001_168 nor do petitioners in their posttrial opening brief make any concerted attempt to persuade us that they have satisfied the requirements for such deductibility petitioners’ entire argument on this point is that expenses_incurred are substantiated in exhibit 124-p total expenses are dollar_figure we sustain respondent’s determination that petitioners are not entitled to deduct these claimed expenses e epilogue we have considered all of the parties’ arguments and all arguments not discussed herein have been rejected as moot irrelevant or without merit decision will be entered under rule


internal_revenue_service number release date index number -------------- ------------------------------ ----------------------------------------------- ----------------------------------------------- - - department of the treasury washington dc person to contact -------------------- id no ------------ telephone number -------------------- refer reply to cc psi - plr-104680-05 date date company ------------------------------------ ---------------------- ------------------------------ corp ------------------------------------------------- country ------------------------------------------ a b c d e f agreement agreement agreement --- --- --- -- --- --- --------------------------------------------------------------------------------- -------------------------------------------------------- --------------------------------------------------------------------------------- ------------------------------------------------------------------- --------------------------------------------------------------------------------- ------------------------------------------------------------------------------- plr-104680-05 dear --------------- this letter responds to a letter from your authorized representative dated date as well as additional correspondence submitted on behalf of company and corp requesting a ruling on the qualifying_income exception to the publicly_traded_partnership rules of ' of the internal_revenue_code facts company was organized as a limited_partnership under the laws of country it is a publicly_traded_partnership with the meaning of sec_7704 corp was incorporated under the laws of country it is engaged directly and through its subsidiaries in the business of transporting liquefied natural_gas lng and crude_oil by ship corp will convey to company a fleet of a lng and crude_oil carrying vessels company will through its operation of this fleet engage in the international lng and crude_oil transportation business upon its formation and its acquisition of the fleet from corp company will indirectly become party to certain charter obligations the charters of subsidiaries of corp under which company will transport lng and crude_oil for the owners of this lng and crude_oil company will have two basic types of charters those relating to lng vessels and those relating to crude_oil vessels the charters have terms ranging from b to c years and typically are entered into before a vessel is constructed pursuant to specifications set forth in the charter under each of the charters company will be fully responsible for operating the vessel representative charters include agreement sec_1 and under the charters company or an affiliate acting as company’s agent will provide the master and crew who will be employees of company or the affiliate the master and crew are responsible for operating the vessel and transporting the cargo for this purpose affiliates of company will employ d sets of crew per vessel each crew will consist of one master and approximately e crew members per lng vessel and one master and approximately f crew members per crude_oil vessel while the charterer determines the ports from which the cargo will be taken as well as the cargo’s destination company and its employees determine the routes to be taken and all other operational matters company is responsible for periodic maintenance of the vessels pursuant to the charters company generally warrants a certain level of vessel performance as measured by several criteria agreement sec_2 and contain additional performance warranties due to technical considerations related to transporting lng plr-104680-05 under agreement sec_1 and the charterer may require certain modifications to the vessel and may in certain circumstances share in profits from the sale of the vessel before the end of the charter’s term under agreement sec_2 and the charterer may purchase the relevant vessel at a scheduled price under agreement the charterer pays a daily rate subject_to partial reduction if company is temporarily unable to make the vessel available to transport cargo under agreement if company breaches certain material obligations the charterer may convert the charter to a bareboat charter under which the charterer operates and controls the vessel if the operation of any vessel causes damage or loss to a third party company bears sole responsibility company requests a ruling that its income derived from the transportation of lng and crude_oil pursuant to the charters is qualifying_income under sec_7704 law and regulations sec_7704 provides generally that a publicly_traded_partnership shall be treated as a corporation according to sec_7704 the term publicly_traded_partnership means any partnership if interests in the partnership are traded on an established_securities_market or interests in the partnership are readily_tradable on a secondary market or its substantial equivalent sec_7704 exempts from treatment as a corporation any publicly_traded_partnership for any_tax year if the partnership meets the gross_income requirements of sec_7704 for that year and each preceding tax_year beginning after date during which the partnership or any predecessor was in existence sec_7704 provides that a partnership meets the gross_income requirements of sec_7704 for any_tax year if or more of the partnership’s gross_income for that year consists of qualifying_income sec_7704 defines qualifying_income to include income and gains derived from the exploration development mining or production processing refining transportation or marketing of any mineral_or_natural_resource conclusion based solely on the facts and representations submitted we conclude that the income company derives from transporting lng and crude_oil pursuant to the charters is qualifying_income within the meaning of ' d e plr-104680-05 except for the specific ruling 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 as to whether company is taxable as a partnership for federal tax purposes under a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative this ruling is directed only to the taxpayer who requested it according to ' k this ruling may not be used or cited as precedent sincerely s james a quinn senior counsel branch office of associate chief_counsel passthroughs and special industries enclosures copy for ' purposes cc --------------------------------- ------------------------------------------- ------------------------------------------------ -------------------------- ---------------------------- -------------------------------------- ------------------------------------------- -------------------------------------------


internal_revenue_service number release date uil 468b -------------------------------- ------------------------- -------------------------- -------------------------------------------- in re ------------------------- ------------------------------------- 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 ita b06 plr-124833-02 date december legend company ------------------------------------------------- c ------------------------------------------------------------------------------------------------------------------ ----------------------------------------------------------------------------------------- ------------------------------------------------------------------------ ------- ------- --------------------------- d year year date dear ------------- this letter constitutes notice that our ruling letter dated date has been modified to conclude that the escrow accounts established in year by company satisfied all three requirements prescribed in sec_1_468b-1 of the income_tax regulations on date first company established the escrow accounts pursuant to written demands for the deposits by the cs governmental authorities and the provisions of d which require the escrow accounts to be approved and monitored by the cs the first c approved the escrow accounts on date secondly the escrow accounts were created in year to resolve one or more contested or uncontested claims that had given rise to at least one claim asserting liability arising out of a violation plr-124833-02 of law finally the assets in the escrow accounts were otherwise segregated from other assets of company the transferor in year therefore the transfers of funds to the escrow accounts are deductible in year the taxable_year in which the escrow accounts are treated as qualified settlement funds for purposes of sec_468b of internal_revenue_code and each subsequent date that company transfers funds to the respective escrow accounts in this case transfers of funds to the escrow accounts made prior to date will be treated as transferred on date which is the first date on which the escrow accounts are treated as qualified settlement funds this modification has been made to reflect the current position of the internal_revenue_service this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to the powers of attorney on file in this office a copy of this letter will be sent company’s authorized representatives sincerely jeffery g mitchell branch chief branch office of associate chief_counsel income_tax accounting enclosure copy for purposes