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 ita b03 plr-100166-10 date date ty ------- legend taxpayers year year year --------------------------------------- ------- ------- ------- dear ---------------------------- this is in response to your letter dated date in your letter you requested permission to revoke an election under sec_1 d -1 c of the income_tax regulations to treat capital_gains as investment_income under sec_163 and sec_163 of the internal_revenue_code for year facts taxpayers timely filed a joint form_1040 individual_income_tax_return for year the return was prepared and reviewed by tax professionals taxpayers’ return included form_4952 investment_interest expense deduction on which they elected to treat all net capital_gains attributable to the sale of real_property as investment_income the service audited taxpayers’ income_tax returns for year year and year as a result of that audit the service determined that the real_property in question was not investment_property within the meaning of sec_163 as a result taxpayers were not entitled to deduct any investment_expenses incurred in connection with this real_property additionally taxpayers had no reason to elect to treat their net capital_gains as investment_income which is taxed at ordinary_income rates instead of capital_gains rates accordingly taxpayers seek permission to revoke the election plr-100166-10 applicable law sec_163 provides that in the case of a taxpayer other than a corporation the amount allowed as a deduction for investment_interest for any taxable_year shall not exceed the net_investment_income of the taxpayer for the taxable_year that sum of- sec_163 provides in pertinent part that investment_income means i ii iii gross_income from property_held_for_investment other than any gain taken into account under clause ii i the excess if any of- i the net gain attributable to the disposition of property_held_for_investment over the net_capital_gain determined solely by taking into account gains and losses from dispositions of property_held_for_investment plus so much of the net_capital_gain referred to in clause ii ii or if lesser the net gain referred to in ii as the taxpayer elects to take into account under this clause ii sec_1_163_d_-1 of the regulations provides that the election under sec_163 must be made on or before the due_date including extensions of the income_tax return for the taxable_year in which the net_capital_gain is recognized sec_1_163_d_-1 of the regulations provides that the election under sec_163 is revocable with the consent of the commissioner taxpayers are requesting permission to revoke the election which was based on tax_advice rendered by tax professionals this situation is analogous to those situations concerning taxpayers who have not made a particular election provided in the regulations because of inadequate or incorrect advice from knowledgeable tax professionals and are subsequently seeking extensions of time under section of the regulations revrul_83_74 1983_1_cb_112 sec_301_9100-1 through of the regulations provide the standards the commissioner uses to determine whether to grant an extension of time to make a regulatory 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 sec_301_9100-1 of the regulations 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 plr-100166-10 sec_301_9100-1 of the regulations provides that the commissioner may grant a reasonable extension of time 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_9100-3 of the regulations provides that requests for extensions of time for regulatory elections other than automatic changes covered under sec_301_9100-2 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 of the regulations provides that a taxpayer will be deemed to have acted reasonably and in good_faith if the taxpayer- requests relief before the failure to make the regulatory election is discovered by the service inadvertently failed to make the election because of intervening events beyond the taxpayer’s control failed to make the election because after exercising due diligence the taxpayer was unaware of the necessity for the election reasonably relied on the written advice of the service or reasonably relied on a qualified_tax professional and the tax professional failed to make or advise the taxpayer to make the election sec_301_9100-3 of the regulations provides that a taxpayer will not be considered to have acted reasonably and in good_faith if the taxpayer- seeks to alter a return position for which an accuracy-related_penalty could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires a regulatory election for which relief is requested was fully informed of the required election and related tax consequences but chose not to file the election or uses hindsight in requesting relief if specific facts have changed since the original deadline that make the election advantageous to a taxpayer the service will not ordinarily grant relief sec_301_9100-3 of the regulations provides that the commissioner will grant a reasonable extension of time only when the interests of the government will not be prejudiced by the granting of relief under paragraph c i the interests of the government are prejudiced if granting relief would result in a taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made i ii iii iv v i ii iii plr-100166-10 conclusion taxpayer’s election is a regulatory election as defined under sec_301 b because the due_date of the election is prescribed in regulation sec_1 d - b in this situation the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied the information and representations made by the taxpayers establish that taxpayers acted reasonably and in good_faith in fact this situation is the result of the service’s examination of taxpayers’ income_tax returns for years and the resulting disallowance of certain investment_interest expense deductions finally granting an extension will not prejudice the interests of the government taxpayers have represented that taxpayers will not have a lower tax_liability in the aggregate for all taxable years affected by the election if given permission to make the election in the appropriate amount at this time than taxpayers would have if the election were made in the appropriate amount by the original deadline for making the election accordingly the consent of the commissioner is hereby granted for taxpayers to revoke their election to treat net_capital_gain from the sale of the real_property in question as investment_income that they made on their year federal_income_tax return the extension of time to revoke this election shall be for a period of days from the date of this ruling taxpayers should enclose a copy of this letter with their amended_return for year this ruling is directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative the ruling contained in this letter is based upon information and representations submitted by the taxpayers and accompanied by a penalty of perjury statement executed by appropriate parties while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely christopher f kane branch chief branch income_tax accounting cc


t c summary opinion united_states tax_court patrick m herbert and suzanne m herbert petitioners v commissioner of internal revenue respondent docket no 16483-11s filed date patrick m and suzanne m herbert pro_se shaina e boatright for respondent summary opinion swift judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed 1references to other sections are to the internal_revenue_code applicable for the year in issue and all rule references are to the tax_court rules_of_practice and procedure pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined a dollar_figure deficiency in petitioners’ federal_income_tax for and a penalty under sec_6662 of dollar_figure after partial settlement the primary issue remaining for decision is whether dollar_figure petitioner patrick herbert received in from a subchapter_s_corporation should be treated as additional wages subject_to employment_taxes background some of the facts have been stipulated and are so found at the time they filed their petition petitioners resided in minnesota for the last six months of and in patrick herbert petitioner worked as a salesman and a manager for gopher delivery systems gopher delivery operator of a delivery and courier business in the minneapolis-st paul metropolitan area and throughout minnesota wisconsin and iowa for the second half of and for petitioner received total wages from gopher delivery as follows year amount dollar_figure big_number in petitioners purchased the courier business from the owners of gopher delivery and they continued to operate it through petitioners’ courier business was operated as a subchapter_s_corporation under the name h h transportation inc h h petitioner owned and petitioner suzanne e herbert owned of the stock in h h petitioner was president and general manager and a full-time_employee of h h petitioner suzanne herbert was not employed by h h and was not involved in h h’s day-to-day business activities in and petitioner received from h h total wages as follows year amount dollar_figure big_number big_number to make deliveries in its three delivery trucks a 26-foot dock truck a foot flatbed f150 turbo diesel truck and a cargo van h h used contract truck drivers whom petitioner hired petitioner generally paid the truck drivers weekly with checks written on one of h h’s three bank accounts in h h received gross_receipts of dollar_figure from its delivery and courier business an analysis of h h’s bank accounts reflects payments in to contract truck drivers in the total amount of dollar_figure which is also reflected in h h’s quickbook records over and above funds paid to the contract truck drivers for making deliveries for dollar_figure per h h’s quickbook records petitioner often would make supplemental cash payments to the truck drivers to compensate them for making repairs on h h’s trucks with regard to the cash payments to the truck drivers petitioner and h h did not receive receipts from the truck drivers and petitioners’ records are not complete as to the amount of cash actually paid to the truck drivers in during petitioners’ operation of h h up to some point in h h either lost money every year or earned little income in petitioners finally closed the business down after losing their home on account of losses_incurred in the business and their inability to make payments on a home equity loan obtained in to finance their purchase of the business during petitioner received from h h approximately dollar_figure that was deposited into petitioners’ bank account h h and petitioner treated only dollar_figure thereof as wages subject_to employment_taxes petitioner’s receipt of this approximate dollar_figure is evidenced by an analysis of petitioners’ bank account petitioner used a portion of the h h funds transferred into petitioners’ bank account to pay with cash expenses of h h such as the supplemental payments to the truck drivers for truck repairs h h’s bank records and h h’s quickbook records show payment of dollar_figure in rent expenses the accountant whom petitioner and h h used to prepare petitioners’ and h h’s tax returns for and did not properly account for a number of h h’s expenses in h h hired a new accountant h h’s form_1120s u s income_tax return for an s_corporation as filed with respondent reported the total gross_receipts of dollar_figure and reported many business_expenses as costs of goods sold cogs in the total amount of dollar_figure the reported dollar_figure cogs included dollar_figure for contract labor expenses dollar_figure for fuel expenses a franchise fee of dollar_figure and subcontractor fees of dollar_figure the dollar_figure reported for contract labor expenses is approximately dollar_figure more than the dollar_figure reflected in h h’s quickbook records for contract labor expenses also claimed on h h’s tax_return were miscellaneous transportation expense deductions totaling dollar_figure which consisted of vehicle leases payments of dollar_figure vehicle gas expenses of dollar_figure auto repair expenses of dollar_figure and other expenses of dollar_figure after additional deductions which included rent of dollar_figure and the reported wages for petitioner of dollar_figure h h’s form_1120s reported net_income of dollar_figure and pursuant to sec_1366 the reported dollar_figure net_income flowed through to petitioners’ joint individual_income_tax_return on their schedule e supplemental income and loss of their joint individual federal_income_tax return petitioners reported the dollar_figure flowthrough h h income and the dollar_figure as petitioner’s h h wages subject_to employment_taxes the approximate dollar_figure balance of the funds that in were transferred from h h into petitioners’ bank account dollar_figure less dollar_figure equals dollar_figure 2on their joint individual federal_income_tax return petitioners actually reported wages for petitioner from h h of dollar_figure for purposes of our opinion we generally use the dollar_figure h h reported was not treated by h h and petitioners as taxable wages or salary to petitioner rather h h and petitioners treated the dollar_figure as cash that petitioner used to pay expenses of h h on audit respondent determined that the dollar_figure which h h and petitioner reported as petitioner’s wages was unreasonably low and that dollar_figure of h h’s funds transferred into petitioners’ bank account in should be treated as petitioner’s h h wages subject_to employment_taxes accordingly respondent increased petitioner’s h h wages by dollar_figure dollar_figure less dollar_figure equals dollar_figure consistent with this adjustment to petitioner’s wages respondent also increased h h’s business_expense deduction for wages paid to petitioner by dollar_figure as a result respondent’s adjustment to petitioner’s h h wages produced only an increase in petitioners’ employment_taxes not an increase in petitioners’ income_tax on audit respondent also disallowed for duplication dollar_figure of the reported cogs contract labor expenses and all dollar_figure of the reported cogs vehicle fuel expense together totaling a disallowance of dollar_figure and thereby reduced h h’s allowable deduction for cogs to dollar_figure dollar_figure less dollar_figure equals dollar_figure of the total dollar_figure miscellaneous transportation_expenses claimed on h h’s tax_return respondent disallowed dollar_figure which included dollar_figure for lease payments dollar_figure for additional fuel expenses dollar_figure for repairs and dollar_figure of other expenses lastly on audit respondent reduced h h’s business_expense deduction for rent to dollar_figure a disallowance of dollar_figure from the dollar_figure reported rent expense h h wages discussion petitioners contend that h h lost money every year and that petitioner used most of the approximately dollar_figure transferred from h h during into petitioners’ bank account to pay additional h h business_expenses with cash petitioner argues that over and above his reported dollar_figure in h h wages the h h funds he received were not used by him for personal purposes and should not be treated as wages subject_to employment_taxes petitioner acknowledges that he lost misplaced or never kept receipts for many h h expenses he paid with cash and therefore that they were not properly 3on audit respondent made a number of additional adjustments which have been settled by the parties and are not discussed herein recorded in h h’s quickbook records and were not reflected on h h’s tax_return respondent notes that for employment_tax purposes shareholder employees of s_corporations have an incentive to treat corporate payments to shareholders as something other than compensation_for services rendered whether amounts paid to shareholders are to be treated as compensation_for services ie as wages or salary and subject_to employment_taxes involves a question of fact david e 668_f3d_1008 8th cir brewer quality homes inc v commissioner tcmemo_2003_200 aff’d 122_fedappx_88 5th cir to support his dollar_figure increase in petitioner’s h h wages respondent relies largely on one year when petitioner was paid_by gopher delivery wages of dollar_figure and on petitioners’ burden_of_proof we note that respondent does not argue that petitioner’s reported wages for gopher delivery and h h in years before were unreasonably low we believe and accept petitioner’s testimony that he in fact paid significant h h expenses with cash using funds received from h h for example petitioner credibly testified that after finishing deliveries truck drivers often would assist with repairs on the trucks and that he would pay the drivers cash for their assistance no evidence indicates any unusual personal_use by petitioners of the funds in question received from h h in spite of the limited evidence before us we believe it improper and excessive to charge petitioner with receipt from h h in of dollar_figure in additional wages however we also believe petitioner’s reported h h wages of dollar_figure are unreasonably low to estimate what portion of the funds petitioner received from h h in is to be treated as wages we believe it appropriate to average petitioner’s wages for through and to use the average wage amount as the total for petitioner’s h h wages subject_to employment taxes--namely dollar_figure see 178_f2d_115 6th cir we thus conclude that an additional dollar_figure dollar_figure less reported wages of dollar_figure equals dollar_figure should be treated as wages petitioner received from h h in and is subject_to employment_taxes 4using an annualized wage for of dollar_figure petitioner received total wages from h h during through of dollar_figure which divided by equals dollar_figure on brief respondent suggests that his revenue_agent did an informal internet search of compensation paid to managers of delivery and courier businesses however no documentary or other evidence of such an internet search was offered into evidence respondent’s revenue_agent did not testify disallowed expenses sec_162 allows a deduction for ordinary and necessary business_expenses paid_or_incurred in carrying_on_a_trade_or_business however a taxpayer is required to maintain adequate_records sec_6001 sec_1_6001-1 income_tax regs and the commissioner’s determination in a notice_of_deficiency is presumed correct further taxpayers generally bear the burden_of_proof to substantiate claimed expenses rule a 503_us_79 292_us_435 290_us_111 because they provided insufficient documentation to respondent during the audit petitioners do not qualify for a shift in the burden_of_proof under sec_7491 cogs--disallowed dollar_figure dollar_figure contract labor and dollar_figure fuel in their posttrial brief for lack of substantiation petitioners state that they concede respondent’s dollar_figure reduction to h h’s cogs h h is allowed a total cogs deduction for of dollar_figure transportation expenses--dollar_figure dollar_figure lease payments dollar_figure fuel expenses dollar_figure repairs and dollar_figure other of the total dollar_figure miscellaneous transportation expense deduction claimed on h h’s tax_return respondent disallowed dollar_figure which included dollar_figure lease payments dollar_figure fuel expenses dollar_figure repairs and all dollar_figure other expenses on brief petitioners state that they no longer dispute respondent’s disallowance of the dollar_figure relating to lease payments with regard to respondent’s disallowance of dollar_figure for fuel and dollar_figure for repair expenses petitioners on brief claim to have found and made available to respondent copies of receipts that would support an additional dollar_figure in fuel expenses over the dollar_figure respondent allowed and dollar_figure in repair expenses over the dollar_figure respondent allowed for settlement purposes the court encouraged respondent to consider petitioners’ alleged new receipts relating to fuel and repair expenses the parties were not able to reach a settlement the alleged new receipts are not in evidence and are not evidence we can consider at this time no evidence regarding the disallowed other expenses of dollar_figure has been offered we sustain respondent’s disallowance of the dollar_figure in transportation_expenses rent expenses--dollar_figure at trial petitioners admitted that the dollar_figure reported on h h’s federal tax_return for rent expenses was excessive h h’s bank and quickbook records substantiate payment of only dollar_figure in rent expenses petitioners have not produced lease agreements or receipts to substantiate additional rent expenses we sustain respondent’s disallowance of dollar_figure in claimed rent expenses sec_6662 penalty respondent’s adjustments we sustain herein satisfy respondent’s burden of production under sec_7491 petitioner effectively acknowledges that h h’s inadequate and often inconsistent records support imposition of the sec_6662 penalty we sustain respondent’s imposition of the sec_6662 penalty decision will be entered under rule


department of the treasury internal_revenue_service washington d c cc el d-122746-98 uilc dollar_figure number release date memorandum for southern california district_counsel attn miriam howe assistant district_counsel from assistant chief_counsel disclosure litigation subject administrative claim under sec_7431 legend taxpayer husband taxpayer wife taxpayer husband’s girlfriend by letter dated date addressed to the commissioner of internal_revenue_service and the southern california and southwest district directors taxpayer husband through his attorneys submitted an administrative claim for unauthorized disclosure of return_information under sec_7431 and the federal tort claims act u s c as well as improper conduct by an agent under sec_7433 the federal tort claims act and the fourth and fifth amendments to the constitution of the united_states based on discussions between thomas carter chief branch disclosure litigation office_of_chief_counsel and miriam howe assistant district_counsel southern california district it was agreed that the southern california district_counsel office would respond to the sec_7431 and sec_7433 claims this memorandum contains our recommendations regarding taxpayer husband’s sec_7431 claim further it is our understanding that the office of assistant chief_counsel general legal services gls will issue a response to the federal tort claims act claim directly to taxpayer husband’s attorneys our understanding of the facts in this matter is based on taxpayer husband’s letter and our conversations with attorneys in the southern california district_counsel and southwest district_counsel offices based upon this understanding it is our view that the technically and legally correct conclusion is that the taxpayer husband has no actionable claim under sec_7431 however as we indicated to you due to cc el d the nature of the allegations contained in taxpayer husband’s letter we referred the letter to the office of treasury_inspector_general_for_tax_administration tigta for its consideration given this referral we would recommend that the district consult with tigta before responding to taxpayer husband’s administrative claim finally we note that taxpayer husband’s letter raises questions as to certain information included in the information_document_request idr and about the mailing of the idr to taxpayer wife’s address while the answers to these questions would not affect our disclosure response they may be relevant to the district’s overall consideration of taxpayer husband’s claim our suggested language regarding the sec_7431 administrative claim is as follows your date administrative claim seeks actual damages under sec_7431 for the improper disclosure and characterization of taxpayer girlfriend as taxpayer husband ’s girlfriend to taxpayer wife sec_7431 of the internal_revenue_code provides civil remedies for inter alia the unauthorized disclosure of return and or return_information for a claim to exist under this code section a taxpayer must establish that an officer_or_employee of the united_states knowingly or by reason of negligence disclosed a return or return_information with respect to a taxpayer in violation of any provision of sec_6103 sec_6103 sets forth the general_rule that tax returns and return_information shall be confidential and shall not be disclosed by service employees or certain other persons with access to such information except as authorized by title_26 see church of scientology of california v i r s 484_us_7 the term return_information is defined in pertinent part as a taxpayer's identity the nature source or amount of his income payments receipts deductions exemptions credits assets liabilities net_worth tax_liability tax withheld deficiencies overassessments or tax_payments whether the taxpayer's return was is being or will be examined or subject_to other investigation or processing or any other data received by recorded by prepared by furnished to or collected by the secretary with respect to a return or with respect to the determination of the existence or possible existence of liability or the amount thereof of any person under this title for any_tax penalty interest fine forfeiture or other imposition or offense sec_6103 cc el d your letter indicates that the service was auditing a jointly filed income_tax return of taxpayer husband and wife the date information_document_request idr which was prepared and issued in furtherance of that audit and addressed to taxpayer husband and wife is return_information of taxpayer husband and wife because it was prepared and issued with respect to the liability or possible liability of taxpayer husband and wife sec_6103 states that a joint_return shall upon written request be open to inspection by or disclosure to either of the individuals with respect to whom the return is filed further sec_6103 states that return_information with respect to any taxpayer may be open to inspection by or disclosure to any person authorized by this subsection to inspect any return of such taxpayer accordingly since the idr is return_information of taxpayer husband and wife relating as it does to the service’s audit of the jointly filed return sec_6103 e b and e provide authorization for the disclosure of the return_information in the idr to taxpayer wife see generally britt v internal_revenue_service u s t c cch d d c 921_f2d_729 7th cir 818_f2d_536 6th cir see also sec_6103 which allows the disclosure of a return or return_information in an administrative_proceeding pertaining to tax_administration if the taxpayer is a party to the proceeding or the proceeding arose out of or in connection with determining the taxpayer’s civil or criminal liability an audit such as the one that was performed with regards to taxpayer husband and wife is an administrative_proceeding under sec_6103 if you have any questions please contact branch at


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 fip b02 plr-115090-18 date date legend taxpayer operating partnership llc partnership property city --------------------------------------- ----------------------- -------------------------------------- ---------------------------------- -------------------------------------------- ---------------------- ---------------------------------------------- agency --------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- - ------------------------ participation_agreement ------------------------------------------- subsidy agreement ----------------------------------------------------------------------------------------------------------- --------------------------------------------------------------- --------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- ---------------- date date --------------------------- -------------------------- plr-115090-18 date date date taxable_year state state state state a b c d e f g h i j -------------------- -------------------------- ---------------------- ------- -------------- -------------- ------- -------------- ------------ ---------- ----- ---- ----- ---- ----- ---- ----- ---------------- dear ----------------- this letter is in reply to a letter dated date in which taxpayer requests a ruling in connection with its status as a real_estate_investment_trust reit under sec_856 of the internal_revenue_code specifically taxpayer has requested a ruling that pursuant to the authority of sec_856 a cash payment received in plr-115090-18 exchange for restricting certain apartment units to below market rental rates will be considered as qualifying_income for purposes of sec_856 and c facts taxpayer is a state corporation that elected to be treated as a reit beginning with its taxable_year ended date taxpayer’s annual_accounting_period is the calendar_year and its method_of_accounting is the accrual_method taxpayer owns a a general_partner interest directly in operating partnership a state limited_partnership and a b interest indirectly through a wholly-owned subsidiary operating partnership through the c ownership of several disregarded entities owns c of llc a state limited_liability_company which is also disregarded for federal_income_tax purposes llc owns a d partnership_interest in partnership a state limited_partnership as general_partner partnership owns property a collection of more than e apartment homes in an apartment complex in city the original redevelopment of property was financed through a series of bonds issued by agency on date and date in connection with the bond issuances the agency and partnership entered into certain regulatory agreements and a participation_agreement that required partnership to make available f of the apartment units equivalent to g units to occupants of low_or_moderate_income until date upon that date partnership was no longer required to provide below market rate housing or affordability protections but if property continued to be operated on a rental basis agency had the right to rent up to g units from partnership at market rents thereby causing the units to remain at below market rents by providing a subsidy to partnership in the amount of the difference between the below market rent and the market rent for each unit to ensure the long-term availability of affordable housing in the area and to prevent the displacement of low and moderate income residents residing at property upon the expiration of the participation_agreement city and partnership entered into subsidy agreement dated date providing that partnership would maintain the current affordability levels of all g units with respect to the tenants currently residing in those units and also create permanent restrictions on h of those units so that they remain affordable to any future tenants earning up to i of city’s average median income as part of the subsidy agreement city made a payment of dollar_figurej payment to partnership the subsidy agreement references the right of the city under the participation_agreement to cause the units to remain at below market rental rates by providing a subsidy to partnership in the amount of the difference between the below market rental rate and the market rate rent for each selected unit the amount of the payment was agreed upon through a process of negotiation between city and partnership that involved projections by both parties of future market level rents and a process of discounting such future rental stream to net present_value a private appraisal firm plr-115090-18 retained by city reported that the value of permanently preserving the h units for households earning up to i of area median income is dollar_figurej to assure partnership’s compliance with the terms of the subsidy agreement partnership provided city with a promissory note for dollar_figurej no principal payment or interest is due under the promissory note and there is no maturity_date the promissory note only becomes payable if there is default under the subsidy agreement that is not cured partnership received payment on date taxpayer intends to include its share of payment in gross_income in taxable_year law and analysis sec_61 provides that except as otherwise provided by law gross_income means all income from whatever source derived under sec_61 congress intends to tax all gains or undeniable accessions to wealth clearly realized over which taxpayers have complete dominion 348_us_426 sec_856 provides that for a corporation to qualify as a reit at least percent of the corporation's gross_income excluding gross_income from prohibited_transactions must be derived from sources that include dividends interest rents_from_real_property gain from the sale_or_other_disposition of stock securities and real_property other than property in which the corporation is a dealer abatements and refunds of taxes on real_property income and gain derived from foreclosure_property commitment_fees to make loans secured_by mortgages on real_property or to purchase or lease real_property and gain from certain_sales or other dispositions of real_estate_assets sec_856 provides that for a corporation to qualify as a reit at least percent of the corporation's gross_income excluding gross_income from prohibited_transactions must be derived from rents_from_real_property interest on obligations secured_by mortgages on real_property or on interests_in_real_property gain from the sale_or_other_disposition of real_property other than property in which the corporation is a dealer dividends from reit stock and gain from the sale of reit stock abatements and refunds of taxes on real_property income and gain derived from foreclosure_property commitment_fees to make loans secured_by mortgages on real_property or to purchase or lease real_property gain from certain_sales or other dispositions of real_estate_assets and qualified_temporary_investment_income sec_856 provides that rents_from_real_property includes subject_to exclusions provided in sec_856 a rents from interests_in_real_property b charges for services customarily furnished or rendered in connection with the rental of plr-115090-18 real_property whether or not such charges are separately_stated and c rent attributable to personal_property leased under or in connection with a lease of real_property but only if the rent attributable to the personal_property for the taxable_year does not exceed percent of the total rent for the taxable_year attributable to both the real and personal_property leased under or in connection with such lease sec_856 provides that to the extent necessary to carry out the purposes of part ii of subchapter_m of the code the secretary is authorized to determine solely for purposes of such part i whether any item_of_income or gain that does not otherwise qualify under sec_856 or c may be considered as not constituting gross_income for purposes of sec_856 or c or ii whether any item_of_income or gain that otherwise constitutes gross_income not qualifying under sec_856 or c may be considered as gross_income that qualifies under sec_856 or c sec_1_856-3 provides that a reit that is a partner in a partnership is deemed to own its proportionate share of each of the assets of the partnership and to be entitled to the income of the partnership attributable to that share for purposes of sec_856 the interest of a partner in the partnership's assets is determined in accordance with the partner's capital interest in the partnership sec_1_856-4 provides that the term rents_from_real_property means generally the gross amounts received for_the_use_of or the right to use real_property of the real_estate_investment_trust the legislative_history underlying the tax treatment of reits indicates that a central concern behind the gross_income restrictions is that a reit’s gross_income should largely be composed of passive_income for example h_r rep no 86th cong 2d sess pincite 1960_2_cb_819 pincite states o ne of the principal purposes of your committee in imposing restrictions on types of income of a qualifying real_estate_investment_trust is to be sure the bulk of its income is from passive_income sources and not from the active_conduct_of_a_trade_or_business under the subsidy agreement the payment is being provided by city to partnership in exchange for preserving the affordability of certain units based on the language of the subsidy agreement the extensive appraisal report provided and the representations of taxpayer regarding the negotiations between city and partnership the amount of the payment was calculated specifically with the intent to compensate partnership for the difference between the below market rental rate and the market rental rate for specific units throughout the remaining life of property the cash payment however is not specifically enumerated as qualifying_income in sec_856 or c provided in a lump-sum the payment approximates the net present_value of the rent foregone by keeping certain units at below market rental rates the payment can therefore be considered as being in the nature of or substitute for actual plr-115090-18 rent if received by partnership in the form of monthly payments from tenants paying market rent taxpayer’s share of the payments would be qualifying_income to taxpayer under sec_856 and c therefore treating taxpayer’s share of the lump- sum payment as qualifying_income for purposes of sec_856 and c does not interfere with or impede the objectives of congress in enacting sec_856 and c conclusions based on the facts and representations set forth above we rule pursuant to the authority of sec_856 that taxpayer’s proportionate share of income from payment in taxable_year will be considered as qualifying_income under sec_856 and c this ruling's application is limited to the facts representations code sections and regulations cited herein except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular no opinion is expressed with regard to whether taxpayer or any other entity otherwise qualifies as a reit under subchapter_m of the code this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely andrea m hoffenson chief branch office of associate chief_counsel financial institutions products


jeremy m jacobs and margaret j jacobs petitioners v commissioner of internal revenue respondent docket no filed date ps own the boston bruins bruins a national hockey league franchise based in boston massachusetts during the taxable periods in issue the bruins played approximately one- half of their hockey games at their home arena in boston and approximately one-half of their hockey games at away city arenas throughout the united_states and canada the bruins stayed at hotels when visiting away cities and contracted with the hotels for the provision of pregame meals to players and team personnel ps deducted the full cost of pregame meals furnished to bruins’ players and personnel r issued to ps a notice_of_deficiency determining that the cost of pregame meals was subject_to the limitation of sec_274 held ps’ provision of pregame meals to bruins’ players and personnel at away city hotels qualifies as a de_minimis_fringe under sec_274 and therefore the cost of such meals is not subject_to the limitation of sec_274 sean m akins jeremy d spector and lauren a ross for leon st laurent and randall s trebat jr for petitioners respondent ruwe judge respondent determined deficiencies of dollar_figure and dollar_figure in petitioners’ federal_income_tax for the taxable years and respectively the sole issue for decision is whether deeridge farms hockey association deeridge a subchapter_s_corporation owned directly or indirectly by petitioners is entitled to deductions for the full amounts of expenses_incurred in providing meals to profes- sional hockey players and team personnel at hotels in cities other than boston massachusetts or whether the deduction for meal expenses is limited to under sec_274 unless otherwise indicated all section references are to the internal_revenue_code code in effect for the years in issue on date respondent filed with the court a motion to strike requesting that exhibit attached to petitioners’ reply brief along with certain portions of the reply brief be stricken on date pursuant to an order of the court petitioners filed a response objecting to respondent’s motion to strike we will issue a separate order denying re- spondent’s motion to strike jacobs v commissioner and all rule references are to the tax_court rules of prac- tice and procedure findings_of_fact some of the facts have been stipulated and are so found the first second and first amended second stipulations of fact and the attached exhibits are incorporated herein by this reference at the time the petition was filed petitioners resided in new york petitioners are the owners of the boston bruins bruins or team a national hockey league nhl franchise based in boston massachusetts petitioners own the bruins through three entities deeridge manor house hockey association llc manor house and the boston professional hockey association inc bpha deeridge was incorporated on date and has been a subchapter_s_corporation since its election on date during the taxable years in issue petitioner jeremy m jacobs owned of deeridge and petitioner margaret j jacobs owned of manor house which in turn owned of deeridge deeridge wholly owned bpha which is a massachusetts corporation on date deeridge elected to treat bpha as a qualified subchapter_s_corporation bpha owns and operates the bruins the nhl and the bruins the nhl is a professional ice hockey league formed in during the years in issue the nhl consisted of hockey teams based throughout the united_states and canada the nhl is divided into two conferences the eastern conference and the western conference the eastern conference is subdivided into three divisions the atlantic the northeast and the southeast and the western conference is subdivided into three divisions the pacific the central and the northwest during the years in issue the bruins were members of the eastern conference’s northeast division the bruins are one of the oldest and most success- ful teams in the nhl since when the bruins first joined the nhl they have won the stanley cup ie the nhl’s championship on six separate occasions as part of united_states tax_court reports their business model the bruins’ goal is to win as many hockey games as possible nhl scheduling an nhl season typically begins in september and con- cludes in june of the following year nhl seasons consist of preseason games regular season games and postseason games preseason games are played in september and early october regular season games are played in october through mid-april and postseason games are played from mid-april through june each nhl team plays a total of regular season games per season games at its hometown arena home games and games at arenas in different cities away games the nhl commissioner’s office establishes the schedule for each season in consultation with nhl teams the nhl constitution and bylaws obligate nhl teams to play regular season home and away games eight nhl teams from each conference qualify for the postseason on the basis of their regular season performance and the nhl constitution and bylaws obligate each playoff team to play both home and away games during the postseason cba -which binds the nhl requires teams to arrive in the away city at least six hours before the start of an away game the collective bargaining agreement the nhl member teams and players of member teams-requires that an nhl team travel to an away city the day before game day if the flight to the away city is greater than minutes if an nhl team fails to participate in a scheduled away game it must forfeit the game lose playoff points incur financial penalties from the nhl and indemnify the home team for loss of revenue and other expenses the bruins’ home arena for the taxable years in issue was the td gar- den in boston massachusetts and their practice and training facility was the ristuccia memorial arena in wilmington massachusetts the bruins usually travel to away city preseason games on the day of the game because the nhl does not require earlier arrival and preseason games have no playoff implications pursuant to the nhl constitution the bruins receive of revenues from regular season ticket sales for home games and no revenues from reg- ular season ticket sales for away games the bruins’ away games are tele- cast on the new england sports network and bpha earns a rights fee for the telecast jacobs v commissioner bruins’ traveling arrangements during the years in issue the bruins traveled to away games with various personnel which typically included between and players the head coach assistant coaches medical personnel athletic trainers equipment managers communications personnel travel logistics man- agers public relations media personnel and other employees traveling hockey employees during the years in issue the bruins’ traveling hockey employees traveled to every away game the bruins begin to identify and contract with prospective away city hotels soon after the nhl releases the game schedule which is typically months before the season starts the contracts between the bruins and away city hotels pro- vide for sleeping accommodations and banquet or conference rooms meal rooms where pregame meals and snacks are served the bruins select the away city hotels on the basis of the location level of service provided by the hotel and quality of food served for the pregame meals if the hotel sufficiently meets the bruins’ needs the team will typically return to the same establishment for future games in the same season or in subsequent seasons each away city hotel prepares pregame meals ie break- fast lunch or brunch and snacks that meet the players’ spe- cific nutritional guidelines to ensure optimal performance for the upcoming game and throughout the remainder of the sea- son the bruins contract in advance with each away city hotel for the provision of pregame meals and snacks and the food is made available to all traveling hockey employees the bruins initiate the meal contracting process by providing a custom meal menu to the prospective away city hotel requesting specific types and quantities of food the bruins tend to keep food options consistent at each away city hotel the bruins typically request certain concessions from the away city ho- tels including a table with keys for prekeyed rooms for expedited check-in late checkout corresponding to the game time no game day housekeeping to prevent disturbing player rest a complimentary suite for the head coach suite upgrades for the gm president athletic trainers and onsite travel coordinator and no fee for the meal room when the bruins are visiting cities that are home to other eastern con- ference teams the hotel contracts usually will include a provision guaran- teeing room availability should the bruins qualify for the postseason united_states tax_court reports to avoid players’ having gastric problems during the game the bruins always order the same quantity of food to feed all traveling hockey employees using this custom meal menu the hotel prepares and sends to the bruins a banquet event order beo which sets forth the date time meal room number of guests menu and pricing for each pregame meal the beos typically list fewer anticipated meal attendees than the actual number of meal attendees for cost reduction reasons if the beo deviates from the custom meal menu the bruins contact the hotel to have the discrepancy corrected once the beo meets the bruins’ needs the team accepts the offer set forth in the beo by executing the docu- ment and returning it to the hotel for a countersignature the meal room is provided to the bruins at no extra cost and the meal rooms are set up similarly at each hotel-usu- ally round tables with chairs and buffet stations where food and beverages are available for self-service for privacy rea- sons the bruins request that the location of the meal room not be disclosed to the public and the meal room is acces- sible only to traveling hockey employees waiters waitresses and dining captains the day before an away game on the day before an away game the bruins’ traveling hockey employees take a charter flight to the away city and check in to the away city hotel bruins players have an p m curfew on the night before a game depending on how early the team arrives on the day before an away game the players will use the time before curfew to eat a meal rest receive treatments from the training staff or complete strength and conditioning workouts game day morning on the morning of an evening away game the bruins players have a mandatory breakfast between and a m the pregame breakfast takes place in the meal room assigned to the team by the hotel pursuant to the terms of the contract entered into by the bruins and the hotel the as discussed more fully infra p the bruins will occasionally play away games in the afternoon rather than in the evening on these occa- sions the meal schedule will differ jacobs v commissioner traveling hockey employees are provided an itinerary for each away game which details the time and location of meals breakfast is made available to all traveling hockey employees and attendance is mandatory for all players players may be fined or scratched from participating in games if they are late to or absent from breakfast aside from nutrition breakfast also provides the bruins with a chance to conduct team business bruins players will meet with coaches during breakfast-either one-on-one or in small groups-to discuss strategy and review game film the public relations staff also attends breakfast where they meet with players concerning anticipated media inquiries inter- views or other public-facing issues bruins players also meet with staff at breakfast to receive game tickets for family and friends coaches trainers and management also use break- fast to meet amongst themselves and make roster adjust- ments because of illness injury strategy or performance issues following breakfast the bruins typically board a charter bus and travel to the opponent’s arena or practice facility to practice for the upcoming game on occasion if the head coach determines that players are fatigued and in need of extra rest the team will skip its postbreakfast practice and instead conduct meetings at the hotel to review game film and discuss strategy game day afternoon when the bruins return from the postbreakfast practice they have lunch between and p m local time which like breakfast is made available to all traveling hockey employees lunch is identified in the bruins’ travel itinerary and is held in the designated meal room and attendance is mandatory for all players at lunch the bruins’ coaches may conduct small_group and or one-on-one meetings with players and the public relations staff may meet with players to discuss anticipated media inquiries interviews and public-facing issues after lunch bruins’ players are afforded free time which is usually used to rest before the game the bruins are also provided an afternoon snack which generally is between and p m local time before evening away games like breakfast and lunch the pregame snack is identified in the united_states tax_court reports travel itinerary and takes place in the designated meal room however unlike breakfast and lunch it is not mandatory for bruins’ players to attend or eat the pregame snack afternoon game schedule the than rather evening and on certain occasions the bruins will play away games in the afternoon the abovementioned schedule will be altered in these instances a pregame brunch replaces both the breakfast and lunch held in advance of evening games the pregame brunch takes place between a m and p m depending on the time of the afternoon game as with breakfast and lunch pre- ceding away evening games the pregame brunch before away afternoon games is made available to all traveling hockey employees is mandatory for bruins’ players is identified in the travel itinerary and involves meetings strategy sessions film review and other game preparation and media-related activities other hotel activities in addition to lodging meals and meetings the bruins use away hotels for other team-related activities for instance the team’s athletic trainers use hotel space to provide players with medical treatment physical therapy massages and strength and conditioning training it is important that each bruins player receive proper medical treatment and strength and conditioning training to decrease the likelihood of injury and maximize athletic performance the treatments and strength and conditioning training are provided to the players in different areas of the away city hotel including suites player rooms the fitness center and the pool and hot tubs game and postgame activities after the pregame snack or brunch in the case of an after- noon away game and two hours and minutes before game time the bruins’ traveling hockey employees board a charter bus and depart for the opponent’s arena upon arrival at the opponent’s arena the players stretch and dress in their uni- forms for the game an nhl game consists of minutes of playing time and lasts approximately minutes from start jacobs v commissioner to finish after the conclusion of the game the bruins will typically remain at the opponent’s arena for approximately one hour to shower change clothes and meet with the media the bruins’ traveling hockey employees then board a charter bus and travel to the airport to fly back to boston or to the next away city tax returns petitioners timely filed their federal_income_tax returns for the taxable years and deeridge electronically filed forms 1120s u s income_tax return for an s cor- poration for the taxable years and claiming meal expense deductions of dollar_figure and dollar_figure respectively for pregame meals provided to the bruins’ traveling employees while at away city hotels respondent issued a notice_of_deficiency dated date determining deficiencies of dollar_figure and dollar_figure in petitioners’ federal_income_tax for the taxable years and respectively the deficiencies result from respond- ent’s disallowance of of deeridge’s claimed deductions for meal expenses provided to the bruins’ traveling hockey employees in cities other than boston petitioners timely filed a petition with this court disputing respondent’s deter- mination opinion the issue for decision is whether petitioners through bpha and deeridge are entitled to deduct the full cost of pregame meals provided to the bruins’ traveling hockey employees while at away city hotels or alternatively whether sec_274 limits this deduction to of the expenses for such meals petitioners argue that sec_274 does not limit deductions for the cost of pregame meals provided at away city hotels because the meals qualify as a de_minimis_fringe under sec_274 and alternatively an expense for entertainment sold to cus- tomers under sec_274 respondent argues that none of the exceptions to sec_274 applies to the bruins’ respondent’s adjustments in the notice_of_deficiency do not disallow claimed meal expense deductions associated with meals provided to the bruins’ players and staff at the td garden in boston massachusetts united_states tax_court reports provision of pregame meals and therefore the limitation applies the commissioner’s determinations in the notice of defi- ciency are generally presumed correct and the taxpayers bear the burden of proving that the determinations are incor- rect rule a 290_us_111 deductions are a matter of legislative grace and the taxpayers bear the burden of proving that they are entitled to the claimed deductions 503_us_79 292_us_435 sec_162 allows as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business sec_274 dis- allows a deduction for certain meal and entertainment_expenses otherwise deductible under sec_162 unless the expenses are associated with the active_conduct of the tax- payer’s trade_or_business respondent does not challenge that the bruins’ pregame meal expenses are associated with the active_conduct of petitioners’ trade_or_business if the deduction for meal expenses is not disallowed by sec_274 then sec_274 imposes a limita- tion on the deduction for meal expenses unless an exception applies sec_274 provides in pertinent part sec_274 only percent of meal and entertainment_expenses allowed as deduction - in general -the amount allowable as a deduction under this chapter for- a any expense for food or beverages and b any item with respect to an activity which is of a type gen- erally considered to constitute entertainment amusement or recre- ation or with respect to a facility used in connection with such activity shall not exceed percent of the amount of such expense or item which would but for this paragraph be allowable as a deduction under this chapter exceptions -paragraph shall not apply to any expense if- a such expense is described in paragraph or of subsection e b in the case of an expense for food or beverages such expense is excludable from the gross_income of the recipient under sec_132 by reason of subsection e thereof relating to de_minimis fringes jacobs v commissioner petitioners argue that the bruins’ provision of pregame meals to traveling hockey employees at away city hotels qualifies for the de_minimis_fringe exception under sec_274 or alternatively as expenses for entertainment sold to customers under sec_274 we first address petitioners’ argument that pregame meals meet the de_minimis_fringe exception i de_minimis_fringe exception petitioners are entitled to deduct the full cost of pregame meals provided to the bruins’ traveling hockey employees if the meals meet the de_minimis_fringe exception see sec_274 sec_132 as a preliminary matter sec_132 requires that access to the eating facility is available on substantially the same terms to each member of a group_of_employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees for the years in issue a highly_compensated_employee was one who received compensation exceeding dollar_figure see sec_132 notice_2009_94 2009_50_irb_848 notice_2008_102 2008_2_cb_1106 the bruins provided pregame meals to all trav- eling hockey employees and we find this classification ie bruins employees traveling to away cities to perform busi- ness duties to be a reasonable classification given the nature of the team’s business petitioners provided credible testi- mony that the pregame meals were made available to all bruins’ traveling hockey employees-highly compensated nonhighly compensated players and nonplayers-on substantially the same terms petitioners also provided testi- mony which we find credible that any discrepancy between anticipated and actual meal attendees was a function of cost reduction concerns and not discrimination we therefore hold that the bruins’ provision of pregame meals to traveling sec_274 cross-references sec_274 which provides entertainment sold to customers -expenses for goods or serv- ices including the use of facilities which are sold by the taxpayer in a bona_fide transaction for an adequate_and_full_consideration in money or money’s worth sec_132 does not affect this case because it specifically has no appli- cation to sec_132 united_states tax_court reports hockey employees satisfies the nondiscriminatory manner requirement of sec_132 employee meals provided in a nondiscriminatory manner constitute a de_minimis_fringe under sec_132 if the eating facility is owned or leased by the employer the facility is operated by the employer the facility is located on or near the business_premises of the employer the meals furnished at the facility are provided during or imme- diately before or after the employee’s workday and the annual revenue derived from the facility normally equals or exceeds the direct operating costs of the facility the revenue operating cost test sec_132 106_tc_343 sec_1 a income_tax regs we will address each requirement in turn a eating facility is owned or leased by employer for employee meals at an employer-operated eating facility to qualify as a de_minimis_fringe under sec_274 and sec_132 the regulations require that the employer-oper- ated eating facility be owned or leased by the employer sec_1_132-7 income_tax regs the regulations do not define the word lease it is a ‘fundamental canon of statutory construction’ that ‘unless otherwise defined words will be interpreted as taking their ordinary contemporary common meaning ’ sandifer v u s steel corp 571_us_220 quoting 444_us_37 114_tc_72 a lease is commonly defined as a con- tract by which a rightful possessor of real_property conveys the right to use and occupy the property in exchange for consideration black’s law dictionary 9th ed although the beos and hotel contracts entered into between the bruins and the away city hotels are not specifi- cally identified as leases the substance of these contracts indicates that the bruins are paying consideration in exchange for the right to use and occupy the hotel meal rooms the bruins’ execute beos and hotel contracts with each away city hotel to occupy meal rooms and determine petitioners do not contend that they own the away city hotel meal rooms jacobs v commissioner what types of food are served and the beos specify the dates and times of the meals and the anticipated number of attendees the bruins do not provide separate consideration for the rental of the meal rooms however the meal rooms are essential to the bruins’ away city business operations and the hotels agree to provide the meal rooms free of charge because the bruins spend money for lodging and food the bruins dictate several aspects regarding the setup of the meal rooms such as the furnishings and the presence of audiovisual equipment or a whiteboard the bruins also require the hotel to keep the location of the meal room pri- vate from the general_public by refraining from posting any identifying information about the bruins’ use of the room the evidence establishes that the bruins contract with away city hotels for the right to use and occupy meal rooms to conduct team business and therefore these agreements are substantively leases b operated by the employer for employee meals at an employer-operated eating facility to satisfy the de_minimis_fringe exception under sec_132 the eating facility must be operated by the employer see sec_1_132-7 income_tax regs sec_1_132-7 income_tax regs provides the following guidance operation by the employer -if an employer contracts with another to operate an eating facility for its employees the facility is considered to be operated by the employer for purposes of this section if an eating facility is operated by more than one employer it is considered to be operated by each employer the bruins contract with each away city hotel regarding the operation of the meal rooms as well as food preparation and service several weeks before the bruins travel to the away city hotel they provide meal requirements to the hotel the away city hotel then prepares a beo setting forth the date time designated meal room number of guests menu and per-person pricing for each meal ordered the bruins will either contact the hotel if changes to the beo are needed or accept the offer set forth in the beo by exe- cuting the beo and returning it to the hotel for a countersig- nature the beos also typically provide for the furnishings and setup of the meal room and the hotel staff that will united_states tax_court reports assist in preparing and serving the food the bruins agree to pay a fee for each meal and a service fee of up to of the cost of the meals we find that by engaging in this process with away city hotels the bruins are contract ing with another to operate an eating facility for its employees see sec_1_132-7 income_tax regs c business_premises for employee meals at an employer-operated eating facility to qualify as a de_minimis_fringe sec_132 requires that the eating facility be located on or near the business_premises of the employer see also sec_1_132-7 income_tax regs congress intended a commonsense approach when making a determination regarding an employer’s business_premises lindeman v commissioner respondent argues that petitioners have not substantiated that the bruins contracted with away city hotels to operate meal rooms specifically respondent argues p etitioners did not note to the court the repeated in- stances that the beos as well as the eventual bills checks and invoices show sales_taxes were imposed on the food charges such assessments demonstrate that the beos were not contracts for services but instead in form and substance meal purchase orders respondent concludes that the operation of the away hotel meal rooms does not reflect the operation of an established and fixed food preparation and or eating facility but only the purchase of a few meals on an individual day to be held in a pri- vate room we find no merit to this argument sec_119 provides in pertinent part sec_119 meals_and_lodging furnished to employee his spouse and his dependents pursuant to employment -there shall be excluded from gross_income of an employee the value of any meals or lodging furnished to him his spouse or any of his dependents by or on behalf of his employer for the convenience_of_the_employer but only if- in the case of meals the meals are furnished on the business_premises of the employer or in the case of lodging the employee is required to accept such lodging on the business_premises of his employer as a condition of his employment the texts of sec_119 and sec_132 both use the phrase business_premises however the caselaw relevant to our analysis discusses busi- ness premises in the context of sec_119 and not sec_132 because congress has not directed us otherwise we construe the phrase business_premises to connote the same meaning in both code provisions see w nat’l mut ins co v commissioner 102_tc_338 aff ’d 65_f3d_90 8th cir neither party argues to the contrary jacobs v commissioner t c an employer’s business_premises is a place where employees perform a significant portion of duties or where the employer conducts a significant portion of busi- ness 71_tc_216 aff ’d 614_f2d_398 5th cir it is not necessary for an eating facility to be located in an employer’s principal struc- ture for it to be considered on the business_premises id whether an eating facility is located on or near the business_premises of an employer is a factual issue and consideration must be given to the employee’s duties as well as to the nature of the employer’s business id citing lindeman v commissioner t c pincite see also 85_tc_731 an inquiry regarding business_premises infers a functional rather than spatial unity and is not limited by questions of geography or quantum of business activities 585_f2d_1060 ct_cl this is not the first time we have been asked to decide whether rented hotel space constitutes a taxpayer’s business_premises in mabley v commissioner tcmemo_1965_323 tax ct memo lexis at we held that a rented hotel suite used for daily executive lunches con- stituted part of a company’s business_premises in mabley the island creek coal co decided to hold daily executive luncheon conferences at a suite inside the prichard hotel to provide for daily contact among the president and his staff members in order that all might keep informed as to the activities of all departments id tax ct memo lexis at the leased suite consisted of a dining room a recep- tion room a toilet and a closet id at the luncheon meetings were held pincite p m or sometimes began earlier or later and lasted from one to three hours and frequently lasted longer each staff member was required to attend the daily meetings id at the prichard hotel agreed to provide the company meals from the hotel kitchen during regular mealtimes at current rates charged to hotel guests id at in holding that the hotel constituted the business_premises of the company we reasoned that the rented hotel suite in which the meals were furnished was acquired and actually used for the conduct of business of the company the furnishing of the meals being merely incidental id at united_states tax_court reports we conclude that away city hotels were part of the bruins’ business_premises for the years in issue in arriving at this conclusion we consider the traveling hockey employees’ performance of significant business duties at away city hotels along with the unique nature of the bruins’ business ie professional hockey see vanicek v commissioner t c pincite benninghoff v commissioner t c pincite mabley v commissioner tax ct memo lexis at first and foremost the nature of the bruins’ business requires the team to travel to various arenas across the united_states and canada and it is not feasible for the bruins to be a viable nhl franchise without participating in hockey games outside of boston the nhl constitution and bylaws obligate each nhl team to play both home and away games during the regular season and if the team qualifies postseason games not only does the nhl require teams to participate in away games but it also requires visiting teams to arrive in an away city at least six hours before the away game commences the cba imposes an additional require- ment that visiting nhl teams travel to the away city the day before game day if travel by airplane is greater than minutes furthermore if an nhl team fails to participate in an away game it must forfeit the game lose playoff points incur financial penalties imposed by the nhl and indemnify the home team for loss of revenue and other expenses there- fore an integral part of the bruins’ professional hockey busi- ness involves traveling throughout the united_states and canada to play away games as dictated by the nhl schedule the job of the bruins’ team includes playing one- half of their regular season games away from their home- town arena and the financial health of the nhl franchise- not to mention the nhl itself-would be adversely affected if teams refused to play away games staying in away city hotels is indispensable to the bruins’ preparation and is also necessary for maintaining a success- ful hockey operation and navigating the rigors of an nhl- mandated schedule the bruins are a highly respected professional hockey organization whose goals include fielding a competitive hockey team winning as many regular season games as possible qualifying for the postseason and winning the stanley cup the evidence adduced at trial establishes that away city hotels are essential to the bruins’ effective jacobs v commissioner preparation and like the taxpayer in mabley the bruins use the hotel to conduct business the away city hotels provide lodging so bruins’ players can obtain adequate rest which is essential to professional athletes playing a physical sport with games scheduled in short succession the bruins con- tract with each away city hotel to set up a private meal room and to provide meals snacks that meet the players’ specific nutritional guidelines which ensures optimal performance for the upcoming game and throughout the remainder of the season not only do the pregame meals provide essential nutrition for the players but they also serve as a forum for the bruins to maximize preparation time and conduct team business see mabley v commissioner tax ct memo lexis at concluding that a rented hotel suite con- stituted business_premises because the hotel suite in which the meals were furnished was acquired and actually used for the conduct of business of the company like the meals pro- vided in mabley the pregame meals are mandatory for players excepting the snack and provide an opportunity for bruins’ players to meet with coaches to strategize and review game film the bruins’ public relations staff uses this time to prepare players for upcoming interviews and other public- facing issues it is also a time when the players meet with staff to receive tickets for family and friends coaches trainers and management also use meal time to meet amongst themselves and make roster adjustments for a variety of reasons aside from the meal room the bruins use other areas in the away city hotels for preparation athletic trainers use hotel space to provide players with medical treatment phys- ical therapy and massages players use hotel fitness centers for strength and conditioning sessions which help decrease the chance of injury and maximize athletic performance given the nature of the nhl and the bruins’ game schedule we see no way that the team’s traveling hockey employees could perform all these necessary functions exclusively in boston the evidence at trial also establishes that the bruins could not perform all these activities at the opponent’s arena because of limited access and insufficient space and facilities we thus conclude that away city hotels are vital to the bruins’ business objective of winning hockey games and are where a significant portion of traveling hockey the united_states tax_court reports employees’ responsibilities and the bruins’ business is con- ducted see vanicek v commissioner t c pincite mabley v commissioner tax ct memo lexis at accordingly we hold that the away city hotels constituted part of the bruins’ business_premises for the years in issue respondent acknowledges that the bruins perform busi- ness activities at away city hotels however respondent argues that the traveling hockey employees’ activities at away city hotels are insignificant because the activities at away city hotels are qualitatively less important than playing in the actual hockey game and the bruins spend quantitatively less time at each away city hotel than they do at the team’s boston facilities although we agree with respondent that playing in hockey games is important to the bruins’ business it seems that the quality of play is directly related to the team’s preparation this preparation includes business activities that occur at away city hotels such as eating nutritious meals obtaining adequate rest meeting with coaches individually or in small groups to strategize reviewing game film receiving athletic treatments and mas- sages and completing strength and conditioning workouts the evidence at trial further indicates that the strength and conditioning workouts performed by the players at away city hotels provide important benefits to the players not just for the immediate game but throughout the remainder of the season without the preparatory activities that occur at away city hotels the bruins’ performance during games would likely be adversely affected furthermore respondent pro- vides no precedent to support the argument that business_premises are limited to the location where the most quali- tatively significant business activity occurs we also disagree with respondent’s argument that away city hotels cannot constitute the bruins’ business_premises because the team spends quantitatively less time at each individual away city hotel when compared to the team’s time spent at its boston facilities although the bruins do spend quantitatively less time at each individual away city hotel than they do in boston this goes to the unique nature of a professional hockey team that is required to play one-half of its games away from home it is therefore illogical for respondent to ignore the nature of the bruins’ business and the nhl and analyze the amount of time spent at each away jacobs v commissioner city hotel in isolation see vanicek v commissioner t c pincite lindeman v commissioner t c pincite respondent also provides no precedent to support the propo- sition that a quantitative comparison of time is critical to determining business_premises see adams f 2d pincite stating that determinations of business_premises limited to the geographic contiguity of the premises or to questions of the quantum of business activities on the premises are too restrictive accordingly we hold that the away city hotels constituted part of the bruins’ business_premises for the years in issue d revenue operating cost test for employee meals at an employer-operated eating facility to qualify as a de_minimis_fringe sec_132 requires that revenue derived from the employer-operated eating facility equal or exceed the direct operating costs of the facility ie the revenue operating cost test sec_132 provides that an employee entitled under sec_119 to exclude the value of a meal provided at such facility shall be treated as having paid an amount for such meal equal to the direct operating costs of the facility attributable to such meal regulations provide that an employer-operated eating facility satisfies the revenue operating cost test if the employer can reasonably determine that the meals are excludable to the recipient employees under sec_119 boyd gaming corp v commissioner t c pincite sec_1_132-7 income_tax regs meals are excludable to recipient employees under sec_119 if they are fur- nished for the convenience_of_the_employer and furnished on the business_premises of the employer sec_119 whether meals are furnished for the convenience_of_the_employer is a question of fact to be determined by an anal- ysis of all the facts and circumstances sec_1_119-1 income_tax regs meals furnished without charge to the employee will be considered for the convenience_of_the_employer if the meals are furnished for a substantial non- compensatory business reason of the employer sec_1 a i income_tax regs in making this determination we are guided by sec_1_119-1 income_tax regs which lists examples of substantial noncompensatory busi- ness reasons see boyd gaming corp v commissioner united_states tax_court reports t c pincite we further remain cognizant that if a taxpayer provides credible and uncontradicted evidence of business reasoning the court will refrain from second-guessing a tax- payer’s business judgment 177_f3d_1096 9th cir rev’g tcmemo_1997_445 the evidence establishes that the pregame meals at away city hotels are provided to the bruins’ traveling hockey employees for substantial noncompensatory business reasons the bruins provide pregame meals to traveling hockey employees at away city hotels first and foremost for nutri- tional and performance reasons meals are selected by the bruins to meet the exacting nutritional needs of professional athletes and menus are kept consistent from city to city to avoid players’ experiencing unexpected gastric problems during games the bruins also provide pregame meals to the traveling hockey employees at away city hotels because they are subject_to a busy schedule and have only limited time to prepare for an upcoming game the bruins play regular season games which include away games at locations throughout the united_states and canada the record estab- lishes that the traveling hockey employees arrive at away city hotels the day before the game or sometimes the morning of the game and spend most of their time with preparation activities such as ensuring players get adequate rest reviewing game film strategizing and making roster adjustments conducting player-coach meetings preparing for public relations inquiries providing remedial or preventative athletic treatments and completing strength and condi- tioning workouts to maintain player health and optimize performance providing meals to traveling hockey employees at away city hotels enables the bruins to effectively manage a hectic schedule by minimizing unproductive time eg finding and obtaining appropriate meals from restaurants in each city and maximizing time dedicated to activities that help achieve the organization’s goal of winning hockey games petitioners have provided credible_evidence estab- lishing the business reasons for furnishing pregame meals to traveling hockey employees at away city hotels and we will not second-guess their business judgment see id because we concluded supra p that the away city hotels were the business_premises of the bruins we need not jacobs v commissioner repeat our discussion here accordingly we hold that peti- tioners’ provision of meals at away city hotels is for the con- venience of the employer under sec_119 and therefore satisfies sec_132 revenue operating test of cost the e meals furnished during before or after employee’s workday sec_1_132-7 income_tax regs provides that the meals furnished at the facility are provided during or immediately before or after the employee’s workday respondent concedes that petitioners have satisfied this requirement we conclude that petitioners’ provision of pregame meals and snacks to the traveling hockey employees at away city hotels qualifies as a de_minimis_fringe pursuant to sec_274 accordingly petitioners are entitled to deduct the full cost of the meals without regard to the limita- tion imposed by sec_274 ii entertainment exception sec_274 exempts from the limitation of sec_274 e xpenses for goods or services including the use of facilities which are sold by the taxpayer in a bona_fide transaction for an adequate_and_full_consideration in money or money’s worth sec_1_274-2 f ix income_tax regs provides that this exception applies to a ny expendi- ture by a taxpayer for entertainment to the extent the entertainment is sold to customers in a bona_fide transaction for an adequate_and_full_consideration in money petitioners argue that t he cost of the meals that the bruins provide to their players is part of the expenses that they incur to pro- vide hockey entertainment to their fans and therefore meets this exception because as previously decided supra part i the bruins’ provision of meals to their traveling hockey employees at away city hotels satisfies the de_minimis_fringe exception of sec_274 we need not address peti- tioners’ alternative argument concerning the application of sec_274 united_states tax_court reports in reaching our decision we have considered all arguments made by the parties and to the extent not mentioned or addressed they are irrelevant or without merit to reflect the foregoing an appropriate order will be issued denying respondent’s motion and decision will be entered for petitioners f


t c memo united_states tax_court robert i redisch and pamela a redisch petitioners v commissioner of internal revenue respondent docket no filed date joseph falcone for petitioners alicia a mazurek and alexandra e nicholaides for respondent memorandum findings_of_fact and opinion buch judge respondent issued a notice_of_deficiency determining the following deficiencies and penalties with respect to the redisches’ federal_income_tax for years and unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the continued year deficiency dollar_figure big_number penalty sec_6662 dollar_figure big_number after concessions the issues remaining for consideration are whether the redisches converted their secondary residence into a rental property such that they are entitled to certain deductions including an ordinary_loss deduction and whether they are liable for accuracy-related_penalties under sec_6662 on the basis of the evidence presented at trial we hold that the redisches did not convert their secondary residence into a property_held_for_the_production_of_income and are not entitled to related deductions or an ordinary_loss deduction further they are liable for accuracy-related_penalties findings_of_fact mr and mrs redisch were married during and the years in issue mr redisch is a veterinary doctor and has been in practice over years hammock dunes is a private oceanfront community in palm coast florida hammock dunes has two golf courses two clubhouses and a variety of housing continued tax_court rules_of_practice and procedure all monetary amounts are rounded to the nearest dollar options including condominiums golf villas and single-family homes in mr redisch rented a golf villa in hammock dunes mr redisch enjoyed his stay at hammock dunes and decided to pursue purchasing real_estate within the community in date the redisches purchased a piece of property in hammock dunes for dollar_figure intending to build a home on the land when the redisches returned to hammock dunes to meet with an architect about their future home they rented an oceanfront condo during their stay after spending time in the condo the redisches decided to sell the land and buy an oceanfront condo instead they sold their land in the fall of for approximately dollar_figure the redisches purchased an oceanfront condo porto mar property in date for dollar_figure the porto mar property was a seasonal home and the redisches never intended that it be nor did it become their primary residence after purchasing the porto mar property the redisches made some cosmetic changes such as painting the condo and installing track lighting carpet and custom closets and they purchased furniture the parties stipulate that the redisches’ basis in the porto mar property is dollar_figure the redisches purchased the porto mar property for their personal_use and often spent time there with their daughter tragically the redisches’ daughter passed away in after that the redisches decided that they could no longer stay in the porto mar property rather than selling it in the redisches decided to rent it out because they believed that they could sell it later at a profit while generating cash in the short term mr redisch contacted a realtor from hammock dunes real_estate co realty company to assist him in renting out the porto mar property hammock dunes was still under development and the realty company showed potential purchasers properties within the community including those that were newly constructed mr redisch selected this company because most of the realtors lived within the hammock dunes community and he believed they would be in the best position to rent out the porto mar property the realty company also operated an information center within the community that was staffed with realtors who would provide information and tours to potential buyers mr redisch testified that he entered into a one-year contract with the realty company beginning around date the redisches intended to rent out the furnished porto mar property under a one-year lease that included the option to assume mr redisch’s golf membership mr redisch determined the monthly rental price on the basis of discussions he had with realtors that he knew and his past experience renting in the community the redisches stopped staying at the porto mar property after their daughter passed away in date they removed most of their personal belongings but they would visit to ensure the porto mar property was in suitable condition for showings the redisches did not return in part because of the memories of spending time in the porto mar property with their daughter and in part because they had agreed to keep it available to the realty company to show at any time the realty company maintained an on-call agent at all times to be available to prospective clients the redisches were not paid to keep the porto mar property available as a model but the agents would let prospective clients know that it was available to rent they changed one of the bedrooms into a child’s room at the suggestion of the realty company to appeal to potential renters that were grandparents the redisches hoped that a potential buyer would decide to construct a home in hammock dunes and rent the porto mar property during construction much as the redisches had the porto mar property was also featured in a portfolio of rental properties in the realty company’s office the redisches did not offer any evidence to show the efforts that the realtor took to market the porto mar property outside hammock dunes when the redisches returned to hammock dunes they stayed with sue barnes a friend who also owned a condominium in an adjacent building the unit had two master bedrooms and ms barnes invited the redisches to stay at her property for as long as they wanted any time they wanted the redisches had a key to ms barnes’ property and would assist her by receiving deliveries when she was away the redisches would stay at ms barnes’ property for weeks or even months but they did not pay her rent the redisches received inquiries from two potential renters however neither rented the porto mar property because one wanted to rent it for only two months and one had a large dog both of which situations conflicted with building restrictions because of lackluster interest in renting the porto mar property the redisches listed it for sale with a different agent in date the redisches still hoped to rent it out but were considering other options such as selling or leasing to own because other owners in the building were losing their properties to foreclosure and they were worried about how that would affect the price of the porto mar property mr redisch remained in contact with the agent during to try to determine why they were not receiving offers in date the redisches took the porto mar property off the market to obtain an appraisal in order to price it more competitively the porto mar property sold for dollar_figure in date the furniture in the unit sold for dollar_figure the redisches jointly filed form sec_1040 u s individual_income_tax_return for and each return was prepared by a paid return preparer and included a schedule e supplemental income and loss claiming deductions relating to the porto mar property respondent examined the returns and issued a notice_of_deficiency on date making several adjustments and determining deficiencies and accuracy-related_penalties under sec_6662 the redisches while residing in michigan timely petitioned subsequently the redisches amended their petition asserting that the sale of the porto mar property should have been reported on the form_1040 as an ordinary_loss instead of as a long-term_capital_loss as it was originally reported after concessions by both parties the only issues remaining are whether the porto mar property was converted to a property_held_for_the_production_of_income such that schedule e deductions are allowable whether the redisches are entitled to an ordinary_loss deduction on the sale of the porto mar property and whether the redisches are liable for accuracy-related_penalties under sec_6662 i burden_of_proof opinion the commissioner’s determinations in the notice_of_deficiency are generally presumed correct and taxpayers bear the burden of proving otherwise the burden with respect to a factual issue may shift to the commissioner under sec_7491 if the taxpayer introduces credible_evidence regarding the issue has complied with the necessary substantiation requirements has maintained all records and has cooperated with reasonable requests by the commissioner for witnesses information documents meetings and interviews the redisches do not argue that the burden should shift nor have they met the requirements under sec_7491 accordingly the burden remains on them ii conversion to a property_held_for_the_production_of_income generally no deduction is allowed for personal living or family_expenses however an individual can deduct all ordinary and necessary expenses paid_or_incurred during the taxable_year for the management conservation or rule a 290_us_111 sec_262 maintenance_of_property_held_for_the_production_of_income the individual bears the burden of proving that a conversion to a profit-motivated purpose occurred that burden cannot be satisfied if the profit-motivated purpose was secondary to another purpose not motivated by profit whether an individual converted his personal_property to one held_for_the_production_of_income is a question of fact that depends on the purpose or intention of the individual as gleaned from all of the facts and circumstances in8 the case of a converted residence the court often looks to five factors to determine the taxpayer’s intent the length of time the house was occupied by the individual as his residence before placing it on the market for sale whether the individual permanently abandoned all further personal_use of the house the character of the property recreational or otherwise offers to rent and sec_212 65_tc_34 murphy v commissioner tcmemo_1993_292 84_tc_809 aff’d without published opinion 800_f2d_260 4th cir offers to sell no one factor is determinative and we consider all of the facts and circumstances similarly sec_165 allows a deduction for any loss sustained during the taxable_year that is not otherwise compensated however in order for an individual to deduct such a loss the loss must be incurred_in_a_trade_or_business be incurred in any transaction entered into for profit though not connected with a trade_or_business or arise from some sort of casualty or theft an individual can claim a loss under sec_165 on property purchased or constructed as a primary residence if before its sale it is rented or otherwise appropriated to income-producing purposes and is used for such purposes up to the time of its sale dollar_figure after considering all of the facts and circumstances we find that the porto mar property was not converted to a rental property the redisches used the porto mar property for four years before abandoning personal_use of it in april grant v commissioner t c pincite 54_tc_1298 saunders v commissioner tcmemo_2002_143 aff’d 75_fedappx_494 6th cir sec_165 sec_1_165-9 income_tax regs although mr redisch testified that he signed a one-year agreement with a realty company to rent the porto mar property he did not provide any other evidence of such an agreement even if the redisches had produced the contract mr redisch stated that the efforts of the realty company to rent out the porto mar property were limited to featuring it in a portfolio kept in the company’s office and telling prospective buyers that it was available when showing it as a model it is unsurprising that this minimal effort yielded only minimal interest mr redisch did not testify regarding any other tactics that he attempted to employ to rent out the porto mar property other than getting a new real_estate agent mr redisch also did not provide any evidence beyond a copy of a multiple listing service listing of the porto mar property of the actions taken by the second agent to rent out the home accordingly we find that the redisches did not make a bona_fide attempt to rent out the porto mar property and therefore did not convert it to one held_for_the_production_of_income consequently the redisches are not entitled to deductions under sec_212 or a loss deduction under sec_165 relating to the porto mar property iii accuracy-related_penalties sec_6662 and b and imposes a accuracy-related_penalty on any portion of an underpayment_of_tax required to be shown on a return if the underpayment is due to among other reasons negligence disregard of rules or regulations or any substantial_understatement_of_income_tax respondent bears the burden of production with respect to any penalty or addition_to_tax the redisches then bear the burden of proving any defensesdollar_figure an understatement of income_tax is substantial if the understatement exceeds the greater of of the tax required to be shown on the return or dollar_figure in accordance with this opinion the redisches’ exact underpayment for each year depends on the rule_155_computations if these computations establish a substantial_understatement_of_income_tax for either year respondent has met his burden with respect to that year respondent made no showing as to negligence the redisches have failed to prove any defenses although they stated that their return was completed by a paid return preparer the redisches provided no see sec_7491 sec_6664 sec_6662 see olagunju v commissioner tcmemo_2012_119 jarman v commissioner tcmemo_2010_285 information about the paid return preparer or what information the paid return preparer used to prepare the return accordingly we sustain the penalties under sec_6662 for and if the rule_155_computations establish substantial understatements of income_tax iv conclusion on the basis of our examination of the record before us and the parties’ arguments at trial we find that the redisches are not entitled to deductions under sec_212 or a loss deduction under sec_165 for the porto mar property because they did not convert it to a property_held_for_the_production_of_income further they are liable for an accuracy-related_penalty for each year to reflect the foregoing and the concessions of the parties decision will be entered under rule