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 intl b06 plr-136138-14 date february legend taxpayer ------------------------------------- shareholder a --------------------- shareholder b ------------------- accounting firm -------------------- attorney -------------------- accountant ------------------------- date ---------------------- date -------------------- date ---------------- date ------------------ dear --------------- this replies to your representative’s letter dated date by which you request on behalf of taxpayer an extension of time under sec_301 a to file a form 4876-a election to be treated as an interest_charge_disc effective as of date plr-136138-14 the rulings contained in this letter are based upon information and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process facts taxpayer is a domestic_corporation wholly owned by shareholder a and shareholder b shareholder a and shareholder b are individuals engaged in a production activity through a corporation which they own in proportion to their interests in taxpayer they are not personally sophisticated in federal_income_tax matters accountant is a member of accounting firm which through its certified public accountants and other qualified professionals has provided federal tax_advice to individuals and businesses for many years including shareholder a shareholder b and their business attorney is a solo practitioner in general business matters who had represented shareholder a and shareholder b’s business in the past shortly before date shareholder a and shareholder b learned through an industry association about benefits that an interest charge domestic_international_sales_corporation ic-disc may provide shareholder a and shareholder b consulted accounting firm to learn more and then to help them set up an ic-disc to work with their business shareholder a and shareholder b retained attorney to form taxpayer and to prepare the legal documents but not the federal tax filings pertaining to its intended qualification and operation as an ic-disc taxpayer was incorporated on date accountant having knowledge of these circumstances agreed with shareholder a and shareholder b to take responsibility for taxpayer’s tax filings including filing of form 4876-a to qualify taxpayer as an ic-disc as of its incorporation taxpayer believed that it had met all requirements and taken all steps necessary to thus qualify as an ic-disc taxpayer proceeded to operate as an ic-disc taxpayer did not take any position inconsistent with ic-disc status on date early the next year taxpayer timely filed its first tax_return as an ic-disc a few weeks later on date taxpayer received a notice from the internal_revenue_service irs stating that the irs had no record of taxpayer filing a form 4876-a upon investigation taxpayer discovered that no form 4876-a had been filed accounting firm explained that it had inadvertently failed to obtain and file a completed form 4876-a on date a few weeks after discovering the initial failure_to_file form 4876-a and a little more than a year after date accounting firm submitted on behalf of taxpayer a form 4876-a requesting ic-disc status effective as of taxpayer’s plr-136138-14 incorporation accounting firm accompanied this form with a brief explanation of the inadvertent initial failure_to_file but the irs notified taxpayer that this election was rejected as untimely for the requested effective date over the course of the next several weeks taxpayer proceeded to engage representation to prepare and submit the ruling_request that is the subject of this letter law and analysis sec_992 provides that an election by a corporation to be treated as a disc1 shall be made by such corporation for a taxable_year at any time during the day period immediately preceding the beginning of the taxable_year except that the secretary may give his consent to the making of an election at such other times as he may designate sec_992 provides that such election shall be made in such manner as the secretary shall prescribe and shall be valid only if all persons who are shareholders in such corporation on such first day of the first taxable_year for which such election is effective consent to such election temp sec_1_921-1t provides in part that a corporation electing ic-disc status must file form 4876-a and that a corporation electing to be treated as a ic-disc for its first taxable_year shall make its election within days after the beginning of that year sec_301_9100-1 provides in part that the commissioner in exercising the commissioner's discretion may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that a regulatory election is 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 for this purpose an election includes an application_for relief in respect of tax sec_301_9100-3 provides that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 automatic extensions must be made under the rules of sec_301_9100-3 requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_1 an ic-disc is the type of disc domestic_international_sales_corporation for which current law provides plr-136138-14 e to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that the grant of relief will not prejudice the interests of the government in the present situation the election described in temp sec_1 1t b is a regulatory election as defined in sec_301_9100-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant taxpayer an extension of time provided that taxpayer satisfies the standards for relief set forth in sec_301_9100-3 based on the facts and representations submitted with taxpayer's ruling_request we conclude that taxpayer satisfies sec_301_9100-3 accordingly taxpayer is granted an extension of time of days from the date of this ruling letter to file form 4876-a such filing will be treated as a timely election to be treated as an ic- disc for taxpayer's first taxable_year the granting of an extension of time to make the election is not a determination that taxpayer is otherwise eligible to make the election or to claim disc status or benefits taxpayer should attach a copy of this letter_ruling to its federal_income_tax returns for the taxable years to which this letter applies 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-136138-14 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 _________________________ marissa k rensen assistant to branch chief branch office of associate chief_counsel international


t c summary opinion united_states tax_court joseph orlando beckford petitioner v commissioner of internal revenue respondent docket no 906-05s filed date joseph orlando beckford pro_se vivian n rodriguez for respondent dean special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed unless otherwise indicated subsequent section references are to the internal_revenue_code as in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority respondent determined for a deficiency in petitioner’s federal_income_tax of dollar_figure the issues for decision are whether petitioner is entitled to a dependency_exemption deduction for his niece an earned_income_credit a child_tax_credit and an additional_child_tax_credit background the stipulation of facts and exhibits received into evidence are incorporated herein by reference at the time the petition in this case was filed petitioner resided in miami florida during petitioner wa sec_24 years old petitioner lived in a house with his mother thelma blake ms blake his brother and his niece tw tw is the daughter of petitioner’s sister at the time tw was years old petitioner was employed as a computer repair technician by sygnetics inc and alienware corp in ms blake was employed in and she earned approximately dollar_figure to dollar_figure that year petitioner filed a form_1040 u s individual_income_tax_return for reporting wages of dollar_figure and adjusted_gross_income of dollar_figure respondent issued to petitioner a statutory_notice_of_deficiency determining that petitioner is not entitled to a dependency_exemption deduction for tw an earned_income 1the court will refer to the minor child by her initials credit a child_tax_credit or an additional_child_tax_credit because he failed to substantiate his claims discussion the commissioner’s determinations are presumed correct and generally taxpayers bear the burden of proving otherwise rule a 290_us_111 dependency_exemption petitioner claimed a dependency_exemption for tw for respondent disallowed the deduction contending that petitioner has failed to provide any substantiation that he provided more than half of tw’s support during sec_151 allows a taxpayer to claim an exemption deduction for each qualifying dependent a daughter of a sister of the taxpayer is considered a dependent so long as the child’s gross_income for the calendar_year in which the taxable_year of the taxpayer begins is less than the exemption_amount and more than half the child’s support for the taxable_year was received from the taxpayer sec_151 sec_152 although petitioner contends that he took care of tw in and that he provided more than half of tw’s support he has failed to offer any records to corroborate his testimony 2petitioner has not raised the issue of sec_7491 which shifts the burden_of_proof to the commissioner in certain situations this court concludes that sec_7491 does not apply because petitioner has not produced any evidence that establishes the preconditions for its application petitioner explained that he lacked documentation because he generally paid tw’s expenses in cash petitioner and ms blake shared the expenses for support of the household according to petitioner he helped with paying the mortgage the utilities and most of everything the record is unclear as to the amount of expenses paid for the household it is also unclear how petitioner and ms blake allocated the expenses between them it appears that petitioner contributed to the household expenses whenever he was able and that he did not pay a set amount to ms blake the court is unable to determine how much of the expenses paid_by petitioner related to tw tw attended private school and her tuition was approximately dollar_figure per month ms blake testified that both she and petitioner together paid tw’s tuition petitioner however failed to offer any records or receipts from the school to show the amount of tw’s expenses or how those expenses were paid and allocated ms blake by her own admission earned about three times as much as petitioner in the court concludes that petitioner has not offered sufficient evidence to show that he provided more than half of tw’s support in earned_income_credit respondent disallowed the earned_income_credit contending that petitioner has failed to substantiate that he treated tw as his own child sec_32 allows an eligible_individual an earned_income_credit against the individual’s income_tax_liability sec_32 limits the credit allowed and sec_32 prescribes different percentages and amounts used to calculate the credit based on whether the eligible_individual has no qualifying children one qualifying_child or two or more qualifying children to be eligible to claim an earned_income_credit with respect to a qualifying_child a taxpayer must establish inter alia that the child bears a relationship to the taxpayer prescribed by sec_32 that the child meets the age requirements of sec_32 and that the child shares the same principal_place_of_abode as the taxpayer for more than one-half of the taxable_year as prescribed by sec_32 in order for a niece to meet the relationship requirement of sec_32 the taxpayer must show that he cared for the niece as his own child sec_32 petitioner has not offered any evidence to show that he cared for tw as if she were his own daughter even if petitioner did provide some financial support for tw it is insufficient to show that he cared for tw as his own child in this court has indicated that merely contributing financially to the support of an individual does not rise to the level of caring for the individual as one’s own child see mares v commissioner tcmemo_2001_216 smith v commissioner tcmemo_1997_544 although petitioner is not eligible to claim an earned_income_credit under sec_32 for a qualifying_child he may be an eligible_individual under sec_32 even if he does not have any qualifying children for a taxpayer is eligible under this subsection only if his adjusted_gross_income was less than dollar_figure revproc_2002_70 2002_2_cb_845 petitioner’s adjusted_gross_income was dollar_figure accordingly petitioner is eligible for an earned_income_credit child_tax_credit and additional_child_tax_credit for petitioner claimed a child_tax_credit of dollar_figure and an additional_child_tax_credit of dollar_figure with tw as the qualifying_child respondent determined that petitioner is not entitled to either sec_24 authorizes a child_tax_credit with respect to each qualifying_child of the taxpayer the term qualifying_child is defined in sec_24 a qualifying_child means an individual with respect to whom the taxpayer is allowed a deduction under sec_151 who has not attained the age of as of the close of the taxable_year and who bears a relationship to the taxpayer as prescribed by sec_32 sec_24 since petitioner is not allowed a deduction with respect to tw as a dependent under sec_151 tw is not qualifying_child in the absence of a qualifying_child in petitioner is not entitled to claim a child_tax_credit the child_tax_credit is a nonrefundable personal credit that was added to the internal_revenue_code by the taxpayer_relief_act_of_1997 publaw_105_34 111_stat_796 with a provision for a refundable_credit the additional_child_tax_credit for families with three or more children for taxable years beginning after date the additional_child_tax_credit provision was amended to remove the restriction that only families with three or more children are entitled to claim the credit see sec_24 economic_growth_and_tax_relief_reconciliation_act_of_2001 publaw_107_16 sec c 115_stat_46 in the absence of other nonrefundable personal credits a taxpayer is allowed to claim a child_tax_credit in an amount that is the lesser_of the full child_tax_credit or the taxpayer’s federal_income_tax liability for the taxable_year see sec_26 if the child_tax_credit exceeds the taxpayer’s federal_income_tax liability for the taxable_year a portion of the child_tax_credit may be refundable as an additional_child_tax_credit under sec_24 for the additional_child_tax_credit is allowed in an amount that is the lesser_of the remaining child_tax_credit available or percent of the amount by which the taxpayer’s earned_income exceeds dollar_figure sec_24 and b d revproc_2002_70 sec_3 c b pincite the refundable and nonrefundable portions of the child_tax_credit cannot exceed the total allowable_amount of the credit petitioner is not entitled to claim an additional_child_tax_credit because he did not qualify for a child_tax_credit reviewed and adopted as the report of the small_tax_case division to reflect the foregoing decision will be entered under rule


office_of_chief_counsel internal_revenue_service memorandum number release date cc corp b04 postf-136412-12 uilc date april third party communication none date of communication not applicable to associate area_counsel lb_i area nrc - jacksonville fl from lewis k brickates office of associate chief_counsel corporate subject -------------------------------------------------------------------- this memorandum responds to your request for assistance and our recommendation as to whether a notice_of_deficiency should be issued with regard to certain of the transactions undertaken by the taxpayer’s affiliated_group in year a conference was held with the taxpayer and with various service personnel on date this memorandum has been coordinated with cc intl this memorandum may not be used or cited as precedent legend taxpayer us sub f sub f sub f sub f sub f sub --------------------------------------- ---------------------------- ------------------------------- ----------------------------------------- --------------------- ------------------------------------------------- ---------------------------------------------- ----------------------------------------- ------------------------------------------------------------------------ postf-136412-12 f sub f corporation date year year year country a country b country c a b c d e ----------------------- ------------------------------------------------------------------------ -------------------------------------------------------- ------------ ----------------------- ------- ------- ------- -------- ---------------- ----------------- --------------- ----------------- ----------------- ----------------- --------------- summary of the facts the relevant background and transactions are detailed in your request for advice so we state here only a general summary taxpayer through its wholly-owned us subsidiary us sub had highly profitable operations generating cash in country a through a country a corporate group held by a country a parent f sub in addition to its country a operating subsidiaries f sub also owned a non-country a finance company and subsidiary f sub and f sub taxpayer documented potential foreign_currency volatility and foreign tax reasons for restructuring the ownership of its country a operations and its non-country a financing activities the restructuring occurred in two stages a few months apart during year the first stage the f reorganization generally consisted of the contribution of f sub to postf-136412-12 f sub a country b corporation after which f sub elected to be treated as a disregarded_entity de following the de election f sub distributed dollar_figurea million of its cash to f sub taxpayer treated the contribution of f sub to f sub following by f sub 6’s de election as qualifying as a reorganization described in sec_368 also in this stage f sub distributed the stock of f sub to f sub further selected subsidiaries of f sub were sold to f corporation a country a corporation and f corporation and its subsidiaries filed elections to be treated as des f corporation also paid off various third-party debentures the second stage the transaction generally consisted of creating a leveraged acquisition vehicle f sub a country c_corporation held by f sub which was a country b entity treated as a corporation for u s tax purposes the leverage consisted of preferred equity certificates a term note and a demand note totaling approximately dollar_figurec issued to f sub in exchange for f sub stock f sub used the f sub stock which taxpayer established had not appreciated since the exchange described in the preceding sentence to acquire f sub from us sub following this acquisition f sub elected to be treated as a de and f sub was distributed up through f sub to f sub during year sec_2 through f sub repaid the term and demand notes totaling dollar_figured including interest to f sub the payments the taxpayer treated the foregoing f reorganization transaction and payments as nonrecognition transactions and tax free repayment of debt you have requested our views whether under applicable code provisions or judicial doctrines the transactions may be treated as giving rise to taxable gain or distributions taxable as dividends or under subpart_f as will be explained we conclude that neither judicial doctrines nor applicable code provisions should be applied as the basis for a notice_of_deficiency in this particular case based on a consideration of the relevant authorities in light of the particular facts and circumstances of this case in our view the f reorganization and the transaction this stock_distribution helped alleviate concerns that the tp had with proposed country a corporate tax legislation that would have subject the income of f sub 1’s non country a subsidiaries including f sub retroactively to country a’s corporate_income_tax at the time of this distribution the stock of f sub was worth dollar_figureb million dollars the foregoing transactions although described in notice_2006_85 2006_2_cb_677 the notice will not be governed by the regulations pursuant to the notice which will only apply to transactions occurring on or after date however as indicated you request our views on whether the transactions may still be challenged under applicable code provisions or judicial doctrines possibilities left open by the notice because your specific questions are interrelated the discussion is combined you have specifically asked whether sec_269 may be applied to challenge the transactions we believe that sec_269 does not apply under the particular facts of this case because as discussed later in this memorandum the taxpayer has submitted documentation that shows non-federal income_tax business purposes sufficient to support the transactions postf-136412-12 should each be respected as qualifying for nonrecognition treatment respectively under sec_368 and sec_368 and should not be stepped together or with the subsequent payments under revrul_96_29 1996_1_cb_50 the f reorganization is treated separately from the transaction even though these transactions occurred in proximity to each other the f reorganization was supported by a sufficient business_purpose the f reorganization helped preserve and insulate f sub 1’s assets from the unstable country a economy while approvals for the ultimate f sub f sub structure were being obtained thus the f reorganization avoided a potentially substantial economic loss to the taxpayer further taxpayer documented potential foreign_currency volatility and exposure and foreign tax reasons for restructuring the ownership of its country a operations and its non-country a financing activities in the manner chosen we conclude that these purposes in regard to the f reorganization and the transaction satisfy the business_purpose threshold applicable to sec_368 reorganizations under the facts and circumstances we also do not believe the government should challenge on the basis that the acquisition vehicle f sub was not capable of economically completing the acquisition of f sub in the transaction because it was only capitalized with dollar_figuree at the outset in many leveraged buyouts the acquirer is a much smaller capitalized corporation which acquires a much larger capitalized corporation this type of capitalization occurs frequently and is considered within the norm in the area of leveraged buyouts it is immaterial that f sub was capitalized at the outset with a lesser amount than the f sub stock it ultimately acquired in the transaction furthermore the total consideration of dollar_figurec that f sub paid to f sub for the f sub stock was equal to the value of the f sub stock later acquired by f sub in the transaction accordingly we conclude that the transaction was a value-for- value exchange the f reorganization also helped the taxpayer avoid the proposed adverse country a tax legislation see footnote supra the business_purpose doctrine for reorganizations originated in case law see 293_us_465 55_sct_266 79_led_596 the doctrine does not entirely proscribe the existence of a tax motive for transactions even gregory acknowledges that the legal right of a taxpayer to decrease the amount of what otherwise would be his taxes or altogether avoid them by means which the law permits cannot be doubted gregory at page see also 131_fsupp_458 s d ny the business_purpose doctrine has been incorporated into the sec_368 regulations in acquisitive reorganizations one satisfactory non-federal tax business_purpose is sufficient to satisfy the business_purpose requirement see 653_f2d_253 6th cir the business_purpose requirement for reorganizations described in sec_368 is less rigorous than the corresponding requirement for sec_355 transactions the transactions at issue in this case implicate sec_368 not sec_355 the f sub notes used in the transaction were fully repaid by the payments the taxpayer also followed applicable debt criteria when it created and issued the notes so the notes qualify as debt for federal tax purposes this conclusion also impacts whether these instruments receive a zero basis in f sub 4’s hands as will be discussed later in this memorandum postf-136412-12 f sub is not required to recognize gain due to sec_1_1032-2 on the use of f sub stock as consideration to acquire f sub sec_1_1032-2 contemplates a subsidiary purchasing its parent corporation’s stock and then using that stock as consideration in a triangular_reorganization see also example of sec_1_1502-31 p stock purchased by s at or about the time of a reorganization which stock is later used in the reorganization considered as occurring outside the contours of the plan_of_reorganization under sec_1_1032-2 the subsidiary is fully taxable on any appreciation inherent in that stock upon such use in the instant case however the taxpayer represents that the f sub stock had not appreciated between the time of the receipt of such stock by f sub and such stock’s use by f sub to acquire f sub moreover once a subsidiary’s acquisition of its parent stock is respected as a purchase it follows that the parent would receive a sec_1012 cost_basis in property acquired in a transaction to which sec_1032 applies thus we conclude that f sub 5’s acquisition of the stock of f sub in part for the two notes which qualify as debt for federal tax purposes results in f sub receiving basis in the notes finally because we conclude that the notes should be respected as debt the payments should constitute repayments of such debts not dividends or other_amounts that would give rise to subpart_f_income this memorandum may contain privileged information any unauthorized disclosure of this document may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call ----- -------------- if you have any further questions see footnote supra


internal_revenue_service number release date index number ------------------------------- -------------------------- ------------------------- - - x department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-128330-06 date october ------------------------------------------------------------------------------------------------------ ------------------------ state -------- d1 ----------------- -------------------- d2 dear ------------ this responds to a letter dated date submitted on behalf of x by x's authorized representative requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x is a limited_liability_company organized pursuant to the laws of state on d1 it was intended that x elect s_corporation treatment effective on d2 however form_2553 election by a small_business_corporation was not timely filed for x sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective generally if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made sec_1362 provides that if an s election is made after the first two and one-half months of a corporation's taxable_year then the corporation will not be plr-128330-06 treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for such taxable_year and sec_1362 shall not apply based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation effective d2 accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective d2 within days following the date of this letter then such election will be treated as timely made for x's taxable_year beginning d2 a copy of this letter should be attached to the form_2553 except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transaction described above under any other provision of the code specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely bradford r poston senior counsel branch associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


t c memo united_states tax_court kiva dunes conservation llc e a drummond tax_matters_partner commissioner of internal revenue respondent petitioner v docket no filed date david m wooldridge for petitioner linda j wise and john w sheffield for respondent memorandum findings_of_fact and opinion wells judge by notice of final_partnership_administrative_adjustment fpaa respondent disallowed a charitable_contribution_deduction claimed by kiva dunes conservation llc kiva dunes for its grant to the north american land trust nalt of a perpetual conservation_easement covering a golf course that it owned respondent also determined that a section accuracy-related_penalty applies after trial respondent conceded on brief that kiva dunes is entitled to a sec_170 charitable_contribution_deduction for consequently the issues remaining for our decision are the value of the perpetual conservation_easement and therefore the amount of the allowable deduction under sec_170 and h and whether a sec_6662 accuracy-related_penalty applies findings_of_fact some of the facts and certain exhibits have been stipulated by the parties the stipulation of facts is incorporated in this opinion and the stipulated facts are so found the tax_matters_partner of kiva dunes is e a drummond the petitioner we will refer to e a drummond as petitioner when we refer to him in his capacity as tax_matters_partner and mr drummond when we refer to him in his individual capacity at the time of the filing of the petition the principal_place_of_business for kiva dunes was in alabama 1all section references are to the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure on date mr drummond purchased real_property on the fort morgan peninsula2 in baldwin county alabama from the resolution trust corporation for dollar_figure rtc property the rtc property i sec_12 miles west of the intersection of alabama highway sec_59 and sec_180 and consists of approximately acres south of highway and approximately acres north of highway on date mr drummond formed d e investments llc d e an alabama limited_liability_company that elected to be taxed as a partnership for federal_income_tax purposes by quitclaim_deed dated date mr drummond conveyed his interest in the rtc property to d e during d e initiated the development of a residential resort community on the rtc property consisting of a gated residential subdivision the kiva dunes subdivision and a jerry pate-designed 9-acre golf course kiva dunes golf course the planned resort community also features swimming pools tennis courts and beach access 2the fort morgan peninsula lies between the gulf of mexico on the south and mobile bay and bon secour bay on the north the peninsula is approximately miles long and ranges in width from miles to miles u s highway runs east-west through the peninsula in total baldwin county ha sec_32 miles of gulf coastline that is consistently ranked as one of the most beautiful beach destinations in the united_states 3the kiva dunes subdivision consists of residential lots of which are on the beach during kiva dunes golf course was completed and opened to the public and soon thereafter the individual residential lots began selling on date mr drummond formed kiva dunes an alabama limited_liability_company that elected to be taxed as a partnership for federal_income_tax purposes on date d e executed a warranty deed conveying kiva dunes golf course to kiva dunes on date kiva dunes placed a perpetual conservation_easement easement on kiva dunes golf course and donated the easement to nalt kiva dunes filed a form_1065 u s return of partnership income for the tax period ended date on which it claimed a charitable_contribution_deduction of dollar_figure for the easement this amount was based on an appraisal prepared by petitioner’s expert in the instant case claud clark mr clark kiva dunes also reported a dollar_figure cash contribution to nalt respondent issued an fpaa to kiva dunes determining that it was not entitled to the claimed deduction for the easement or the 4during kiva dunes golf course was rated the no public golf course in the united_states 5a permitted use of the encumbered property could be that of a golf course a park or an agricultural enterprise contemporaneously with the contribution of the easement to nalt kiva dunes leased kiva dunes golf course subject_to the easement to d e for the purpose of operating the golf course as of trial d e continued to operate the golf course dollar_figure cash contribution and that a sec_6662 accuracy- related penalty applies opinion a taxpayer is entitled to deduct pursuant to sec_170 a qualified_conservation_contribution made within a taxable_year sec_170 f b iii h see hughes v commissioner tcmemo_2009_94 as noted above after trial respondent conceded that kiva dunes’s grant of the easement is a qualified_conservation_contribution pursuant to sec_170 and that kiva dunes is entitled to a deduction under sec_170 consequently we need decide only the value of the easement for purposes of determining the amount of the allowable deduction and whether a sec_6662 accuracy-related_penalty applies deductions are a matter of legislative grace and a taxpayer bears the burden of proving entitlement to any claimed deductions 503_us_79 moreover the commissioner’s determination of value is normally presumed correct and the taxpayer bears the burden of proving that the determination is incorrect see rule a 6respondent stipulates that petitioner is entitled to a charitable_contribution_deduction for the dollar_figure cash contribution to nalt 290_us_111 schwab v commissioner tcmemo_1994_232 generally the amount of a charitable_contribution is the fair_market_value of the contributed_property at the time it is contributed sec_1_170a-1 c income_tax regs fair_market_value is the price at which property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or sell and both having a reasonable knowledge of relevant facts sec_1_170a-1 income_tax regs in deciding the fair_market_value of property we must take into account not only the current use of the property but also its highest_and_best_use see 87_tc_389 sec_1_170a-14 and ii income_tax regs a property’s highest_and_best_use is the highest and most profitable use for which it is adaptable and needed or likely to be needed in the reasonably near future 292_us_246 the highest_and_best_use can be any realistic objective potential use of the property 87_tc_892 7petitioner does not argue that sec_7491 applies to shift the burden_of_proof to respondent nonetheless we decide the instant case on the evidence in the record and need not address which party bears the burden_of_proof under circumstances where there is a substantial record of sales of easements comparable to a donated easement the fair_market_value of the donated easement is based on the sale prices of those comparable easements sec_1_170a-14 income_tax regs where as in the instant case there is no established market for similar conservation easements and no record exists of sales of such easements the regulations provide a method to determine fair_market_value if no substantial record of market-place sales is available to use as a meaningful or valid comparison as a general_rule but not necessarily in all cases the fair_market_value of a perpetual conservation restriction is equal to the difference between the fair_market_value of the property it encumbers before the granting of the restriction and the fair_market_value of the encumbered property after the granting of the restriction sec_1_170a-14 income_tax regs we have used a before and after methodology in evaluating conservation easements 109_tc_303 hughes v commissioner supra the parties in the instant case agree that the before and after methodology is the appropriate valuation method to determine the fair_market_value of the easement additionally any enhancement in the value of a donor’s other_property resulting from the easement contribution or of property owned by certain related_persons reduces the value of the contribution deduction sec_1_170a-14 income_tax regs valuation is not a precise science and the fair_market_value of property on a given date is a question of fact to be resolved on the basis of the entire record see eg 43_tc_663 arbini v commissioner tcmemo_2001_141 in the instant case each party has offered the report and testimony of an expert witness to establish the value of the easement for purposes of arriving at the proper amount of kiva dunes’s charitable_contribution_deduction an expert’s opinion is admissible if it assists the trier of fact to understand the evidence or to determine a fact in issue fed r evid we evaluate expert opinions in the light of the expert’s demonstrated qualifications and all other evidence in the record see 86_tc_547 where experts offer competing estimates of fair_market_value we decide how to weigh those estimates by inter alia examining the factors they considered in reaching their conclusions see 38_tc_357 we are not bound by the opinion of any expert witness and we may accept or reject expert testimony in the exercise of our sound judgment 304_us_282 94_tc_193 we may also reach a decision as to the value of property that is based on our own examination of the evidence in the record 538_f2d_927 2d cir affg tcmemo_1974_285 petitioner’s expert mr clark is a professional real_estate appraiser and has decades of experience in baldwin county he has lived and worked in the immediate vicinity of the subject property for years and owns and has owned property on the fort morgan peninsula mr clark performs more appraisal work in baldwin county than any other appraiser and he has a great depth of knowledge of the comparable properties used in valuing the easement and of the surrounding local real_estate market respondent’s expert philip paulk mr paulk is a member of the appraisal institute mai he has spent a substantial portion of his appraisal career in atlanta georgia mr paulk recently moved to and has offices in birmingham alabama miles from kiva dunes golf course mr paulk has no particular expertise in baldwin county and he has been to the baldwin county alabama area only twice in connection with his appraisal of the easement 8mai is a designation awarded to qualifying members of the american institute of real_estate appraisers and within the appraisal community is viewed as the most highly regarded appraisal designation see estate of auker v commissioner tcmemo_1998_185 valuation of the easement each party’s expert determined before and after values of kiva dunes golf course and considered the issue of enhancement of other_property owned by kiva dunes or related parties each expert’s conclusions as to the fair_market_value of the easement were computed by subtracting his estimate of the after value and of any enhancement from his estimate of the before value fair_market_value of kiva dunes golf course before conservation_easement each of the experts concluded that the highest_and_best_use of kiva dunes golf course at the time of the contribution of the easement would have been for the development of a residential subdivision to reach their respective before value estimates both experts used a discounted cashflow analysis of estimated revenues and costs associated with the development and sale of lots in a hypothetical subdivision however certain of their assumptions differed in important ways namely the number of lots available for sale the average sale price of the lots and the rate at which the lots would sell the differences in their assumptions led to a dramatic difference in their respective before value estimates mr clark’s was dollar_figure and mr paulk’s was dollar_figure we examine the critical assumptions 9we note that it is not unusual in valuation cases that two expert appraisers reach significantly different conclusions the instant case poses such a dilemma and consequently the continued made by each expert and decide the plausibility of those assumptions in reaching an appropriate before value for kiva dunes golf course lots available for sale mr clark determined that lots could be developed for sale in his hypothetical subdivisiondollar_figure wayne dyess mr dyess the planning and zoning director of the baldwin county zoning continued credibility of the experts’ determinations is of paramount importance for our purposes a useful tool with which to measure the reasonableness of the experts’ assumptions is the purchase_price for the woodlands golf course woodlands woodlands was approximately miles and miles inland from kiva dunes golf course woodlands was purchased for dollar_figure for the purpose of developing a residential apartment community and was comparable in size to kiva dunes golf course petitioner argues that the woodlands sale price calls into question the opinions and assumptions of paulk concerning the before value and provides clear evidence that the low before value assigned by paulk was not based in reality specifically petitioner contends that proximity to the beach is a significant value factor for residential uses the popularity and high-end residential use of land on the fort morgan peninsula property gives the kiva dunes golf course a substantially higher value than a similar_property used for residential apartment purposes several miles north away from the beach after considering the evidence in the record we agree the experts in the instant case recognize that proximity to the beach imparts a premium to the value of real_estate with kiva dunes golf course sitting on one of the most beautiful stretches of coastline in the united_states a willing buyer and a willing seller would necessarily anticipate a premium price for the property mr paulk’s before value which falls dollar_figure short of the woodlands sale price does not reflect adequately the superior locale of kiva dunes golf course and is not as petitioner persuasively argues based in reality 10the subject property was zoned r-6 this permitted the development of six homes per acre board agreed mr paulk concluded that a local zoning regulation11 would limit development on the property to lots mr paulk’s conclusion however was based on an erroneous interpretation of the regulation specifically mr paulk’s conclusion was based upon his determination that gross land area did not include slopes streams ponds watercourses wetlands floodways and floodplainsdollar_figure consequently mr 11the baldwin county zoning regulations sec_23 d provides in relevant part as follows d open space reservation a minimum of percent of the gross land area shall be set_aside for permanent open space for the purpose of providing parks recreational facilities pedestrian ways and or for con- serving sensitive elements of the environment including but not limited to slopes streams ponds watercourses wetlands floodways and floodplains a stormwater detention ponds retention ponds or similar holding basins for stormwater shall not be included in the 20-percent open space requirement b a minimum of percent of the required open space must be contiguous and must be usable for passive or active recreation purposes the usable open space shall not include steep slopes streams ponds watercourses wetlands floodways and or floodplains 12to the contrary mr dyess testified that gross land area includes everything within the boundaries of a particular development mr dyess further opined on whether percent of the open space in mr clark’s conceptual plan was contiguous and usable for passive or active recreation purposes as continued paulk’s interpretation substantially reduced the available land for lot development because he excluded the lakes and wetlands on kiva dunes golf course ultimately mr paulk admitted that mr clark’s 370-lot subdivision was viable we conclude that it was reasonable to assume that lots could be developed on kiva dunes golf coursedollar_figure continued required by the regulation initially mr dyess stated in looking at the plan not having the exact numbers typically it doesn’t look like they’re going to have the 50-percent to be definitive we’d want to see the numbers ultimately mr dyess conceded that the plan design could be adjusted to meet the contiguous requirement notably however he never suggested that such an adjustment would require a reduction in the number of lots available or the elimination of any of the proposed manmade lakes 13respondent takes the position that the presence of a local beach wildlife inhabitant of the area near kiva dunes golf course the federally protected alabama beach mouse would have a profound impact on the development of the proposed subdivision specifically respondent contends that mr clark did not account for the time and cost that would be associated with securing the necessary permits in developing the property from the evidence before us we are not persuaded that the presence of the alabama beach mouse would have significantly affected the development of kiva dunes golf course we note that mr paulk’s report makes no reference to the alabama beach mouse and there is no adjustment in mr paulk’s values to account for any potential delay or expense associated with the potential impact that the presence of the alabama beach mouse might have on the development indeed both experts agree that projected sales of the hypothetical lots would have begun closing on date moreover aaron valenta a regional habitat conservation plan coordinator for the fish and wildlife service testified that kiva dunes golf course does not fall within the alabama beach mouse’s critical habitat ultimately no evidence or testimony was offered that would support a finding that the presence of the alabama beach mouse would prevent the development of the proposed subdivision average lot price mr clark concluded that the initial lot price in his hypothetical subdivision would average dollar_figure in reaching this value mr clark considered a number of variables the quality of the lots market demand and comparable sales mr clark’s conceptual plan proposed the enlargement of several lakes and the creation of several pool and recreation areas on kiva dunes golf course consequently approximately percent of his proposed lots out of would front the lakes both experts agree that this lake frontage factor alone would have a significant impact on lot value additionally jim edgmon mr edgmon an agent of d e and manager of kiva dunes golf course testified that all of the lots would have access to the amenities of the adjacent kiva dunes subdivision including the use of tennis courts swimming pools beach walkovers and dedicated areas on the beach itself moreover the lots in the hypothetical subdivision would frequently have beautiful views of mobile bay mr clark also considered the market for house lots in baldwin county in reaching his initial lot price the total population in baldwin county from through the period shortly before the valuation_date increased dollar_figure percentdollar_figure 14mr edgmon testified that baldwin county was the second- fastest-growing county in alabama and maybe the top or in continued total households during that same period correspondingly increased dollar_figure percent and the median home price increased percentdollar_figure mr clark opined that the population surge coupled with a dwindling supply of available home sites would increase demand and the selling_price for the proposed lots as a final consideration mr clark looked to local sales of properties he believed were nearest in quality to the proposed lots he noted several sales of developed lots land price computed by extraction in the neighboring martinique development martinique dollar_figure martinique’s sales ranged from dollar_figure to dollar_figure mr clark also examined several and early sales of off-of-the-beach lots at the kiva dunes subdivision ranging in price from dollar_figure to dollar_figure in continued the country 15the statistical data for population and household growth was included in mr paulk’s report 16mr clark testified that neighboring subdivisions were approaching sellout 17extraction is a method of estimating land value in which the depreciated cost of the improvements on the improved property is estimated and deducted from the total sale price to arrive at an estimated sale price for the land appraisal institute the appraisal of real_estate 12th ed mr paulk offered no criticism as to mr clark’s extraction values 18martinique is approximately mile east of kiva dunes golf course off highway it is a single-family development with ample lakes a swimming pool tennis courts and convenient access to the beach highlighting his kiva dunes subdivision comparables mr clark stressed that their quality and size were inferior to those of the proposed lotsdollar_figure in contrast mr paulk determined that the initial lot price in his hypothetical subdivision would average dollar_figure in arriving at that number mr paulk testified he averaged the sale prices of just two interior lots sold at the kiva dunes subdivisiondollar_figure in other words mr paulk assumed that two of the least desirable lots in the kiva dunes subdivision would be of comparable quality to that of the hypothetical lotsdollar_figure mr paulk’s proposed lots would not front the lakes would not have views of mobile bay or any lakes and would be far removed from the amenities of the kiva dunes subdivision we conclude that mr paulk’s assumptions are not realistic because they fail to rely on comparable lot characteristics 19as set forth above mr clark testified that the majority of lots in the proposed subdivision would front lakes in his report mr clark’s data is suggestive of the appeal and premium value of lake front property in baldwin county for instance lake view lots at tannin village averaged dollar_figure per square foot whereas open view lots at the kiva dunes subdivision averaged only dollar_figure per square foot limited view lots at the kiva dunes subdivision averaged a mere dollar_figure per square foot 20lot sold for dollar_figure and lot sold for dollar_figure the actual average for these lots dollar_figure was then increased percent for appreciation to arrive at a reconciled initial value per lot of dollar_figure rounded 21in his report mr paulk expressly states that his conclusions as to initial lot price are based on recent interior lot sales at kiva dunes emphasis added mr paulk’s testimony at trial is inconsistent with his appraisal in several respects in his report mr paulk stresses that most lots in the proposed development will have water views of the onsite lakes moreover mr paulk reports that the proposed subdivision closely resembles martinique yet he does not give any consideration to the actual sale prices of its lots in computing his initial lot price for instance he lists the average selling prices of lots at developments morgantown22 dollar_figure peninsula23 dollar_figure and the kiva dunes subdivision dollar_figure yet he curiously assigns a value for average lot sales for martinique at zerodollar_figure as set forth above martinique lots were selling for much more than the residential lots at the kiva dunes subdivision we conclude that martinique possesses many of the characteristics of mr clark’s hypothetical subdivision and provides the most accurate representation of the quality and value of the proposed lots mr paulk’s assumption that the quality of the proposed lots would mirror that of two inferior 22morgantown is a single-family residential development on the south side of highway approximately one-half mile west of kiva dunes golf course 23peninsula is a single-family residential golf course community on the north side of highway approximately miles west of highway 24mr paulk designates the average lot sale price for martinique in a separate section as n a the only such property to receive that designation in his report lots at the kiva dunes subdivision is unavailing we conclude that mr clark’s analysis is persuasive and that an initial lot price of dollar_figure for the hypothetical subdivision is reasonable absorption rate mr clark assumed that his 370-lot subdivision would sell out in years averaging sales of lots per year in making his assumption he compared absorption data from local developments including the kiva dunes subdivision and martinique mr paulk on the other hand assumed his 300-lot subdivision would sell out in years averaging sales of lots per year mr paulk appears to have relied exclusively on absorption data from martinique to forecast his absorption rate both experts relied on martinique in support of their respective assumptions on the issue of the proper absorption rate indeed as set forth above the quality of the lots at martinique its amenity package and its location mirror those of the proposed subdivision accordingly we conclude that martinique is a useful gauge of an appropriate absorption rate sales at martinique were brisk during sales dollar_figure a former sales agent at martinique to which mr clark’s report refers indicated that sales were slowed by the construction pace and that the lots could have sold out much quicker had 25sales for totaled and sales reported for half of totaled they been sold as vacant lots mr clark testified that the demand for vacant lots was feverish as existing developments were approaching sellout and mr paulk’s data in his report corroborates mr clark’s conclusions for instance by the kiva dunes subdivision morgantown and martinique had sold out considering that the proposed plan would have had more than three times as many lots available for purchase as martinique we conclude that a sales forecast of lots per year is reasonable having found mr clark’s assumptions as to the available lots for sale initial lot price dollar_figure and annual rate of lot sales per year reasonable we need not address in detail the remaining assumptions made by the experts in deriving their respective before value opinions as they are largely offsetting to illustrate if we incorporate mr clark’s aforementioned assumptions into mr paulk’s discounted cashflow computation leaving intact mr paulk’s remaining assumptions as to lot appreciation percent developer’s profit percent sales commissions percent closing marketing costs percent property taxes dollar_figure lot and discount rate percent mr paulk’s before value would amount to dollar_figure 26martinique comprise sec_104 developed lots 27mr clark estimated lot appreciation pincite percent developer’s profit pincite percent sales commissions pincite percent continued if we further incorporate respondent’s concession on brief as to mr clark’s 5-percent lot appreciation rate mr paulk’s before value would increase an additional dollar_figure ultimately with the foregoing substitutions mr paulk’s before value dollar_figure would exceed mr clark’s before value dollar_figure by dollar_figure we conclude that mr clark’s testimony is credible and his assumptions are reasonable and amply supported by the evidence presented at trial and in his report moreover we conclude that the woodlands sale is corroborative evidence of the reasonableness of mr clark’s conclusions accordingly we assign a before value to kiva dunes golf course of dollar_figure fair_market_value of kiva dunes golf course after conservation_easement the experts agree that immediately after the charitable_contribution the highest_and_best_use of kiva dunes golf course was the continued operation of the golf coursedollar_figure however in continued closing costs overhead pincite percent and a discount rate pincite percent 28we do not however decide that petitioner is entitled to a higher before value than that determined by mr clark 29during mr clark prepared and submitted a supplemental report in which he opined on the economic health of the golf industry for at trial he testified that his new data information mr clark admits would not have been available to a hypothetical buyer and seller during suggests that the continued operation of kiva dunes golf course as a golf course continued determining the after value of kiva dunes golf course the experts used very different methodologies mr paulk used an income approach he divided a capitalization rate into a number that he represented was the net_income of kiva dunes golf course mr paulk determined the after value to be dollar_figure in contrast mr clark concluded that the economic health of kiva dunes golf course during was too poor to support an income capitalization approach instead he found sales of comparable properties that he analyzed and adjusted to reach an after value of dollar_figure in determining his after value mr paulk divided a capitalization rate percent into a number that he erroneously represented was the net_income of kiva dune sec_29 continued would not be the highest_and_best_use of the property in support of his new position mr clark highlighted a recent golf course closure diminishing rounds played in baldwin county and recent losses sustained by several local courses on brief respondent argues vociferously that mr clark’s vacillation on the highest_and_best_use of the property after the donation presents insurmountable obstacles for petitioner in establishing the fair_market_value of the property after the donation we disagree the fair_market_value of kiva dunes golf course should be based on its highest_and_best_use on its valuation_date see 87_tc_389 sec_1_170a-14 income_tax regs in other words the information mr clark used to determine the highest_and_best_use of the property must be limited to information that would have been available to the hypothetical buyer or seller on the date of the donation accordingly we assign no weight to mr clark’s supplemental report or his testimony insofar as it relates to the highest_and_best_use of kiva dunes golf course golf course--dollar_figure the error was that in calculating the net_income mr paulk failed to account for all of the expenses listed on d e’ sec_2002 tax_return as well as reserves in lieu of depreciationdollar_figure the table below summarizes the omitted categories of expense that when subtracted from mr paulk’s computed net_income result in a negative number description salaries wages employee_benefits repairs maintenance taxes licenses expense dollar_figure big_number big_number big_number 30at trial mr edgmon testified that the net_income for kiva dunes golf course was a negative number 31d e’s return was audited for taxable_year the irs did not propose any adjustments to the expense categories on the return or challenge whether any of the listed expenses were ordinary or necessary 32we recognize and both experts agree that depreciation does not figure into an appraisal value computation however mr paulk admitted that appraisal principles require that an alternative similar concept be substituted to reflect the economic cost of maintaining and or replacing equipment required for the operation of the golf course examples of such items relevant for such purposes would include but are not limited to maintenance vehicles maintenance equipment irrigation systems and golf carts in appraisal parlance a reserve reflects this anticipated cost of replacement and maintenance mr paulk made no attempt to determine the amount of an appropriate reserve in his after value analysis on brief respondent argues that an appropriate reserve would not approximate d e’s depreciation_deductions because d e depreciated under an accelerated method ie double declining balance method and claimed a special depreciation allowance of percent under sec_168 we agree with respondent that an appropriate reserve does not mirror the claimed depreciation_deductions in the instant case however it is not necessary to determine an appropriate reserve as d e’s remaining expenses more than offset d e’ sec_2002 income rent depreciation_reserve total big_number big_number big_number at trial mr paulk admitted that he was provided d e’ sec_2002 tax_return before he submitted his appraisal we therefore place no reliance on mr paulk’s after value determination mr clark used the comparable sales_method to reach his after value the comparable sales_method is based upon the commonsense approach of taking the actual sales prices of properties similar to the subject property and then relating these prices to the subject property 72_tc_1 the fair_market_value of kiva dunes golf course is calculated by reference to the sale prices of the comparable properties adjusted upward to the extent that the property is superior to the comparable_property in some fashion and downward to the extent it is inferior in some fashion see whitehouse hotel ltd pship v commissioner t c __ __ slip op pincite see also schwab v commissioner tcmemo_1994_232 this approach is based on the principle that the prudent purchaser would pay no more for a property than the cost of acquiring an existing property with the same utility mr clark made seven adjustments to the prices of his comparables for differences in market conditions location value access and visibility size availability of utilities topographical and wetland characteristics and financing terms under ideal circumstances there is an abundance of sales of truly comparable properties made under similar conditions only minor adjustments are required and the value is easily derived however as in the instant case when such conditions do not exist many factors come into play and more adjustments are required as might be expected the lack of sales of comparable properties results in a more subjective value highly dependent on the independent judgment of the individual appraiserdollar_figure in reaching his after value mr clark identified five sales of properties he considered comparable dollar_figure mr clark’s first comparable was a 186-acre vacant parcel of land in gulf shores alabama the property sold on date for dollar_figure per acre or dollar_figure million the land was purchased for the purpose of 33mr clark testified that the limited use for which kiva dunes golf course could be developed had a profound effect on his adjustments to his comparables t his is an eased property that has just about all of its rights stripped from it except recreational type uses and if this were an uneased property there would be different adjustments but an eased property under the conservation_easement had very limited use so whether you’ve got wetlands that you can’t do anything with or you’ve got an eased piece of property that you can’t do anything with you can’t do anything with them 34all five of mr clark’s sales of comparable properties occurred in baldwin county developing woodlands as a golf course after adjusting the price per acre for market conditions percent location -10 percent access visibility -10 percent size -5 percent utilities percent topography wetlands percent and financing percent mr clark arrived at an adjusted_value for his first comparable of dollar_figure per acre the second comparable was an 818-acre vacant parcel of land also in gulf shores alabama the property sold on date for dollar_figure or dollar_figure per acre the property ha sec_1 miles of frontage on the south margin of bon secour bay and approximately miles fronting on the north row of highway the land was purchased for the development of a residential community which included a golf course and tennis center after adjusting the price per acre for market conditions location -20 percent access visibility -5 percent size percent utilities -20 percent topography wetlands -20 percent and financing percent mr clark arrived at an adjusted_value for his second comparable of dollar_figure per acre the third comparable was a 320-acre vacant parcel of land in foley alabama the property sold on date for dollar_figure per acre or dollar_figure this comparable is in an area of significant commercial development after adjusting the price per acre for market conditions percent location -10 percent access visibility -10 percent size percent utilities -5 percent topography wetlands percent and financing percent mr clark arrived at an adjusted_value for his third comparable of dollar_figure per acre mr clark’s fourth comparable was a 190-acre parcel of land in foley alabama the property was sold on date for dollar_figure per acre or dollar_figure mr clark testified that the property was purchased by the consumer guaranty corporation for the purpose of developing a golf course after adjusting the price per acre for market conditions percent location percent access visibility -5 percent size -5 percent utilities -20 percent topography wetlands percent and financing percent mr clark arrived at an adjusted_value for his fourth comparable of dollar_figure per acre the fifth comparable was a 254-acre parcel of land in foley alabama the property sold on date for dollar_figure per acre or dollar_figure million the site was improved with a number of farm buildings mr clark testified that the property was commonly referred to as one of the prettiest sites for a golf course that there could be in baldwin county after adjusting the price per acre for market conditions percent location -5 percent access visibility -5 percent size percent utilities -20 percent topography wetlands percent and financing percent mr clark arrived at an adjusted_value for his fifth comparable of dollar_figure per acre on the basis of the average price of his five comparables adjusted for differences mr clark determined an after value of dollar_figure we are mindful of the fact that in reaching his after value mr clark did not take into consideration the highest_and_best_use of his comparables in the traditional sense he instead selected properties that were purchased for recreational uses that would be permitted on kiva dunes golf coursedollar_figure in other words mr clark considered the market forces in baldwin county an accurate barometer of the highest_and_best_use of a comparable_property we do not find mr clark’s analysis in that regard to be fatal as respondent contends we are satisfied that mr clark’s selection of comparables was reasonable under the circumstances and that his adjustments to the prices of the comparables were based upon sound judgment and a detailed knowledge of all the properties mentioned in his report however we agree with respondent that an upward adjustment to mr clark’s after value is justified in one 35the average price per acre for the five comparable properties is dollar_figure multiplying that number by the total acreage of the easement acres results in an after value of dollar_figure rounded mr clark inadvertently erred in two respects in reaching his after value number--he miscalculated the average price per acre of his five comparables at dollar_figure and he multiplied that number by acres 36for instance the property could be operated as a golf course a park or an agricultural enterprise respect mr clark’s comparables consist of unimproved land while kiva dunes golf course’s current condition is that of an award-winning golf course consequently an upward adjustment to the prices of the comparables for the cost of turning the unimproved_real_estate into a comparable golf course property is warranted petitioner contends on brief that the approximate costs of the improvements are reflected in the basis of the golf course real_estate dollar_figure as reported on schedule l balance_sheet per books of kiva dunes’ sec_2002 form_1065 the basis of the golf course real_estate improvements is actually dollar_figure we arrived at this figure by subtracting the portion of the cost_basis attributable to the golf course real_estate dollar_figure from the cost_basis of kiva dunes golf course dollar_figure we computed the proportional share of the golf course real_estate basis by dividing the total acreage for kiva dunes golf course by the total acreage for the rtc property and multiplying that fraction by the total purchase_price for the rtc property dollar_figure the foregoing improvement costs dollar_figure must be adjusted to account for depreciation see wortmann v commissioner tcmemo_2005_227 on schedule l of its form_1065 d e reported a cost_basis in kiva dunes golf course of dollar_figure d e depreciated the costs of improvements on kiva dunes golf course for taxable_year sec_2001 dollar_figure and dollar_figure and its cost_basis was correspondingly reduced to dollar_figure to reflect the deductionsdollar_figure we therefore add to petitioner’s cost of improvements dollar_figure the depreciation_deductions d e claimed for taxable_year sec_2001 and sec_2002 to derive a value for the costs of improvements on kiva dunes golf course dollar_figure dollar_figure dollar_figure dollar_figure accordingly after adjusting mr clark’s after value to account for the improvements we conclude that the after value for kiva dunes golf course is dollar_figure dollar_figure comparable value dollar_figure depreciation adjustment enhancement mr clark determined that the conservation_easement enhanced property owned by d e north of highway by dollar_figure respondent agrees we shall adjust our final value to reflect that enhancement conclusion on the basis of our review of all the valuation evidence giving due consideration to our observation at trial of the witnesses for both parties and to the testimony of the expert sec_37d e did not depreciate the costs of improvements in and there is no evidence in the record before us that d e depreciated any costs of improvements to the subject property before and their reports we conclude that the fair_market_value of the easement is dollar_figure we have considered all of the parties’ contentions and arguments that are not discussed herein and we find them unnecessary to reach without merit or irrelevantdollar_figure to reflect the foregoing decision will be entered under rule 38we reached this number by subtracting our after value dollar_figure as well as enhancement dollar_figure from our before value dollar_figure 39respondent argues that kiva dunes is liable for either a substantial or a gross valuation penalty pursuant to sec_6662 and e or h sec_6662 and b imposes a 20-percent penalty on that portion of an underpayment which results from a substantial_valuation_misstatement there is a substantial_valuation_misstatement if the value of any property claimed on the return is percent or more of the amount determined to be the correct amount sec_6662 sec_6662 increases the penalty to percent in the case of a gross_valuation_misstatement there is a gross_valuation_misstatement if the value is percent or more of the value determined to be the correct amount sec_6662 we corrected kiva dunes’s reported value approximately percent accordingly kiva dunes is not subject_to a valuation penalty


t c memo united_states tax_court western management inc petitioner v commissioner of internal revenue respondent docket no filed date robert e kovacevich and richard w kochansky for petitioner milton b blouke and roger p law for respondent memorandum findings_of_fact and opinion foley judge the petition in this case was filed in response to a notice_of_determination concerning worker classification under section notice_of_determination unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and continued relating to petitioner’s liabilities pursuant to the federal_insurance_contributions_act fica and the federal_unemployment_tax_act futa for and the first quarter of period in issue the issues for decision are whether robert e kovacevich kovacevich was petitioner’s employee for federal employment_tax purposes petitioner is entitled to relief under sec_530 of the revenue act of publaw_95_600 92_stat_2885 as amended sec_530 petitioner owes employment_taxes pursuant to sec_3111 and sec_3301 and petitioner is liable for sec_6656 and sec_6662 penalties findings_of_fact on date kovacevich incorporated petitioner as robert e kovacevich p s a washington c_corporation whose name was subsequently changed to western management inc from its incorporation and through the period in issue petitioner’s only source_of_income was from the provision of legal services and kovacevich was petitioner’s sole shareholder president and secretary-treasurer in petitioner’s board_of directors voted to pay kovacevich dollar_figure in and dollar_figure annually thereafter kovacevich designated the seattle first national bank spokane and eastern branch seafirst as the depository for all of petitioner’s funds all moneys that were paid on continued all rule references are to the tax_court rules_of_practice and procedure petitioner’s accounts_receivable were deposited in the seafirst account kovacevich worked to hours per month for petitioner and performed all services necessary to generate gross_receipts on behalf of petitioner including paying creditors hiring employees signing checks determining employee compensation renewing petitioner’s malpractice insurance and signing petitioner’s federal tax returns no other person performed legal services on behalf of petitioner kovacevich received funds from petitioner as his needs arose and was not compensated for his services at predetermined intervals in and the first quarter of respectively petitioner paid kovacevich dollar_figure and dollar_figure petitioner issued checks to kovacevich his wife and their creditors eg nordstrom teneff jewelry fit and hollywood and national golf and kovacevich informed petitioner’s accountant and tax_return_preparer bob moe associates moe that the payments were draws petitioner classified the payments as loans on its corporate ledgers and did not file forms 1099-misc miscellaneous income relating to the payments petitioner also paid kovacevich’s law license renewal fees office expenses bar dues and health insurance premiums and deducted most of these expenses on its corporate_income_tax returns kovacevich and his wife kovacevichs maintained at farmers and merchant’s bank a personal line of credit on the corporate ledgers moe listed the checks written to farmers and merchants bank and mbna in the receivable from officer account these checks had an ln memo description indicating that the payment related to a loan or the receivable from officer account from through petitioner sponsored a defined_benefit_plan for kovacevich its only participant in and petitioner contributed dollar_figure and dollar_figure respectively to the plan petitioner’s fiscal_year ends on march on its corporate income returns for and petitioner deducted officers’ compensation expenses in the amounts of dollar_figure and dollar_figure respectively kovacevich in his capacity as president amended petitioner’s form_941 employer's quarterly federal tax_return with the following statement the amount of earnings_of employee robert e kovacevich was not clear hence was left off the employee paid all income_tax due hence the withholding is unnecessary however the social_security_tax is due a completed w-2 c term is included on date respondent sent petitioner a notice_of_determination in which respondent determined that kovacevich was an employee for federal employment_tax purposes and that petitioner was not entitled pursuant to sec_530 to relief from such classification enclosed with the notice_of_determination was a schedule setting forth petitioner’s liabilities as follows year deficiency dollar_figure big_number addition_to_tax sec_6656 dollar_figure penalty sec_6662 dollar_figure big_number on date the court filed respondent’s motion to dismiss in part for lack of jurisdiction and to strike as to the amounts of employment_taxes and additions to tax proposed for assessment by the respondent partial motion to dismiss on date the court filed petitioner’s response to the motion and granted the motion on date on date the court filed petitioner’s motion to dismiss for lack of jurisdiction and judgment on the pleadings motion to dismiss on october and the court held proceedings to determine whether petitioner properly classified kovacevich as an independent_contractor and whether petitioner is entitled to sec_530 relief on date congress amended sec_7436 to provide this court with jurisdiction to determine the correct amounts of federal employment_taxes in worker classification cases see community renewal tax relief act of crtra publaw_106_554 sec f stat 2763a-643 that amendment was retroactive to date crtra sec g stat 2763a-643 on date the court vacated its date order of dismissal and denied respondent’s motion on date the court held proceedings to determine the correct amount of employment_taxes at the time the petition was filed petitioner’s principal_place_of_business was spokane washington opinion i jurisdiction petitioner contends that this court lacks jurisdiction to determine the correct amount of employment_taxes because sec_7436 was amended after this court granted respondent’s partial motion to dismiss the notice_of_determination is invalid and no employment_tax is due a our decision to vacate the date order was proper petitioner contends that the court improperly vacated its date order which granted respondent’s partial motion to dismiss petitioner relying on 514_us_211 contends that the constitution’s separation of powers principles and the due process clause of the fifth_amendment prohibit the reopening of final judgments relating to sec_7436 cases petitioner’s reliance on plaut is misplaced in plaut the action was dismissed and the judgment of dismissal became final prior to the enactment of the applicable statute specifically the judgment of the district_court dismissing that case with prejudice was entered on date was not appealed and became final days later legislation purporting to authorize the reopening of that final judgment and the reinstatement of the complaint was signed into law by the president on date the supreme court held that the retroactive legislation was unconstitutional to the extent it required federal courts to reopen judgments that became final before its enactment plaut v spendthrift farm supra plaut is distinguishable because the amendment to sec_7436 does not require the reopening of judgments which had become final prior to the amendment’s enactment cf plaut v spendthrift farm supra pincite vacating the order was within our authority and consistent with the amendment and its effective date see sec_7436 moreover our judgment in this case is not yet final see sec_7481 rule a consequently plaut is inapplicable accordingly this court’s decision to vacate its date order was proper 116_tc_79 n b_notice of determination petitioner contends that the notice_of_determination is invalid because the unexplained arrows and rounding of the amounts used to determine the deficiencies indicate vagueness challenges regarding the validity of a notice_of_determination are analogous to such challenges to a notice_of_deficiency 113_tc_250 holding that a notice_of_determination was not invalid for failure to specify the names of the individuals whose status had been determined pursuant to sec_7436 a notice_of_deficiency is not invalid for failure to explain the adjustments failure to cite statutory provisions on which respondent relied or inconsistencies in the notice_of_deficiency id pincite 90_tc_110 47_tc_340 there is no dispute that the name of the taxpayer the affected tax periods and the amounts of the deficiencies are set forth in the notice_of_determination generally the court will not examine respondent’s motives or procedure leading to his determination relating to a notice_of_deficiency see 79_tc_185 62_tc_324 similarly petitioner has not identified any reason to examine respondent’s motives or procedure leading to his determination pursuant to sec_7436 c kovacevichs’ fica tax payment on date the court filed petitioner’s motion to dismiss on the ground that the court lacks jurisdiction because the kovacevichs allegedly paid all of their fica_taxes our jurisdiction pursuant to sec_7436 is based upon whether petitioner properly classified kovacevich as an independent_contractor and whether petitioner is entitled to sec_530 relief henry randolph consulting v commissioner supra in addition we have jurisdiction to determine petitioner’s employment_tax liability relating to amounts petitioner paid kovacevich in and sec_7436 therefore petitioner’s motion to dismiss will be denied ii employment status sec_3111 and sec_3301 impose taxes on employers under fica and futa respectively based on wages paid to employees employee is defined for purposes of the fica tax in sec_3121 with certain modifications not germane here this definition applies for purposes of the futa_tax as well sec_3306 pursuant to sec_3121 the term employee includes any individual who has the status of an employee under the common_law paragraphs and of sec_3121 delineate statutory employees these individuals are considered employees regardless of their status under the common_law rules see 119_tc_121 any officer of a corporation is a statutory_employee if such officer performs substantial services for a corporation and receives remuneration for those services see 117_tc_141 affd sub nom 54_fedappx_100 3d cir sec_3121 sec_31_3121_d_-1 employment_tax regs kovacevich was a statutory_employee because at all relevant times he served as petitioner’s president and secretary-treasurer worked in all significant aspects of petitioner’s business performed substantial services for petitioner in his capacity as an officer and obtained remuneration for such services from petitioner as his needs arose iii sec_530 of the revenue act of sec_530 provides relief from employment_tax liability notwithstanding the actual relationship between the taxpayer and the individual performing services sec_530 the taxpayer however must establish it did not treat the worker as an employee filed all returns for periods after date on a basis consistent with the taxpayer’s treatment of such worker as not being an employee and had a reasonable basis for not treating the worker as an employee sec_530 and joseph m grey pub accountant p c v commissioner supra pincite petitioner contends that the court’s determination of whether kovacevich is an employee or independent_contractor is controlled by clackamas gastroenterology associates p c v wells u s __ 123_sct_1673 date we disagree in clackamas the court simply held that in determining whether four director-shareholder physicians were employees or employers for purposes of the americans with disabilities act of the common-law element of control is the principal guidepost the court did not consider whether these individuals were employees or independent contractors for fica and futa purposes for employment_tax purposes kovacevich is a statutory_employee pursuant to sec_3121 and we need not resort to the common-law principles considered in clackamas petitioner treated kovacevich as an employee sec_530 petitioner’s board_of directors voted to pay kovacevich a dollar_figure salary and issued a form_w-2 wage and tax statement relating to in addition kovacevich in his capacity as petitioner’s president filed an amended form_941 for with the following statement the amount of earnings_of employee robert e kovacevich was not clear hence was left off the employee paid all income_tax due hence the withholding is unnecessary however the social_security_tax is due a completed w-2 c term is included emphasis added furthermore petitioner did not file forms relating to payments made to kovacevich sec_530 thus petitioner fails the first two requirements and accordingly is not entitled to relief iv liability for employment_tax petitioner paid kovacevich dollar_figure and dollar_figure in wages during and the first quarter of respectively because we have determined that kovacevich is an employee under sec_3121 and sec_3306 petitioner is liable for fica and futa taxes as determined by respondent see sec_3306 and b a and b v penalties under sec_6656 and sec_6662 sec_6656 imposes a penalty equal to percent of the portion of an underpayment in tax that is required to be deposited if the failure to deposit is more than days beyond the prescribed deadline see sec_6656 sec_31_3402_b_-1 sec_31_3402_c_-1 employment_tax regs petitioner has not established reasonable_cause for failing to make the required deposits of tax therefore we sustain respondent’s determination see 251_f3d_862 9th cir sec_6662 imposes an accuracy-related_penalty equal to percent of the portion of an underpayment that is attributable to negligence petitioner’s contention that amounts paid to kovacevich were not wages is meritless see van camp bennion v united_states supra pincite stating that the reasonable basis standard is not satisfied by a return position that is merely arguable or that is merely a colorable claim 918_f2d_90 9th cir petitioner did not exercise due care in the filing of its return and thus is liable for the sec_6662 penalty therefore we sustain respondent’s determination contentions we have not addressed are irrelevant moot or meritless to reflect the foregoing an order denying petitioner’s motion to dismiss will be issued and decision will be entered under rule