office_of_chief_counsel internal_revenue_service memorandum number release date cc ita postn-124588-06 uilc date date to senior tax analyst reporting compliance w_i w cp rc s from senior technician reviewer associate chief_counsel income_tax accounting cc ita subject form_8332 this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent you asked whether the service may consider a form_8332 presented during an examination of a noncustodial parent’s return if he or she claimed the exemption for a child on his or her return but did not attach a form_8332 to the return as discussed below form_8332 constitutes evidence concerning the noncustodial parent’s right to claim the exemption the service may consider the form in evaluating the parent’s claim during examination law the pre-1985 version of sec_152 presented difficult problems of proof and substantiation of support to provide more certainty congress amended sec_152 to allow the custodial_parent the exemption for a child unless an exception applied the relevant exception permits the custodial_parent to waive the exemption and allows the noncustodial_parent to claim the exemption as amended sec_152 requires that postn-124588-06 the custodial_parent memorialize the waiver in a signed written declaration as prescribed by regulations that the noncustodial_parent attaches to the noncustodial parent’s return congress believed that the new methodology would provide the irs and the parties with much clearer substantiation of the parties’ intent on waiver of the exemption the increased certainty would reduce the need for the irs to adjudicate the issue see h rept part ii pincite the regulations under sec_152 authorize the service to prescribe the form and manner of the written declaration the custodial_parent may waive a claim to an exemption for a child by signing a form_8332 release of claim to exemption for child of divorced or separated parents or a substantially_similar statement the requirement to attach the custodial parent’s signed written declaration to the noncustodial parent’s return is designed to force the parents to stipulate to who claims the exemption when the return is filed and thus avoid subsequent disputes analysis and conclusion if the parents dispute entitlement to the exemption usually when both parents claim the exemption the service will need to address the issue by considering all relevant evidence of the custodial parent’s waiver of the exemption and may consider the form in evaluating the parent’s claim during examination of course only one parent is entitled to the dependency_exemption for a child under sec_152 evaluating the noncustodial parent’s claim during audit necessarily affects the custodial parent’s right to the exemption we hope this memorandum is responsive to your request please call - if you have any further questions


‘significant index no rr vvo4t5u sz _ department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division sep set ep rr tad company this letter constitutes notice that pursuant to your request of date as modified by your authorized representative’s letter dated date -named and andard for the december code have been december your request for waivers of the minimum fundj waivers of the percent tax under sec_4971 of the internal_revenue_code granted for the above-named plan for the plan years ending and december plan for the plan years ending december december have been withdrawn and the case has been closed by this office the waivers of the percent tax have been granted in accordance with b of the employee retirement income security act erisa the amounts for which the waivers have been granted are equal to percent of the accumulated funding deficiencies in the funding_standard_account as of december ll and december extent such funding deficiencies have not been corrected ine end of the plan years for which the waivers have been granted to the 2uu548u the company manufactures straight and specialized builders and and associated tooling used by steel mills and steel coil processors and hardened wear parts for machines the company also provides regrinding services on the knives it manufactures as well as miscellaneous products including resale items the company is privately held with nearly of the outstanding and issued shares owned by one family according to information submitted by your authorized representative the company intends to file a request with the pension_benefit_guaranty_corporation to effect a distress termination of the plan _machine this ruling is directed only to the taxpayer that requested it sec_61 k of the code provides that it may not be used or cited by others as precedent we have sent a copy of this letter to the manager ep classification in to the manager ep compliance unit in - and to your authorized representative pursuant to a power_of_attorney on file in this office if you require further assistance in this matter please contact - sincerely yours ae donna m prestia manager employee_plans actuarial group


internal_revenue_service department of the treasury index number washington dc number release date legend company d1 x dear person to contact telephone number refer reply to plr-122379-98 cc dom p si date date this letter responds to a letter dated date submitted by your authorized representative on behalf of company requesting a ruling under sec_1362 of the internal_revenue_code that company’s s_corporation_election will be effective as of the taxable_year beginning d1 facts according to the information submitted company was incorporated on d1 its sole shareholder x had intended for company to be an s_corporation from inception but company’s form_2553 election by a small_business_corporation was not timely filed law sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 explains when an s election will be effective 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 beginning the year in which the election is made 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 treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making the election and b plr-122379-98 the secretary determines that there was reasonable_cause for the failure to timely make the election the secretary may treat the election as timely made for that taxable_year conclusions after applying the relevant law to the facts submitted and the representations made we conclude that company has established reasonable_cause for not making a timely election and is eligible for relief under sec_1362 accordingly if company makes an election to be an s_corporation by filing with the appropriate service_center a completed form_2553 containing an effective date of d1 for the election within days following the date of this letter then the election will be treated as timely made a copy of this letter should be attached to the form_2553 filed with the appropriate service_center a copy is enclosed for that purpose except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed concerning whether company is an s_corporation for federal tax purposes pursuant to a power_of_attorney on file in this office a copy of this letter will be sent to your authorized representative this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours donna m young senior technician reviewer branch office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number -------------------------------------------------- -------------------------------------------------- -------------------------- -------------------------------------------------- department of the treasury washington dc person to contact --------------- id no ------------- telephone number --------------------- refer reply to cc ita b6 - plr-170105-03 date date legend parent -------------------------------- ------------------------------------ ---------------------------------- ------------------------------------------------------------------------ -------------------------------------------------------------------------- subsidiary -------------------------------------------------- subsidiary -------------------------------------------------- subsidiary -------------------------------------------------- date date dear ------------------ this ruling replies to the letter and enclosures requesting an extension of time under sec_301_9100-1 of the procedure and administration regulations for parent to file copies of three forms application_for change in accounting_method with the internal_revenue_service irs national_office this request was made in accordance with sec_301_9100-3 facts ------------------------------ ----------------------------- plr-170105-03 on date parent timely filed its consolidated federal_income_tax return for the tax_year ending date along with the originals of the relevant three forms filed under revproc_2002_9 2002_1_cb_327 as modified by revproc_2002_19 2002_1_cb_696 as modified by announcement 2002_1_cb_561 and as amplified clarified and modified by revproc_2002_54 2002_2_cb_432 to change the following methods_of_accounting for parent and subsidiaries and to capitalize the direct costs and all appropriate indirect_costs of acquiring property held for resale under revproc_2002_9 appendix sec_4 a for subsidiary to allocate and account for costs related to producing certain property pursuant to sec_263a of the internal_revenue_code under revproc_2002_9 appendix sec_4 and for parent and subsidiaries and to treat trade discounts as a reduction in the cost of merchandise purchased at the time the discount is recognized in accordance with sec_1_471-3 of the income_tax regulations under revproc_2002_9 appendix section revproc_2002_9 provides the procedures by which a taxpayer may obtain however parent’s accountant inadvertently failed to timely file the copies of the three forms with the irs national_office law and analysis automatic consent to change certain methods_of_accounting a taxpayer complying with all the applicable provisions of this revenue_procedure has obtained the consent of the commissioner of the irs to change the taxpayer's method_of_accounting under sec_446 and the regulations thereunder section a of revproc_2002_9 provides that a taxpayer changing a method_of_accounting pursuant to revproc_2002_9 must complete and file a form_3115 in duplicate the original must be attached to the taxpayer's timely filed including extensions original federal_income_tax return for the year_of_change and a copy with signature of the form_3115 must be filed with the irs national_office no earlier than the first day of the year_of_change and no later than when the original is filed with the federal_income_tax return for the year_of_change sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make certain regulatory elections sec_301_9100-1 defines a regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the requests for relief under sec_301_9100-3 will be granted when the taxpayer plr-170105-03 commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 conclusion based solely on the facts and representations submitted we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied accordingly an extension of time is hereby granted for parent to file the necessary copies of the forms with the irs national_office this extension shall be for a period of days from the date of this ruling please attach a copy of this ruling to each of the forms when they are filed concerning the federal_income_tax consequences arising from parent’s and subsidiaries’ activities further we express no opinion on whether parent is qualified to file the forms under revproc_2002_9 that it otherwise meets the requirements of that revenue_procedure and that the requested changes in accounting methods described above meet the requirements of that revenue_procedure being sent to taxpayer’s authorized representatives sec_6110 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 this ruling is directed only to the parent and subsidiaries that requested it except as specifically ruled upon above no opinion is expressed or implied thomas a luxner chief branch office of associate chief_counsel income_tax accounting - sincerely


t c summary opinion united_states tax_court joyce a siddons petitioner and richard j siddons intervenor v commissioner of internal revenue respondent docket no 1188-04s filed date joyce a siddons pro_se timothy s sinnott for respondent couvillion special_trial_judge this case was heard pursuant to sec_7463 in effect when the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority 1unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure this case arises from petitioner’s election to seek relief from joint_and_several_liability for federal_income_tax for the year under sec_6015 c and f respondent determined that petitioner is not entitled to relief the issue for decision is whether petitioner is relieved of any liability for tax for under sec_6015 c or f some of the facts were stipulated those facts with the exhibits annexed thereto are so found and made part hereof petitioner’s legal residence at the time the petition was filed was jasper indiana during the year at issue petitioner was married to richard siddons intervenor petitioner and intervenor were married in they separated several times for short periods of time during their marriage and were divorced on date petitioner has been employed full time as a cleaning person for a restaurant known as chicken place for at least years in intervenor owned and operated a small painting busine sec_2petitioner and her former husband also filed their federal_income_tax return timely showing a balance due the unpaid liability was fully satisfied by offsetting the parties’ and federal_income_tax overpayments and is not an issue in this case although petitioner made reference at trial to being entitled to a refund for this collection of unpaid liability a request was not included in her petition and is thus not before the court 3although intervenor appeared at the calendar call of this case he was unable to appear at trial due to a medical_condition moreover intervenor was excused from appearing by the court called hoosier painting that specialized in painting interiors and exteriors of residential homes petitioner and intervenor filed their joint federal_income_tax return timely the return reported wages from petitioner’s employment of dollar_figure and a credit for withheld federal_income_tax of dollar_figure the return also included a schedule c profit or loss from business for intervenor’s painting business that activity reflected a net profit of dollar_figure the tax_shown_on_the_return was dollar_figure which included dollar_figure of self-employment_tax from intervenor’s trade_or_business activity the return was prepared and filed by a certified_public_accountant and was signed by both parties respondent agrees that the unpaid liability is solely attributable to intervenor’s income petitioner filed form_8857 request for innocent spouse relief with the internal_revenue_service irs on or about date the irs subsequently denied relief and petitioner filed a timely petition in this court petitioner’s sole position is that she is entitled to relief from joint liability under sec_6015 respondent pursuant to rule and 115_tc_118 served notice of this proceeding on intervenor who filed a notice of intervention on date however in his intervention intervenor did not state his reasons for objecting to petitioner’s claim for relief moreover intervenor was excused from testifying at the trial generally spouses filing joint federal_income_tax returns are jointly and severally liable for the taxes due thereon sec_6013 under certain circumstances however sec_6015 provides relief from this general_rule sec_6015 applies to any liability for tax arising after date and to any liability for tax arising on or before date but remaining unpaid as of such date internal_revenue_service restructuring and reform act of publaw_105_206 112_stat_740 sec_6015 provides three avenues for relief to a taxpayer who has filed a joint_return sec_6015 allows relief for understatements of tax attributable to certain erroneous items on the return sec_6015 provides relief for a portion of an understatement_of_tax for taxpayers who are separated or divorced and sec_6015 more broadly confers on the secretary discretion to grant equitable relief for 4see supra note sec_6015 was enacted as part of the internal_revenue_service restructuring and reform act of rra publaw_105_206 112_stat_734 prior to the enactment of sec_6015 relief from the imposition of joint_and_several_liability for spouses filing joint returns was available under sec_6013 taxpayers who otherwise do not qualify under sec_6015 or c a requisite to granting relief under sec_6015 or c is the existence of a tax_deficiency sec_6015 and c 120_tc_62 if there is no deficiency for the year for which relief is sought relief from joint_and_several_liability is not available under sec_6015 or c 120_tc_137 block v commissioner supra in this case for the year in question there is an underpayment_of_tax arising from a filed income_tax return on which the tax_shown_on_the_return was not paid there is no deficiency arising from the issuance by respondent of a notice_of_deficiency therefore because there is no deficiency but merely an underpayment_of_tax petitioner is not entitled to relief under sec_6015 or c to that extent therefore respondent is sustained however petitioner falls under the equitable relief provision of sec_6015 sec_6015 provides in part that a taxpayer may be relieved from joint_and_several_liability if it is determined that taking into account all the facts and circumstances it is inequitable to hold the taxpayer liable for the unpaid tax and relief is not available under sec_6015 or c because petitioner is not eligible for relief under sec_6015 or c she satisfies the second requirement of sec_6015 we review respondent’s denial of relief under sec_6015 to determine whether respondent abused his discretion 118_tc_106 affd 353_f3d_1181 10th cir pursuant to sec_6015 the commissioner has prescribed guidelines in revproc_2000_15 sec_4 2000_1_cb_447 for determining whether an individual qualifies for equitable relief from joint_and_several_liability revproc_2000_15 sec_4 c b pincite sets forth seven threshold conditions that must be satisfied before the secretary will consider any request for equitable relief pursuant to sec_6015 in this case respondent agrees that petitioner has satisfied the seven threshold conditions revproc_2000_15 sec_4 c b pincite provides that equitable relief will ordinarily be granted if the seven threshold conditions and each of the following three elements are satisfied three element test a at the time relief is requested the requesting spouse is no longer married to or is legally_separated from the nonrequesting spouse or has not been a member of the same household as the nonrequesting spouse at any time 6rev proc does not apply to this case because although it supersedes revproc_2000_15 2000_1_cb_447 for requests still pending on date for which no preliminary determination_letter had been issued as of date respondent issued the preliminary determination_letter to petitioner on date revproc_2000_15 supra therefore applies here during the 12-month_period ending on the date relief was requested first element b at the time the return was signed the requesting spouse had no knowledge or reason to know that the tax would not be paid the requesting spouse must establish that it was reasonable for the requesting spouse to believe that the nonrequesting spouse would pay the reported liability if a requesting spouse would otherwise qualify for relief under this section except for the fact that the requesting spouse had no knowledge or reason to know of only a portion of the unpaid liability then the requesting spouse may be granted relief only to the extent that the liability is attributable to such portion second element and c the requesting spouse will suffer economic hardship if relief is not granted for purposes of this section the determination of whether a requesting spouse will suffer economic hardship will be made by the commissioner or the commissioner's delegate and will be based on rules similar to those provided in sec_301_6343-1 of the regulations on procedure and administration third element respondent concedes that petitioner satisfied the first element because her divorce from intervenor was finalized before she filed her petition for relief from joint_and_several_liability in addition respondent concedes that petitioner would suffer economic hardship if she were required to pay the remaining liability and therefore satisfies the third element the parties however dispute whether petitioner has satisfied the second element whether petitioner did not know or have reason to know when the requesting spouse signed the return that the tax would not be paid accordingly the issue for the court is whether petitioner established that it was reasonable for her to believe that intervenor would pay the reported liability wiest v commissioner tcmemo_2003_91 revproc_2000_15 sec_4 c b pincite respondent argues that petitioner could not have reasonably believed intervenor would pay the tax due because she and intervenor already had an unpaid liability for the taxable_year however petitioner testified and the court agrees she was unaware of the unpaid liability from at the time she signed the return petitioner testified that although intervenor sometimes spent money foolishly he told her he had enough money from the proceeds of his painting business to cover the tax_liability the court finds that petitioner had virtually no involvement with intervenor’s business she had a high school education and no further business or bookkeeping training an accountant maintained intervenor’s books and took care of his business_expenses although petitioner was an authorized signatory on intervenor’s business account she testified this was only to enable her to sometimes pay their mortgage note out of the business account because intervenor did not draw a regular salary the extent of her knowledge of intervenor’s business dealings was that the account held enough to pay the mortgage 7the unpaid liability from taxable_year was fully satisfied in through the offsetting by respondent of overpayments from petitioner and intervenor’s and federal income taxes see supra note furthermore intervenor had already made an estimated_tax payment of dollar_figure to cover the self-employment taxes for the year petitioner had no reason to believe that there were insufficient funds to cover the income_tax_liability or that there were insufficient funds for intervenor to pay the tax petitioner contends she relied on intervenor’s assurance that he would pay the tax_liability absent any conflicting evidence or testimony the court finds petitioner’s testimony credible and holds that it was reasonable for her to believe that intervenor would pay the reported liability wiest v commissioner supra therefore petitioner has satisfied the second element and qualifies for relief under sec_6015 respondent abused his discretion in denying her claim for relief and petitioner therefore is relieved of the entire amount of the liability reviewed and adopted as the report of the small_tax_case division decision will be entered for petitioner 8rev proc sec_4 c b pincite provides a facts_and_circumstances_test whereby a taxpayer may also qualify for relief under sec_6015 facts_and_circumstances_test although respondent and petitioner addressed at trial many of the factors discussed in the facts_and_circumstances_test it is not necessary for the court to address them because they are examined only when a taxpayer fails to satisfy the three-element test


internal_revenue_service department of the treasury number release date index nos washington dc person to contact telephone number refer reply to cc ita plr-143946-03 date date legend year year dear this is in reference to a form_1128 application to adopt change or retain a tax_year submitted on behalf of the taxpayer tin requesting permission to change its accounting_period for federal_income_tax purposes from a week tax_year ending on the saturday nearest to december to a week tax_year ending on the saturday nearest september effective september year the taxpayer has requested that the form_1128 be considered timely filed under the authority contained in sec_301_9100-3 of the procedure and administration regulations the taxpayer is a partnership and its form_1128 requesting a change in accounting_period to a week tax_year ending on the saturday nearest september was due on or before april year the information furnished indicates that the application_for the change in accounting_period was filed late because of an error or misunderstanding however this application_for sec_301_9100-3 relief was filed within days of the return’s due_date revproc_2002_38 2002_1_cb_1037 provides the exclusive procedures for certain partnerships s_corporations electing s_corporation and personal_service_corporations to obtain automatic approval to change their annual accounting periods under sec_442 of the internal_revenue_code a taxpayer complying with all the applicable provisions of this revenue_procedure has obtained the consent of the commissioner of the internal_revenue_service to change its annual_accounting_period under sec_442 and the income_tax regulations thereunder section dollar_figure of revproc_2002_38 provides that a form_1128 filed pursuant to this revenue_procedure will be considered timely filed for purposes of sec_1_442-1 only if it is filed on or before the time including extensions for filing the return for the short_period required to effect such change plr-143946-03 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 such as the instant case 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 evidence to establish that the taxpayer acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government based on the information submitted and the representations made it is held that the taxpayer has acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government accordingly the requirements of the regulations for granting relief have been satisfied in this case and the taxpayer's late filed form_1128 requesting permission to change to a week tax_year ending on the saturday nearest september effective september year is considered timely filed since a change in accounting_period under revproc_2002_38 is under the jurisdiction of the director internal_revenue_service center where the taxpayer’s returns are filed we have forwarded the application to the director ogden service_center any further communication regarding this matter should be directed to the service_center the ruling contained in this letter is based upon facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling verification of the factual information representations and other data may be required as part of an examination process this ruling addresses the granting of sec_301_9100-3 relief only no opinion is expressed regarding the tax treatment of the instant transaction under the provisions of any other sections of the code or regulations that may be applicable thereto or regarding the tax treatment of any conditions existing at the time of or effects resulting from the instant transaction specifically no opinion is expressed as to whether the taxpayer is permitted under the code and applicable regulations to change to the tax_year requested in the subject form_1128 this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent sincerely robert a berkovsky branch chief office of associate chief_counsel income_tax and accounting enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ---------------------------------- ---------------------------------- ---------------------------------- ------------------------ ------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-123846-11 date november x --------------------------------------------------------------------------------------------------- ------------------------ country --------------- date ------------------- date ---------------------- date ----------------------- dear ---------------- this letter responds to your letter dated date and additional correspondence requesting a ruling under sec_301_7701-3 and sec_301_9100-3 of the procedure and administration regulations specifically your letter requests the service’s consent to change x’s classification from a disregarded_entity to an association_taxable_as_a_corporation effective date x was formed on date under the laws of country x an eligible_entity elected to be treated as a disregarded_entity for federal tax purposes effective date x represents that as of date x had a change_of_ownership of more than fifty percent that would satisfy sec_301 c iv sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 elections are necessary only when an eligible_entity does not want to be classified under the default classification or when an eligible_entity chooses to change its classification plr-123846-11 sec_301_7701-3 provides that except for certain existing entities described in sec_301_7701-3 unless a foreign eligible_entity elects otherwise the entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single member that does not have limited_liability sec_301_7701-3 provides that except as provided in sec_301 c iv and v an eligible_entity may elect to be classified as other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 entity classification election with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under sec_301 c i will be effective on the date specified by the entity on form_8832 or on the date filed if no date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed sec_301_7701-3 provides that if an eligible_entity makes an election under sec_301_7701-3 to change its classification the entity cannot change its classification by election again during the sixty months succeeding the effective date of the election however the commissioner may permit the entity to change its classification by election within the sixty months if more than fifty percent of the ownership interests in the entity as of the effective date of the subsequent election are owned by persons that did not own any interests in the entity on the filing_date or on the effective date of the entity's prior election sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 sets forth the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the plr-123846-11 taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government based on the facts submitted and the representations made we consent to x changing its classification for federal tax purposes less than months after its previous classification change as a result x is granted an extension of time of days from the date of this letter to file form_8832 with the appropriate service_center to elect to be classified as an association_taxable_as_a_corporation for federal tax purposes effective date a copy of this letter should be attached to the form_8832 except as expressly provided herein we express or imply no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion regarding whether x is otherwise eligible to make the election this ruling is directed only to the taxpayer requesting it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination sincerely associate chief_counsel passthroughs special industries by ____________________________ bradford r poston senior counsel branch passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service department of the treasury number release date index number 468a washington dc person to contact telephone number refer reply to cc psi 6-plr-103906-02 date date legend taxpayer utility holding_company plant commission a commission b state resolution plan energy nuclear a b c dear this letter responds to your request for private_letter_ruling dated date and subsequent submissions you requested that we rule on certain tax consequences under sec_468a of the internal_revenue_code to taxpayer and holding_company through its divisions energy and nuclear and their qualified nuclear decommissioning funds of the transfer of the plant in the context of a reorganization plr-103906-02 facts taxpayer has represented the following facts and information relating to the ruling_request taxpayer in it’s regulated electric utility business principally operated by utility generates electricity and provides electric and gas transmission and distribution services in state utility is under the regulatory jurisdiction of commission a and commission b utility owns a percent of the plant which consists of b units as required by commission a in resolution utility has established and maintained two separate qualified nuclear decommissioning trusts for plant one for amounts subject_to the jurisdiction of commission a and one for amounts subject_to the jurisdiction of commission b in response to changes in the electric industry utility has proposed plan pursuant to plan utility will separate its operations into generation electric transmission gas transmission and distribution segments initially in c holding_company was organized as a wholly-owned subsidiary of utility simultaneously three wholly-owned subsidiaries of holding_company including energy were organized as limited_liability companies taxpayer represents that the three subsidiaries will be treated as disregarded entities pursuant to sec_301_7701-3 of the regulations after the formation of energy but on or before the effective date of plan nuclear will be organized as a wholly-owned subsidiary of energy in the form of a limited_liability_company taxpayer represents that nuclear will be treated as a disregarded_entity pursuant to sec_301_7701-3 of the regulations plan calls for the generation segment of utility’s business to be distributed to energy and its subsidiaries and for the gas and electric transmission segments to be distributed to the other two subsidiaries of holding_company only the distribution segment will remain with utility plant and associated assets including both of the qualified nuclear decommissioning funds will be distributed to nuclear nuclear will be liable for all expenses related to decommissioning plant nuclear will lease plant to energy and energy will operate and maintain plant during the lease subsequent to the transfer of plant to nuclear the stock of holding_company will be distributed to taxpayer on or shortly after the effective date of plan utility will be spun off to taxpayer’s shareholders following the transfer of plant to nuclear nuclear will be subject solely to the regulatory jurisdiction of commission b however because under the terms of the trust agreement commission a will continue after the transfer of the funds to nuclear to have jurisdiction and oversight over the qualified nuclear decommissioning fund that contains amounts contributed during the period of commission a’s original jurisdiction over utility commission a requires that the fund continue after the transfer to be kept plr-103906-02 separate from and not commingled with the qualified nuclear decommissioning fund that contains amounts contributed during the period of commission b’s original jurisdiction over utility utility and energy have requested but have not yet received approvals from various entities including commission b and the nuclear regulatory commission relating to several facets of plan the taxpayer has requested the following rulings requested ruling utility holding_company through its divisions energy and nuclear and the qualified nuclear decommissioning funds will not recognize any gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfer of the interests in the qualified nuclear decommissioning trust funds and holding company’s qualified nuclear decommissioning funds through its division nuclear will have a basis in the assets held equal to the basis of such assets in utility’s qualified nuclear decommissioning funds immediately prior to the transfer of the interests in the qualified nuclear decommissioning funds requested ruling while it owns interests in the plant holding_company through its divisions is eligible to maintain the qualified nuclear decommissioning funds under sec_1_468a-5 requested ruling while it owns interests in the plant and for so long as commission a requires that the commission a jurisdictional decommissioning trust not be commingled with the commission b jurisdictional decommissioning trust holding_company through its divisions may maintain separate trusts for the commission a and commission b jurisdictional share of the qualified nuclear decommissioning trusts in accordance with sec_1_468a-5 law and analysis sec_1_468a-5 sets out the qualification requirements for nuclear decommissioning funds it provides in part that a qualified nuclear decommissioning fund must be established and maintained pursuant to an arrangement that qualifies as a_trust under state law sec_1_468a-5 provides that an electing taxpayer can establish and maintain only one qualified nuclear decommissioning fund for each nuclear power plant if a nuclear power plant is subject_to the ratemaking jurisdiction of two or more public_utility commissions and any such public_utility commission requires a separate fund to be maintained for the benefit of ratepayers whose rates are established or approved by the public_utility commission the separate funds maintained for such plant whether or not established and maintained pursuant to a single trust agreement shall be considered a single nuclear decommissioning fund plr-103906-02 sec_1_468a-6 provides rules applicable to the transfer of an interest in a nuclear power plant and transfer of the qualified nuclear decommissioning fund where certain requirements are met specifically sec_1_468a-6 provides that sec_1_468a-6 applies if-- immediately before the disposition the transferor maintained a qualified nuclear decommissioning fund with respect to the interest disposed of and immediately after the disposition-- i the transferee maintains a qualified nuclear decommissioning fund with respect to the interest acquired ii the interest acquired is a qualifying interest of the transferee in the nuclear power plant iii either a proportionate amount which could include all of the assets of the transferor’s qualified nuclear decommissioning fund is transferred to a qualified nuclear decommissioning fund of the transferee or the transferor’s entire qualified nuclear decommissioning fund is transferred to the transferee provided in the latter case or if the transferee receives all of the assets in the transferor’s qualified nuclear decommissioning fund but not the transferor’s qualified nuclear decommissioning fund that the transferee acquires the transferor’s entire qualifying interest in the plant and iv the transferee continues to satisfy the requirements of sec_1_468a-5 which permits an electing taxpayer to maintain only one qualified nuclear decommissioning fund for each plant sec_1_468a-6 provides that a disposition that satisfies the requirements of sec_1_468a-6 will have the following tax consequences at the time it occurs neither the transferor nor the transferor’s qualified nuclear decommissioning fund will recognize gain_or_loss or otherwise take any income into account by reason of the transfer of a proportionate amount of the assets of the transferor’s qualified nuclear decommissioning fund to the transferee’s qualified nuclear decommissioning fund or by reason of the transfer of the transferor’s entire qualified nuclear decommissioning fund to the transferee for purposes of the regulations under sec_468a this transfer or the transfer of the transferor’s qualified nuclear decommissioning fund will not be considered a distribution of assets by the transferor’s qualified nuclear decommissioning fund neither the transferee nor the transferee’s qualified nuclear decommissioning fund will recognize gain_or_loss or otherwise take any income into account by reason of plr-103906-02 the transfer of a proportionate amount of the assets of the transferor’s qualified nuclear decommissioning fund to the transferee’s qualified nuclear decommissioning fund or by reason of the transfer of the transferor’s entire qualified nuclear decommissioning fund to the transferee for purposes of the regulations under sec_468a this transfer or the transfer of the transferor’s qualified nuclear decommissioning fund will not constitute a payment or a contribution of assets by the transferee to its qualified nuclear decommissioning fund transfers of assets of a qualified nuclear decommissioning fund to which this section applies do not affect basis thus the transferee’s qualified nuclear decommissioning fund will have a basis in the assets received from the transferor’s qualified nuclear decommissioning fund that is the same as the basis of those assets in the transferor’s qualified nuclear decommissioning fund immediately before the distribution under sec_1_468a-6 the service may treat any disposition of an interest in a nuclear power plant occurring after date as satisfying the requirements of the regulations if the service determines that such treatment is necessary or appropriate to carry out the purposes of sec_468a conclusions based on the information submitted by taxpayer and expressly conditioned on taxpayer’s representation that energy and nuclear are disregarded entities under sec_301_7701-3 we reach the following conclusions the transfer of the qualified nuclear decommissioning funds from utility to nuclear qualify as dispositions under the general provisions of sec_1_468a-6 accordingly utility holding_company through its divisions energy and nuclear and the qualified nuclear decommissioning funds will not recognize any gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfer of the interests in the qualified nuclear decommissioning trust funds and holding company’s qualified nuclear decommissioning funds through its division nuclear will have a basis in the assets held equal to the basis of such assets in utility’s qualified nuclear decommissioning funds immediately prior to the transfer of the interests in the qualified nuclear decommissioning funds while it owns interests in the plant through its divisions or otherwise holding_company is eligible to maintain the qualified nuclear decommissioning funds while it owns interests in the plant and commission a requires that the commission a jurisdictional qualified nuclear decommissioning trust not be commingled with the commission b jurisdictional qualified nuclear decommissioning trust holding_company through its divisions may maintain separate trusts for the commission a and commission b jurisdictional share of the qualified nuclear decommissioning trusts plr-103906-02 except as specifically determined above no opinion is expressed or implied concerning the federal_income_tax consequences of the transaction described above in particular no opinion is expressed or implied concerning whether holding_company energy or nuclear are an eligible_taxpayer as defined in sec_1_468a-1 in addition no opinion is expressed or implied concerning whether energy or nuclear are properly disregarded for tax purposes and treated as divisions of holding_company this letter_ruling is directed only to the taxpayer that requested it sec_6110 provides that this ruling may not be used or cited as precedent in accordance with the power_of_attorney on file with this office the original of this letter is being sent to taxpayer’s authorized representative we are also sending a copy of this letter_ruling to taxpayer and to the industry director natural_resources lm nr sincerely peter c friedman senior technician reviewer branch office of associate chief_counsel passthroughs and special industries cc


internal_revenue_service number release date index number ----------------------------- -------------------------- --------------------------------------- ---------------------------------------- -------------------------------- in re --------------------------------------- ein ---------------- 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 plr-110963-07 date june legend taxpayer a --------------------------------------- ---------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --- ---------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- -------------------------------------------------- ----------------------------------------- ---------------------------------------------------------------------------------------- ------------------- ---------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- ------------------ ------------------ ----------------------- -------------------- ----------------------- ---------------------- ----------------------- ---------------------- ------------- ------------- ---------------- b corp a corp b corp c note a note b court a case a date date date date date date date a date b state a state b z year ------- plr-110963-07 dear ----------------- this is in reply to your letter dated date requesting a ruling regarding the federal_income_tax treatment of amounts paid_by taxpayer to settle a class action lawsuit you have requested a ruling that amounts paid_by taxpayer to settle the lawsuit may be deducted as ordinary and necessary business_expenses under sec_162 of the internal_revenue_code facts taxpayer is engaged in the business of a taxpayer’s division corp a is engaged in the business of b a significant portion of the claims against taxpayer in the class action related to alleged omissions and misrepresentations by taxpayer regarding corp a in its financial reports sec filings and securities offerings additional claims against taxpayer in the class action related to alleged omissions and misrepresentations by taxpayer regarding its former subsidiary corp b in financial reports sec filings and securities offerings on date a actions were filed in court a as securities class actions on behalf of persons and entities who purchased or otherwise acquired taxpayer’s securities the defendants were taxpayer its individual officers and directors its outside auditor and certain lenders underwriters and financial advisors to taxpayer with respect to its securities offerings these actions were consolidated as case a the complaint alleged causes of action against taxpayer under sec_11 and sec_12 of the securities act of section b of the securities exchange act of and rule 10b-5 promulgated thereunder state b securities laws and common_law the class members are all purchasers of taxpayer’s common_stock from date 1-date the class period purchasers of taxpayer’s common_stock issued on date the date stock offering purchasers of taxpayer’s common_stock issued as a result of the date merger of corp c into taxpayer the corp c offering purchasers of taxpayer’s notes issued on date either purchased in the open market or in the date offering the note a offering purchasers of the taxpayer’s notes issued on date either purchased in the open market or in the date offering the note b offering plr-110963-07 the complaint alleged that plaintiffs purchased or otherwise acquired the above items at prices that were artificially inflated as a result of material omissions and misrepresentations by taxpayer the alleged material misrepresentations and omissions by taxpayer related to taxpayer’s failure to properly account for its credit exposure to corp b taxpayer’s concealment of its manipulation of the profits assets and revenues of corp a taxpayer’s concealment of various other guarantees obligations risks and improprieties including its role in the state a energy crisis with regard to the allegations of material misrepresentations and omissions by taxpayer i all of the allegations of material omissions or misrepresentations in the date stock offering were also alleged to have occurred in the financial reports and sec filings of taxpayer ii all of the allegations of material omissions or misrepresentations in the note a offering were also alleged to have occurred in the financial reports and sec filings of taxpayer iii all of the allegations of material omissions or misrepresentations in the corp c offering were also alleged to have occurred in the financial reports and sec filings of taxpayer iv all of the allegations of material omissions or misrepresentations in the note b offering were also alleged to have occurred in the financial reports and sec filings of taxpayer and v none of the alleged omissions or misrepresentations in press releases by taxpayer was alleged to have occurred in connection with the date stock offering the corp c offering the note a offering or the note b offering under the settlement agreement entered into as of date b taxpayer agreed to pay dollar_figurez to an escrow account that will be treated as a qualified_settlement_fund as defined in sec_1_468b-1 pursuant to the final judgment entered by court a taxpayer was released from all claims of members of the settlement class upon payment law and analysis sec_162 provides in part that there shall be allowed as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business sec_263 prohibits a deduction for capital expenditures specifically sec_263 disallows a deduction for any amounts paid out for new buildings or for permanent improvements or betterments made to increase the value of any property sec_1_263_a_-4 provides in part that a taxpayer must capitalize an amount_paid to another party to acquire any intangible from that party in a purchase or similar transaction for these purposes an intangible includes an ownership_interest in a plr-110963-07 corporation partnership trust estate limited_liability_company or other entity sec_1_263_a_-4 in addition a taxpayer must capitalize amounts paid to facilitate the acquisition of an intangible generally amounts paid in settlement of lawsuits are currently deductible if the acts which gave rise to the litigation were performed in the ordinary conduct of the taxpayer’s business see eg 27_tc_960 allowing petitioner to deduct amounts paid in settlement of legal proceedings charging petitioner with mismanagement in the liquidation of assets revrul_80_211 1980_2_cb_57 allowing corporation to deduct amounts paid as punitive_damages that arose from a civil lawsuit against the corporation for breach of contract and fraud in connection with the ordinary conduct of its business activities revrul_79_208 1979_2_cb_79 permitting taxpayer to deduct payments to settle lawsuit and obtain a release from claims under a franchise agreement if litigation arises from a capital_transaction the settlement costs and legal fees associated with such litigation are characterized as acquisition costs and must be capitalized under sec_263 see 397_us_572 holding litigation costs incurred by corporation in appraisal proceedings mandated by state law to determine the value of dissenter’s shares were part of the cost of acquiring those shares 397_us_580 litigation costs incurred in appraisal action to determine fair purchase_price were costs to acquire property 473_f2d_1217 7th cir amounts paid in settlement of nuisance action that was brought to establish price of property were capital expenditures business_expenses though are not converted into capital expenditures solely because they have some connection to a capital_transaction in determining whether litigation costs are deductible expenses or capital expenditures the courts and the service have looked to the origin of the claim to which the settlement or other litigation costs relate see woodward v commissioner u s pincite 372_us_39 under the origin_of_the_claim_test the character of a particular expenditure is determined by the transaction or activity from which the taxable_event proximately resulted gilmore u s pincite the purpose consequence or result of the expenditure is irrelevant in determining the origin of the claim and therefore the character of the litigation cost for tax purposes mckeague v commissioner cl_ct aff’d without opinion 852_f2d_1294 in the present case the issue involves whether taxpayer’s payment to settle its class action lawsuit may be deducted under sec_162 as an ordinary and necessary business_expense or must be capitalized under sec_263 as a cost incurred in connection with the acquisition of assets under the origin_of_the_claim_test the inquiry involves examining the particular claims in the class action litigation and determining whether the claims had their origin in the conduct of taxpayer’s ordinary and necessary business activities or whether any of the claims were rooted in a capital_transaction plr-110963-07 the substantive allegations against taxpayer in large measure originate as material misrepresentations or omissions in financial reports and sec filings see exhibit b table of allegations in complaint taxpayer’s plr submission the same material omissions and misrepresentations are also alleged in the date stock offering the corp c offering the note a offering and the note b offering specifically with respect to the corp c offering for example the complaint alleges that the registration_statement materially misrepresents the true financial condition business_assets earnings and prospects of taxpayer as to several of its divisions the complaint also alleges that the registration_statement materially omits to state and materially misrepresents the true financial condition business_assets earnings and prospects of taxpayer because it omits various undisclosed matters such as the nature of one of its division’s interest rate risk and credit default risk in existence at the date thereof and which are disclosed in taxpayer’s year 10-k furthermore the complaint alleges that the taxpayer’s financial statements incorporated by reference in the corp c offering and registration_statement were materially misleading because of material omissions and misrepresentations as well as failure to record a charge against earnings in respect of the credit exposure of one of its divisions these same omissions and misrepresentations are alleged in financial reports and sec filings we note that the corp c offering was made as a result of the date merger of corp c into taxpayer see complaint case a ------------------------------------------- taxpayer’s position is that the settled claims were based on alleged omissions and misrepresentations in financial reports sec filings press releases and offering materials in securities offerings the alleged acts were claimed to have resulted in the inflation of the prices of taxpayer’s securities during the class period adversely affecting all persons who acquired taxpayer’s securities either in the open market or in a securities offering all of the alleged omissions and misrepresentations made in connection with any offering were also alleged to have occurred in financial reports and sec filings and none of the alleged press release omissions and misrepresentations were alleged to have occurred in connection with any of the offerings accordingly taxpayer states that each alleged omission or misrepresentation was alleged to have occurred in connection with taxpayer’s normal business activities of preparing and publishing financial reports making sec filings or issuing press releases related to its business in missouri pacific corp v united_states cl_ct the taxpayer made a public offering to acquire shares of a target corporation’s stock in exchange for its own common_stock the exchange_offer was contained in a prospectus and letter to target’s shareholders the prospectus was then incorporated into a registration_statement filed with the sec after the exchange the target’s former shareholders filed a class action lawsuit against the taxpayer and the former target alleging the prospectus and letter contained false representations that overstated the value of taxpayer’s shares and understated the value of the target’s shares pursuant to a settlement the taxpayer plr-110963-07 paid damages to shareholders who participated in the exchange_offer in an amount that compensated for the true value of the stocks exchanged on the exchange date the taxpayer sought to deduct the settlement costs as business_expenses because the complaints were the result of an ongoing dispute between target’s shareholders and the taxpayer but the claims_court disagreed stating that the settlement payments constituted an adjustment to the amount_paid for the target stock under the origin_of_the_claim_test the court determined that the claims originated in the taxpayer’s purchase of the target stock the district_court order approving the settlement specifically stated that the action resulted from a public offer made by the taxpayer to acquire target’s stock thus the court concluded that the predominant nature of the proceedings involved the adequacy of the consideration paid for the target’s stock in the exchange_offer and thus was grounded in a capital_transaction see also berry petroleum co v commissioner t c aff’d 142_f3d_442 9th cir settlement of litigation originated in acquisition of target stock resulting in merger and that origin of the claim was fraud in the representations made to accomplish the merger at a good price not merely fraud in the operation of the companies which was incidental to the merger here the factual circumstances of the litigation leading to the settlement are claims against taxpayer by purchasers of stock or notes pursuant to specific offerings all of the allegations involve representations which are part of ordinary business activities- ie registration statements financial reports sec filings press releases pursuant to the origin of the claim the transaction or activity from which the taxable_event proximately resulted was to settle claims resulting from ordinary business activities it is irrelevant that the settled claims had some connection to stock and note offerings or that one stock offering was immediately after and a result of a merger capital_transactions were not the sine qua non of the allegations in the complaint rather the alleged misrepresentations occurred in a number of reports statements filings etc which were produced over a period of time as part of regular business activities the complaint does not indicate that the allegations stemmed from any conduct by taxpayer involving any acquisitive transaction or merger transactions rather the claims focus on alleged misrepresentations and omissions occurring over several years while in pursuit of ongoing business activities accordingly we believe that the origin of these claims was in the ordinary conduct of taxpayer’s business the misrepresentations and omissions occurred over a number of years in documents prepared as a common and routine activity in carrying_on_a_trade_or_business both the courts and the service have allowed taxpayers to deduct the costs of settling and defending claims arising out of fraudulent misrepresentations made in the conduct of their trade_or_business see 234_f2d_660 6th cir revrul_80_211 1980_2_cb_57 while technically the claims arise in the context of stock and note offerings the actual origin of the claims was not a capital_transaction but rather the ongoing alleged false statements and omissions plr-110963-07 in addition this situation is distinguishable from missouri pacific supra and berry petroleum supra in both cases the courts determined that the claims originated in the taxpayers’ acquisitions of targets’ stock rather than in their ordinary business operations conclusion thus for the reasons discussed above and based solely on the facts and circumstances presented berein we conclude that amounts incurred by taxpayer to settle the above-referenced class action lawsuit may be deducted as ordinary and necessary business_expenses under sec_162 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office a copy of this letter is being sent to authority’s authorized representative the ruling contained in this letter is based upon information and representations submitted by authority and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the materials submitted in support of the request for a ruling it is subject_to verification upon examination sincerely yours office of associate chief_counsel income_tax and accounting _________________________ robert m casey senior technician reviewer


t c summary opinion united_states tax_court edward d and donna l johns petitioners v commissioner of internal revenue respondent docket no 13763-99s filed date edward d johns pro_se brandi b darwin specially recognized and stephen r takeuchi pajak for respondent 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 the decision to be entered is should not subsequent effect for not reviewable by any other court and this opinion be cited as authority unless otherwise indicated section references are to the internal_revenue_code in the year in issue respondent determined a deficiency of dollar_figure and an addition_to_tax under sec_6651 of dollar_figure for petitioners concede that they should have included an additional dollar_figure of interest_income in their gross_income and that they are liable for the failure_to_file addition_to_tax under sec_6651 a this court must decide whether dollar_figure of discharge_of_indebtedness income is includable in petitioners' gross_income some of the facts in this case have been stipulated and are so found petitioners resided in ft myers florida at the time they filed their petition in the job of petitioner edward johns petitioner was terminated petitioner knew he and his wife were overextended on credit card debt and that they would be faced with financial problems petitioners were headed for bankruptcy some of the creditors offered petitioners a settlement for less than the full amount of debt due petitioners paid a portion of the debts to these creditors and in return the remainder of the debts were discharged petitioners withdrew dollar_figure from their retirement account and paid the early withdrawal penalty on this amount in order to use part of the amount to satisfy their debts in on the dates set forth below petitioners made the following payments and the following portions of their credit card loans were forgiven by the lenders date payments discharge total mbna aug dollar_figure dollar_figure dollar_figure mbna aug big_number big_number big_number barnett bank n a sept big_number big_number big_number nationsbank of delaware n a oct big_number big_number big_number total of debts discharged dollar_figure none of the aforementioned amounts included interest which would have been deductible if paid all of the debts that were discharged were valid debts petitioners did not file for bankruptcy in petitioners did not include the dollar_figure of discharged debt in their gross_income on their federal_income_tax return respondent determined that the income from the discharge of petitioners' debts must be included in their gross_income because petitioners' creditors forgave the debts based on the testimony and the exhibits presented at trial we find that petitioners had the following liabilities prior to the discharge of the loans on date fleet mortgage dollar_figure nationsbank big_number mbna america big_number mbna america big_number barnett bank big_number chemical bank big_number bank of new york big_number g e capital credit big_number florida power and light credit_union first north american national bank big_number first union bank big_number dollar_figure on date petitioners had the following assets house assessed value dollar_figure fpl thrift_plan big_number thrift_plan withdrawal big_number metlife annuity big_number van big_number furniture etc big_number automobile big_number sedan big_number cash and bank accounts big_number trailer dollar_figure in addition petitioners had potential interests in the fpl pension_plan and the florida retirement_system which we find unnecessary to address in this case as explained below on date when the mbna loans were discharged petitioners had assets of dollar_figure and liabilities of dollar_figure on date when the barnett bank n a loan was discharged petitioners had assets of dollar_figure dollar_figure less the payments to mbna of dollar_figure and dollar_figure and liabilities of dollar_figure dollar_figure less the mbna debts of dollar_figure and dollar_figure on date when the nations bank loan was discharged petitioners had assets of dollar_figure dollar_figure less the payment to barnett bank of dollar_figure and liabilities of dollar_figure dollar_figure less the barnett bank debt of dollar_figure petitioner stated if i have to pay income_tax on the portion the companies cancelled i will have learned one thing it does not pay to try and do the right and moral thing just file bankruptcy and clear your debts petitioners contend that they should not have to include the dollar_figure of discharged debt in their income because they were insolvent in respondent contends that petitioners were not insolvent in because all of petitioners' property should be included in the calculation of the fair_market_value of their assets under sec_108 regardless of whether some property is exempt from creditors’ claims under state law under sec_61 gross_income includes all income from whatever source derived including income_from_discharge_of_indebtedness under certain circumstances a taxpayer may exclude from gross_income the income_from_discharge_of_indebtedness if the discharge occurs when the taxpayer is insolvent sec_108 b the exclusion cannot exceed the amount by which the taxpayer is insolvent sec_108 for purposes of this section insolvent is defined as the excess of liabilities over the fair_market_value of assets sec_108 d such a determination is to be made on the basis of the taxpayer's assets and liabilities immediately before the discharge sec_108 under the florida constitution florida residents are provided with a homestead_exemption fla const art sec_4 west under this exemption in general the debtor's residence and the debtor's personal_property to the value of dollar_figure are exempt from creditors id the florida statutes also provide exemptions for annuities and certain pension retirement and profit-sharing_plans fla stat ann sec_222 dollar_figure west a debtor's interest not to exceed dollar_figure in value in a single motor_vehicle is also exempt from creditors fla stat ann sec dollar_figure west therefore under florida law petitioners' creditors would not be able to attach petitioners' home dollar_figure of the automobile dollar_figure of personal_property the interests in the fpl thrift_plan and the metlife annuity and the potential interests in the fpl pension and the florida retirement_system even so for purposes of sec_108 and d petitioners cannot exclude from their assets the property exempt under florida law this court recently held that property exempt from creditors under state law may not be excluded from assets when making an insolvency determination under sec_108 a b and d 116_tc_87 as set forth above on each of the three dates on which petitioners’ debts were discharged petitioners’ assets exceeded their liabilities we understand that petitioners considered themselves insolvent in but at all relevant times petitioners were solvent at the time their debts were discharged within the meaning of sec_108 because petitioners were solvent we need not address whether the potential benefits under the fpl pension_plan and the florida retirement_system which petitioners had no access to in should be included in assets nor do we need to decide whether the fair_market_value of the home was greater than the assessed value of the home on this record we hold that petitioners must include the dollar_figure of discharged debt in their gross_income pursuant to sec_108 a b to the extent we have not addressed any of the parties' arguments we have considered them and find them to be without merit reviewed and adopted as the report of the small_tax_case division decision will be entered for respondent


t c memo united_states tax_court augustin b jombo petitioner v commissioner of internal revenue respondent docket no filed date augustin b jombo pro_se c ted li for respondent memorandum findings_of_fact and opinion colvin judge respondent determined a deficiency in petitioner’s federal_income_tax of dollar_figure and an accuracy- related penalty under sec_6662 of dollar_figure petitioner worked for the consulate general of nigeria in new york city in in that year he won about dollar_figure million in the new york state lottery nysl the winnings were payable in - equal annual installments beginning in in petitioner received dollar_figure as lottery winnings and he no longer worked for the nigerian consulate general he disclosed his lottery winnings on his income_tax return and claimed that the winnings were not taxable in because inter alia he was employed by the consulate general of nigeria when he won the lottery following a concession by petitioner the issues for decision are whether petitioner bears the burden_of_proof we hold that he does whether petitioner constructively received all of his lottery winnings in we hold that he did not whether petitioner may exclude the lottery winnings he received in because he was employed by the consulate general of nigeria in when he won the lottery we hold that he may not whether petitioner had a dollar_figure net_operating_loss carried over to we hold that he did not whether petitioner is liable for the accuracy-related_penalty under sec_6662 for we hold that he is not to the extent described below unless otherwise provided section references are to the internal_revenue_code in effect for the applicable years and - - rule references are to the tax_court rules_of_practice and procedure findings_of_fact some of the facts have been stipulated and are so found petitioner resided in the united kingdom when he filed his petition he has a master’s degree in business administration petitioner began working as a clerk for the consulate general of nigeria in new york city in in petitioner bought nysl tickets for dollar_figure each on date petitioner won about dollar_figure million from the nysl payable in equal annual installments beginning in the nysl did not offer petitioner the option of receiving a lump-sum payment in petitioner was employed by the consulate general of nigeria when he won the lottery he used the cash_method_of_accounting in petitioner received two or three offers to buy the rights to his future lottery winnings for about cents on the dollar dhe did not sell his rights petitioner acquired permanent u s resident status on date and he maintained that status in the nysl paid petitioner dollar_figure in on a form_8275 disclosure statement attached to his return petitioner reported that he received dollar_figure from the nysl and said _- _- augustin b jombo had diplomatic status when he won the new york lottery in his winnings are being paid out over a twenty-year period prior audits have denied mr jombo gambling_losses against his lottery winnings under reg the internal_revenue_service agent in charge of the audit ruled that mr jombo was considered to have won the lottery in which is the only year he is considered to have gambling winnings therefore since all his gambling winnings were considered to have taken place in his diplomatic status would exempt his lottery winnings from income_taxation mr jombo should not have to pick up gambling winnings from the twenty-year payout as taxable_income because he won the lottery in when he had diplomatic status petitioner claimed a dollar_figure net_operating_loss nol on his return in a separate statement attached to his return petitioner identified the nol as a net_operating_loss_carryover but he did not state from which year or years he was carrying the loss respondent sent petitioner a letter dated date informing him that his federal_income_tax return had been selected for examination opinion a petitioner’s contentions petitioner contends that respondent bears the burden_of_proof for all issues he is not liable for tax on his lottery payment because he constructively received all of his lottery winnings in when he was a tax-exempt employee of the nigerian consulate general his lottery winnings are a nontaxable annuity he is entitled to a net_operating_loss_carryover deduction of dollar_figure in and he is not liable for the accuracy-related_penalty under sec_6662 because he disclosed his lottery winnings on his return b burden_of_proof petitioner contends that respondent bears the burden of proving that the nysl winnings petitioner received in are taxable_income we disagree under sec_7491 the burden_of_proof is placed on the secretary under certain circumstances sec_7491 applies to court proceedings arising in connection with examinations beginning after date internal_revenue_service restructuring and reform act of publaw_105_206 sec a 112_stat_726 respondent sent a letter to petitioner dated date informing him that his federal_income_tax return had been selected for examination absent any contrary evidence we treat that date as the date respondent’s examination of petitioner’s tax_year began thus sec_7491 does not apply and respondent’s determination is presumed to be correct and petitioner bears the burden_of_proof on all issues in this case rule a 290_us_111 cc whether petitioner constructively received all of his lottery winnings in petitioner contends that the nysl amounts that he received in are not taxable in because he constructively received all of his lottery winnings in petitioner points - - out that he had the opportunity to sell his future winnings but he decided not to do so he contends that he constructively received payment of all of his lottery winnings in because he had an unqualified vested right to sell his future lottery payments in we disagree for reasons stated next whether petitioner constructively received all of his lottery winnings in a cash_method taxpayer generally recognizes an item_of_gross_income when it is actually or constructively received sec_1_446-1 a income_tax regs a cash_method taxpayer constructively receives funds if the taxpayer has an ungualified vested right to receive immediate payment 103_tc_634 affd without published opinion 89_f3d_856 11th cir 96_tc_814 64_tc_564 affd without published opinion 539_f2d_714 7th cir the nysl did not offer to pay petitioner all of his lottery winnings in thus petitioner did not constructively receive all of his nysl lottery winnings from the nysl in whether petitioner constructively received winnings because he could have sold the right to receive future lottery payments in petitioner contends that he constructively received all of his lottery winnings in because he could have sold the right to receive his future lottery payments at a 50-percent discount - j- in we disagree a taxpayer constructively receives income when he has an unqualified vested right to receive immediate payment childs v commissioner supra martin v commissioner supra petitioner did not accept an offer to buy the right to receive his future lottery winnings an unaccepted offer to buy a future income stream gives a taxpayer no right to the proceeds from a sale of that income stream accordingly petitioner did not constructively receive all of his lottery winnings in petitioner contends in his opening brief that cowden v commissioner tcmemo_1961_229 and sainte claire corp v commissioner tcmemo_1997_171 affd without published opinion sub nom boccardo v commissioner 164_f3d_629 9th cir support his contention that he constructively received all of the lottery winnings in when he received offers to buy the future lottery payments we disagree in cowden the court held that the contract right to deferred_bonus payments under an oil_and_gas lease was the equivalent of cash and thus taxable as if cash had been received by the taxpayer because the obligation of the payor was an unconditional and assignable promise to pay by a solvent obligor was of a kind that was frequently transferred to lenders or investors at a discount not substantially greater than the generally prevailing premium for_the_use_of money and was readily convertible to cash cowden is distinguishable because petitioner did not have the option to --- - receive a lump-sum payment from the nysl or an enforceable promise to pay a lump sum ' the taxpayer in sainte claire corp v commissioner supra owned a promissory note that was due on date on date the taxpayer corporation and the borrower negotiated an extension of the note to date we held that the taxpayer corporation constructively received the principal owed on the promissory note when it became due on date because on that date the taxpayer had an unrestricted right to receive the income the taxpayer was able to collect it and the failure to receive it was due to the taxpayer’s own choice sainte claire corp is distinguishable from this case because petitioner never had the right to receive the lottery installment in we conclude that petitioner did not constructively receive his payment from the nysl in and that the nysl payment is taxable in ' petitioner conceded in his reply brief that cowden v commissioner tcmemo_1961_229 and the cash equivalency and economic benefit doctrines do not support his contention that he received all of the lottery winnings in d whether petitioner may exclude his nysl winnings because he was an employee of the nigerian consulate general the vienna convention on diplomatic relations of and the vienna convention on consular relations of petitioner contends that he may exclude dollar_figure that he received from the nysl in under either the vienna convention on diplomatic relations date u s t or the vienna convention on consular relations date u s t we disagree article of the vienna convention on diplomatic relations article supra provides that diplomatic agents are exempt from all dues and taxes except d dues and taxes on private income having its source in the receiving state and capital taxes on investments made in commercial undertakings in the receiving state similarly article d of the vienna convention on consular relations article u s t pincite provides that consular officers and employees are exempt from all dues and taxes except this was ratified by the u s senate date ratification deposited date entered into force for the united_states date adopted by the diplomatic relations act of publaw_95_393 92_stat_808 currently codified pincite u s c sec 254a this was ratified by the u s senate date ratification deposited date entered into force for the united_states date -- - d dues and taxes on private income including capital_gains having its source in the receiving state and capital taxes relating to investments made in commercial or financial undertakings in the receiving state petitioner’s lottery payment in was private income having its source in the united_states thus that payment is not exempt from tax under either article or article petitioner contends that the nysl payment is tax exempt under article of the vienna convention on consular relations article u s t pincite article states exemption from taxation of consular premise sec_1 consular premises and the residence of the career head of consular post of which the sending state or any person acting on its behalf is the owner or lessee shall be exempt from all national regional or municipal dues and taxes whatsoever other than such as represent payment for specific services rendered the exemption from taxation referred to in paragraph of this article shall not apply to such dues and taxes if under the law of the receiving state they are payable by the person who contracted with the sending state or with the person acting on its behalf we disagree article applies only to taxes imposed on consular premises and on the residence of the career head of the consular post thus the dollar_figure that petitioner received from the nysl in is not excluded from income by the vienna conventions sec_893 petitioner contends that the dollar_figure that he received from nysl in is exempt from tax under sec_893 because he was an employee of a foreign government we disagree salaries and wages received by an employee as compensation_for official services to a foreign government or international_organization are exempt from tax sec_893 however income received by employees of a foreign government or international_organization from sources other than their salary fees or wages is subject_to federal_income_tax sec_1_893-1 income_tax regs thus petitioner’s lottery winnings are not exempt from tax under sec_893 sec_893 provides in part sec_893 compensation of employees of foreign governments or international organizations --- a rule for exclusion ----wages fees or salary of any employee of a foreign government or of an international_organization including a consular or other officer or a nondiplomatic representative received as compensation_for official services to such government or international_organization shall not be included in gross_income and shall be exempt from taxation under this subtitle if-- br whether petitioner’s nysl payment is excluded from gross_income as an annuity under sec_72 b petitioner contends that he may exclude the nysl payment from income as an annuity under sec_72 we disagree gross_income generally includes any amount_received_as_an_annuity sec_72 however amounts attributable to the taxpayer’s investment in the annuity_contract are excludable sec_72 petitioner paid dollar_figure for the winning lottery ticket thus petitioner may exclude at most dollar_figure id we conclude that petitioner may not exclude the nysl payment from income under sec_72 f whether petitioner had a dollar_figure net_operating_loss_carryover for petitioner contends that he may carry over to a dollar_figure net_operating_loss which resulted from investment losses from his rental property in previous years we disagree petitioner reported in a statement attached to his return that he had a dollar_figure net_operating_loss_carryover he sec_72 provides in part in general --gross income does not include that part of any amount_received_as_an_annuity under an annuity endowment or life_insurance_contract which bears the same ratio to such amount as the investment_in_the_contract as of the annuity_starting_date bears to the expected_return under the contract as of such date a tax_return is not evidence of the truth of the facts continued - - did not identify on the return the year or years from which he was carrying the loss to on brief petitioner contends that he carried forward rental property losses from and to carry forward or carry back net operating losses the taxpayer must prove the amount of the net_operating_loss carryforward or carryback and that his or her gross_income in other years did not offset that loss sec_172 25_tc_1100 revd and remanded on other grounds 259_f2d_300 5th cir there is no evidence in the record that petitioner had rental property losses or that any losses exceeded his large amount of gross_income from through petitioner testified that his net_operating_loss claim related to a dollar_figure million stock_options loss in he did not explain how he knew in when he filed his return that he would have a dollar_figure million stock_options loss in we conclude that petitioner may not carry over any losses to continued stated in it 103_tc_428 71_tc_633 62_tc_834 g whether petitioner is liable for the accuracy-related_penalty under sec_6662 adeguate disclosure and reasonable basis petitioner contends that he is not liable for the accuracy- related penalty under sec_6662 for negligence and substantial_understatement_of_income_tax because he adequately disclosed his positions relating to the lottery winnings and net_operating_loss on a statement attached to his return and had a reasonable basis for those positions sec_6662 b sec_1_6662-3 income_tax regs we agree to the extent described below taxpayers are liable for a penalty under sec_6662 equal to percent of the part of the underpayment attributable to negligence or disregard of rules or regulations or to any substantial_understatement_of_income_tax sec_6662 and b and however a taxpayer is not liable for the accuracy-related_penalty under sec_6662 and b if the taxpayer adequately discloses the relevant facts affecting the item on his or her return or ina statement attached to the taxpayer’s return and has a reasonable basis for that treatment or there was reasonable_cause for the underpayment and the taxpayer acted in good_faith sec_6662 d b c sec_1_6662-3 sec_1_6664-4 a income_tax regs -- - we consider the facts and circumstances in deciding whether the taxpayer acted with reasonable_cause and in good_faith sec_6664 sec_1_6664-4 income_tax regs we conclude that petitioner acted in good_faith and was not negligent in claiming that the lottery winnings were nontaxable because when he filed his return petitioner reasonably believed that the lottery winnings he received in were nontaxable the taxpayer must disclose an item or a position on a return on a form_8275 disclosure statement or a form 8275-r regulation disclosure statement attached to the return or a gualified amended_return sec_1_6662-3 income_tax regs petitioner adequately disclosed on form_8275 attached to his return the facts relevant to the lottery winnings and he had a reasonable basis for his position relating to those winnings in contrast petitioner did not disclose facts relating to or have a reasonable basis for his treatment of the net_operating_loss_carryover we conclude that petitioner is not liable for the accuracy-related_penalty with respect to his lottery winnings but is liable for that penalty with respect to his net_operating_loss_carryover - reliance on professionals a taxpayer may be relieved of liability for the accuracy- related penalty if he or she shows that there was reasonable_cause for the understatement and that the taxpayer acted in good_faith with respect to the understatement sec_6664 sec_1_6664-4 income_tax regs petitioner contends that he is not liable for the accuracy-related_penalty under sec_6662 because he reasonably relied on the advice of tax professionals we disagree petitioner did not name any professionals or say what information he provided to them we conclude that petitioner did not rely on the advice of tax professionals and that he is liable for the accuracy-related_penalty under sec_6662 for to reflect the foregoing decision will be entered for respondent