internal_revenue_service department of the treasury number release date index numbers washington dc re person to contact telephone number refer reply to cc psi b09-plr-132329-01 date date legend decedent date trust date date date date date date date date date caregiver trust trust trust trust trust plr-132329-01 trust trust step-grandchild step-grandchild step-grandchild charity stepdaughter dollar_figurea dollar_figureb dollar_figurec dollar_figured corporation dear this is in response to your letter dated date requesting a ruling under sec_2601 of the internal_revenue_code the facts and representations submitted are summarized as follows decedent executed a revocable_trust agreement trust on date and amended it on date date date date date and date corporation is the trustee of the trust paragraph of the trust as amended provides for the payment of debts and taxes upon decedent’s death paragraph of the trust provides that after providing for the payments contemplated in paragraph the trustee shall divide the remaining trust property including property to which the trustee is entitled under decedent’s will into four separate trusts one of which shall consist of one-half of such trust property and shall be designated the charitable_trust each of the other three shall consist of one- sixth of trust’s property and be designated respectively by the names of decedent’s three step-grandchildren step-grandchild step-grandchild and step-grandchild the trustee is directed to immediately distribute the principal of the charitable_trust to charity paragraph of the trust directs that caregiver a non-skip_person to decedent be paid dollar_figurea per year in monthly installments these payments are to be made out of income and to the extent income is insufficient out of principal of the respective trusts named for decedent’s step-grandchildren plr-132329-01 paragraph subsection a of the trust provides that from the trusts of the step-grandchildren the trustee shall pay to the beneficiary for whom a_trust is named and his or her descendants such part or all of the income and principal of the trust at such times as the trustee believes desirable for the best interests and welfare of the beneficiary and his or her descendants in that order and as a group considering the desirability of supplementing their respective incomes or assets and all other circumstances and factors the trustee believes pertinent all undistributed_income is to be accumulated and from time to time added to principal paragraph subsection b of the trust provides that if a beneficiary for whom a_trust is named dies before the complete distribution of principal from the trust the principal and undistributed_income of the trust shall be distributed to or for the benefit of his spouse and descendants or such religious charitable scientific or educational_purposes in such proportions and subject_to such trusts powers and conditions that beneficiary may provide and appoint by will specifically referring to this power to appoint paragraph subsection c of the trust provides that any part of a_trust not effectively disposed of by any other provision shall be divided and allocated on the death of the last to die of the beneficiary for whom the trust is named and decedent per stirpes among the living descendants of the beneficiary or if none then per stirpes among the then living descendants of the nearest lineal ancestor of the beneficiary who was also a descendant of stepdaughter and of whom one or more descendants then are living or if none then per stirpes among stepdaughter’s then living descendants paragraph subsection d of the trust provides that when a descendant of a step-grandchild for whom a_trust is named reaches thirty years of age the trustee shall distribute the remaining principal of the trust to him or her paragraph subsection e of the trust provides that on the day preceding the end of twenty-one years after the death of the last to die of decedent’s husband’s descendants living on date and decedent the trustee shall distribute any property then held in a_trust to the beneficiary for whom the trust is named decedent died on date the trustee divided each step-grandchild’s trust into three trusts trust a which consisted of dollar_figureb trust b which consisted of dollar_figurec and an annuity_trust which consisted of dollar_figured the division and allocation were provisional because the trustee was not certain that the generation-skipping_transfer gst tax applied to decedent for step-grandchild trust a has been designated as trust and trust b has been designated as trust for step-grandchild trust a has been designated as trust and trust b has been designated as trust for step- grandchild trust a has been designated as trust and trust b has been designated as trust the annuity trusts have been consolidated into trust and will continue to pay an annuity to caregiver for her life any amount in trust at caregiver’s death will be divided and allocated among the trusts named for decedent’s step-grandchildren plr-132329-01 the executor of decedent’s estate timely filed a federal estate_tax_return form_706 on date in accordance with the requirements of sec_26_2601-1 of the generation-skipping_transfer_tax regulations the executor attached to schedule r of form_706 a sworn statement stating decedent was under a mental_disability to change the disposition of her property from date until her death and certifications of decedent’s physicians stating that decedent was incompetent to handle her own affairs during the period of time that each physician treated decedent the certifications cover the entire period of time from date until decedent’s death the internal_revenue_service service issued an estate_tax closing letter for decedent’s estate on date the trustee proposes to merge trust a and trust b for each step-grandchild into a single trust for the step-grandchild the trustee has requested a ruling under chapter of the internal_revenue_code that under b c of the tax_reform_act_of_1986 act each of the trusts created under trust is exempt from the generation-skipping_transfer gst tax and each trust a and b which are named for a step-grandchild of decedent may be merged into a separate trust that will be exempt from gst tax sec_2601 of the code imposes a tax on every generation-skipping_transfer made after date under b c of the tax_reform_act_of_1986 the tax does not apply to any generation-skipping transfer-- i under a_trust to the extent such trust consists of property included in the gross_estate of a decedent other than property transferred by the decedent during his life after the date of the enactment of the act or reinvestments thereof or ii that is a direct_skip that occurs by reason of the death of any decedent but only if such decedent was on the date of the enactment of the act under a mental_disability to change the disposition of his property and did not regain his competence to dispose_of such property before the date of death sec_26_2601-1 of the generation-skipping_transfer_tax regulations provides in part that if an individual was under a mental_disability to change the disposition of his or her property continuously from date until the date of his or her death the provisions of chapter do not apply to any generation-skipping transfer-- a under a_trust as defined in sec_2652 to the extent such trust consists of property or the proceeds of property the value of which was included in the gross_estate of the individual other than property transferred by or on behalf of the individual during the individual’s life after date or b which is a direct_skip other than a direct_skip from a_trust that occurs by reason of the death of the individual sec_26_2601-1 provides that the term mental_disability means mental incompetence to execute an instrument governing the disposition of the individual’s property whether or not there was an adjudication of incompetence and regardless of whether there has been an appointment of a guardian fiduciary or other plr-132329-01 person charged with either the care of the individual or the care of the individual’s property sec_26_2601-1 provides that if there has not been a court adjudication that the decedent was mentally incompetent on or before date the executor must file with form_706 either- a certification from a qualified physician stating that the decedent was- i mentally incompetent at all times on and after date and ii did not regain competence to modify or revoke the terms of the trust or will prior to his or her death or sufficient other evidence demonstrating that the decedent was mentally incompetent at all times on and after date as well as a statement explaining why no certification is available from a physician and any judgment or decree relating to the decedent’s incompetency that was made after date sec_26_2601-1 provides that the items in sec_26_2601-1 and will be considered relevant but not determinative in establishing the decedent’s state of competency sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust exempt from the gst tax under sec_26_2601-1 sec_26_2601-1 and sec_26_2601-1 will not cause the trust to lose its exempt status under sec_26_2601-1 a modification will not cause a_trust that was irrevocable on date to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a generation-skipping_transfer or the creation of a new generation-skipping_transfer according to the facts as represented the principal of trust trust trust trust trust trust and trust consists of property that was included in decedent’s gross_estate and decedent’s form_706 included a certification regarding decedent’s mental_disability from each physician who treated decedent from date until her death because the required statements were filed with the form_706 on date and the service issued an estate_tax closing letter on date the service has accepted that decedent was under a mental_disability to change the disposition of her property continuously from date until her death plr-132329-01 because decedent was under a mental_disability to change the disposition of her property continuously from date until her death the provisions of b c of the tax_reform_act_of_1986 apply to each of the trusts and thus the provisions of chapter of the internal_revenue_code will not apply to any generation-skipping_transfer made from the trusts in addition the trustee proposes to merge each step-grandchild’s separate trusts for step-grandchild trust will merge with trust for step-grandchild trust will merge with trust for step-grandchild trust will merge with trust in this case the merger of the trusts will not result in either an increase in the amount of a generation-skipping_transfer or the creation of a new generation-skipping_transfer thus the mergers will not result in a shift in beneficial_interest to a lower generation beneficiary or extend the time for vesting of any beneficial interests in the trusts for purposes of sec_26_2601-1 accordingly we conclude that the merged trusts will continue to be exempt from the gst tax except as specifically ruled herein we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely james f hogan senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter


t c memo united_states tax_court crystal beach development of destin ltd waters edge building company tax_matters_partner petitioner v commissioner of internal revenue respondent docket no filed date r issued a notice of final_partnership_administrative_adjustment fpaa to p the partnership’s tax_matters_partner for the taxable years and the fpaa was accompanied by an explanation of affected items stating that a penalty under sec_6662 would be charged p filed a petition_for_readjustment contesting adjustments to partnership items and the accuracy-related_penalty under sec_6662 r filed a motion to dismiss for lack of jurisdiction and to strike the portion of the petition contesting the accuracy-related_penalty held the court lacks jurisdiction to review the accuracy-related_penalty in this partnership-level proceeding see n c f energy partners v commissio89_tc_741 held further the amendments made by the taxpayer_relief_act_of_1997 publaw_105_34 111_stat_1026 which provide that penalties will be determined in partnership-level proceedings are effective for taxable years beginning only after date and are therefore not applicable to the years before the court held further r's motion to dismiss for lack of jurisdiction and to strike will be granted david d aughtry for petitioner ronald buch and william l blagg for respondent memorandum opinion cohen chief_judge this case was assigned to special_trial_judge robert n armen jr pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_183 the court agrees with and adopts the opinion of the special_trial_judge which is set forth below opinion of the special_trial_judge armen special_trial_judge this matter is before the court on respondent's motion to dismiss for lack of jurisdiction and to strike with respect to penalties additions to tax respondent moves to dismiss for lack of jurisdiction and to strike allegations in the petition pertaining to the accuracy- related penalty under sec_6662 as explained in detail below we shall grant respondent's motion unless otherwise indicated all section references are to the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure background on date respondent issued a notice of final_partnership_administrative_adjustment fpaa to crystal beach development of destin ltd the partnership setting forth adjustments to the partnership's returns forms for and attached to the fpaa are a schedule of examination changes which includes a statement that penalties or additions to tax under sec_6662 which may be applicable at the investor level are being recommended in the examination of the flow-through_entity and an explanation of affected items which states that an addition to the tax is charged as provided by sec_6662 waters edge building company the partnership's tax_matters_partner filed a timely petition_for_readjustment with the court the petition includes allegations contesting the imposition of the accuracy-related_penalty as indicated respondent filed a motion to dismiss for lack of jurisdiction and to strike respondent contends that the court lacks jurisdiction over the accuracy-related_penalty in this partnership-level proceeding on the ground that such penalty is an affected_item that can be reviewed only at the individual partner level respondent further contends that allegations pertaining to such penalty should be stricken from the petition_for_readjustment petitioner filed an objection to respondent's motion arguing that the motion should be denied on the grounds that respondent's motion was not timely filed the fpaa includes an adjustment based on the penalty prescribed in sec_6662 a and sec_6221 was amended in to clarify that additions to tax and penalties are to be determined in partnership--level proceedings this matter was called for hearing at the court's motions session in washington d c counsel for respondent appeared at the hearing and presented oral argument in support of the pending motion counsel for petitioner filed a written_statement pursuant to rule c in lieu of attendance at the hearing discussion the tax_court is a court of limited jurisdiction and we may exercise our jurisdiction only to the extent authorized by congress see 85_tc_527 the court's jurisdiction may be challenged by either party or by the court sua sponte at any stage of the proceedings see 96_tc_10 and cases cited therein consistent with this principle we reject petitioner's assertion that respondent's motion to dismiss and to strike should be denied on the ground that it was not timely filed petitioner further asserts that respondent's motion should be denied because the fpaa included an adjustment charging the penalty prescribed in sec_6662 we disagree although the court's jurisdiction in a partnership proceeding is contingent on the issuance of a valid fpaa and a timely-filed petition_for_readjustment see 87_tc_874 the fpaa does not define the scope of the court's jurisdiction see eg 96_tc_707 rather as previously stated the court's jurisdiction is prescribed by statutory provisions to which we now turn the court's jurisdiction to review adjustments to a partnership return is governed by the unified partnership audit and litigation procedures set forth in sec_6221 through see tax equity and fiscal responsibility act of tefra publaw_97_248 96_stat_648 pursuant to the tefra provisions which apply with respect to all taxable years of a partnership beginning after date the tax treatment of any partnership_item generally is determined ina single proceeding at the partnership level see 87_tc_1279 87_tc_783 see also sec_6226 partnership items include each partner's proportionate share of the partnership's aggregate items of income gain loss deduction or credit see sec_6231 sec_301 a -1 a proced admin regs partnership items are distinguished from affected items which are defined in sec_6231 as any item to the extent such item is affected by a partnership_item see 95_tc_209 the first type of affected_item gives rise to a computational adjustment without the necessity of a partner-level proceeding the computational adjustment is made to record the change in a partner's tax_liability resulting from the proper treatment of partnership items see sec_6231 white v commissioner supra once partnership-level proceedings are completed the commissioner is permitted to assess a computational adjustment against a partner without issuing a notice_of_deficiency see sec a n c f energy partners v commissio89_tc_741 maxwell v commissioner supra pincite n the second type of affected_item is one that is dependent on factual determinations to be made at the individual partner level see n c f energy partners v commissioner supra pincite section a a provides that the normal deficiency procedures apply to those affected items that require partner- level determinations traditionally additions to tax for negligence were considered affected items requiring factual determinations at the individual partner level see n c f energy partners v commissioner supra pincite see sec_301 a -1t d temporary proced admin regs fed reg date in n c f energy partners v commissioner supra a case similar in many respects to the case now before the court the commissioner issued an fpaa to n c f energy partners ncf determining adjustments to ncf's returns for and the fpaa was accompanied by an explanation of items which stated that the commissioner intended to assert additions to tax including additions to tax for negligence at the individual partner level the tax_matters_partner filed a petition_for_readjustment on ncf's behalf contesting both adjustments to partnership items and the various additions to tax mentioned in the explanation of items the commissioner moved to dismiss for lack of jurisdiction and to strike the allegations in the petition pertaining to additions to tax on the ground that such items constituted affected items that could be resolved only at the in the omnibus budget reconciliation act of publaw_101_239 sec 103_stat_2395 congress consolidated the additions to tax for negligence and substantial_understatement under new sec_6662 entitled imposition of accuracy-related_penalty although respondent never amended sec_301 a - 1t d temporary proced admin regs fed reg date to include accuracy-related_penalties within the definition of the term affected items we are satisfied that congress intended for accuracy-related_penalties to be treated similarly to additions to tax ie as affected items see h conf rept pincite individual partner level following the completion of partnership- level proceedings the court agreed with the commissioner that the additions to tax in question were affected items that could not be raised in the partnership-level proceedings with regard to additions to tax for negligence the court stated in pertinent part a partner will be liable for the addition_to_tax for negligence pursuant to sec_6653 if he has an underpayment_of_tax some part of which is due to negligence the existence of an underpayment_of_tax at the partner level cannot be made until the partner's share of distributable items of income loss deduction and credit is determined in the partnership level proceeding once the partnership level proceeding ends however the factual question of whether any part of the underpayment was due to the partner's negligence must be answered at the partner level n c f energy partners v commissioner supra pincite however in the taxpayer_relief_act_of_1997 publaw_105_34 111_stat_1026 congress amended sec_6221 to provide that the applicability of any penalty addition_to_tax or additional_amount which relates to an adjustment to a partnership_item shall be determined at the partnership level h conf rept pincite states in pertinent part present law partnership items include only items that are required to be taken into account under the income_tax subtitle penalties are not partnership items since they are contained in the procedure and administration subtitle as a result penalties may only be asserted against a partner through the application of the deficiency procedures following the completion of the partnership--level proceeding house bill the house bill provides that the partnership-level proceeding is to include a determination of the applicability of penalties at the partnership level however the provision allows partners to raise any partner-level defenses in a refund forum kftfective date--the provision is effective for partnership taxable years ending after the date of enactment the taxpayer_relief_act_of_1997 was signed into law on date in sum additions to tax for negligence traditionally have been treated as affected items that may be redetermined only ina partner-level proceeding however based on changes to the tefra partnership provisions enacted as part of the taxpayer_relief_act_of_1997 accuracy-related_penalties for negligence will be determined in partnership-level proceedings effective for partnership taxable years ending after date consistent with the preceding discussion it follows that the court lacks jurisdiction to review the applicability of the accuracy-related_penalty for the taxable years and that petitioner has attempted to place in dispute in this case in so holding we reject petitioner's contention that the amendments to the tehfra provisions enacted by the taxpayer_relief_act_of_1997 were intended to clarify existing law the legislative_history -- - underlying the tefra amendments quoted above includes a clear description of present law which states that penalties can only be asserted against a partner through the application of the deficiency procedures following the completion of the partnership-level proceeding see h conf rept pincite further congress unambiguously provided that the tehfra amendments would apply prospectively only--the amendments are effective for taxable years ending after date--and do not apply to the taxable years in issue simply put petitioner's assertion that congress enacted the tefra amendments described above as a clarification of existing law is incorrect in sum we hold that the court lacks jurisdiction over the accuracy-related_penalty that petitioner has attempted to place in dispute in this partnership-level proceeding the penalty may be contested at the individual partner level only following the completion of partnership-level proceedings accordingly we shall grant respondent's motion to dismiss for lack of jurisdiction and to strike with respect to penalties additions to tax to reflect the foregoing an order will be issued granting respondent's motion and dismissing that part of this case pertaining to the accuracy-related_penalty under sec_6662


internal_revenue_service number release date index number ---------------------------- --------------------------------------------------------- ---------------------------------------------------- -------------------------- ---------------------------- in re --------------------------------------------------- ---------------------------------------------------- ------------------------ department of the treasury washington dc third party communication date of communication month dd yyyy person to contact --------------------------- id no --------------- ----------------- telephone number ------------------------------ refer reply to cc ita b04 plr-116340-12 date october legend taxpayer ein ------------------------------------------ ---------------- development_corporation ------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------ ein ------------------------------------- ---------------- exempt_organization -------------------------------------------------------------------------------------------------------------- ------------------------------------------------------ ein limited_partnership ein state address date date ------------- ---------------- -------------------------------------- ---------------- ------------- -------------------------- ---------------------------- ------------------- ---------------- plr-116340-12 building building city y z successor owner ein date year dear ---------------- ---------------------------- ------------------ --------------------------- ------------------ ------------ ---- -------- --------------------------------------- ---------------- ------------------ ------- this letter responds to your private_letter_ruling request dated date regarding an extension of time to make an election under sec_168 of the internal_revenue_code code specifically you requested an extension of time to make an election under sec_168 for taxpayer a tax-exempt_controlled_entity under sec_168 facts taxpayer is a subchapter_c_corporation for federal_income_tax purposes uses the accrual_method of accounting and has the calendar_year as its taxable_year taxpayer a holding_company is wholly owned by development_corporation a not-for-profit corporation development_corporation in turn is wholly owned by exempt_organization a not-for-profit corporation which has received a determination that it is a tax-exempt_organization described in sec_501 based on exempt organization’s ultimate control of taxpayer taxpayer is a tax-exempt_controlled_entity within the meaning of code sec_168 taxpayer development_corporation and exempt_organization all are organized under the laws of state and all are located at address plr-116340-12 taxpayer was formed on date on date limited_partnership was formed limited_partnership was formed to acquire own and rehabilitate building and building both of which are low-income_housing projects located in city state taxpayer is the sole general_partner of limited_partnership and has a y percent interest in limited partnership’s capital profits and losses exempt_organization owned the remaining z percent interest in limited partnership’s capital profits and losses on date subsequently at a closing held on date exempt_organization withdrew as a limited_partner with successor organization being admitted to the limited_partnership and succeeding to exempt organization’s z percent interest as part of the closing agreements signed on date taxpayer was contractually obligated to make an election under code sec_168 to be treated as a taxable entity the election was to be made for the year in which buildings were placed_in_service buildings were placed_in_service in year taxpayer filed a timely federal_income_tax return for year but failed to make the sec_168 election on that return however from the affidavit and other materials submitted it is clear that taxpayer at all times intended to make the sec_168 election upon discovering its failure taxpayer promptly sought an extension of time in which to file the election applicable law sec_168 provides that for purposes of sec_168 if any property that is not tax-exempt-use property is owned by a partnership having both a tax-exempt_entity and a nontax-exempt entity as partners and any allocation to the tax-exempt_entity is not a qualified_allocation then an amount equal to such tax-exempt entity’s proportionate share of such property is treated as tax-exempt_use_property sec_168 provides generally that any tax-exempt_controlled_entity is treated as a tax-exempt_entity for purposes of sec_168 and under sec_168 a tax-exempt_controlled_entity can elect not to treated as a tax- exempt entity such an election is irrevocable and will bind all tax-exempt entities holding an interest in the tax-exempt_controlled_entity under sec_301_9100-7t of the procedure and administration regulations an election under sec_168 must be made by the due_date of the tax_return for the first taxable_year for which the election is to be effective sec_301_9100-1 provides that the commissioner of internal revenue has discretion to grant a reasonable extension of time to make a regulatory election sec_301_9100-1 defines the term regulatory election as including any election the due_date for which is prescribed by a regulation the sec_168 election is a regulatory election plr-116340-12 sec_301_9100-1 though sec_301_9100-3 provides the standards that the service will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-3 provides that requests for extensions of time for regulatory elections other than automatic changes covered in sec_301_9100-2 will be granted when the taxpayer provides evidence including affidavits to establish that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer will be deemed to have acted reasonably and in good_faith if the taxpayer-- i ii iii requests relief before the failure to make the regulatory election is discovered by the service failed to make the election because of intervening events beyond the taxpayer's control failed to make the election because after exercising due diligence the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of the service or v reasonably relied on a qualified_tax professional and the tax professional failed to make or advise the taxpayer to make the election under sec_301_9100-3 a taxpayer will not be considered to have acted reasonably and in good_faith if the taxpayer- i ii iii seeks to alter a return position for which an accuracy-related_penalty could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires a regulatory election for which relief is requested was fully informed of the required election and related tax consequences but chose not to file the election or uses hindsight in requesting relief if specific facts have changed since the original deadline that make the election advantageous to a taxpayer the service will not ordinarily grant relief sec_301_9100-3 provides that the service will grant a reasonable extension of time only when the interests of the government will not be prejudiced by the granting of plr-116340-12 relief the interests of the government are prejudiced if granting relief would result in a taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made analysis it is apparent from the facts submitted by taxpayer that taxpayer intended from the outset to make the sec_168 election that its failure to make the election on its original return was inadvertent and that taxpayer is not using hindsight in requesting relief moreover taxpayer requested relief before the failure to make the election was discovered by the service finally taxpayer acted reasonably and in good_faith and the interests of the government will not be prejudiced by the granting of relief under sec_301_9100-3 conclusion based solely on the facts as represented and the applicable law we conclude that the request for relief under sec_301_9100-3 should be granted accordingly taxpayer is treated as if it made the sec_168 election with the tax_return it filed for year provided that taxpayer attaches a copy of this letter to the next return it files if taxpayer files electronically it may satisfy this requirement by attaching a statement to the return that provides the date and control number of this letter_ruling in addition the letter_ruling or statement should be attached for all subsequent returns and amended returns for all taxable years to which this ruling is relevant although this office has not verified any of the material submitted or facts assumed in support of the request_for_ruling they are subject_to verification on examination except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-116340-12 enclosed is a copy of the letter showing the deletions proposed to be made when it is disclosed under sec_6110 if you have any questions concerning this matter please contact the individual whose name and telephone number appear at the beginning of the letter sincerely michael j montemurro branch chief associate chief_counsel income_tax accounting enclosure copy for sec_6110 purposes


t c memo united_states tax_court peter u and mary m boehme petitioners v commissioner of internal revenue respondent docket no filed date m who together with her husband p filed joint returns for the audit years assigned her right to receive certain future annual lottery payments in exchange for a lump-sum payment to her by w of dollar_figure m used dollar_figure of the dollar_figure to repay loans to m which had been secured_by the future annual lottery payments of the dollar_figure dollar_figure represented repayment of the outstanding principal_amount of the loans and the dollar_figure balance qualified as the payment of interest held m’s right to receive certain future annual lottery payments does not constitute a capital_asset 119_tc_1 followed held further the dollar_figure that m received from w is ordinary_income -- - held further the dollar_figure interest payment constituted the payment of nondeductible personal_interest under sec_163 i r c peter u boehme and mary m boehme pro sese ronald t jordan for respondent memorandum opinion halpern judge by notice_of_deficiency dated date respondent determined deficiencies in petitioners’ federal_income_tax for and the audit years in the amounts of dollar_figure and dollar_figure respectively after concessions the issues remaining for decision are whether dollar_figure received by petitioner mary m boehme in in exchange for her right to receive certain future annual lottery payments is ordinary_income or capital_gain and whether petitioners are entitled to deduct for dollar_figure paid_by mary in connection with the repayment of loans to her secured_by her lottery winnings petitioners raised the latter issue during a hearing in lieu of trial the hearing without objection by respondent unless otherwise indicated all section references are to the internal_revenue_code in effect for the years at issue and ' certain adjustments to petitioners’ dependency_exemptions and schedule a itemized_deductions for are derivative of the adjustments at issue and will be resolved by our resolution of those adjustments - - all rule references are to the tax_court rules_of_practice and procedure background this case was submitted fully stipulated under rule the facts stipulated by the parties are so found the stipulation of facts including facts stipulated at the hearing with accompanying exhibits are incorporated herein by this reference hereinafter petitioners husband and wife will be referred to individually as peter and mary at the time the petition was filed petitioners resided in mooresville indiana the following is a summary of the facts necessary for our discussion in while petitioners were residing in colorado mary won dollar_figure million from the colorado state lottery which was to be paid over a 25-year period in annual payments commencing date and ending date in order to make the lottery payments the colorado state lottery purchased an annuity and named mary as the beneficiary on date date date and date mary received four separate loans the loans from metwest services of spokane washington metwest as collateral for the loans mary pledged future lottery payments the future lottery payments which were due to be paid to her on - - date through date in the following amounts before applicable tax withholdings payment_date gross amount date dollar_figure date big_number date big_number date big_number date big_number date big_number date big_number date big_number date big_number date big_number date big_number date big_number total big_number on date mary and woodbridge financial corp woodbridge executed a lottery prize assignment agreement the assignment agreement pursuant to which mary assigned to woodbridge her rights to receive the future lottery payments before applicable tax withholdings in exchange for a lump-sum payment of dollar_figure payable within days after the colorado state lottery and the annuity company funding the lottery payments had given their approval of the assignment on date mary and woodbridge executed an addendum to the assignment agreement the addendum pursuant to which the parties agreed that mary would use up to dollar_figure of the dollar_figure to be received pursuant to the assignment agreement to repay the balance due on the loans anticipated not to exceed dollar_figure by mary and woodbridge and that woodbridge would pay directly to mary any outstanding balance in excess of dollar_figure the parties - - intended that mary retain at least dollar_figure after repayment of the outstanding balance of the loans in date dollar_figure was paid in satisfaction of the balance due on the loans and dollar_figure was received and retained by mary on schedule d capital_gains_and_losses of their return petitioners reported a dollar_figure long-term_capital_loss arising out of the foregoing transactions that loss was derived by treating dollar_figure as the sales_price or amount_realized by virtue of mary’s assignment of the future lottery payments to woodbridge and treating the gross amount of the assigned payments dollar_figure as mary’s basis in such payments petitioners then claimed a capital_loss deduction of dollar_figure in computing their total income for respondent’s notice_of_deficiency issued on date disallowed the dollar_figure deduction and determined that the transaction with woodbridge resulted in dollar_figure of ordinary_income to petitioners during the hearing petitioners conceded that the entire dollar_figure is includable in income but they maintain that it should be treated as capital_gain ’ although the matter is not specifically addressed by the parties they appear to agree that the issue is whether to characterize the dollar_figure as ordinary_income or as long-term_capital_gain petitioners originally reported the transaction as generating long-term_capital_loss and respondent has not raised an issue as to petitioners’ holding_period for the assigned right to the future lottery payments we therefore assume that respondent agrees that such right which arose in had been held for more than year at the time of its sale to woodbridge in and that assuming such right constitutes a capital continued - - the principal_amount of the loans for which the future lottery payments served as collateral was dollar_figure dollar_figure of which was used to construct or improve petitioners’ personal_residence there is no evidence in the record as to petitioners’ use of the other dollar_figure petitioners’ residence did not serve as additional collateral or security for the loans and that property was not mortgaged in connection with the loans the dollar_figure loan discharge payment consisted of dollar_figure in repayment of the loans and dollar_figure of interest or of a combination of interest plus penalties for early repayment petitioners seek to deduct the dollar_figure payment which if allowable would partially offset the inclusion of the dollar_figure paid_by woodbridge as consideration for the future lottery payments in gross_income continued asset its transfer would give rise to long-term_capital_gain see sec_1222 during the hearing peter acknowledged that some portion of the dollar_figure additional payment constituted a penalty for prepayment of the loans in his brief respondent characterizes the entire dollar_figure as accrued interest the distinction is of no consequence because loan prepayment penalties are generally treated as interest for federal_income_tax purposes see 36_tc_255 affd 312_f2d_749 6th cir loan prepayment penalty deductible as interest in the year of payment see also 65_tc_625 25_tc_1265 revrul_57_198 1957_1_cb_94 therefore we shall treat the issue as solely involving the deductibility of a dollar_figure interest payment - j- discussion i the capital_gain issue the issue in dispute is whether the dollar_figure that mary received in exchange for her assignment of the future lottery payments to woodbridge is ordinary_income or long-term_capital_gain resolution of that issue depends upon whether mary’s right to receive the future lottery payments constitutes a capital_asset within the meaning of sec_1221 the question of whether the right to receive future lottery payments which represent a portion of the total anticipated payout constitutes a capital_asset does not present an issue of first impression in 119_tc_1 we held that the right to receive such payments does not constitute a capital_asset within the meaning of sec_1221 in that case we provided a thorough analysis of the caselaw which led us to that result no purpose would be served by repeating the legal analysis in davis and we refer to that analysis in support of our holding herein that petitioners’ in 119_tc_1 the taxpayers assigned a portion of each of future annual lottery payments out of a total of such payments that they were entitled to receive id at p in this case mary assigned all of the future lottery payments which also represented a portion of the total future payments that she was entitled to receive we do not view that distinction as material and we view the lottery payment right assigned in davis as in substance identical to the lottery payment right assigned in this case for purposes of deciding whether such right constitutes a capital_asset --- - right to receive the future lottery payments does not constitute a capital_asset within the meaning of sec_1221 and the dollar_figure received by petitioners from woodbridge in exchange for that right constitutes ordinary_income accord united_states v maginnis aftr 2d ustc par big_number d or ii deductibility of the dollar_figure interest payment a introduction during the hearing peter agreed that dollar_figure of the proceeds of the loans was used to construct or improve petitioners’ personal_residence such residence was not used as collateral for the loans and no mortgage was placed on the property in connection with the loans in light of those stipulated facts respondent argues that with respect to individuals sec_163 denies any deduction for personal_interest and that there is no evidence to indicate that petitioners’ interest payments fall within any of the exceptions to the definition of personal_interest set forth in sec_163 h sec_163 defines personal_interest in pertinent part as follows personal_interest --for purposes of this subsection the term personal_interest means any interest allowable as a deduction under this chapter other than-- continued - b applicability of sec_163 d in particular respondent argues that petitioners’ interest payments fail to satisfy the requirements for the exception provided in sec_163 d for qualified_residence_interest that is because although petitioners’ principal_residence meets the definition of a qualified_residence see sec_163 a i1 and although the loans constituted acquisition_indebtedness which pursuant to sec_163 h b includes indebtedness incurred in constructing or substantially improving any qualified_residence repayment of the loans was not secured_by such residence as required by sec_163 h b ii we agree with respondent that based upon the stipulated facts the dollar_figure interest payment does not constitute qualified_residence_interest within the meaning of sec_163 h d and continued a interest_paid or accrued on indebtedness properly allocable to a trade_or_business other than the trade_or_business of performing services as an employee b any investment_interest within the meaning of subsection d d any gualified residence interest within the meaning of paragraph -- - c applicability of sec_163 h a petitioners argue for the first time on brief that the dollar_figure interest payment is deductible under sec_163 h a as interest_paid or accrued on indebtedness properly allocable to a trade_or_business we assume that that argument represents an attempt by petitioners to link the loans to mary’s business use of petitioners’ personal_residence the schedule cs included in petitioners’ returns for the audit years indicate that mary was engaged in a business conducted on a cash_basis referred to variously as model train painting or professional custom painting the form_8829 expenses for business use of your home for states that dollar_figure percent of petitioners’ residence was used regularly and exclusively for business for such business_use_percentage is stated to be percent as a general_rule this court will not consider issues raised by a party for the first time on brief when to do so will prevent the opposing party from presenting evidence or arguments that might have been offered had the issue been timely raised 79_tc_415 in this case respondent notified the court of his intention not to file a reply brief for the reason that his opening brief adequately disposes of the relevant factual and legal aspects of this case respondent has thereby failed to object to petitioners’ argument on the basis of timeliness therefore we shall consider petitioners’ argument on the merits on the basis of the record before us we decline to hold that any portion of the dollar_figure interest payment is deductible pursuant to sec_163 a in order to fall within that provision an interest payment must qualify as i nterest expense allocated to a trade_or_business_expenditure sec_1_163-8t a a temporary income_tax regs fed reg date a trade_or_business_expenditure is one that has been incurred in connection with the conduct_of_a_trade_or_business sec_1_163-8t temporary income_tax regs fed reg date there is nothing in the record to indicate that any portion of the loans was used to modify or improve that portion of petitioners’ residence devoted to the conduct of mary’s business in fact the forms attached to the returns for the audit years indicate that none of the proceeds of the loans was used for such purpose therefore we find that no portion of the dollar_figure interest the form_8829 for states that out of a total area of big_number square feet big_number square feet were used regularly and exclusively for business according to the form_8829 filed for the comparable figures are big_number square feet total area and square feet business use area thus while total area increased between and presumably as a result of the improvement paid for by a portion of the proceeds of the loans the amount devoted to business use decreased by almost percent during that same period payment is excepted from the definition of nondeductible personal_interest pursuant to sec_163 h a d applicability of sec_163 b petitioners’ exhibit placed in evidence during the hearing consists of a copy of the instructions for preparing i r s form_4952 investment_interest expense deduction the form_4952 instructions at the hearing peter noted that the form_4952 instructions state that property_held_for_investment includes property that produces income from annuities although petitioners have failed to elaborate further either at the hearing or in their brief we interpret peter’s introduction of the form_4952 instructions as an attempt to argue that at least a portion of the dollar_figure interest payment is deductible as investment_interest pursuant to sec_163 b and more specifically that such interest was paid on indebtedness properly allocable to property_held_for_investment e the annuity purchased by the colorado state lottery to fund the lottery payments to mary sec_163 a assuming that we have accurately described petitioners’ argument we find it to be without merit the annuity allegedly held for investment was held by the colorado state lottery not by mary who incurred the interest_expense more significantly petitioners explicitly stipulated that the loans to the extent of dollar_figure were used to purchase or improve petitioners’ - principal_residence which does not qualify as property_held_for_investment see sec_163 a as noted previously there is no evidence in the record as to petitioners’ use of the dollar_figure balance of the loans thus the dollar_figure interest payment is not allocable to an investment_expenditure which is defined in pertinent part as an expenditure properly chargeable to capital_account with respect to property_held_for_investment see sec_1_163-8t c b temporary income_tax regs fed reg date asa result no portion of the dollar_figure interest payment qualifies as investment_interest within the meaning of sec_163 h b be conclusion the dollar_figure interest payment constituted the payment of nondeductible personal_interest under sec_163 to reflect the foregoing decision will be entered under rule


t c no united_states tax_court jimmie l williams and annie w williams deceased jimmie l williams personal representative petitioners v commissioner of internal revenue respondent docket no filed date p on three separate occasions advised the court and r that he had filed petitions in bankruptcy in each instance p’s statement that he had filed a bankruptcy petition was intended to invoke the automatic_stay on this court to avoid compliance with this court’s orders to avoid trial and to thwart this court’s rules and procedures on one of the occasions no petition had been filed and no bankruptcy proceeding commenced instead p submitted a forged bankruptcy document to r and the court in each instance where a bankruptcy petition was actually filed p withdrew the petition and caused the bankruptcy to be dismissed not long after it was instituted r moved for dismissal of p’s case for lack of prosecution a penalty under sec_6673 i r c anda sanction because of p’s disobedience avoidance and resistance to this court’s orders rules decrees or commands - - held r’s motion will be granted p is liable for a criminal fine under sec_7456 i r c asa sanction for his misbehavior jimmie l williams pro_se michael w berwind for respondent opinion gerber judge respondent moved to dismiss this case for lack of prosecution and for sanctions to be imposed on jimmie l williams hereinafter petitioner respondent points out that petitioner has been unresponsive to requests to settle or engage in pretrial preparation in accord with this court’s rules and orders respondent also contends that petitioner intentionally and unnecessarily delayed and protracted this proceeding and that a sec_6673' penalty of dollar_figure should be imposed upon petitioner in addition to the sec_6673 penalty respondent contends that petitioner should be sanctioned or fined dollar_figure because of petitioner’s misconduct and intentional avoidance of this court’s legal orders rules decrees or commands respondent has shown that petitioner has intentionally misrepresented facts in the form of oral and written all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated misrepresentations altered documents which reflected that petitioner had filed a bankruptcy petition when in fact no bankruptcy proceeding had commenced background on date respondent mailed a notice_of_deficiency to petitioners determining income_tax deficiencies additions to tax and accuracy-related_penalties as follows additions to tax penalty year deficiency sec_6651 a sec_6662 a dollar_figure dollar_figure dollar_figure big_number big_number big_number a petition was filed on date an amended petition was filed on date and respondent’s answer was filed on date this case was first set for trial on the date los angeles california trial session on date petitioner advised respondent that he had voluntarily petitioned into a chapter liquidating bankruptcy bankruptcy in support of petitioner’s claim he provided respondent with what purported to be a copy of petitioner’s bankruptcy petition petitioner’s purported bankruptcy petition reflected the bankruptcy court docket no la99-19644aa on date the parties engaged in a telephone conference with the court at which time a discussion of petitioner’s alleged bankruptcy petition ensued q4e- on the basis of petitioner’s representations on date the court issued an order staying the tax_court proceedings in accord with u s c sec_362 that order staying the proceedings resulted in the removal of petitioner’s case from the date los angeles california trial session in addition to the stay order several status reports filed with this court reference petitioner’s alleged bankruptcy proceeding on date petitioner advised respondent that bankruptcy had been dismissed and that information was in turn conveyed to the court on date this case was again scheduled for trial in los angeles california on date during the pretrial period petitioner ignored respondent’s offers to meet as required by this court’s rules and pretrial order petitioner failed to file a trial memorandum as required by the court’s pretrial order on date petitioner filed a chapter bankruptcy case docket no laqo-37835ec bankruptcy on date an order was issued again to stay these proceedings and remove this case from the date trial session on date respondent advised the court that bankruptcy had been closed on date this case for the third time was placed on a los angeles california trial session beginning date once again respondent - - offered to discuss the case with petitioner with a view to settlement or trial preparation but petitioner did not respond to respondent’s invitation on date respondent served petitioner with requests for discovery and admissions and petitioner failed to respond on date respondent moved to compel petitioner’s responses to discovery and on date the court issued an order to show cause as to why sanctions should not be imposed on petitioner petitioner was given until date to respond to the court’s order on date without responding to the court’s order to show cause petitioner filed a petition in bankruptcy docket no la01-38974ec bankruptcy on date the court for the third time stayed the proceedings in this case on date respondent filed an emergency motion with the bankruptcy court seeking to have the automatic_stay lifted with respect to bankruptcy and on date the bankruptcy court lifted the automatic_stay on date this court issued an order reactivating the proceedings in this case thereafter respondent filed his motions to dismiss and for sanctions both of which were set for a hearing at a special session of the court at los angeles california on date petitioner did not appear at the hearing -- - respondent’s motion for sanctions was supported by the written declaration by a representative of respondent’s counsel’s office dated date the declaration explained that the bankruptcy court’s files were examined and that docket no la99-19644aa the docket number shown on the purported petition for bankruptcy involved the bankruptcy of one zakarian arsen in addition a search of the bankruptcy court’s records did not reveal that petitioner had filed a bankruptcy proceeding during the period reflected in the purported bankruptcy petition discussion a respondent’s motion to dismiss for lack of prosecution respondent has moved to dismiss this case because of petitioner’s lack of prosecution we note that respondent does not bear the burden_of_proof on any portion of the determined deficiencies in income_tax additions to tax or accuracy-related_penalties petitioner has ignored this court’s orders and has failed to either prepare for trial or appear at scheduled hearings petitioner has intentionally delayed this case on three separate occasions by advising of bankruptcy proceedings both real and alleged and interposing the automatic_stay to avoid trial and compliance with this court’s orders in addition petitioner has ignored all of respondent’s invitations to settle or to stipulate petitioner has not attempted and never intended to pursue the determined deficiencies on their - merits for those reasons respondent’s motion to dismiss for lack of prosecution will be granted pursuant to rule sec_53 and sec_123 and a decision entered for the full amount of the determined deficiencies additions to tax and accuracy-related_penalties see 116_tc_111 affd 289_f3d_452 7th cir 67_tc_931 affd 565_f2d_954 5th cir b respondent’ s motion for a penalty under sec_6673 sec_6673 authorizes the court to impose a penalty not to exceed dollar_figure against taxpayers who institute or maintain proceedings primarily for delay respondent contends that petitioner’s 3-year pattern of conduct in this case reflects that he was dilatory and intended to delay the proceedings in this case respondent lists the following facts which show petitioner’s dilatory conduct a once fictitiously and twice actually used the bankruptcy courts at the last possible moment to delay proceedings in this case b failed to appear at the calendar calls on date and date and at the recall of the case on date c failed to comply with any of the court’s orders to file status reports the court’s date show cause order or any of the court’s three pre-trial orders and d failed to reply to either of respondent’s two invitations to settle the case or prepare it for trial or to answer any of respondent’s discovery requests --- - petitioner’s conduct shows that he instituted and or maintained this proceeding primarily for delay although respondent attempted to engage petitioner in settlement or trial preparation activity petitioner was unresponsive and failed to comply with this court’s pretrial order and rules see 102_tc_596 95_tc_624 affd without published opinion 956_f2d_1168 9th cir more significantly petitioner improperly interposed the automatic_stay of the bankruptcy code to delay this court’s proceedings and to avoid compliance with this court’s order to show cause on three occasions petitioner interposed the automatic_stay of the bankruptcy code by filing or purporting to file a bankruptcy petition shortly before his tax_court case was scheduled for trial the petitions into bankruptcy occurred shortly before each scheduled trial session or date for petitioner’s compliance with this court’s orders in each instance the trial sessions had been scheduled for at least months before petitioner’s last-minute connivance causing the delay of this court’s proceedings moreover none of petitioner’s bankruptcy proceedings were allowed to mature on both occasions petitioner closed the bankruptcy proceeding a short time after he had filed the bankruptcy petition --- - petitioner allowed the bankruptcy proceeding to exist just long enough to avoid this court’s orders and process petitioner’s conduct in this proceeding was intended to delay the proceeding and the results of his actions were burdensome both to the bankruptcy court and to this court see anders v commissioner tcmemo_1999_294 petitioner’s tactics resulted in an extraordinary and substantial waste of resources accordingly we hold petitioner liable for a dollar_figure penalty pursuant to sec_6673 cc respondent’s motion for a monetary sanction or fine against petitioner for abuse of process respondent has moved that the court impose an additional dollar_figure sanction against petitioner with respect to his false claim of bankruptcy filing which included misrepresentations and presentment of a forged document to the court and respondent during date petitioner represented to respondent and to the court that he had filed a proceeding in the bankruptcy court relying on petitioner’s oral and written representations the court issued an order staying the tax_court proceedings see u s c sec_362 respondent points out that all courts are vested with the inherent power to impose silence respect and decorum in their presence and submission to their lawful mandates anderson v dunn 19_us_204 it is established that this court -- - inherent power and authority to regulate and supervise proceedings before it so as to insure the integrity of its processes see freytaq v commissioner 501_us_868 501_us_32 the court’s inherent power extends to regulate both conduct before it and conduct beyond its confines see chambers v nasco inc supra pincite the court has recognized its authority to maintain the integrity of its proceedings and its ability to provide relief for a party’s misconduct see eg dixon v commissioner tcmemo_2000_116 imposing additional sanctions some on the basis of inherent power dixon v commissioner tcmemo_1999_101 cmem inc v commissioner tcmemo_1991_467 crop associates--1986 v commissioner tcmemo_2000_216 in addition to our inherent power sec_7456 as pertinent to this case provides that the tax_court and each division thereof shall have power to punish by fine or imprisonment at its discretion such contempt of its authority and none other as-- misbehavior of any person in its presence or so near thereto as to obstruct the administration of justice disobedience or resistance to its lawful writ process order rule decree or command we consider however whether it would be appropriate to impose a sanction on petitioner in addition to the dollar_figure penalty for his institution or maintenance of this proceeding for purposes of delay the dollar_figure penalty under sec_6673 as explained above was imposed because of petitioner’s obvious pattern of delay and extensive waste of the resources of the court system and the government however petitioner’s false date bankruptcy petition the intentional interposition of automatic stays to thwart this court’s orders rules or commands and his intentional misrepresentation regarding the nonexistent bankruptcy proceeding deserve separate rebuke in that regard contempt of court may be civil or criminal depending upon the purpose being served 67_tc_212 affd 568_f2d_531 7th cir c ivil contempt is coercive and remedial in character whereas criminal contempt is punitive to vindicate the authority of the court see eg 221_us_418 384_us_364 id petitioner’s dilatory tactics were carried out in disobedience and defiance of this court’s rules orders or command the false documentation and misrepresentations were acts intended to obstruct the administration of justice accordingly it is appropriate to impose a criminal sanction under sec_7456 for petitioner’s misbehavior under sec_7456 in addition to the dollar_figure penalty imposed under sec_6673 because of the possibility of monetary fine’s being imposed as a criminal sanction on petitioner he was provided with an opportunity to show cause why such a fine should not be imposed this was accomplished by the issuance of a notice and order to - show cause on date which was personally served on petitioner by a u s marshal on date in that notice and order petitioner was again advised of respondent’s allegations and he was given an opportunity to show cause in writing why such a fine should not be imposed petitioner responded in writing and in essence made the following contentions in an attempt to show cause he is a law abiding citizen he relied on other unnamed individuals including a paralegal to handle his affairs during this period and he was ill and or under medication during the period under consideration petitioner’s attempt to blame the forged bankruptcy petition on others falls short of the mark he has not identified the person who he alleged caused the forgery of the bankruptcy petition in addition petitioner in a telephone conference with the court and by submission of the bankruptcy petition to respondent represented that he had filed for bankruptcy petitioner advised respondent and the court of the filing of the petition and advised respondent of the dismissal of bankruptcy petitioner must have been aware throughout the 8-month period in we note that petitioner had failed to appear and or to respond to respondent’s motion for these sanctions which had been scheduled for a hearing at a special session of the court at los angeles cal on date the period under consideration is almost years which he interposed the automatic_stay of the bankruptcy code that no such proceeding had been instituted petitioner offered no document to show that bankruptcy had been dismissed even if we were able to believe that petitioner had been deceived by another person as to the forged bankruptcy petition on several occasions he interposed the automatic_stay at critical stages of this proceeding to avoid compliance with this court’s orders to avoid long-scheduled trial dates on the eve of trial and otherwise to elude this court’s orders rules procedures and process although petitioner purported to file three separate bankruptcy actions none were pursued in the two instances where petitions in bankruptcy were actually filed it was no coincidence that petitioner withdrew the petitions and caused the dismissal of the bankruptcy proceedings each time the automatic_stay had served his purpose of avoiding and obstructing the proceedings in this court such conduct was clearly intentional and constitutes disobedience or resistance to this court’s lawful writ process order rule decree or command see sec_7456 respondent moved that the court impose a dollar_figure sanction for petitioner’s conduct in this proceeding the purpose of penalizing petitioner in these circumstances is to impress upon him that his misbehavior will not be tolerated and that he must respect the process and obey the lawful orders of this court in ryan v commissioner supra pincite this court imposed a dollar_figure criminal fine for repeated contumacious failure to answer interrogatories in this case petitioner also ignored and attempted to avoid this court’s order enforcing respondent’s discovery request by interposing the automatic_stay in this case petitioner intentionally misrepresented and wrongfully interposed the automatic_stay to frustrate and ignore the lawful orders rules and process of this court the effect of petitioner’s conduct in this case is more serious and more deceitful than the taxpayer’s conduct in ryan we note that the dollar_figure fine in ryan was imposed more than years ago in order to impress petitioner with the seriousness of this matter and to fine him for his conduct in criminal contempt of this court we hold petitioner unconditionally liable for a fine of dollar_figure to reflect the foregoing an appropriate order and decision will be entered for respondent


tcmemo_2012_239 united_states tax_court kerry mark kerstetter and sherry lee kerstetter petitioners v commissioner of internal revenue respondent docket no filed date kerry mark kerstetter and sherry lee kerstetter pro sese ann louise darnold for respondent memorandum findings_of_fact and opinion cohen judge respondent determined deficiencies additions to tax and penalties in relation to petitioners’ federal_income_tax as follows year deficiency penalty addition_to_tax sec_6662 sec_6651 dollar_figure big_number big_number big_number dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure --- dollar_figure --- after concessions the issues for decision are whether petitioners are entitled to business_expense deductions or net_operating_loss carryovers beyond those conceded by respondent and whether petitioners are liable for the sec_6651 addition_to_tax for and for the sec_6662 penalties unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure findings_of_fact petitioners resided in arkansas at the time they filed their petition during the years in issue kerry mark kerstetter petitioner conducted an accounting and tax preparation business operated out of petitioners’ home sherry lee kerstetter assisted in petitioner’s business and also conducted some real_estate activity out of petitioners’ home petitioner and ms kerstetter maintained separate offices in the home sixteen percent of the home or square feet was used exclusively and regularly for business purposes during the years in issue the rest of the home was sometimes used for meeting with clients or with internal_revenue_service irs personnel auditing petitioner’s clients’ returns but was also used for personal purposes petitioners filed a joint federal_income_tax return for each of the years in issue on schedule c profit or loss from business attached to each of those returns they claimed depreciation of dollar_figure which was based on of the cost_basis of the home with no reduction for personal_use also on schedules c they claimed interest_expense deductions of dollar_figure dollar_figure dollar_figure and dollar_figure for and respectively some of the interest should have been allocated to a farm activity reported on schedule f profit or loss from farming and some should have been allocated to personal mortgage interest and reported on schedule a itemized_deductions other interest that they reported on their returns was personal and not deductible on their schedules c for the years in issue petitioners deducted as supplies expenses amounts spent for pet food and pet supplies but they now concede the disallowance of those deductions on each of the tax returns for the years in issue petitioners claimed a net_operating_loss_carryover that eliminated any_tax liability the claimed net operating losses allegedly were incurred beginning in and the amount claimed on the return for example was dollar_figure petitioners’ tax_return was due with extensions date but was not filed until date the same date on which their return was filed their return was due with extensions date but was not filed until date two days before their return was filed petitioners did not have reasonable_cause for late filing of their returns examination of petitioners’ returns commenced in and the notice_of_deficiency was sent on date disallowance of the net_operating_loss_carryover was explained in the notice_of_deficiency as follows due to the disallowance of net_operating_loss carryovers from prior years as set forth in the examination_report for the taxable years ended date and date the net_operating_loss_carryover to the taxable years ended date date date and date is dollar_figure accordingly your taxable_income for and are sic increased dollar_figure dollar_figure dollar_figure and dollar_figure respectively during the examination the pretrial processes in this case and at trial petitioners claimed to have boxes of documents substantiating the net_operating_loss carryovers at no time however did they present to respondent or to the court evidence to substantiate any losses or carryovers applicable to the years in issue business_expense deductions opinion petitioners’ arguments in this case have not been supported by evidence or by authority instead petitioners make assertions based only on their generalized testimony and on petitioner’s claimed years of experience in dealing with the irs on behalf of clients petitioners have the burden_of_proof with respect to deductions see rule a 292_us_435 we are not required to accept testimony that is improbable or implausible see 394_f3d_1030 8th cir aff’g tcmemo_2003_212 112_tc_183 particularly in view of petitioner’s experience the absence of corroboration of his testimony by organized and reliable records leads us to conclude that petitioners have not carried their burden_of_proof as to the disputed deductions see shea v commissioner t c pincite they have not satisfied the conditions for shifting that burden to respondent under sec_7491 after an extensive examination of petitioners’ records of expenditures during the years in issue and negotiations before and concessions after trial respondent has agreed to deductions based on use of of petitioners’ home as their business offices petitioners however continue to claim that the percentage should be increased to reflect storage space floor space under furniture and equipment located in combined use areas and bathrooms connected to their offices sec_280a establishes the general_rule that no deduction is allowed with respect to business use of a taxpayer’s personal_residence sec_280a however provides that sec_280a shall not apply if a portion of the taxpayer’s personal_residence is exclusively used on a regular basis as the principal_place_of_business for any trade_or_business of the taxpayer see 88_tc_1532 petitioners’ testimony fails to persuade us that they used more than of the residence exclusively for business purposes from their testimony it appears that personal records were also kept on computers and in the closet areas that they claim as business related a table a computer or a copy machine located in a room that is used both for business and personal purposes may be occasionally used for business but dual use of pieces of furniture or equipment does not satisfy the exclusive use test nor does occasional business use of a room such as a bathroom which is also used for personal purposes satisfy this test see eg sam goldberger inc v commissioner t c pincite7 sengpiehl v commissioner tcmemo_1998_23 we do not accept petitioners’ claims that the items remaining in dispute were used exclusively for business or their allocation of fractional portions of rooms depreciation on the portion of the residence used exclusively for business purposes is thus limited to the conceded by respondent petitioners contend that interest_paid on credit card debt reflects borrowing to pay business_expenses their generalized assertions cannot be verified or traced in the documentary_evidence the irs determined that of the credit card charges were for business and allocated a proportionate amount of deductible_interest to schedules c and f petitioners’ contention that all of the credit card interest was incurred for business purposes is improbable and they have not established that they are entitled to deduct any amount greater than that allowed by respondent petitioners also attempt to use self-serving and conclusory assertions rather than evidence with respect to the net_operating_loss_carryover demanding that respondent’s representatives identify specific documents needed to substantiate their carryovers petitioners have the burden of proving the amounts of the losses and that they have not been absorbed in other years see eg 115_tc_605 sandoval v commissioner t c memo aff’d without published opinion 67_fedappx_252 5th cir they have not shown either and none of the claimed carryovers may be allowed penalties and additions to tax respondent has the burden of coming forward with evidence that the imposition of penalties or additions to tax is appropriate see sec_7491 respondent has conceded the sec_6651 addition_to_tax for the stipulation establishes that the tax_return for was filed late so petitioners must show reasonable_cause to avoid the sec_6651 addition_to_tax see sec_6651 116_tc_438 they have not done so petitioners contend that they did not expect to owe any_tax and thus late filing was a moot point however a mistaken belief that the sec_6651 addition_to_tax would not apply because the taxpayers do not expect to owe any_tax does not constitute reasonable_cause see ruggeri v commissioner tcmemo_2008_300 morgan v commissioner tcmemo_1984_384 aff’d 807_f2d_81 6th cir they also contend that they requested consecutive extensions of more than six months for filing their return the parties’ stipulation of facts and sec_1_6081-1 income_tax regs refute this contention petitioners have neither identified nor established reasonable_cause to avoid the sec_6651 addition_to_tax for sec_6662 and b and provides a penalty of on the portion of an underpayment_of_tax due to negligence or disregard of rules or regulations or attributable to a substantial_understatement_of_income_tax sec_6662 defines negligence as any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code and disregard means any careless reckless or intentional disregard the evidence of erroneous deductions and improper allocation of depreciation and interest claimed by petitioners is sufficient to prove negligence and satisfies respondent’s burden of production whether applied because of a substantial_understatement_of_income_tax or negligence or disregard of rules or regulations the accuracy-related_penalty is not imposed with respect to any portion of the underpayment as to which the taxpayer acted with reasonable_cause and in good_faith see sec_6664 the decision as to whether the taxpayer acted with reasonable_cause and in good_faith depends upon all the pertinent facts and circumstances see sec_1_6664-4 income_tax regs relevant factors include the taxpayer’s effort to assess his or her proper tax_liability including the taxpayer’s reasonable and good_faith reliance on the advice of a professional such as an accountant see id petitioners have the burden of proving reasonable_cause and good_faith see higbee v commissioner t c pincite they have not done so here in relation to the sec_6662 penalties petitioners claim to have records with respect to their net_operating_loss carryovers going back to the 1980s but they decline to organize or produce records substantiating their claims they have not attempted to justify the excess_depreciation claimed the misallocation of interest deductions or the disallowed supplies expenses petitioners have failed to identify or provide support for any exception to application of the penalty and it will be applied to the recomputed underpayment amounts to reflect concessions and our holdings decision will be entered under rule


department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc corp b03 plr-136178-04 date october ------------------------------------------------------ internal_revenue_service number release date index number -------------------------------------- -------------------------------------------------- ------------------------------------- ---------------------------------------- - --------------------------------------------------- ---------------- --------- ------------- ---------------------------- distributing ---------------------------------------------------------------- ----------------------------------------------------------- controlled ------------------------------------------------------------------------- ----------------------------------------------------------------- state x a -------------------------------------------------------------- b -------------------------------------------------------------- c -------------------------------------------------------------- d -------------------------------------------------------------- e -------------------------------------------------------------- business f business g ------------------------------------ --------------------------------- ------------------------------ ---------------------------- --------------------------- h --------- --------------------------------------------------------------------------------- ---------- ------------- -------------- ----------------- ------------------ ------------------ ------------------ --------------------- --------------------- --------------------- plr-136178-04 k l m n o p q r s t w dear ------------------ we respond to your request dated date for rulings on the federal_income_tax consequences of a proposed transaction the material information submitted for consideration is summarized below submitted by the taxpayer and accompanied by penalties of perjury statement executed by an appropriate party this office has not verified any of the materials 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 in particular this office has made no determination regarding whether the transaction i satisfies the business_purpose requirement of sec_1_355-2 of the income_tax regulations ii is used principally as a device for the distribution of the earnings_and_profits of the distributing_corporation or the controlled_corporation or both see sec_355 of the internal_revenue_code and sec_1_355-2 or iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in the distributing_corporation or the controlled_corporation see sec_355 and sec_1_355-7t the rulings contained in this letter are based on facts and representations ------------- ----------- shareholder plr-136178-04 distributing is a state x corporation engaged directly in business f and business g the taxpayer has supplied financial information that indicates that each of business f and business g had gross_receipts and operating_expenses representative of the active_conduct_of_a_trade_or_business for each of the past five years distributing has outstanding h shares of voting common_stock and h shares of non-voting common_stock that are owned in the following percentages none of the above shareholders are related of distributing in order to effectuate the proposed transaction is proposed controlled will be formed as a state x corporation and wholly owned subsidiary for what are represented to be valid business purposes the following transaction percent of voting common_stock percent of non-voting common_stock k m o q s a b c d e l n p r t distributing will transfer business g to controlled together with cash assets and liabilities associated with that business in exchange for w shares of controlled common_stock constituting all of the outstanding_stock of controlled and distributing immediately thereafter will make a pro_rata distribution of all of the outstanding_stock of controlled to its shareholders i ii the taxpayers have made the following representations in connection with the no part of the consideration to be distributed by distributing will be received by the distributing shareholders as a creditor employee or in any capacity other than that of a shareholder of the corporation the five years of financial information submitted on behalf of distributing is representative of the corporation’s present operations and with regard to such corporation there have been no substantial operational changes since the date of the last financial statements submitted transaction a b plr-136178-04 c d e f g h l j k following the transaction distributing and controlled each will continue the active_conduct of its business independently and with its separate employees the distribution of the stock of controlled is carried out for the following corporate business purposes the expansion goals and required financing of the two businesses are becoming so divergent that efficient financing and operation requires that the businesses operate separately the complete segregation of these businesses will improve the debt to equity ratio for business f and enhance its borrowing capacity allowing for expansion and the nature of business f subjects business g to significant liabilities under state statutes furthermore liability insurance is becoming increasingly difficult to maintain distributing cannot obtain insurance coverage for certain liabilities therefore in order to protect business g from these risks distributing has proposed to separate the two businesses the distribution of the stock of controlled is motivated in whole or substantial part by one or more of these corporate business purposes the transaction is not used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both the total adjusted bases and the fair_market_value of the assets to be transferred to controlled by distributing each equals or exceeds the sum of the liabilities to be assumed as determined under sec_357 by controlled the liabilities to be assumed as determined under sec_357 in the transaction were incurred in the ordinary course of business and are associated with the assets being transferred no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the distribution of the controlled stock payments made in connection with all continuing transactions if any between distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length no two parties to the transaction are investment companies as defined in sec_368 f iii and iv there is no acquisition of stock of distributing or controlled including any predecessor or successor of any such corporation that is part of a plan or series of related transactions within the meaning of sec_1_355-7t that includes the distribution of the controlled stock plr-136178-04 distributing is not an s_corporation within the meaning of sec_1362 but immediately before the distribution distributing will be eligible to make an s_corporation_election pursuant to sec_1362 controlled may elect to be an s_corporation pursuant to sec_1362 on the first available date after the distribution based solely on the information submitted and representations made we hold as follows the transfer by distributing of the business g assets to controlled in exchange for all of the issued and outstanding_stock of controlled and the assumption by controlled of the liabilities associated with business g followed by the distribution of the stock of controlled as described above will qualify as a reorganization under sec_368 distributing and controlled each will be a_party_to_a_reorganization under sec_368 distributing will recognize no gain_or_loss upon the transfer of the business g assets to controlled in exchange for controlled stock and the assumption_of_liabilities as described above sec_361 and sec_357 controlled will recognize no gain_or_loss on the receipt of the business g assets in exchange for controlled stock as described above sec_1032 controlled’s basis in each asset will be the same as the basis of such asset in the hands of distributing immediately prior to the transfer sec_362 controlled’s holding_period for each asset received from distributing will include the period during which distributing held such asset sec_1223 distributing will recognize no gain_or_loss on the distribution of the controlled stock sec_361 distributing’s shareholders will recognize no gain_or_loss and no amount will be included in their income upon their receipt of the controlled stock as described above sec_355 the aggregate basis of the distributing and controlled stock in the hands of the distributing shareholders immediately after the distribution will equal the distributing shareholders' aggregate basis in their distributing stock immediately before the distribution allocated in proportion to the fair_market_value of each in accordance with sec_1_358-2 sec_358 b and c l plr-136178-04 the distributing shareholders' holding_period of the controlled stock received in the distribution will include the holding_period of the distributing stock on which the distribution is made provided that such distributing stock is held by them as a capital_asset on the date of the distribution sec_1223 earnings_and_profits will be allocated between distributing and controlled in accordance with sec_1_312-10 no opinion is expressed about the tax treatment of the proposed transaction under other provisions of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings in particular no opinion is expressed regarding i whether the distribution satisfies the business_purpose requirement of sec_1_355-2 ii whether the transaction is used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both and iii whether the distribution and an acquisition or acquisitions are part of a plan or series of related transactions under sec_355 a ii this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent it is important that a copy of this letter be attached to the federal_income_tax returns of the taxpayers involved for the taxable_year in which the transaction covered by this letter is consummated pursuant to the power_of_attorney on file in this office a copy of this letter has been sent to the taxpayers’ authorized representative sincerely _________________ filiz a serbes chief branch office of associate chief_counsel corporate cc