t c memo united_states tax_court robert rowan westerman petitioner v commissioner of internal revenue respondent docket no filed date robert r westerman pro_se william b mcclendon for respondent memorandum findings_of_fact and opinion haines judge petitioner petitioned the court for redetermination of a deficiency of dollar_figure and an addition_to_tax under sec_6651 of dollar_figure for the deficiency wa sec_1unless otherwise indicated all section references are to the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure amounts are rounded to the nearest dollar the result of the denial of deductions claimed on petitioner’s schedule c profit or loss from business attached to his federal_income_tax return the issues for decision after concession sec_2 for are whether petitioner is entitled to deductions for car and truck expenses travel_expenses meals and entertainment_expenses and other schedule c expenses we must further decide whether petitioner is liable for the addition_to_tax under sec_6651 findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts together with the attached exhibits is incorporated herein by this reference at the time petitioner filed his petition he resided in tennessee i background on date petitioner filed his income_tax return on date respondent sent a notice_of_deficiency for petitioner’s federal_income_tax return petitioner filed a timely petition with this court 2on brief respondent concedes that petitioner may deduct the following expenses on his schedule c dollar_figure for a date round trip flight for petitioner’s daughter dollar_figure paid to mccs recreation division for a craft table dollar_figure paid to adamos studios for studio time in california dollar_figure paid to studio musicians dollar_figure paid to hearharmony com for transcription services and dollar_figure paid to motion video inc for location shooting in philadelphia during petitioner worked as an operations research analyst at fort smith in hawaii petitioner also dabbled in the music and entertainment business recording cds and writing books before petitioner had recorded a cd with his daughter titled a father-daughter christmas and published a children’s book titled the legend of kalikimaka in petitioner began recording a second cd titled christmas hawaiian style that year petitioner also decided to remake a father- daughter christmas into a new cd titled it won’t be christmas on his federal_income_tax return petitioner deducted many of the expenses associated with recording his cds performing and selling his music and selling his books in his notice_of_deficiency respondent disallowed the following deductions expense car and truck travel meals and entertainment other total amount dollar_figure big_number big_number big_number big_number the other expenses included performance expenses of dollar_figure recording expenses of dollar_figure rehearsal studio and disk expenses of dollar_figure transcription service expenses of dollar_figure and video expenses of dollar_figure ii travel in petitioner made several trips to los angeles and philadelphia to record christmas hawaiian style and it won’t be christmas and to shoot a music video overall petitioner took seven trips in three trips to philadelphia and four trips to los angeles petitioner’s wife usually accompanied him on these trips petitioner claimed all seven trips were business trips and deducted the costs of flights hotels car rentals meals and entertainment recording and video expenses and other miscellaneous expenses on his schedule c petitioner’s philadelphia trips consisted of a 4-day trip in january in which petitioner spent two-thirds of day shooting his music video a 6-day trip in november during which petitioner his wife and their two children traveled to new york city to see a broadway play and a 3-day trip in december to reshoot the music video petitioner’s son also traveled to philadelphia for the 4-day january trip petitioner’s los angeles trips consisted of a 3-day trip in january in which petitioner spent all days recording at adamos recording studio a 3-day trip in may in which petitioner’s daughter recorded at adamos recording studio an 8-day trip in august in which petitioner spent day recording at adamos recording studio and a 10-day trip in november in which petitioner spent days recording at adamos recording studio aside from petitioner’s first trip to los angeles in january petitioner spent little time in the studio recording for instance during the may trip though petitioner had rented the recording studio for days he was present for only day of recording the remaining days were used by his daughter to record her portion of the cd similarly though petitioner recorded for day on his august trip to los angeles the remainder of the 8-day trip was spent on vacation with his wife in nashville and miami petitioner spent his time in nashville attending his daughter’s play and touring the grand old opry respondent disallowed petitioner’s deductions for travel_expenses and meals and entertainment_expenses associated with these trips iii business in hawaii petitioner also conducted business in hawaii petitioner deducted car and truck expenses related to his business activity on his schedule c however petitioner failed to maintain a log of dates and miles driven therefore respondent disallowed the deduction respondent also disallowed petitioner’s deduction for performance expenses petitioner produced receipts for expenses_incurred in repairing his guitar obtaining dental work and purchasing hair dye and sunglasses petitioner did not wear his sunglasses during his performances instead he used them mostly for driving further respondent disallowed petitioner’s deduction for recording expenses a portion of petitioner’s cd was recorded at a studio in hawaii petitioner produced atm receipts of cash withdrawals with handwritten notes on them to substantiate this recording expense respondent also disallowed petitioner’s deduction for rehearsal studio and disk expenses petitioner produced receipts from music stores and bar receipts from the warriors lounge at the hale koa hotel to substantiate the deductions i business_expense deductions opinion deductions are a matter of legislative grace and the taxpayer must prove he or she is entitled to the deductions claimed rule a 292_us_435 sec_162 provides that there shall be allowed as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business the parties stipulated that petitioner carried on a trade_or_business during the regulations specify that ordinary and necessary business_expenses include the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer’s trade_or_business sec_1_162-1 income_tax regs taxpayers are required to maintain records sufficient to establish the amounts of allowable deductions and to enable the commissioner to determine the correct_tax liability sec_6001 112_tc_183 in addition to satisfying the criteria for deductibility under sec_162 certain categories of expenses must also satisfy the strict substantiation requirements of sec_274 in order for a deduction to be allowed the expenses to which sec_274 applies include among other things traveling expenses which include expenses for meals_and_lodging while away from home and entertainment_expenses see sec_274 and if the trial record provides sufficient evidence that the taxpayer has incurred a deductible expense but the taxpayer is unable to substantiate adequately the precise amount of the deduction to which he or she is otherwise entitled the court may estimate the amount of the deductible expense and allow the deduction to that extent cohan_rule 39_f2d_540 2d cir 85_tc_731 50_tc_823 affd per curiam 412_f2d_201 2d cir sec_1_274-5t temporary income_tax regs fed reg date in these instances the court is permitted to make as close an approximation of the allowable expense as it can bearing heavily against the taxpayer whose inexactitude is of his or her own making cohan v commissioner supra pincite however in order for the court to estimate the amount of an expense the court must have some basis upon which an estimate may be made vanicek v commissioner supra pincite without such a basis any allowance would amount to unguided largesse 245_f2d_559 5th cir sec_274 overrides the cohan_rule and thus specifically precludes the court from allowing a deduction for travel_expenses entertainment_expenses gifts and expenses with respect to sec_280f listed_property including passenger automobiles unless the taxpayer substantiates by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement the amount of the expense or other item the time and place of the travel entertainment or use or date and description of the gift the business_purpose of the expense or other item and in the case of entertainment or gifts the business relationship to the taxpayer of the recipients or persons entertained a car and truck expenses travel_expenses and meals and entertainment_expenses on his return petitioner claimed a deduction for i car and truck expenses ii travel_expenses and iii meals and entertainment_expenses these expenses are subject_to the substantiation requirements of sec_274 see sec_274 280f d car and truck expenses petitioner claims a deduction for car and truck expenses of dollar_figure for passenger automobiles and any other_property used as a means of transportation are listed_property as defined by sec_280f sec_274 sec_280f accordingly a taxpayer must satisfy the strict substantiation requirements of sec_274 for car and truck expenses the taxpayer must substantiate the automobile expenses by adequate_records or other corroborating evidence of items such as the amount of each expense the time and place of the automobile’s use and the business_purpose of its use see sanford v commissioner supra pincite maher v commissioner tcmemo_2003_85 to satisfy the adequate_records requirement of sec_274 a taxpayer must maintain records and documentary_evidence that in combination are sufficient to establish each element of an expenditure or use sec_1_274-5t temporary income_tax regs fed reg date although a contemporaneous log is not required corroborative evidence to support a taxpayer’s reconstruction of the elements of the expenditure or use must have a high degree of probative value to elevate such statement to the level of credibility of a contemporaneous record sec_1_274-5t temporary income_tax regs fed reg date in the absence of adequate_records to substantiate each element of an expense a taxpayer may alternatively establish an element by his own statement whether written or oral containing specific information in detail as to such element and by other corroborative evidence sufficient to establish such element sec_1_274-5t temporary income_tax regs fed reg date petitioner determined his car and truck expenses by estimating the miles he drove in furtherance of his business petitioner testified that for weeks a year he drove approximately miles per week for his business picking up and delivering books arranging to be on radio and television and appearing at performances and book signings however petitioner failed to keep a mileage log and failed to introduce written or oral evidence beyond his testimony of the estimated miles sufficient to establish the elements required under sec_274 thus we sustain respondent’s determination with regard to the car and truck expenses travel_expenses petitioner claimed a deduction for travel_expenses of dollar_figure for petitioner introduced a printout he created from his financial software and some receipts for airfare rental cars and hotels respondent argues that petitioner has failed to substantiate that these costs were incurred in the ordinary course of petitioner’s trade_or_business only such traveling expenses as are reasonable and necessary in the conduct of the taxpayer’s business and directly attributable to it may be deducted sec_1_162-2 income_tax regs if a taxpayer travels to a destination and while at the destination engages in both business and personal activities traveling expenses to and from such destination are deductible only if the trip is related primarily to the taxpayer’s trade_or_business sec_1_162-2 income_tax regs if the trip is primarily personal the traveling expenses to and from the destination are not deductible even though the taxpayer engages in business activities while at the destination id however expenses while at the destination which are properly allocable to the taxpayer’s trade_or_business are deductible even though the traveling expenses to and from the destination are not deductible id petitioner claimed a deduction for travel_expenses associated with his seven trips to philadelphia and los angeles the record shows that the only trip on which petitioner spent most of his trip in the studio recording or filming was his january trip to los angeles therefore we find that petitioner has established a primarily business_purpose for only the january trip to los angeles the travel_expenses associated with all the other trips are not ordinary and necessary trade_or_business_expenses with respect to the january trip to los angeles we must determine whether petitioner provided adequate substantiation for these travel_expenses pursuant to sec_274 sec_274 places heightened substantiation requirements on taxpayers claiming deductions under sec_162 for any traveling expense while away from home in order to be entitled to a deduction for an expense for travel the taxpayer must show each of the following elements the amount of each separate expenditure the dates of departure and return and the number of days spent on business the place of destination by name of city or town and the business reason or expected business benefit from travel see sec_274 sec_1_274-5t temporary income_tax regs fed reg date petitioner must substantiate each element of an expenditure or use by adequate_records or by sufficient evidence corroborating his own statement see sec_1_274-5t temporary income_tax regs supra petitioner has failed to satisfy the substantiation requirements of sec_274 with respect to the deductions for travel_expenses associated with this trip petitioner failed to produce a receipt for his flight additionally petitioner testified that his wife routinely joined him on his business trips petitioner failed to provide any evidence as to whether he alone used the rental car and the hotel room or whether his wife also used them without more information regarding the use of the rental car and hotel room we sustain respondent’s determination with regard to the travel_expenses meals and entertainment_expenses petitioner reported meals and entertainment_expenses of dollar_figure respondent argues that petitioner has failed to substantiate that these costs were incurred in the ordinary course of petitioner’s trade_or_business meals and entertainment_expenses are subject_to the strict substantiation requirements of sec_274 no deduction is allowed for these expenses unless the taxpayer substantiates by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement each of the following elements the amount of each separate expenditure the date of the entertainment the name if any address or location of the entertainment the business reason for the entertainment or the nature of the business benefit derived or expected to be derived as a result of the entertainment and the nature of the business_discussion or activity and the occupation of or other information relating to the person or persons entertained including the name title or other designation sufficient to establish the business relationship to the taxpayer see sec_274 sec_1_274-5t temporary income_tax regs fed reg date petitioner produced receipts for approximately one-third of his claimed meals and entertainment_expenses and provided bank account statements for a portion of the remainder of those expenses the receipts list the amount the date and the name and address of the place of business but most indicate that petitioner was accompanied by other individuals petitioner acknowledged that his wife usually traveled with him on his business trips but he failed to indicate how many people each claimed expense covered what amount he paid for himself and what amounts were paid for third parties or the identity of the third parties furthermore the receipts fail to state an adequate business_purpose and the business relationship of the people at the meal petitioner has failed to provide adequate information relating to the person or persons entertained sufficient to establish the business relationship see sec_1_274-5t temporary income_tax regs supra therefore we sustain respondent’s determination with regard to the meals and entertainment_expenses b other expenses petitioner deducted other expenses of dollar_figure in these expenses consist of i performance expenses ii recording expenses iii rehearsal studios and disks and iv video expenses as discussed above petitioner is permitted to deduct ordinary and necessary expenses he pays or incurs during the year in carrying_on_a_trade_or_business see sec_162 petitioner however is required to maintain records sufficient to establish the amounts of his deductions see sec_6001 sec_1_6001-1 income_tax regs performance expenses at trial petitioner introduced copies of receipts and other documentation in support of his contention that he incurred performance expenses of dollar_figure these amounts consisted of guitar repair costs dental work hair dye sunglasses and miscellaneous items in general no deduction is allowed for personal living or family_expenses see sec_262 dental expenses and hair color expenses are inherently_personal see irwin v commissioner tcmemo_1996_490 affd without published opinion 131_f3d_146 9th cir thus we find that petitioner’s dental hair color and personal grooming expenses are not ordinary and necessary trade_or_business_expenses moreover petitioner did not wear his sunglasses during performances and as a result petitioner cannot claim them as a performance expense however we do find that petitioner has produced sufficient evidence to substantiate trade_or_business_expenses of dollar_figure paid to guitar tech petitioner is a musician who plays the guitar during his performances and on his cds petitioner produced receipts from guitar tech for repairs to his guitar accordingly we find that petitioner is entitled to a dollar_figure deduction for performance expenses with respect to all other performance expenses we sustain respondent’s determination recording expenses petitioner claims to have paid dollar_figure in cash for studio time in hawaii to record a portion of his album petitioner produced atm receipts of cash withdrawals with hand written notes on them as evidence of payment of these expenses atm receipts that do not identify the person to whom the cash is being paid are not enough to substantiate these claimed expenses petitioner also claimed computer training expenses of dollar_figure petitioner provided a receipt from mac made easy however the receipt failed to provide a description of the training provided without a description of the training provided the receipt fails to substantiate that the training was related to petitioner’s trade_or_business accordingly we sustain respondent’s determination with respect to the recording expenses rehearsal studio and disk expenses at trial petitioner introduced copies of receipts and other documentation to substantiate rehearsal studio and disk expenses of dollar_figure this amount consisted of purchased cds karaoke disks payment for computer training and payment to the warriors lounge as discussed above no deduction is allowed for personal living or family_expenses see sec_262 petitioner failed to explain how the cds and karaoke disks purchased were related to his trade_or_business without such an explanation we cannot find that the cds are an ordinary or necessary trade_or_business expense petitioner deducted dollar_figure for a practice studio the studio in question is the warriors lounge at the hale koa hotel petitioner submitted receipts from the lounge bar we find that these expenses are personal and may not be deducted finally petitioner claimed dollar_figure in computer training expenses petitioner introduced a receipt for dollar_figure for training on video and music editing software the remaining receipts petitioner provided do not specify what training petitioner received without a description of the training received we cannot find that the remaining payments for computer training were ordinary and necessary trade_or_business_expenses accordingly we find that petitioner is entitled to a dollar_figure deduction for rehearsal studio and disks expenses with respect to all other rehearsal studio and disk expenses we sustain respondent’s determination video expenses at trial petitioner introduced receipts to substantiate his deduction for video expenses of dollar_figure these amounts consisted of dollar_figure for location shooting and dollar_figure for a sweatshirt of this amount respondent has conceded the dollar_figure for location shooting expenses petitioner failed to establish that the purchase of the sweatshirt was not a personal_expense thus we sustain respondent’s determination with respect to the sweatshirt ii addition_to_tax respondent determined that petitioner is liable for an addition_to_tax under sec_6651 for failure to timely file his income_tax return for in general the commissioner bears the burden of production with respect to a taxpayer’s liability for additions to tax sec_7491 116_tc_438 to meet his burden of production with respect to sec_6651 respondent must come forward with sufficient evidence indicating that it is appropriate to impose the addition_to_tax higbee v commissioner supra pincite the parties stipulated that petitioner’s federal_income_tax return was filed on date petitioner’s return was due on date thus respondent has carried the burden of production with respect to the addition_to_tax under sec_6651 sec_6651 imposes an addition_to_tax for failure_to_file the return on the date prescribed determined with regard to any extension of time for filing unless petitioner can establish that the failure was due to reasonable_cause and not due to willful neglect a showing of reasonable_cause requires petitioner to demonstrate he exercised ordinary business care and prudence and nevertheless was unable to file the return by the due_date sec_301_6651-1 proced admin regs in order to avoid an addition_to_tax under sec_6651 petitioner must carry the burden of establishing reasonable_cause see higbee v commissioner supra pincite failure to timely file a tax_return is not excused by the taxpayer’s reliance on an agent and this reliance is not reasonable_cause for a late filing under sec_6651 469_us_241 petitioner testified that his accountant allegedly filed a request for an extension of time for filing his federal_income_tax return however the record is devoid of any evidence substantiating petitioner’s testimony we find that the failure to timely file a federal_income_tax return for was not due to reasonable_cause and was due to willful neglect accordingly we conclude that petitioner is liable for an addition_to_tax under sec_6651 in the amount respondent determined in reaching our holdings we have considered all arguments made and to the extent not mentioned we conclude that they are moot irrelevant or without merit to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number ------------------------------------------ ------------------------ ------------------------------- ----------------------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ----------------- ----------------------------------------------------- telephone number ---------------------- refer reply to cc psi b03 plr-131726-17 date date legend x ------------------------------------------- ------------------------------------------ y ------------------------------------------- --------------------------------- a b c d e state1 --------------------------- ---------------------- ------------------------ ------------------------- -------------------- ---------- state2 ---------- date1 ------------------------ date2 --------------------------- date3 --------------------------- date4 ---------------------- date5 ---------------------- plr-131726-17 dear ---------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x by x’s authorized representative requesting a ruling under sec_1362 of the internal_revenue_code code the information submitted states that x was incorporated under the laws of state1 on date1 and elected to be an s_corporation effective on date2 pursuant to an agreement dated date3 a b c d and e agreed to purchase interests in multiple entities including x in order to ease administrative concerns with respect to the ownership of x and the other entities a b c d and e joined together to form y on date4 under the laws of state2 with the intention that y would purchase and hold the interests in the acquired entities including x on their behalf y is treated as a partnership for federal tax purposes y first acquired an interest in x on date5 as a result of the acquisition of an interest in x by y on date5 x’s s_corporation_election terminated under sec_1362 on that date because y is an ineligible shareholder x represents that x and x’s shareholders have filed tax returns consistent with x being an s_corporation since date5 x further represents that the circumstances resulting in the termination of x’s s_corporation_election were inadvertent and were not motivated by tax_avoidance or retroactive tax planning x and each person who was or is a shareholder of x at any time since date5 agree to make any adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary with respect to such period x further represents x and y have taken all of the necessary corrective steps to rectify the termination of x’s s_corporation_election specifically y has distributed all of its stock in x to y’s owners who are all eligible shareholders sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that a small_business_corporation means a domestic_corporation that is not an ineligible_corporation and that does not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation plr-131726-17 sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation a termination of an s_corporation_election under sec_1362 is effective on or after the date of cessation sec_1362 provides that if an election under sec_1362 by any corporation was terminated under sec_1362 or the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the termination steps were taken so that the corporation is a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified under sec_1362 agrees to make the adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary for that period then notwithstanding the circumstances resulting in such termination the corporation shall be treated as an s_corporation during the period specified by the secretary based solely on the facts submitted and the representations made we conclude that x’s s_corporation_election terminated on date5 due to the purchase of stock of x by y an ineligible shareholder we conclude that this terminating event was inadvertent within the meaning of sec_1362 pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from date5 and thereafter unless x’s s_corporation_election otherwise terminated under sec_1362 for reasons not stated in this letter 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 specifically no opinion is expressed or implied regarding x’s eligibility to be an s_corporation or the validity of its s_corporation_election the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for a ruling it is subject_to verification on examination this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-131726-17 in accordance with the power_of_attorney on file with this office copies of this letter are being sent to your authorized representatives sincerely bradford r poston special counsel office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


t c memo united_states tax_court steven f and kathryn a dawson petitioners v commissioner of internal revenue respondent docket no filed date steven f dawson and kathryn a dawson pro sese timothy f salel for respondent memorandum findings_of_fact and opinion foley judge by notice dated date respondent determined the following deficiencies additions and penalty with respect to petitioners' and federal_income_tax year deficiency additions to tax penalty sec_6651 sec_6662 sec_6653 dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure -- -- dollar_figure unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure after concessions the issue for decision is whether petitioners are entitled to certain deductions relating to their horse training and breeding activity the activity for and and if petitioners are not entitled to deductions whether they are liable for additions to tax and a penalty findings_of_fact some of the facts have been stipulated and are so found the stipulation of settled issues is incorporated by this reference petitioners resided in riverside california when the petition in this case was filed petitioners were divorced in petitioners have three children jeanette joshua and ann during the years in issue steven f dawson was a full-time_employee of the southern pacific railroad where he worked the graveyard shift ie p m to a m as a pipe fitter he also devoted about hours a week to his carpet cleaning business mrs dawson who was a professional bookkeeper during the activity refers to mr and mrs dawson's horse training and breeding activity in and mr dawson's horse training and breeding activity in the years in issue maintained the books_and_records for the carpet cleaning business in mr dawson purchased some arabian horses for training and breeding after about years he sold the horses because it became apparent to him that this endeavor would not be profitable in mr dawson approached mil barton about the prospect of entering into the business of breeding and training paint horses mr barton had been actively involved in this business for more than years he was a competition judge for the american quarter horse association for years and for the american paint horse association for years mr dawson after discussing the paint horse business with mr barton purchased three paint horses one was a stud colt named hot twist the other two were brood mares named kate dillon and dynamic king bar after the sale mr dawson continued to consult with mr barton on how to train and breed the horses mr dawson who was not qualified to train horses hired mr barton in early to train hot twist in hot twist was entered and successful in several horse shows from mid-1988 through mike van leuven handled the training responsibilities mrs dawson maintained books_and_records for the activity mr dawson believed that hot twist after being adequately trained could be entered into numerous national competitions and if successful in these competitions could become a profitable stud petitioners anticipated that the stud fee from breeding hot twist with a single mare would be approximately dollar_figure mr dawson also expected to obtain cash prizes from competitions in which hot twist participated as well as revenue from the sale of foals produced by breeding hot twist with petitioners' two brood mares petitioners filed their joint income_tax return on date and mr dawson filed his individual_income_tax_return on or about date petitioners have conceded that the sec_6651 addition_to_tax for failing to file their return in a timely manner is applicable to their joint income_tax return and to mr dawson's individual_income_tax_return on date respondent issued a notice_of_deficiency disallowing petitioners' claimed deductions relating to the activity and determining additions to tax and a penalty on date petitioners filed their petition opinion sec_183 limits the deductions for an activity_not_engaged_in_for_profit sec_183 an activity_not_engaged_in_for_profit is defined as any activity for which no deductions are allowable under sec_162 or under paragraph or of sec_212 sec_183 for purposes of sec_183 a taxpayer engages in an activity for profit if he entered into the activity with the actual and honest objective of making a profit 78_tc_642 affd without published opinion 702_f2d_1205 d c cir the taxpayer's expectation of profit need not be reasonable but he or she must have a good_faith objective of making a profit 72_tc_28 sec_1_183-2 income_tax regs the determination of whether a taxpayer conducted the activity for profit is made based on the facts and circumstances of the case 72_tc_411 affd without published opinion 647_f2d_170 9th cir although the purpose of the inquiry is to ascertain the taxpayer's subjective intent greater weight is given to objective facts than to the taxpayer's statements of intent 85_tc_557 sec_1_183-2 income_tax regs petitioners bear the burden of proving they intended to make a profit beck v commissioner supra pincite sec_1_183-2 income_tax regs sets forth a nonexclusive list of nine factors designed to provide guidance to courts in analyzing a taxpayer's profit objective see 781_f2d_724 9th cir affg lahr v commissioner tcmemo_1984_472 90_tc_960 affd without published opinion 899_f2d_18 9th cir no single factor is dispositive golanty v commissioner supra pincite the nine factors are the manner in which the taxpayer carries on the activity the expertise of the taxpayer or his advisors the time and effort expended by the taxpayer in carrying on the activity the expectation that the assets used in the activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar activities the taxpayer's history of income or losses with respect to the activity the amount of occasional profits if any that are earned the financial status of the taxpayer and the elements of personal pleasure or recreation involved in the activity sec_1_183-2 income_tax regs after considering the evidence in this case we conclude that petitioners engaged in the activity with the actual and honest objective of making a profit i businesslike manner the fact that a taxpayer carries on an activity in a businesslike manner and maintains complete and accurate books_and_records may indicate that the activity was carried on for profit sec_1_183-2 income_tax regs further abandonment of unprofitable methods in a manner consistent with an intent to improve profitability may indicate a profit objective id several factors indicate that petitioners carried on the activity in a businesslike manner mrs dawson kept books_and_records for the business petitioners also maintained a separate bank account for the activity further petitioners abandoned the arabian horse breeding business when mr dawson realized that it would be unprofitable petitioners then sought a more profitable enterprise and decided to breed paint horses their goal was to develop hot twist into a marketable stud respondent contends that petitioners did not use business records to evaluate the financial status of the activity we conclude that this contention does not necessarily undermine petitioners' position petitioners owned only three horses they employed only one trainer at a time and only one horse was shown in no horses were shown in we believe that petitioners were adequately aware of the results of their rather simple operation their failure to establish that they analyzed their books_and_records is not determinative of this issue ii expertise preparation for an activity by extensive study of its accepted business economic and scientific practices or consultation with those who possess expertise in the activity may indicate that the taxpayer has a profit objective sec_1_183-2 income_tax regs respondent contends that petitioners did not consult experts for advice regarding the operation of the activity we however believe mr barton's uncontradicted testimony that petitioners sought and received his advice while mr dawson was not an expert in the training breeding or showing of horses he regularly consulted with mil barton mr barton with hi sec_40 years of experience in the horse breeding and showing business advised petitioners on how to breed a successful horse and how to make a profit in the activity in addition petitioners hired veterinarians and trainers to board and care for their horses these facts are consistent with petitioners' intention to make a profit iii time devoted to the activity the fact that a taxpayer devotes substantial personal time and effort to carrying on an activity may indicate an intention to derive a profit sec_1_183-2 income_tax regs the fact that the taxpayer devotes a limited amount of time to an activity however does not necessarily indicate a lack of profit objective where the taxpayer employs competent and qualified persons to carry on the activity id petitioners did not personally devote a substantial amount of time to the activity they did however hire competent and qualified persons to assist them in conducting the activity petitioners hired mil barton and mike van leuven to perform the training necessary to produce a quality show horse mr barton fed and cared for hot twist and attended horse shows with hot twist when mr dawson could not attend as discussed above mr barton was competent and qualified in the horse breeding and showing business as a result the fact that petitioners did not devote substantial time to the activity is not inconsistent with the existence of a profit objective iv expectation that assets may appreciate the appreciation of assets is to be considered in determining whether a taxpayer intended to derive a profit from his activity sec_1_183-2 income_tax regs respondent contends that petitioners' indifference to the present and future value of their horses weighs against a finding of profit_motive respondent's contention however is contrary to the facts as hot twist became better known and trained petitioners believed that hot twist could be bred with kate dillon and dynamic king bar and the sale of the foals would produce revenue hot twist could participate in national-level competitions where gate prizes often reached dollar_figure and other horse owners would seek to breed their mares with hot twist according to mr barton petitioners could make approximately dollar_figure per foal by breeding hot twist mr dawson believed that hot twist could breed with more than mares in a single year petitioners also expected to make money on mare care ie a per_diem amount for boarding and feeding mares brought to petitioners for breeding all of these factors would have the effect of increasing the value of petitioners' horses we conclude that petitioners sincerely and reasonably believed that their horses would appreciate in value v taxpayers' financial status the fact that the taxpayer does not have substantial income or capital from sources other than the activity may indicate that the activity is engaged in for profit sec_1_183-2 income_tax regs petitioners' financial status strongly suggests that petitioners engaged in the activity for profit in petitioners earned wage income of dollar_figure and net_income of dollar_figure from the carpet cleaning business in mr dawson earned wage income of dollar_figure from his job at the railroad and net_income of dollar_figure from the carpet cleaning business to earn this income mr dawson worked long hours at two arduous jobs mr dawson's testimony indicated that he was a shrewd hardworking diligent and levelheaded businessman we do not believe that he would squander his hard-earned money on an extravagant hobby vi amount of profits the amount of profits earned in the activity when compared to the amount of losses_incurred the amount of the investment and the value of the assets in use may indicate a profit objective sec_1_183-2 income_tax regs petitioners did not earn a profit on the activity the opportunity to earn substantial profits in a highly speculative venture however is ordinarily sufficient to indicate that the activity is engaged in for profit even though only losses are produced id further in determining whether the taxpayer entered into the activity for profit a small chance of making a large profit may indicate the requisite profit objective sec_1_183-2 income_tax regs according to the regulations it may be found that an investor in a wildcat oil well who incurs very substantial expenditures is in the venture for profit even though the expectation of a profit might be considered unreasonable id petitioners' family was one of modest means petitioners believed that the prospect of producing a champion horse that could generate hundreds of thousands of dollars in revenue and correspondingly large profits seemed to be well worth the risks involved in essence the activity was petitioners' wildcat oil well petitioners actually and honestly believed that if hot twist were successful in horse shows future earnings_and_profits would be substantial mr barton confirmed that hot twist had the potential to be very successful we conclude that petitioners' expectation of future profits is consistent with the existence of a profit objective vii history of income and losses a taxpayer's history of income losses and occasional profits with respect to an activity may indicate the presence or absence of a profit objective sec_1_183-2 income_tax regs respondent contends that because petitioners have incurred losses on their horses in each year they did not have the requisite profit objective we disagree sec_1_183-2 income_tax regs states that a series of losses during the initial or start-up stage of an activity may not necessarily be an indication that the activity is not engaged in for profit where startup losses are involved the taxpayer's objective must be not only to have future net_earnings but also sufficient net_earnings to recoup losses previously sustained 736_f2d_826 1st cir citing 45_tc_261 affd 379_f2d_252 2d cir affg tcmemo_1983_552 petitioners' losses were incurred during the activity's startup stage in petitioners had been in the business of breeding paint horses for only years before hot twist could produce a profit petitioners had to properly train the horse and show him in enough events for him to obtain a favorable reputation this would encourage other horse owners to seek to breed their mares with hot twist based on mr barton's advice petitioners reasonably believed that revenue from the activity would be sufficient to recoup previously sustained losses therefore we conclude that petitioners' brief history of losses does not indicate the absence of a profit objective viii personal pleasure or recreation the presence of personal pleasure or recreation may indicate the lack of a profit objective sec_1_183-2 income_tax regs respondent contends that petitioners derived substantial personal pleasure from the activity mr dawson admitted that he occasionally rode the horses at his home to keep them warmed up as a result respondent contends that petitioners derived personal pleasure from the activity this contention however is not supported by the record mr dawson testified that neither he nor his family ever rode the horses for pleasure and mr barton confirmed that he was not aware of any member of mr dawson's family riding the horses for pleasure further even if mr dawson did derive some satisfaction from the activity that is not determinative of the issue in this case a taxpayer can enjoy his work and still be engaged in it for profit see 59_tc_312 stating that a business will not be turned into a hobby merely because the owner finds it pleasurable suffering has never been made a prerequisite to deductibility hart v commissioner tcmemo_1995_55 same the requirement is that a profit objective be the basic and dominant objective independent elec supply inc v commissioner f 2d pincite we conclude that it was ix past successes in activity the taxpayer's past success in similar or dissimilar activities can be indicative of a profit objective sec_1_183-2 income_tax regs respondent contends that the fact that petitioners have never conducted a successful horse breeding and training business indicates a lack of profit objective we conclude however that this factor is outweighed by the other factors considered above having considered the factors listed in sec_1_183-2 income_tax regs all contentions presented by the parties and the facts and circumstances of this case we hold that petitioners actually and honestly intended to make a profit in the activity consequently sec_183 does not limit the deductions claimed by petitioners with respect to the activity to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number --------------------------------- ---------------------------------- ---------------------------- ---------------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b1 plr-136788-06 date date ----------------------------------- legend x -------------------------------------------------- state date dear ----------- ---------- -------------------------- this letter responds to your letters dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code facts the information submitted states that x was incorporated on date under the laws of state the shareholder of x intended that x be treated as an s_corporation effective date but the election to be treated as an s_corporation was not timely filed law and analysis corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation’s taxable_year then the corporation will be treated as sec_1362 provides that a small_business_corporation may elect to be an s plr-136788-06 an s_corporation for the year in which the election is made under sec_1362 however if an s election is made after the first two and one-half months of a corporation’s taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed sec_1362 provides that if no sec_1362 election is made for any x did not timely file an election to be treated as an s_corporation under sec_1362 except as specifically set forth above no opinion is expressed or implied as to taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply as of date x has however established reasonable_cause for not making a timely s election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and the representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an s_corporation effective date within days from the date of this letter x should submit a properly completed form_2553 effective date with a copy of this letter attached to the relevant service_center the federal_income_tax consequences of the transaction described above under any other provision of the code specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes the code provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer s requesting it sec_6110 of plr-136788-06 in accordance with the power_of_attorney on file with this office a copy of this letter will be sent to your authorized representative sincerely dianna k miosi chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


’ significant index no department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division jun te at i in re this letter constitutes notice that with respect to the above-named defined benefit pension_plan we have granted a conditional waiver of the minimum_funding_standard for the plan_year ended this conditional waiver for the plan_year ended granted in accordance with sec_412 of the internal_revenue_code and sec_303 of the employee_retirement_income_security_act_of_1974 erisa the waived amount is the contribution which would otherwise be required to reduce the balance in the funding_standard_account to zero as of the end of the plan_year for which this conditional waiver has been granted has been through the company has a calendar_year fiscal_year the company had negative eamings from primarily due to large interest_expenses associated with a restructuring that occurred in the company had negative net_worth in resulted in a positive net_worth position at the end of income gain that enabled the company to report positive earnings in however absent the extraordinary income gain the company would have a consecutive earnings loss ir percent decrease in net sales from the levels reported in the company underwent another restructuring this restructuring - primarily due for that year toa and an extraordinary at the end of restructuring enabled the company to significantly reduce its interest the expense the primary cause of its losses in the net sales to the level reached in the extraordinary restructuring gain of the two-pronged strategy of increased penetration in existing foreign markets and expansion of its product base in domestic markets in addition the company has undergone a cost-cutting program to reduce selling and administrative costs period to return and thus eliminate the primary cause absent loss the company has adopted a through as of plan's current_liability because the prospects for recovery are uncertain and because the plan is under-funded we are granting this waiver subject_to the following conditions the value of the assets of the plan was equal to of the the contributions required to satisfy the minimum_funding_standard for the are to be timely made as plan years ending defined in sec_412 of the code without a waiver being granted for such years and the waiver for the plan_year ended is to be secured within twelve months of the date of this letter in a manner acceptable to the pension_benefit_guaranty_corporation if this condition is not satisfied the waiver is retroactively null and void you agreed to this condition in a letter dated date your attention is called to sec_412 of the code and sec_304 of erisa which describe the consequences that would result in the event the plan is amended to increase benefits change the rate in the accrual_of_benefits or to change the rate of vesting while any portion of the waived_funding_deficiency remains unamortized please note that any amendment to other retirement plans maintained by the company or to the company’s profit sharing plan to increase the liabilities of those plans would be considered an amendment for purposes of sec_412 of the code and sec_304 of erisa this ruling is directed only to the taxpayer that requested it sec_611 o k of the code provides that it may not be used or cited by others as precedent when filing form_5500 for the plan_year ended date the date of this letter should be entered on schedule b actuarial information a copy of this letter is being sent to your authorized representative in accordance with a power_of_attorney form on file a copy of this letter is also being sent to the manager employee_plans classification in a copy of this letter should be furnished to the enrolled_actuary for the plan if you have any questions on this ruling letter please contact sincerely carol d gold director employee_plans


internal_revenue_service department of the treasury index number washington dc person to contact telephone number refer reply to plr-109173-99 cc dom p si date date number release date legend company grantor d1 d2 d3 d4 d5 d6 x y the trusts plr-109173-99 the shareholders this letter responds to a letter dated date written by your authorized representative on behalf of company requesting inadvertent termination relief under sec_1362 of the internal_revenue_code facts according to the information submitted company was incorporated on d1 and elected to be treated as an s_corporation on d2 on d3 grantor a company shareholder created x trusts the trusts each for the benefit of one of his grandchildren aside from the named trustees and beneficiaries the terms of the trusts were identical company represents that at the time of their creation each of the trusts met the requirements to be qualified subchapter_s trusts qssts as defined by sec_1361 and therefore were eligible shareholders of an s_corporation on d3 and on subsequent occasions grantor transferred shares of company's stock to each of the trusts currently each trust owns y shares due to an oversight by company's tax advisers the beneficiaries of the trusts failed to file qsst elections as required by sec_1361 and therefore were ineligible shareholders of an s_corporation on d4 the shareholders' tax advisers discovered that the beneficiaries of the trusts never filed qsst elections and that company's s_corporation_election may have terminated on d3 on d5 the trusts' beneficiaries filed qsst elections effective d6 with the appropriate service_center company maintains that the failure_to_file the elections was neither intentional nor motivated by tax_avoidance or retroactive tax planning company and its shareholders agree to make any adjustments that the commissioner may require consistent with treating company as an s_corporation plr-109173-99 law and analysis sec_1361 defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect for the taxable_year sec_1361 provides that a small_business_corporation means a domestic_corporation that is not an ineligible_corporation and that does not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides that for purposes of sec_1361 a_trust which is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states is an eligible shareholder of an s_corporation sec_1361 provides that in the case of a qsst with respect to which a beneficiary makes an election under sec_1361 a the trust shall be treated as a_trust described in sec_1361 and b for purposes of sec_678 the beneficiary of the trust shall be treated as the owner of the portion of the trust consisting of stock in an s_corporation with respect to which the election under sec_1361 is made sec_1361 provides that a beneficiary of a qsst or a beneficiary's legal_representative may elect to have sec_1361 apply sec_1361 provides that an election under sec_1361 shall be effective up to days and months before the date of the election sec_1362 provides than an election to be an s_corporation shall be terminated whenever at any time on or after the first day of the first taxable_year for which corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides that if an election under sec_1362 by any corporation was terminated under sec_1362 the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the termination steps were taken so that the corporation is a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make the adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary for that period then notwithstanding the circumstances resulting in such termination the corporation shall be treated as an s_corporation during the period specified by the secretary conclusions plr-109173-99 after applying the relevant law to the facts submitted and representations made we conclude that company’s s_corporation_election terminated on d3 when grantor transferred shares of company to ineligible shareholders furthermore we rule that this termination was inadvertent within the meaning of sec_1362 under sec_1362 company will be treated as being an s_corporation from d3 until d5 and thereafter provided company's s_corporation_election was valid and was not otherwise terminated under sec_1362 during the termination period the trusts will be treated as if the qsst elections were timely made accordingly the trusts' beneficiaries and the shareholders in determining their respective income_tax liabilities during the termination period and thereafter must include the pro_rata share of the separately and nonseparately computed items of company as provided in sec_1367 and take into account any distributions made by company as provided by sec_1368 if company the trusts or any of the shareholders fail to treat company as described above this ruling shall be null and void except for the specific ruling above no opinion is expressed or implied concerning the federal tax consequences of the facts of this case under any other provision of the code specifically we express no opinion whether company is otherwise qualified to be an s_corporation or whether the trusts are valid qssts pursuant to a power_of_attorney on file with this office copies of this letter are being sent to your authorized representatives this ruling is directed only to the taxpayer requesting it under sec_6110 it may not be used or cited as precedent sincerely yours william p o'shea chief branch office of the assistant chief_counsel passthroughs and special industries


t c memo united_states tax_court david r gemperle and kathryn d gemperle petitioners v commissioner of internal revenue respondent docket no filed date in ps granted to a qualified donee a facade easement on their chicago residence which constituted a certified_historic_structure in a historic_district so that the easement was eligible for classification as a qualified_conservation_contribution within the meaning of sec_170 and h ps obtained an appraisal from an appraiser included on a list of appraisers furnished by the donee the appraiser valued the easement at dollar_figure which amount ps deducted on their and as a carryover returns ps did not include a copy of the appraisal with their return r seeks to deny ps any deduction for their contribution of the easement or alternatively to permit a deduction not to exceed dollar_figure and impose gross_valuation_misstatement penalties under sec_6662 or alternatively penalties for negligence under sec_6662 and b held ps' deductions are denied in full because of ps' failure to include a qualified_appraisal with their return see sec_170 held further because ps failed to include a qualified_appraisal with their return as required by sec_170 they are liable for penalties under sec_6662 and b for disregard of rules and regulations held further in the alternative because ps' unsupported dollar_figure valuation is more than of the maximum dollar_figure valuation supported by the only expert appraisal in evidence they are liable for gross_valuation_misstatement penalties under sec_6662 david r gemperle and kathryn d gemperle pro sese lauren n may kathryn e kelly and anita a gill for respondent memorandum findings_of_fact and opinion halpern judge respondent has determined deficiencies in and alternative penalties with respect to petitioners' federal_income_tax as follows unless otherwise stated section references are to the internal_revenue_code in effect for the years in issue and rule references are to the tax_court rules_of_practice and procedure we round all dollar amounts to the nearest dollar year deficiency dollar_figure big_number penalties sec_6662 sec_6662 dollar_figure big_number dollar_figure big_number the deficiencies are attributable to respondent's disallowance of a charitable_contribution_deduction for and a corresponding carryover deduction for dollar_figure for and dollar_figure for for a total disallowance of dollar_figure that petitioners claimed on account of their donation of a facade easement plus cash the deduction of which respondent does not challenge to landmarks preservation council of illinois landmarks with respect to the underpayments resulting from those disallowances respondent determined accuracy-related_penalties of for a gross_valuation_misstatement under sec_6662 in the alternative he determined accuracy-related_penalties of under sec_6662 for negligence or disregard of rules and regulations as defined in subsection c he found no grounds for mitigation of the penalties under sec_6664 by reason of petitioners' acting with reasonable_cause and in good_faith the issues for determination are whether petitioners are entitled to the foregoing charitable the tax deficiencies are based upon respondent's revenue agent's disallowance of petitioners' total deduction for their contribution of the facade easement ie they are based upon the agent's determination that the facade easement had no value and the alternatively imposed sec_6662 penalties are and of those deficiencies respectively contribution deductions and if not whether they are liable for either of the sec_6662 penalties findings_of_fact the parties have stipulated certain facts and the authenticity of certain documents the facts stipulated are so found and the documents stipulated are accepted as authentic petitioners resided in chicago illinois when they filed the petition background since petitioners have owned and resided in a house built in in the lakewood balmoral neighborhood of chicago lakewood house in the u s department of the interior national park service park service established the neighborhood as a historic_district and also listed the lakewood house on the national register of historic places on or about date the park service certified that the lakewood house constituted a 'certified historic structure' for a charitable_contribution for conservation purposes in accordance with the tax treatment extension act of after learning of the availability of conservation_easement charitable_contribution deductions at a or presentation by landmarks petitioners considered and in decided to pursue with landmarks the creation of a facade easement on the lakewood house landmarks assisted petitioners in the creation and contribution to it of the facade easement including the providing of forms presumably a model for the easement contribution agreement itself and a list of potential appraisers petitioners chose from that list gwendolyn j fiorenzo to appraise the facade easement fiorenzo appraisal ms fiorenzo prepared two appraisals of the proposed facade easement both dated date the second of which corrected errors in the first and was considered by petitioners to be the actual final appraisal the second appraisal was stated to be as of date both appraisals valued the proposed facade easement at dollar_figure the total amount that petitioners deducted for their contribution of the easement to landmarks ms fiorenzo's first appraisal arrived at the dollar_figure figure a reduction in her before-easement valuation of the lakewood house without identifying the after-easement comparable properties and it concluded that the comparable properties' loss in value from the easement typically ranged from to her second appraisal did identify eight after-easement comparable petitioners provided the second appraisal to respondent on date because generally no established market exists for determining the fair_market_value of an easement the before and after appraisal method is normally continued properties found the loss-in-value range for them to be between and but consistent with her first appraisal found a loss in value for the lakewood house description of the easement on date petitioners in their capacities as trustees of trusts in their respective names each as grantor of an undivided interest and landmarks as grantee entered into a preservation easement agreement with respect to the lakewood house by which petitioners conveyed the easement facade easement to landmarks the agreement recites that the obligations imposed by the facade easement were deemed to run as a binding servitude with the land and the agreement was to bind not only petitioners but also their successors as owners of the property without distinction petitioners under the terms of the agreement petitioners agreed not to demolish remove or raze the lakewood house or any portion of the protected elements in general the entire continued used to determine the fair_market_value of restrictive easements with respect to which charitable_contribution deductions are claimed ie the appraiser must compute a before value of the property in its current condition unrestricted by the easement and an after value of the property as encumbered by the easement the excess of the former over the latter constituting the fair_market_value of the easement see 85_tc_677 see also sec_1_170a-14 income_tax regs exterior of the house the roof and chimney and a stone entrance arch and they further agreed that w ithout the prior written permission of landmarks they would not partially demolish or remove the lakewood house or alter the protected elements including any alteration partial removal construction remodeling or physical or structural change or change in surfacing nor would they expand or reduce the lakewood house either horizontally or vertically and they agreed generally to maintain the house and the protected elements in addition petitioners made a cash contribution to landmarks of dollar_figure which was of the dollar_figure charitable_contribution_deduction that they anticipated from their contribution to landmarks of the facade easement petitioners' returns petitioners timely made joint returns of income on form sec_1040 u s individual_income_tax_return for their and taxable calendar years and return respectively those returns show that they were prepared by a paid tax_return_preparer norton v binenfeld certified_public_accountant c p a petitioners attached to the return an incomplete form_8283 noncash charitable_contributions claiming a deduction for the noncash charitable_contribution of the facade easement to landmark no appraisal is included with the return on or around date petitioners submitted a corrected form_8283 to respondent both forms show that they are a version of form_8283 that was revised in date both state an appraisal is generally required for property listed in section b see instructions section b addresses donated property valued at over dollar_figure instructions for form_8283 also revised date state that for contributions of easements made on buildings in historic districts the taxpayer must include with his return a qualified_appraisal exclusion of the fiorenzo appraisal from evidence at the commencement of the trial the court addressed respondent's motion in limine to bar petitioners from asserting that the fiorenzo appraisal exhibits 4-j and 13-j attached to the stipulation of facts qualifies as evidence of the value of their facade easement in his motion respondent noted that petitioners had failed to list ms fiorenzo as a witness and he argued that he would be prejudiced if the fiorenzo appraisal was admitted as evidence of value due to his inability to cross examine her concerning the facts analysis and conclusions purportedly set forth in the two exhibits petitioners in fact did fail to produce ms fiorenzo as a witness as a result we granted respondent's motion and excluded the fiorenzo appraisal as evidence of the value of the facade easement petitioners' witnesses at trial petitioners did call three witnesses in addition to themselves none of them qualified as nor did petitioners claim that they were experts in appraising real_estate therefore their proffered written submissions failed to constitute expert reports and for that reason we granted respondent's motions in limine to exclude those submissions from evidence we did permit petitioners however to elicit testimony from all three as fact witnesses none of the three purported to or did in fact establish a value for petitioners' facade easement the first witness thom greene an architect testified that the zoning laws for the lakewood balmoral district would not prohibit petitioners from expanding the lakewood house by for example attaching an addition to the house the second pamela ball a realtor testified that houses like the lakewood house on 50-foot lots are highly valued because they can be expanded the third maureen murnane also a realtor testified that respondent's expert appraiser improperly referred to one of the houses located like the lakewood house on lakewood avenue as a comparable_property in valuing the lakewood house before petitioners' contribution of the facade easement respondent's witnesses at trial respondent introduced into evidence two expert reports and the authors of those reports testified in support thereof the first expert howard kanter criticized the fiorenzo appraisal primarily on the ground that it fails to satisfy various requirements of the uniform standards of professional appraisal the second expert brian flynn testified that the facade easement had a value in the range of zero to dollar_figure opinion i petitioners' entitlement to a deduction for the facade easement a applicable law sec_170 generally allows a deduction for any charitable_contribution subject_to certain limitations that the taxpayer makes during the taxable_year pursuant to sec_170 and c no deduction is allowed under subsection a for a contribution of property for which a deduction of more than dollar_figure is claimed unless the taxpayer individual partnership or corporation obtains a qualified_appraisal of such property sec_170 defines a qualified_appraisal as an appraisal that complies with pertinent regulations and other internal_revenue_service irs guidance and that is conducted by a qualified_appraiser in accordance with generally accepted appraisal standards a qualified_appraiser is generally defined as an individual who has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements set forth in irs regulations regularly performs appraisals for compensation and meets such other requirements as may be prescribed by irs regulations or other guidance sec_170 we set forth in the margin the elements of a qualified_appraisal sec_1_170a-13 income_tax regs enumerate sec_11 items that a qualified_appraisal must include a a description of the property in sufficient detail for a person who is not generally familiar with the type of property to ascertain that the property that was appraised is the property that was or will be contributed b in the case of tangible_property the physical condition of the property c the date or expected date of contribution to the donee d the terms of any agreement or understanding entered into or expected to be entered into by or on behalf of the donor or donee that relates to the use sale_or_other_disposition of the property contributed e the name address and the identifying number of the qualified_appraiser f the qualifications of the qualified_appraiser who signs the continued sec_170 generally denies a deduction for charitable_contributions of partial_interests in property one exception to that general_rule is for a qualified_conservation_contribution sec_170 pursuant to sec_170 a qualified_conservation_contribution means a contribution of a qualified_real_property_interest to a qualified_organization made exclusively for conservation purposes a qualified_real_property_interest includes a continued appraisal including the appraiser's background experience education and membership if any in professional appraisal associations g a statement that the appraisal was prepared for income_tax purposes h the date or dates on which the property was appraised i the appraised fair_market_value within the meaning of sec_1_170a-1 of the property on the date or expected date of contribution j the method of valuation used to determine the fair_market_value such as the income approach the market-data approach and the replacement-cost-less-depreciation approach and k the specific basis for the valuation such as specific comparable sales transactions or statistical sampling including a justification for using sampling and an explanation of the sampling procedure employed respondent agrees that landmarks is a qualified_organization restriction granted in perpetuity on the use which may be made of the real_property sec_170 under sec_170 a contribution shall not be treated as exclusively for conservation purposes unless the conservation_purpose is protected in perpetuity in the case of a certified_historic_structure ie a building in a registered_historic_district which would include the lakewood house any contribution of a qualified_real_property_interest which is a restriction with respect to the exterior of a building is not considered to be made exclusively for conservation purposes unless the contributed interest ie the restriction preserves the entire exterior of the building and prohibits any change thereof which is inconsistent with the historical character of such exterior see sec_170 and ii in addition the donor and the donee must certify under penalty of perjury that the donee is a qualified_organization with the resources to manage and enforce the restriction and a commitment to do so and the taxpayer donor must include with the return for the contribution_year a qualified_appraisal photographs of the entire building exterior and a description of the restrictions on development of the building see sec_170 and iii b analysi sec_1 introduction respondent sets forth several grounds for his position that petitioners are not entitled to any deduction for their contribution to landmarks of the facade easement including the absence of a qualified_appraisal as required by sec_170 and c the fact that the facade easement or restriction was neither granted in perpetuity as required by sec_170 nor protected in perpetuity as required by sec_170 petitioners' failure to include a copy of a qualified_appraisal or photographs of the lakewood house with the return as required by sec_170 petitioners' failure to include a completed appraisal_summary with the return as required by sec_1_170a-13 and income_tax regs and petitioners' failure to prove that the contribution decreased the value of the lakewood house by dollar_figure because we find that petitioners failed to include a copy of a qualified_appraisal with the return as required by sec_170 we will sustain respondent's adjustments to the and returns denying them any charitable_contribution_deduction on account of their contribution of the facade easement to landmarks and we need not address respondent's alternative grounds for denying the deductions petitioners' failure to satisfy the appraisal-inclusion requirement sec_170 provides that a taxpayer donor who contributes a use restriction such as the facade easement encumbering a certified_historic_structure in a registered_historic_district such as the lakewood house must include with his tax_return for the year of the contribution a qualified_appraisal that provision was added to the internal_revenue_code by the pension_protection_act of pub_l_no sec a sic a stat pincite while it appears on the face of sec_170 that the failure to include the necessary appraisal with the return for the contribution_year is fatal to the deduction negating the exclusivity of the contribution for conservation purposes that result is confirmed in the staff of the joint_committee on taxation's technical explanation of h_r the pension_protection_act of as passed by the house on date and as considered by the senate on date jcx- j comm print the joint_committee staff explains the appraisal-inclusion requirement as follows for any contribution relating to a registered_historic_district made after the date of enactment of the provision date taxpayers must include with the return for the taxable_year of the contribution a qualified_appraisal of the qualified_real_property_interest irrespective of the claimed value of such interest and attach the appraisal with the taxpayer’s return failure to obtain and attach an appraisal results in disallowance of the deduction id pincite emphasis added fn ref omitted see also staff of j comm on taxation description of the chairman's modification to the provisions of the tax relief act of jcx-77-05 j comm print prior unenacted legislation similar the parties have stipulated a copy of the return and nothing resembling a qualified_appraisal is included with it indeed petitioners concede on brief we admit that the full fiorenzo appraisal was not included with the return for lack of a qualified_appraisal included with the return we will sustain respondent's adjustments disallowing for and petitioners' charitable_contribution deductions claimed on account of their contribution of the facade easement to landmark ii application of the accuracy-related_penalty a introduction respondent seeks to impose a accuracy-related_penalty for each of the years in issue under sec_6662 or in the alternative a penalty under sec_6662 and either subsection b or under sec_7491 the commissioner bears the burden of production with regard to penalties and must come forward with sufficient evidence indicating that it is proper to impose penalties 116_tc_438 however once the commissioner has met the burden of production the burden_of_proof remains with the taxpayer including the burden of proving that the penalties are inappropriate because of reasonable_cause id pincite only one accuracy-related_penalty may be applied with respect to any given portion of an underpayment even if that portion is subject_to the penalty on more than one of the grounds set out in sec_6662 sec_1_6662-2 income_tax regs b application of sec_6662 penalty sec_6662 and b imposes a penalty equal to of the portion of the underpayment_of_tax attributable to negligence or disregard of rules or regulations sec_6662 provides in pertinent part that for purposes of sec_6662 disregard includes any careless reckless or intentional disregard sec_1_6662-3 income_tax regs provides in pertinent part that the term rules or regulations includes among other things the provisions of the internal_revenue_code we have sustained respondent's adjustments disallowing petitioners any charitable_contribution_deduction for the contribution of the facade easement to landmarks on the ground that they failed to comply with the requirement of sec_170 that they include a qualified_appraisal with the return for the taxable_year of the contribution that requirement is stated not only in the internal_revenue_code but also in the instructions for the form_8283 that accompanied the return the form itself warned petitioners that an appraisal is generally required for donated property over dollar_figure and directed them to the form_8283 instructions we cannot help but conclude that petitioners did not exercise reasonable diligence to determine the correctness of their return positions in claiming a charitable_contribution_deduction in the face of the warning on the form_8283 that an appraisal is generally required for donations of property over dollar_figure see sec_1_6662-3 income_tax regs petitioners were at least careless if not reckless in ignoring the warning that an appraisal was required they disregarded the appraisal-inclusion requirement of sec_170 and are thus liable for accuracy-related_penalties on account of such disregard unless they can show adequate_disclosure of their position or reasonable_cause for the resulting underpayments and that they acted in good_faith see sec_6664 sec_1_6662-3 income_tax regs petitioners have made no such showing and thus do not escape the sec_6662 penalties because the resulting and underpayments of tax are fully attributable to petitioners' disregard of sec_170 they are liable for accuracy-related_penalties on the whole of those underpayments pursuant to sec_6662 and b we need not consider their liability under sec_6662 and b concerning any substantial_understatement_of_income_tax for similar penalties we will however consider their potential alternative liability for penalties under sec_6662 and b on account of a valuation misstatement c application of sec_6662 penalty analysis sec_6662 and b imposes a penalty equal to of the portion of the underpayment_of_tax attributable to a substantial_valuation_misstatement a valuation misstatement of or more of the correct amount is a gross_valuation_misstatement and the penalty increases to sec_6662 and a i the taxpayer may not rely on a reasonable_cause good-faith defense against imposition of the sec_6662 penalty with respect to gross_valuation_misstatements of charitable_contribution properties see sec_6664 142_tc_279 no penalty however is imposed unless the portion of the underpayment attributable to the valuation misstatement exceeds dollar_figure sec_6662 as discussed supra because petitioners failed to make their alleged qualified_appraiser ms fiorenzo available for cross-examination we determined that her written appraisals constituted inadmissable hearsay evidence and we refused to admit them as evidence of the value of petitioners' facade easement as a result petitioners have failed to furnish admissible evidence that their facade easement had any determinable value respondent submitted expert testimony by mr flynn that the easement's influence on value of the lakewood house would we see no reason to reverse that evidentiary ruling pursuant to rule g an expert witness is required to prepare a written report for submission to the court which pursuant to rule g is received in evidence as the direct testimony of the expert witness because the written report constitutes the expert witness' direct testimony it is necessary that the expert witness be available for cross-examination regarding the truth or accuracy of the assertions in the written report otherwise the written report constitutes excludable hearsay evidence the essential requirement of the hearsay rule is that statements offered testimonially must be subjected to the test of cross-examination wigmore on evidence sec pincite chadbourn rev the premise that the opportunity of cross-examination is an essential safeguard has become the principal justification for the general exclusion of hearsay statements mccormick on evidence sec pincite 7th ed moreover even though the loss of a nonparty witness' direct testimony may impose a severe hardship on the party relying on that testimony which under certain circumstances might justify a court's exercise of its discretion to admit such testimony see id that circumstance does not arise in this case where ms fiorenzo's failure to testify arose out of petitioners' voluntary decision not to make her available see estate of tanenblatt v commissioner tcmemo_2013_263 at as discussed supra none of petitioners' three fact witnesses established a value for the easement be in the range of no measurable impact to a de_minimis impact or as expressed in dollar figures dollar_figure to dollar_figure mr flynn concluded at the high end of the range on the basis of his interpretation of sec_1_170a-14 income_tax regs which addresses the valuation of conservation restrictions on brief petitioners criticize mr flynn's before valuation of dollar_figure for the lakewood house which is dollar_figure less than their proffered before valuation of dollar_figure because they accept mr flynn's after valuation of dollar_figure they determine a dollar_figure value for their facade easement which is dollar_figure more than their deduction based upon the fiorenzo appraisal petitioners' criticism of mr flynn's before valuation is based largely upon his allegedly improper adjustments to the sale prices of houses that he considered comparable to the lakewood house that criticism is problematic in the light of petitioners' acceptance of mr flynn's after valuation which makes adjustments to the sale prices of comparable houses on the same bases that he used in adjusting the before sale prices petitioners have not persuaded us that mr flynn's valuation of their facade easement is unreasonably low in the absence of expert testimony that the value of the easement was greater than dollar_figure we accept that amount as its value for purposes of determining whether petitioners are liable for sec_6662 penalties for gross_valuation_misstatement accepting as we do that dollar_figure constitutes the maximum value of petitioners' facade easement petitioners' dollar_figure valuation thereof is more than of the amount determined to be the correct amount of such valuation thereby triggering the application of gross_valuation_misstatement penalties under sec_6662 and h and satisfying respondent's burden of production under sec_7491 we shall therefore impose the penalty conclusion petitioners are liable for substantial_valuation_misstatement penalties on the portions of their and underpayments attributable to reporting the value of the facade easement to be in excess of dollar_figure decision will be entered under rule


a bas y tax exempt and government entities department of the treasury internal_revenue_service washington d c uniform issue list jun tep atu xxx xxx xxx legend taxpayer a xxx financial_institution b financial_institution c financial_institution d financial_institution e financial_institution f xxx xxx xxx xxx xxx ira x xxx account y xxx account z xxx financial advisor g xxx individual h xxx xxx page amount amount amount amount amount amount amount date date date date date date date dear xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx this letter is in response to your request dated date submitted on your behalf by your authorized representative in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a years old represents that on date he entrusted the rollover of amount from ira x at financial_institution b to financial advisor g a representative of financial_institution e taxpayer a asserts that his failure to accomplish a rollover of amount within the 60-day period prescribed by sec_408 of the code was due to an error made by financial_institution e through its representative financial advisor g xxx page taxpayer a represents that on date he met with financial advisor g to discuss three financial transactions rolling over amount from ira x at financial_institution b to a new ira at financial_institution d refinancing his home mortgage with financial_institution f and using amount from non-qualified account y at financial_institution c to pay off the home equity portion of the mortgage amount and amount were similar sums in the process of completing taxpayer a’s application_for a new ira at financial_institution d financial advisor g mistakenly referred to and used the documentation provided for account y the non-qualified account instead of referring to the documentation provided for ira x on date financial_institution e notified financial advisor g that the ira contract could not be processed because he submitted documentation from a non-qualified account on date financial advisor g submitted to financial_institution e a revised application_for a new non-qualified account at financial_institution d financial_institution d established non-qualified account z on behalf of taxpayer a on date financial_institution c cancelled account y taxpayer a’s non-qualified annuity and transferred amount the funds remaining in the account after the deduction of the surrender charge amount from that annuity to account z the non-qualified account established at financial_institution d on date taxpayer a believed that financial advisor g had set up a new ira at financial_institution d for him and rolled over amount his remaining annuity ira x which he thought was the non-qualified account account y at that time financial_institution b issued a check to taxpayer a for amount all of the funds remaining in ira x after deducting amount the applicable annual fee and surrender charge believing that amount was taken from non-qualified account y taxpayer a used it in conjunction with other personal funds to pay off the home equity portion of his home mortgage amount at financial_institution f into it on date taxpayer a cancelled taxpayer a was unaware of the error until date when his tax advisor informed him that he owed taxes on the distribution of amount from ira x taxpayer a then contacted financial_institution e regarding ira x and account y after researching taxpayer a’s account financial_institution e discovered and financial advisor g admitted to financial_institution e that he believed that he was applying for an ira with financial_institution d on behalf of taxpayer a financial_institution e had contacted financial advisor g and informed him that an ira could not be issued if financial_institution d was to receive non-qualified funds as indicated on the annuity application and financial advisor g inadvertently revised the annuity application resulting in a financial_institution d issuing account z as a non-qualified account rather than as an ira b the transfer of the non-qualified funds into account z rather than the transfer of the qualified funds into it and c taxpayer a liquidating the remaining qualified account ira x rather than the non-qualified account account y taxpayer a submitted a sworn affidavit from individual h acting vice-president of financial_institution e stating financial_institution e received qualified funds from financial_institution b on behalf of taxpayer a prior to the expiration of the 60-day xxx page rollover period taxpayer a followed all procedures indicated as required by financial_institution e for deposit of such funds into what taxpayer a believed to be an ira within the 60-day roll-over period including giving instructions to deposit the funds into an ira and solely due to an error on the part of financial_institution e through its representative financial advisor g amount was not deposited into an ira within the 60-day roll-over period based on the facts and representations you request a ruling that the internal_revenue_service waive the 60-day rollover requirement contained in sec_408 of the code with respect to the distribution of amount from ira x sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if-- i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the 60th day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty xxx page disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 2003_4_irb_359 date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 of the code the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer a including a sworn affidavit by individual h stating that the failure of amount to be rolled over to an ira within the 60-day rollover period was due solely to error by financial_institution e through its representative financial advisor g is consistent with his assertion that his failure to accomplish a timely rollover was caused by an error made by financial advisor g which resulted in amount being deposited into account z a non-ira account therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount from ira x taxpayer a is granted a period of days from the issuance of this ruling letter to contribute amount into a rollover ira provided all other requirements of sec_408 of the code except the 60-day requirement are met with respect to such contribution amount will be considered a rollover_contribution within the meaning of sec_408 of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter is being sent to your authorized representative pursuant to a power_of_attorney on file in this office xxx an if you wish to inquire about this ruling contact xxxx at xxx xxx-xxxx please address all correspondence to se t ep ra t2 sincerely yours dnzety siti donzell littlejohn manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose cc xxx xxx xxx xxx