internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom corp 1-plr-101049-00 date date re legend v w x z agent we respond to your letter dated date requesting that we supplement our letter_ruling dated date plr-103429-99 the prior ruling regarding certain federal_income_tax consequences of a series of transactions which included distributions of stock in controlled by distributing to sub by subsidiary to subsidiary by subsidiary to common parent and by common parent to its shareholders the prior ruling held inter alia that the distributions qualified as tax-free distributions under sec_355 of the internal_revenue_code capitalized terms retain the meanings assigned to them in the prior ruling the taxpayer completed the transactions as proposed in the prior ruling because of the transactions described in the prior ruling controlled became the common parent of four wholly owned subsidiaries subsidiary subsidiary subsidiary and subsidiary the taxpayer now wishes to undertake in the order listed the following proposed transactions which were not described in the request for the prior ruling controlled will cause subsidiary to merge into a single member limited_liability_company all the interests of which will be owned by subsidiary subsidiary subsidiary and subsidiary will declare approximately dollar_figurev in total dividends which they will distribute to controlled in the form of interest- bearing securities the securities will be for a term of w years have a market rate of interest and require payment of interest plus repayment of x percent of plr-101049-00 the principal each year with a balloon payment of principal at the end of the term in conjunction with the transactions proposed in the prior ruling controlled obtained a dollar_figurez unsecured credit facility with a syndicate of lenders led by agent as the administrative agent and a short-term bridge loan for other corporate purposes controlled also sold approximately dollar_figurez of senior unsecured notes through a private_placement with agent the proceeds of which were used to pay down the bridge loan and a portion of the credit facility controlled plans to enter a co-borrowing arrangement with subsidiary and subsidiary with respect to the credit facility and notes whereby controlled subsidiary and subsidiary will be jointly and severally liable for the debt with respect to the proposed transactions the taxpayer has attested that all of the representations made in the prior ruling remain true and correct based solely on the information submitted and the taxpayer’s reaffirmation of the representations contained in the prior ruling we hold that the consummation of the three proposed transactions described above will not have an adverse effect on the rulings contained in the prior ruling and such rulings will remain in full force and effect we express no opinion concerning the federal_income_tax treatment of the proposed transactions themselves under any provisions of the code or regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the proposed transactions this supplemental 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 each taxpayer involved in the transaction in the prior ruling should attach a copy of this supplemental ruling to the taxpayer's federal_income_tax return for the taxable_year in which the transaction was consummated in accordance with a power_of_attorney on file in this office we are sending a copy of this letter to the taxpayer sincerely assistant chief_counsel corporate by mark s jennings acting chief branch


third party communication none date of communication not applicable cca_2015041016033046 id uilc number release date from sent friday date pm to cc bcc subject re b vs hi ----- as discussed we agree with ----- that you should always look at all the facts and circumstances to determine whether one or the other or both penalties apply with respect to a particular return or other document and if both apply which one to assert i’ve attached the legislative_history i mentioned that indicates that if both penalties apply the service can choose which one to assert see p thanks ----------------- ------------- ---------------------


t c memo united_states tax_court robert g taylor ii petitioner v commissioner of internal revenue respondent docket no filed date william lance stodghill for petitioner thomas lee fenner for respondent memorandum findings_of_fact and opinion paris judge respondent determined deficiencies in petitioner’s and federal_income_tax of dollar_figure and dollar_figure respectively and accuracy-related_penalties pursuant to sec_6662 of dollar_figure and dollar_figure respectively after concessions by the parties the remaining issues for decision are whether for petitioner is entitled to a casualty_loss deduction with respect to hurricane damage to his residence in the river oaks neighborhood in houston texas and liable for an accuracy-related_penalty pursuant to sec_6662 findings_of_fact some of the facts are stipulated and so found the first stipulation of facts and related exhibits the exhibits admitted at trial and the exhibits admitted after 1unless otherwise indicated all section references are to the internal_revenue_code code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure 2for the parties agree that there are no adjustments to the deductions for a long-term_capital_loss carryover of dollar_figure an insurance expense of dollar_figure a professional fees expense of dollar_figure of petitioner’s wholly owned subchapter_s_corporation and a royalty loss of dollar_figure claimed on petitioner’s federal_income_tax return the parties also agree that for purposes of computing the net_operating_loss carryforward deduction the nonpassive loss passed through to petitioner from partnerships_and_s_corporations is dollar_figure the real_estate tax deduction is dollar_figure and petitioner is not liable for an accuracy-related_penalty for the parties agree that there are no adjustments to the deductions for a net_short-term_capital_loss for nonbusiness bad_debts of dollar_figure a professional fees expense of dollar_figure and a casualty_loss of dollar_figure of petitioner’s wholly owned subchapter_s_corporation claimed on petitioner’s federal_income_tax return petitioner is also entitled to deduct dollar_figure for real_estate_taxes the concessions memorialized in the stipulation of settled issues are binding in the parties’ rule_155_computations trial are incorporated herein by this reference petitioner resided in texas when he timely filed his petition i the legacy of houston’s river oaks and staub architecture the river oaks neighborhood in houston is often listed as one of the most exclusive and prestigious subdivisions in the united_states john staub a famous residential architect designed houses in river oaks and other locations in texas for over years he is well known for designing bayou bend a 28-room georgian-spanish creole style mansion for the family of ima hogg a texas socialite and philanthropist bayou bend was completed in on a acre lot in the river oaks neighborhood and now operates as a museum facility with the museum of fine arts houston mr staub designed several houses in the river oaks neighborhood including petitioner’s house which was originally designed for harry hanszen in the french norman style based on a medieval chateau in france hanszen house 3although the court did not receive and file petitioner’s petition until date more than days after respondent issued the notice_of_deficiency on date the petition was postmarked date and thus deemed to have been delivered to the court on that date see sec_7502 providing that date of postmark be treated as date of delivery of any document required to be filed under authority of any provision of the internal revenue laws sec_301_7502-1 proced admin regs defining document for purposes of the timely mailed timely filed rule_of sec_7502 to include petitions filed with the tax_court hanszen house was built in on dollar_figure acres of land4 originally owned by the hogg family across the street from bayou bend hanszen house is considered mr staub’s greatest picturesquely romantic house ii hanszen house a original build hanszen house was originally built with four bedrooms and four full bathrooms a luxury in the 1930s two half bathrooms a kitchen a butler’s pantry a dining room a living room with attached garden room in one of the turrets a library a grand two-story foyer and a large porte-cochère over the driveway the grand foyer was accentuated by a cantilevered stone staircase that wound up the interior of one of the turrets landing on a limestone slab the exterior walls were constructed three feet thick and were overlaid with handmade belgian bricks the roof was sheathed with terra cotta shingle tile on the grounds were a renaissance-style reflecting pool and dovecote and extensive gardens designed by ruth london a well-known landscape architect in houston 4the current address is lazy lane for ease of discussion the court will generally refer to the land and improvements--including the hanszen house cabana garage guardhouse and grounds--collectively as the property b expansion and renovation from to hanszen house was expanded and renovated by its then-current owners under the supervision of mr staub mr staub continued the chateau design using the same belgian bricks on the exterior of the house and adding a slate shingle roof a new dining room with its own foyer was built to seat to people and showcased three jacques grüber art nouveau stained glass windows set in bronze the stained glass windows were protected on the outside by bulletproof glass a new wing was built for a grand formal living room with imported 18th- century french wall panels plus four music-themed panels from the chateau de rosny france and eight sets of glass and metal french doors leading to the gardens and courtyard the living room also had a wet bar decorated with art deco bronze elevator door panels and a jacques grüber art nouveau stained glass french ceiling panel with back lighting between the kitchen and the formal living room was a new two-story grand foyer with a new porte-cochère leading to the 10-foot double-arched wood entry doors 5petitioner replaced the bulletproof glass in with uv protective safety glass on the second floor a billiard game room and a master bedroom with his and her full bathrooms with inlaid marble and oak flooring were added a third story was added and a second 635-square-foot basement was built and used as a wine cellar after the renovations and expansion the gross living space of hanszen house exceeded big_number square feet c additional buildings the property included additional buildings a three-car garage a cabana guest house and a guardhouse the three-car garage included storage a bathroom and a second floor with over big_number square feet of living space consisting of two bedrooms and two full bathrooms attached to the garage were a greenhouse and six dog kennels the dog kennels had air-conditioned areas for the dogs and automatic watering systems the cabana had over big_number square feet of living space the first floor of the cabana had a kitchen game and fitness rooms two full bathrooms and a spa with custom art nouveau mosaic tiled floor walls and ceiling the second floor had a bedroom a full bathroom and a balcony outside the cabana was a heated in- ground swimming pool d ownership in petitioner purchased the property for dollar_figure in an as is unwarranted condition the sale price consisted of petitioner’s then-current residence in the river oaks neighborhood and cash included in the purchase were fixtures and sculptures specifically listed in a separate exhibit attached to the sale contract the seller excluded some items including a hector guimard art nouveau iron and glass paris france métropolitain entrance petitioner had the option of purchasing any of the excluded items and purchased from the seller several fixtures and the métropolitain entrance 6the fixtures specifically listed in the exhibit included chandeliers in the living room half bathrooms and a bedroom tiffany and art deco sconces in the half bathrooms a tiffany chandelier in the kitchenette bar in the turret carlo bugatti door panels tiffany and steuben sconces in the grand foyer art deco bronze elevator panels in the wet bar a duffner kimberly leaded chandelier and sconces from one of the bedrooms a large round iron club in the front yard a large french bronze fountain in the parking area bronze figures outside of the cabana a bronze statue in the spa and all large bronze crocks hippos rhinos etc throughout the property 7there are guimard entrances remaining as historical monuments in paris the national gallery of art in washington d c and the museum of modern art in new york each have entrances as part of their gallery collections national gallery of art https www nga gov collection art-object-page html last visited date the museum of modern art https www moma org collection works artist_id locale en page sov_referrer artist last visited date sometime after he purchased the property and before the tax years in issue some or all of the specifically included fixtures and sculptures listed at the time of purchase were conveyed to an entity named the yote trust petitioner reports income and distributions from the yote trust on his individual income_tax returns the trust owned some portion of the jacques grüber art nouveau stained glass windows the antique paneling in the living room and some of the bathrooms the paneling and mirrors in the dining room and dining foyer the indoor and outdoor sculptures a hanging art piece in the living room wet bar artwork that hung above the front door an unattached outdoor fountain mirrors in the living room and one of the half bathrooms and personal items including but not limited to furniture art rugs and mirrors the stained glass windows had an insured value as of date of dollar_figure million the sculptures had an insured value as of date of dollar_figure million three of the chandeliers had a total insured value as of date of dollar_figure the record does not reflect what personal_property was held in the yote trust or the value of the trust property overall 8each piece within petitioner’s personal art collection was also valued and insured individually in petitioner listed lazy lane for sale for dollar_figure million the listing was through date in the listing agreement petitioner specifically excluded from the sale lighting fixtures chandeliers fireplace screens and all other personal_property that was attached to the real_property a separate list of excluded improvements and accessories was also attached to the listing agreement but not provided to the court iii hurricane ike on date hurricane ike struck harris county9 as a category hurricanedollar_figure the property located in harris county sustained significant tree and fence damage over trees and bamboo plants were lost to the hurricane some falling on fencing and outdoor lights additionally window panes were 9on date the president declared that a major disaster existed in the state of texas affecting individuals and households in counties in the houston region including harris county fema texas hurricane ike-fema- 1791-dr declared date https www fema gov pdf news pda pdf last visited date 10a category hurricane on the saffir-simpson hurricane wind scale has sustained wind speeds of to mph and those extremely dangerous winds can cause extensive damage the expected damage is well-constructed frame homes could sustain major roof and siding damage many shallowly rooted trees will be snapped or uprooted and block numerous roads near-total power loss is expected with outages that could last from several days to weeks noaa national hurricane center https www nhc noaa gov aboutsshws php last visited date cracked or broken the jacques grüber stained glass windows in the dining room were damaged glass window panes were cracked the roof was damaged some of the outdoor lights were damaged the guardhouse stairs were destroyed the doors to the cabana were damaged and the pool heaters burned out inside hanszen house there was water damage to the living room oak wood floors the imported french silk wall fabric in the morning room the imported italian or french high-grade silk drapes in the living room and one of the wall murals the 635-square-foot basement containing the wine a water heater and other mechanical equipment was flooded approximately two to three feet deep because the sump pump failed and storm sewer water backed up into the basement the flooded basement was not discovered until several days after the hurricane and mold had formed because of the standing water petitioner had big_number bottles of wine stored in the basement and approximately half were submerged a dedicated computer with customized wine database software a bar code labeler and a scanner and a work station were destroyed in the basement flood in addition the ducts and pipes in the basement were wrapped in asbestos and began to deteriorate in the flood water iv repairs replacement and remediation as of petitioner’s date insurance_policy he had insured the dwelling for dollar_figure other structures for dollar_figure personal_property for dollar_figure and fine art including the stained glass sculptures and three chandeliers for dollar_figure there was no limit on insurance coverage for mold fungi or other microbes on the dwelling or personal_property on date petitioner filed a claim with his insurance company--chubb lloyd’s insurance co of texas chubb for hurricane damage on date petitioner also filed a proof of loss with travelers flood insurance travelers through the u s department of homeland security federal emergency management agency fema national flood insurance program on the proof of loss petitioner reported that the actual cash_value of all property was dollar_figure travelers paid petitioner dollar_figure for flood damage petitioner spent several months repairing replacing and remediating the property and household contents out of the big_number bottles of wine big_number bottles were stored three feet or more above the basement floor the remaining bottles and crates were stored less than three feet above the floor and may have been sitting in water in the flooded basement for several days the big_number bottles of wine were cleaned in a specialized temperature-controlled decontamination process to preserve the labels the wine quality and their respective wooden crates samples of the cleaned bottles and crates were lab tested to ensure the labels were not contaminated with mold a salvage agent for chubb noted that all parties agreed that the wine was damaged from water contact and that the wine was a total loss but petitioner kept of the bottles petitioner’s total wine collection was valued as of date at dollar_figure with an additional dollar_figure needed to import replacements for a collection of that size chubb paid petitioner dollar_figure for the value of the winedollar_figure the computer with custom wine software the work station and the bar code labeler and scanner were also replaced petitioner did not establish his basis in the computer equipment or in the wine collection after the wine was removed the basement was remediated for asbestos and mold the wine storage racks were removed and new custom mahogany racks with the capacity to store bottles of wine per rack were built a sump pump and an ejector pump were installed in the basement to prevent future basement 11nothing in the record explains the discrepancy between the appraisal and the amount petitioner was paid floods two water heaters a pressure booster pump for the cold water system and new insulation were also installed in the basement at the cabana petitioner replaced two mahogany entry doors and refinished six other mahogany doors he had all the cabana windows and door trim repaired or replaced he also had the in-ground pool cleaned and installed a new heater on the grounds petitioner had the trees removed the fence repaired lights and wiring fixed or replaced and trees or bamboo plants replanted at hanszen house he had over square feet of white oak flooring fabricated and installed to match the living room flooring he had water-damaged ceiling repaired in the morning room closets and shelving repaired guardhouse stairs built broken tile from the turrets replaced numerous windows fixed and reglazed and debris cleaned out of the gutters petitioner also had the silk drapes and silk wall panels replaced with imported silk the jacques grüber stained glass windows in the dining room needed extensive repairs a specialty art glass company removed over large and small panels containing over damaged pieces to repair the butterflies and cockatoes sic peacocks and water fountain birds and flowers and one peacock centered flower bouquet windows chubb reimbursed petitioner for the cost of the above-referenced repairs and replacements making adjustments for normal wear_and_tear and petitioner’s deductible part of the repair costs included the amounts paid to store clean and test the wine bottles additionally chubb reimbursed petitioner for payments he made to an individual to coordinate and oversee the repairs overall chubb paid petitioner a total of dollar_figure petitioner took the property off the real_estate market for the remainder of in order to make all the needed repairs and he eventually sold it in dollar_figure 12on date petitioner sold lazy lane as unimproved property for dollar_figure million the sale did not include hanszen house other structures landscaping on the property or anything owned by the yote trust and petitioner was given the right to demolish or remove the improvements and fixtures within a specified time paragraph a of the special provisions addendum spa attached to the unimproved property contract included the yote trust as a party to the contract solely for purposes of agreeing to be bound by the provisions hereof related to the excluded_property paragraph g of the spa provided g buyer and seller acknowledge and agree that buyer is purchasing the property as an unimproved lot as is and that the improvements and fixtures situated on the property may be wholly or partially demolished and or removed by seller for a period of up to six months following the expiration of the buyer occupation period it is specifically understood and agreed that a substantial portion of the consideration for the sale of the property is seller’s ability to remove and salvage any or all of the improvements and fixtures located on the property in seller’s sole determination including but not limited to the fascia brick windows doors continued v precasualty and postcasualty fair_market_value a petitioner’s return petitioner’s form_1040 u s individual_income_tax_return was filed on date petitioner’s accounting firm prepared his federal_income_tax return petitioner had retained the same accounting firm for years to prepare his individual and business tax returns the firm used a multistep process for petitioner’s tax returns after petitioner provided his documents and tax information a preparer with over years of experience prepared the first draft of the tax_return then it was sent to a certified_public_accountant cpa in the firm for a thorough second check if the tax_return was complicated then another cpa in the firm performed a third review finally the managing cpa in the firm petitioner’s cpa reviewed and signed the return this process was used for petitioner’s return because petitioner’s cpa considered it complicated the continued banisters lighting wiring a c units wood flooring non-native landscaping and any other improvements fixtures or personalty located on the property the spa provided that the buyer could occupy hanszen house for months after closing petitioner lived in hanszen house until the beginning of date then the buyer and his family moved into the house and lived there until date as of date petitioner was still salvaging items from the property return consisted of over pages with numerous schedules and forms and over worksheet statements for petitioner reported adjusted_gross_income of dollar_figure with total_tax due of dollar_figure which he paid in full at the time he filed the return petitioner claimed a casualty_loss deduction of dollar_figure dollar_figure less the dollar_figure limitation per casualty_loss for on form_4684 casualties and thefts dated and attached to the return petitioner reported a basis in the property of dollar_figure million insurance reimbursements of dollar_figure fair_market_value before the casualty of dollar_figure and fair_market_value after the casualty of dollar_figure petitioner’s cpa testified that the precasualty fair_market_value was based on the listing price of the property reduced for the time it spent on the market the precasualty fair_market_value reported on form_4684 is also consistent with values reported on petitioner’s chubb and fema insurance claims neither petitioner nor his cpa provided an explanation as to the postcasualty fair_market_value b petitioner’s first supplement to petition on date petitioner filed a first supplement to petition seeking a casualty_loss deduction in excess of the amount claimed on his tax_return in doing so petitioner relied on a retrospective appraisal performed by gayle robertson woodum a licensed real_estate appraiser with over years of experience appraising premium properties in the river oaks neighborhood as well as other neighborhoods in houstondollar_figure ms woodum determined that the property’s fair_market_value before the casualty was dollar_figure and after the casualty was dollar_figure in ms woodum conducted a retrospective appraisal for tax litigation purposes only valuing petitioner’s property as of september and she had visited the property before hurricane ike when petitioner held open houses and also performed a full inspection of the property after hurricane ike on date in forming her precasualty appraisal of petitioner’s property as of date ms woodum made the following assumption extraordinary assumption that the subject property was in good condition as of date and the assumptions made regarding specific data obtained from data sources for the subject and comparables is correct were the data employed in this appraisal found to be incorrect the opinions expressed in this report could be impacted in a positive or negative respect 13at trial ms woodum was accepted as a qualified expert witness and testified as to the property’s fair_market_value the court also received into evidence ms woodum’s written reports see rule g stating that an expert witness shall submit to the court a written report that generally serves as his or her direct testimony the appraised property comprised the fee simple interest surface rights only of the real_estate including the land and any attached improvementsdollar_figure it did not include intangibles fixtures and personal_property ms woodum valued the property as of date at dollar_figure valuing the land at dollar_figure and the improvements at dollar_figure the appraisal report included ms woodum’s descriptions of the hanszen house cabana and grounds the detailed descriptions of the improvements on the land included some of the property that had been conveyed to the yote trust the appraisal did not consider or value the property held in the yote trust separately from the rest of the property in forming her postcasualty valuation of petitioner’s property as of date ms woodum made the following assumption i have relied upon the owner’s description of damages to the subject’s improvements as a result of flooding during hurricane ike the itemized sworn statement in proof of loss to chubb for dollar_figure excluding tree loss chubb photographs and a physical inspection of the property by this appraiser on date the description of damages on which she relied was as follows the sump pump failure caused the accumulation of 2’ to 3’ of water in the basement and the flooding of the hot water heaters due to the 14in the context of the appraisals improvements include the hanszen house cabana and grounds circumstances following the hurricane it was several days before the flooded basement was discovered by that time mildew and mold had permeated the residence including areas behind the wood paneling and walls a pump was procured and it took three days to remove standing water wallcoverings and wood flooring were damaged the wood flooring was removed to leave a ‘hole’ for fans to dry out the basement which took approximately days damaged flooring could not be matched causing additional issues ms woodum valued the post-hurricane ike property at dollar_figure specifically valuing the land at dollar_figure and therefore valuing hanszen house and other improvements at dollar_figure this translates to a decline in total fair_market_value but a decline in value to hanszen house and the other improvements after hurricane ike ms woodum used a paired sales approach15 to provide an indication of the market reaction to damages she determined the paired sales reflected the most similar comparables to the property because they had known defects needing minor and extensive renovations at the time of their sales all of the paired sales occurred before hurricane ike and the known defects did not originate from a casualty she opined 15ms woodum described the paired sales approach as a common method of appraisal in which two similarly situated properties are compared in order to isolate and value a particular feature such as hurricane damage to determine the market reaction to the isolated feature and thus its impact on the overall value of the property the severity of damages to the subject’s improvements and attributes of the subject property limit qualified buyers under the best of circumstances market participants confirm purchasers having little appetite for major repairs in river oaks or other competing markets the trend is to raze damaged improvements as opposed to performing rehabilitation a conservative discount is indicated tempered by the opinion of site value quantified in this addendum this percentage is considered reasonable and supportable for the damages sustained to the improvements and the full disclosure that would be required to market the property in ‘as-is where-is’ condition costs for time dealing with remediation inconvenience loss of use stigma associated with previous flood disclosure etc are factors that would have to be considered this method appears to be the most reasonable approach because the most logical purchaser response to a property with damaged improvements is to raze the improvements in favor of new_construction based on conversations with market participants in point of fact the subject property did sell in for ‘lot value only’ based on the buyer’s intent to design and construct improvements to his specifications at trial ms woodum further opined that the property was stigmatized as a result of the flood she specified that flooding could lead to a diminution in value attributed to market or public perception part of the stigmatization of petitioner’s property she opined was attributable to the discovery of asbestos during the postflood remediation process ms woodum’s date appraisal indicates that the minimum average and maximum sale prices of properties in the river oaks neighborhood all declined from to also approximately one-third fewer properties sold in the river oaks neighborhood in compared to at trial ms woodum acknowledged that there was a general market decline in or around dollar_figure vi notice_of_deficiency and civil penalty approval respondent issued petitioner the subject notice_of_deficiency dated date respondent determined that petitioner was not entitled to deduct a casualty_loss for and that he was liable for an accuracy-related_penalty on an underpayment due to negligence or a substantial_understatement_of_income_tax under sec_6662 revenue_agent angela okharedia examined petitioner’s return and made the initial determination that petitioner was liable for an accuracy-related_penalty ms okharedia’s immediate supervisor terry chen approved the penalty determination in writing by signing ms okharedia’s work papers on june dollar_figure 16contemporaneous with hurricane ike an international banking crisis beginning with the collapse of lehman brothers and a subprime mortgage crisis also tempered the relevant real_estate market 17ms okharedia’s work papers were admitted into the record on date upon respondent’s motion to reopen the record opinion i burden_of_proof petitioner argues in his opening brief that respondent bears the burden_of_proof under sec_7491 the court need not decide this issue generally the commissioner’s determination_of_a_deficiency is presumed correct and the taxpayer bears the burden of proving it incorrect see rule a 290_us_111 moreover deductions are a matter of legislative grace and the taxpayer bears the burden of proving his entitlement to any deductions claimed 503_us_79 292_us_435 sec_7491 however provides that subject_to certain limitations where a taxpayer introduces credible_evidence with respect to a factual issue relevant to ascertaining the taxpayer’s tax_liability the burden_of_proof shifts to the commissioner with respect to that issue sec_7491 applies with respect to a factual issue only if the requirements of sec_7491 are satisfied under sec_7491 a taxpayer must have maintained all records required by the internal_revenue_code and cooperated with reasonable requests by the secretary for witnesses information documents meetings and interviews the court decides this case on a preponderance_of_the_evidence without regard to which party bears the burden_of_proof see 131_tc_185 supplementing tcmemo_2007_340 see also 394_f3d_1030 8th cir aff’g tcmemo_2003_212 accordingly the court does not decide whether sec_7491 is applicable here ii storm casualty_loss subject_to certain limitations an individual is entitled to a deduction for any loss es sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise that arise from fire storm or other_casualty sec_165 c h and dollar_figure generally the net_casualty_loss is allowed as a deduction only to the extent it exceeds dollar_figure and then only to the extent it exceeds of the taxpayer’s adjusted_gross_income sec_165 and a the general_rule was modified 18the tax cuts and jobs_act of pub_l_no sec stat pincite9 added sec_165 to limit individual casualty_loss deductions to the extent attributable to a federally_declared_disaster 19as part of the tax extenders and alternative_minimum_tax relief act of pub_l_no sec_706 and d stat pincite congress changed the dollar_figure limitation per casualty to dollar_figure dollar_figure for taxable years beginning after date effective for taxable years beginning after date by the tax extenders and alternative_minimum_tax relief act of pub_l_no sec_706 sec_122 stat pincite2 which renders inapplicable the of adjusted_gross_income limitation for a net_disaster_loss which means the excess of personal casualty losses attributable to a federally_declared_disaster occurring before date in a disaster_area over personal casualty gains therefore a taxpayer incurring a net_disaster_loss in a federally_declared_disaster area in was allowed a casualty_loss deduction even if the net_casualty_loss did not exceed of the taxpayer’s adjusted_gross_income see sec_165 to compute a casualty_loss deduction the following values of the damaged or destroyed property must be established fair_market_value before the casualty fair_market_value after the casualty and the taxpayer’s basis in the property see 46_tc_751 aff’d 387_f2d_420 8th cir sec_1_165-7 b income_tax regs as a general_rule the precasualty and postcasualty values must be determined by competent appraisal sec_1_165-7 income_tax regs a competent appraisal must recognize the effects of any general market decline affecting undamaged as well as damaged property which may occur simultaneously with the casualty so that any deduction will be limited to the actual loss resulting from damage to the property id as an alternative method of proving a decline in value the regulations provide that if the taxpayer has repaired the property damage resulting from the casualty the taxpayer may use the cost of repairs to prove the loss of value to the property from the casualty see id subdiv ii the taxpayer must show that a the repairs are necessary to restore the property to its condition immediately before the casualty b the amount spent for such repairs is not excessive c the repairs do not care for more than the damage suffered and d the value of the property after the repairs does not as a result of the repairs exceed the value of the property immediately before the casualty id the cost of repairing the property must be the actual cost incurred to repair the property not an estimate 70_tc_391 thus an estimate of the cost of repairing the property cannot be used to determine the decline in the value of the property id the amount of the loss deductible under sec_165 is limited to the taxpayer’s adjusted_basis in the property sec_1_165-7 income_tax regs the amount must then be reduced by the compensation received for the loss sec_165 see sec_1_165-7 examples and income_tax regs iii amount of loss a competent appraisal form_4684 the record does not establish that the valuations petitioner reported on his form_4684 were based on competent appraisals nor does the record reflect how petitioner or his cpas determined the precasualty or postcasualty fair market values of the property even though the precasualty fair_market_value petitioner reported is consistent with the value he reported to fema and the value of the property insured through chubbdollar_figure ms woodum’s retrospective appraisal petitioner contends that he is entitled to a casualty_loss deduction because he offered expert testimony as to the difference between the property’s pre- and post-casualty fair market values petitioner obtained the appraisal for litigation purposes in general expert witness opinions can help the court to understand subjects requiring specialized training knowledge or judgment fed r evid however the court is not bound by the expert’s opinion helvering v nat’l 20it is also not clear whether the value of the wine or other personal_property factored into the reported valuations grocery co 304_us_282 the court weighs the opinions of expert witnesses according to their qualifications and other relevant evidence 250_f2d_242 5th cir aff’g in part and remanding in part tcmemo_1956_178 85_tc_469 ms woodum’s two appraisals showed a difference in fair_market_value between the pre- and post-casualty property of dollar_figure the court is not persuaded that the appraisals are reliable measures of petitioner’s casualty_loss and declines to rely on them as an initial matter there is no indication that ms woodum excluded from her valuation any of the property held in the yote trustdollar_figure furthermore ms woodum’s postcasualty appraisal relied heavily on the stigmatization of hanszen house due to the flooded basement she noted that the fear of future flooding may have caused an immediate adverse buyer reaction this court has traditionally held that physical damage to property is a prerequisite to deducting a casualty_loss under sec_165 see eg squirt co v 21as stated supra p the record does not reflect the description or value of the property held in the yote trust given that petitioner originally purchased the property in for dollar_figure see supra p and reported his basis as dollar_figure million on his form_4684 see supra p it is possible that the difference represents the value of the property conveyed to the yote trust commissioner 51_tc_543 aff’d 423_f2d_710 9th cir pulvers v commissioner 48_tc_245 aff’d 407_f2d_838 9th cir 47_tc_1 28_tc_717 aff’d 252_f2d_425 4th cir mancini v commissioner tcmemo_2019_16 at chamales v commissioner tcmemo_2000_33 wl kamanski v commissioner tcmemo_1970_352 tax ct memo lexis aff’d 477_f2d_452 9th cir this court has refused to permit deductions on the basis of a temporary decline in market_value see eg squirt co v commissioner t c pincite pulvers v commissioner t c pincite thornton v commissioner t c pincite citizens bank of weston v commissioner t c pincite chamales v commissioner wl kamanski v commissioner tax ct memo lexis for example in citizens bank of weston v commissioner t c pincite the court stated that physical damage or destruction of property is an inherent prerequisite in showing a casualty_loss in thornton v commissioner t c pincite the court stated that no allowance can be made for purported immediate buyer resistence to purchases in a flood-damaged area particularly in the absence of evidence of postflood sales of comparable properties in the area at depressed prices when again faced with taxpayers seeking a deduction premised upon a decrease in market_value the court further explained in pulvers v commissioner t c pincite citing 274_us_398 the scheme of our tax laws does not however contemplate such a series of adjustments to reflect the vicissitudes of the market or the wavering values occasioned by a succession of adverse or favorable developments such a decline was termed a hypothetical loss or a mere fluctuation in value id pincite the court likewise emphasized in squirt co v commissioner t c pincite that n ot all reductions in market_value resulting from casualty-type occurrences are deductible under sec_165 only those losses are deductible which are the result of actual physical damage to the property this rule was reiterated yet again in kamanski v commissioner tax ct memo lexis at when the court observed in the instant case there was likewise relatively small physical damage to petitioner’s property and the primary drop in value was due to buyer resistance to purchasing property in an area which had suffered a landslide if there had been no physical damage to the property petitioner would be entitled to no casualty_loss deduction because of the decrease in market_value resulting from the slide t he only loss which petitioner is entitled to deduct is for the physical damage to his property the court even further reiterated in chamales v commissioner wl at that an attempt to base a deduction on market devaluation without proving the extent of property damage is contrary to existing law however no allowance can be made for purported immediate buyer resistance to purchases in a flood-damaged area particularly in the absence of evidence of postflood sales of comparable properties thornton v commissioner t c pincite ms woodum did not include any post-hurricane sales of comparable properties in her paired sales approach ms woodum acknowledged that there was a general market decline in ms woodum’s date appraisal indicates that the minimum average and maximum sale prices in the river oaks neighborhood all declined from to also approximately one-third fewer properties sold in the river oaks neighborhood in compared to ms woodum also opined that the property was stigmatized because during the postflood remediation process petitioner discovered asbestos in the basement of the house a casualty event occurs when an unexpected accidental force is exerted on property 48_tc_430 see also 120_f2d_253 2d cir noting that progressive deterioration of property through a steady operating cause is not an accidental force 76_tc_593 aff’d 680_f2d_91 11th cir while the asbestos was discovered when the basement flooded petitioner purchased the property in an as is unwarranted condition the asbestos was present in the house at the time petitioner purchased it and any diminution in value attributable to the discovery of the longstanding asbestos is not part of petitioner’s casualty_loss see pulvers v commissioner t c pincite the court is not persuaded that the value of hanszen house and other improvements declined by as ms woodum concludes and if the value did decline that much the court is not persuaded that it did so solely because of the damage resulting from hurricane ike the court will not rely on ms woodum’s appraisals as evidence of petitioner’s loss from hurricane ike accordingly petitioner has not established his loss through competent appraisal dollar_figure b cost of repairs as an initial matter the record does not reveal petitioner’s basis in the wine collection or in the computer equipment this court has consistently held that where a taxpayer’s basis is not established his loss cannot be computed millsap 22similarly petitioner did not establish the postcasualty value of his wine collection therefore he did not establish its decline in value if any following hurricane ike v commissioner t c pincite 24_tc_199 aff’d 247_f2d_233 2d cir petitioner spent several months repairing and replacing the property after hurricane ike thus he would generally be entitled to a casualty_loss deduction equal to the cost of those repairs not in excess of his adjusted_basis in the property and not otherwise compensated for by insurance petitioner does not argue that he made repairs to the property that were not compensated for by insurance petitioner purchased the property in for dollar_figure on his form_4684 he reported his basis as dollar_figure million there is no explanation in the record as to the difference in basisdollar_figure in any event however petitioner’s adjusted_basis in the property exceeds the cost of any repairs he made to the property so his casualty_loss would not be limited by his adjusted_basis petitioner received insurance payments totaling dollar_figure well in excess of the cost of repairs he would otherwise be entitled to deduct as a casualty_loss accordingly petitioner is not entitled to a casualty_loss deduction for 23as stated supra note it is possible that the difference represents the value of the property that was conveyed to the yote trust iv accuracy-related_penalty sec_6662 and b and imposes a accuracy-related_penalty on any underpayment of federal_income_tax attributable to a taxpayer’s negligence or disregard of rules or regulations or substantial_understatement_of_income_tax ‘ n egligence’ includes any failure to make a reasonable attempt to comply with the provisions of the code and the term ‘disregard’ includes any careless reckless or intentional disregard sec_6662 an understatement of income_tax is substantial if the amount of the understatement exceeds the greater of of the tax required to be shown for the taxable_year or dollar_figure sec_6662 with respect to an individual taxpayer’s liability for a penalty the commissioner must produce sufficient evidence indicating that the imposition of a penalty is appropriate sec_7491 116_tc_438 here respondent’s burden of production includes evidence that the penalty was personally approved in writing by the immediate supervisor of the individual making such determination sec_6751 see 851_f3d_190 2d cir aff’g in part rev’g in part tcmemo_2015_42 graev v commissioner 149_tc_485 supplementing and overruling in part 147_tc_460 petitioner then bears the burden of proving that the penalty is inappropriate including the applicability of any defense see higbee v commissioner t c pincite the sec_6662 penalty does not apply to any portion of an underpayment if it is shown that there was a reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to such portion sec_6664 the decision whether the taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all pertinent facts and circumstances sec_1_6664-4 income_tax regs reasonable_cause and good_faith are present where the taxpayer establishes by a preponderance_of_the_evidence that the taxpayer reasonably believed that the professional upon whom the reliance is placed was a competent tax adviser who has sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment 115_tc_43 aff’d 299_f3d_221 3d cir the court need not decide whether respondent has satisfied his burden under sec_7491 because even if he has the court finds that petitioner acted in good_faith and with reasonable_cause petitioner relied on his cpa and the accounting firm to prepare his tax_return correctly petitioner had a complicated return with multiple schedules and he provided his accounting firm with the documentation necessary to prepare it petitioner’s cpa had been licensed for years and he had reviewed petitioner’s tax returns for many years the accounting firm’s practice included multiple layers of review it was reasonable for petitioner to believe his cpa was a competent tax adviser and the court finds that he gave his cpa all the necessary information for his return and that he relied in good_faith on the cpa’s judgment accordingly petitioner is not liable for an accuracy-related_penalty under sec_6662 for v conclusion the court has considered all of the arguments made by the parties and to the extent they are not addressed herein they are considered unnecessary moot irrelevant or without merit to reflect the foregoing decision will be entered under rule


--------------------------------------------- department of the treasury employer_identification_number contact person - id number contact telephone number uil internal_revenue_service p o box cincinnati oh number release date date date legend b name of program c name of company x dollars amount y dollars amount dear you asked for advance approval of your scholarship grant procedures under sec_4945 this approval is required because you are a private_foundation that is exempt from federal_income_tax you requested approval of your scholarship program to fund the education of certain qualifying students our determination we approved your procedures for awarding scholarships based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding scholarships meet the requirements of code sec_4945 as a result expenditures you make under these procedures won't be taxable also awards made under these procedures are scholarship or fellowship grants and are not taxable to the recipients if they use them for qualified_tuition_and_related_expenses subject_to the limitations provided in code sec_117 description of your request your letter indicates you will operate a scholarship program called b your purpose is to make grants to charitable organizations b's purpose is to award scholarships to individuals to attend a post-secondary educational program at i an accredited four-year college or university for up to four years or ii a junior college or vocational program for up to two years recipients will also be offered guidance and support from your volunteers as well as career mentoring and counseling from c employees letter catalog number 58263t graduating high school students and individuals who have obtained a g e d who will attend a post-secondary educational_institution and have an affiliation with one or more of your current or former grantee organizations are eligible for a scholarship relatives of members of your scholarship selection committee members of your board_of directors and employees and principals of c are not eligible to apply you plan to publicize b among your current and former grantees which include educational and community based organizations that provide tutoring literacy and mentoring and after-school programs you believe this will enable you to identify potential scholarship recipients who have proven their commitment to succeed you may also publicize the availability of the program to other members of the community your current and former grantee organizations will identify candidates who have benefited them and nominate them for the scholarships those nominated will complete an application provide you high school transcripts and letters of recommendation after applications are submitted you will form a scholarship committee consisting of a board member your program director and or vice president and at least two other committee members you will send the applications to all committee members and then hold a formalized meeting to select the recipients recipients will be selected based upon their personality and character traits that enable them to be successful and upon a minimum grade point average of interviews may be scheduled if further information is needed your board will determine the number of scholarships and the amount that will be annually awarded based upon your financial resources available for distribution currently you plan to award x dollars per year for four years to an applicant planning to attend a four-year accredited college or university and y dollars per year for each year of the course of study to an applicant planning to attend a junior college or vocational program the funds will be sent directly to the school on behalf of the recipients you will obtain reports and or grade transcripts from the institutions where the recipients are enrolled and will pay grants directly to the educational_institution for each student and only for students who i continue to maintain a gpa of and ii remain enrolled and in good standing at the institution of the student's choice students will also be required to submit an annual report of their academic year and the impact of their scholarship you can terminate the scholarship if the recipient becomes academically ineligible or the student's gpa drops below a if a student withdraws or is expelled from school the award will not be renewed for the following school year you represent that you will complete the following arrange to receive and review grantee reports annually and upon completion of the purpose for which the grant was awarded investigate diversion of funds from their intended purposes and take all reasonable and appropriate steps to recover the diverted funds ensure other grant funds held by a grantee are used for their intended purposes and withhold further payments to grantees until you obtain grantees' assurances that future diversions will not occur and letter catalog number 58263t that grantees will take extraordinary precautions to prevent future diversion from occurring you represent that you will maintain the following all records relating to individual grants including information obtained to evaluate grantees identify a grantee is a disqualified_person establish the amount and purpose of each grant and establish that you undertook the supervision and investigation of grants described above basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that meets all of the following requirements of code sec_4945 is not a taxable_expenditure the foundation awards the grant on an objective and nondiscriminatory basis the irs approves in advance the procedure for awarding the grant the grant is a scholarship or fellowship subject_to the provisions of code sec_117 the grant is to be used for study at an educational_organization described in code sec_170 b a ii other conditions that apply to this determination this determination only covers the grant program described above this approval will apply to succeeding grant programs only if their standards and procedures don't differ significantly from those described in your original request this determination applies only to you it may not be cited as a precedent you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you must report any significant changes to your program to the cincinnati office of exempt_organizations at internal_revenue_service exempt_organizations determinations p o box cincinnati oh you cannot award grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives all funds distributed to individuals must be made on a charitable basis and further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 letter catalog number 58263t you should keep adequate_records and case histories so that you can substantiate your grant distributions with the irs if necessary we've sent a copy of this letter to your representative as indicated in your power_of_attorney please keep a copy of this letter in your records if you have questions please contact the person listed at the top of this letter sincerely jeffrey i cooper director exempt_organizations rulings and agreements letter catalog number 58263t


t c no united_states tax_court marc g bissonnette and lillian i cone petitioners v commissioner of internal revenue respondent docket no filed date p was a ferryboat captain for a company that carried travelers on sea voyages to destinations on puget sound washington the company’s home port was in seattle washington p worked approximately to 17-hour days on turnaround runs completed within hours that each included a 6-hour layover at an away- from-home port during off-season voyages and a to 1-hour layover at an away from home port during peak- season voyages p paid for his meals and incidental_expenses m ie while traveling p reported his m ie incurred during these layovers as miscellaneous_itemized_deductions under sec_162 i r c for and the deduction amounts were ascertained from the federal per_diem rates for m ie as prescribed under revproc_2000_39 2000_2_cb_340 and its successors r denied the deductions determining that p was not away from home within the meaning under sec_162 i r c because his voyages did not require him to obtain sleep or rest additionally r argues that if p is considered away from home and is entitled to deduct his m ie p was required to prorate and reduce those expenses for a partial day of travel away from home and was required to further reduce these expenses by percent pursuant to sec_274 i r c held petitioner was away from home for purposes under sec_162 i r c and may deduct m ie incurred while obtaining sleep or rest during the 6-hour layovers held further p may deduct the allowable federal m ie rate for a full_day of travel held further p is required to reduce his allowable m ie by percent pursuant to sec_274 i r c gregory l white for petitioners lisa m oshiro for respondent haines judge respondent determined deficiencies in petitioners’ federal income taxes for and years at issue of dollar_figure dollar_figure and big_number respectively unless otherwise indicated all section references are to the internal_revenue_code as amended and rule references are to the tax_court rules_of_practice and procedure amounts are rounded to the nearest dollar after concessions the issues for decision are whether marc g bissonnette petitioner was away from home within the meaning of sec_162 by virtue of his duties as a passenger ferryboat captain on turnaround voyages completed within hours if petitioner was away from home whether he is required to prorate and reduce his allowable meals and incidental_expenses m ie for a partial day of travel away from home and if petitioner was away from home whether he is required to further reduce his allowable m ie by percent pursuant to sec_274 findings_of_fact petitioner’s education and employment the parties’ stipulation of facts and the attached exhibits a are incorporated herein by this reference and the fact sec_2 the parties filed a stipulation of settled issues in which they agreed to the amounts of deductions that petitioners are entitled to claim for spouse union dues for the years at issue tax preparation fees in and spouse continuing education expenses in and license fees in the parties also stipulated that if the court determines petitioner was away from home during either the victoria layovers or the friday harbor layovers or both petitioner has substantiated the time place and business_purpose of the travel petitioner may use the federal m ie rate for the locality of travel for each day or partial day that he was away from home petitioner incurred telephone expenses of dollar_figure dollar_figure and dollar_figure for the years at issue respectively and petitioner incurred taxi expenses while in victoria during the years at issue of dollar_figure dollar_figure and dollar_figure respectively petitioner concedes that his miscellaneous_itemized_deductions for the years at issue are limited to amounts which exceed percent of his adjusted_gross_income under sec_67 stipulated are so found at the time the petition was filed petitioners resided in kingston washington kingston is a community on the kitsap peninsula washington on puget sound after petitioner graduated from high school in he was nominated to attend the merchant marine academy by senator claiborne pell petitioner graduated from the academy in with a bachelor of science degree for the next to years petitioner operated deep sea vessels he then returned to school to earn a master’s degree in marine transportation at the university of rhode island in petitioner has two oceans licenses one permits him to be master of a ship up to big_number tons the other to be a third mate on a ship without limitations as to the ship’s tonnage during the years at issue petitioner was employed as the director of marine operations and senior captain for clipper navigation inc the company the company owned and operated ferryboats that carried travelers on sea voyages throughout puget sound the company’s main office terminal and home port are in seattle washington the company paid petitioner an hourly rate his duties included captaining the ferryboats named victoria clipper clipper victoria clipper iii clipper iii and the lewis and clark to victoria b c canada victoria and or friday harbor washington in the san juan islands friday harbor on all voyages each ferryboat was maintained by a crew and a first mate each ferryboat carried up to big_number passengers and as captain petitioner was responsible for the safety of all passengers this responsibility required his full attention at all times any trouble or incident on the ferryboat during a voyage was his responsibility the voyages petitioner captained began and ended within the same 24-hour period at the company’s home port in seattle washington he generally worked to hours a day for consecutive days with the following consecutive days off he typically began work as early a sec_5 a m to a m to prepare the ferryboat and was released from duty between p m to p m and occasionally as late as midnight the time fluctuations were a result of changes in the company’s schedule and a variety of other unpredictable factors including u s customs and border protection security checks high sea levels poor weather maintenance problems log tows fueling interference by recreational boats minimum wake requests and assisting with rescues or medical emergencies for example if weather conditions were severe petitioner would need to take an alternative route which could extend travel time by approximately hours the first mate could operate the ferryboat only while in the captain’s presence at the end of a workday petitioner usually did not have time to return to his personal_residence for dinner on account of his early starting time and long commute to and from his residence he remained in seattle and slept on a cot stored aboard one of the company’s vessels the company did not require him to stay overnight pay him during this time nor provide him an allowance for meals or incidental_expenses regardless during overnight periods he helped out with maintenance problems and kept watch for bad weather on one occasion severe weather forced petitioner to move a ferryboat in the middle of the night usually half of the captains employed by the company stay overnight on the ferryboats the company’s voyages during the year are classified as occurring during either peak travel season or off-peak travel season b peak travel season in the years at issue the peak travel seasons began date date and date and each generally lasted though september of the year in which it began petitioner ordinarily captained the clipper iii in and on a schedule servicing both friday harbor and victoria on the same day because the company leased the clipper iii to the united petitioner does not claim he was away from home when he stayed overnight in seattle on one of the company’s ferryboats states navy in petitioner captained its replacement the lewis and clark the lewis and clark was smaller and slower than the clipper iii as a result the company altered the peak- season schedule to limit the voyages to friday harbor and discontinued the friday harbor to victoria leg of the voyage for the entire season occasionally petitioner captained another ferryboat because of a shift trade with another captain or to cover for an ill captain the ferryboats petitioner captained during the peak-seasons for the years at issue generally followed the schedules below departure arrival depart seattle1 arrive friday harbor depart friday harbor arrive victoria depart victoria arrive friday harbor depart friday harbor arrive seattle2 a m a m a m p m p m p m p m p m a m a m a m a m a m --- p m --- p m --- --- p m p m p m p m p m passengers generally start boarding minutes to an hour before departure as stated above the seattle arrival time could be later because of unpredictable circumstances in and the clipper iii had a 30-minute-to-1-hour layover in victoria and friday harbor in the lewis and clark voyages had a layover in friday harbor that lasted over hours during all layovers neither petitioner nor the crew were for purposes of this opinion peak travel season voyages are only the voyages performed with the clipper iii and the lewis and clark off duty and during the 5-hour layover petitioner usually fueled the ferryboat and continually moved it to different locations because of harbor congestion because petitioner did not go off duty during these voyages the company provided a second captain capable of maintaining the ferryboat to allow petitioner time to rest petitioner did not provide receipts to substantiate his m ie incurred during peak-season layovers or during on-board rest breaks instead he used the allowable federal m ie rate for the locality of travel c off-peak travel season in the years at issue each off-peak travel season ran from september until the next year’s peak-season began during each off-peak season petitioner typically captained the clipper from seattle to victoria and back the clipper generally departed seattle between and a m arrived in victoria between and a m departed victoria between and p m and the federal m ie rate represents the daily amount that the government pays to its traveling employees to reimburse them for breakfast lunch dinner and incidental_expenses 115_tc_210 the term locality of travel means the locality where an employee traveling away from home in_connection_with_the_performance_of_services as an employee of the employer stops for sleep or rest revproc_2000_39 2000_2_cb_340 revproc_2001_47 2001_2_cb_332 revproc_2002_63 2002_2_cb_691 revproc_2003_80 2003_2_cb_1037 arrived back in seattle between p m and p m during the to 7-hour layover the passengers would explore the city of victoria the company provided a four-bedroom condominium in victoria where the clipper’s crew rested during the layover because most of the crew were young and noisy petitioner did not go to the condominium instead he had lunch swam for minutes and returned to the clipper to sleep or rest for approximately hours on a cot he stored on board if the sleeping accommodations on the ferryboat had not been available petitioner would have rented a room at a hotel petitioner was neither paid an hourly wage for the layover period in victoria nor reimbursed for m ie he incurred during these layovers petitioner did not provide receipts to substantiate his m ie instead he used the allowable federal m ie rate for the locality of travel d procedural background petitioners timely filed their federal_income_tax returns for the years at issue respondent issued the notice_of_deficiency in dispute on date petitioners timely filed their petition on date petitioners’ gross_income for the years at issue is not in dispute the parties dispute whether petitioners may deduct under sec_162 traveling expenses listed on their schedules a itemized_deductions for the years at issue and if any of the expenses are deductible whether petitioners must reduce the deductible amounts pursuant to the partial day rule and sec_274 opinion petitioner argues his m ie are deductible because they were incurred while he was traveling away from home on business trips requiring sleep or rest sec_262 provides that a taxpayer generally cannot deduct personal living or family_expenses however sec_162 allows taxpayers to deduct traveling expenses paid_or_incurred while away from home in the pursuit of a trade_or_business traveling expenses include travel fares meals lodging and other expenses incident to travel sec_1_162-2 income_tax regs for purposes of sec_162 the term home generally means the taxpayer’s principal place of employment and not where his or her personal_residence is located 74_tc_578 we decide the issues in this case including whether petitioner was away from home for purposes of sec_162 on the basis of the evidence in the record without regard to the burden_of_proof accordingly we need not and do not decide whether the burden-shifting rule_of sec_7491 applies see 116_tc_438 a sec_162 sleep_or_rest_rule the standard used to determine whether a taxpayer is away from home was developed through a series of cases including 286_f2d_333 5th cir as stated in williams as applied to a traveler whose work does not require him to be away_from_home_overnight the standard is if the nature of the taxpayer’s employment is such that when away from home during released time it is reasonable for him to need and to obtain sleep or rest in order to meet the exigencies of his employment or the business demands of his employment his expenditures including incidental_expenses such as tips for the purpose of obtaining sleep or rest are deductible traveling expenses under sec_162 id this standard is commonly referred to as the sleep_or_rest_rule the facts of williams assist in understanding the sleep_or_rest_rule articulated above in williams the taxpayer a railroad engineer worked a 16-hour day every other day on a turnaround run between montgomery alabama his home terminal and atlanta georgia he had a 6-hour layover in atlanta before his return to montgomery the same day although the taxpayer was not required by his employer to do so during the layover period he felt it was necessary to sleep and rest and rented a hotel room at the hotel he had lunch and dinner as well as rested and slept before resuming work the court_of_appeals for the fifth circuit concluded that on account of the length of the taxpayer’s workday hours the duration of his layover hours and the responsibility of his position it was necessary for the taxpayer to rest during his layover in order to carry out his assignment even though no statute regulation or railroad rule required him to sleep or rest before his return trip id pincite furthermore the court reasoned that the phrase away from home does not require a person to actually be away overnight the court held that the costs of meals lodging and tips during the 6-hour layover were deductible id pincite shortly after williams was decided the commissioner issued revrul_61_221 1961_2_cb_34 which announced his concurrence with the sleep_or_rest_rule as interpreted in williams the although the length of a workday is considered in determining whether a taxpayer actually needed sleep or rest the revenue act does not necessarily require as a prerequisite to a deduction for traveling expenses on less than an overnight trip that the employee work substantially longer than an ordinary workday 286_f2d_333 5th cir the pertinent part of revrul_61_221 1961_2_cb_34 states the internal_revenue_service will follow the recent decision of the united_states court_of_appeals for the fifth circuit in f m williams v george d patterson fed 2d the service had contended that the taxpayer was not away from home on such trips because they were not continued continued overnight trips as that term is explained in revrul_54_497 c b pincite for the reason that williams’ trips did not necessitate his absence from his home terminal for a minimum period which lasted substantially longer than an ordinary days’ work and during which his duties required him to obtain necessary sleep in atlanta the court concluded however that williams had satisfied the dual test prescribed by the service since his 16-hour absence on such round trips including one hour for discharging his duties before leaving and after returning to his home terminal was substantially longer than an ordinary workday and it was reasonably necessary for williams to sleep during his layover in order to carry out his assignment even though there was no statute regulation or railroad order requiring him to sleep and rest prior to his return run the service agrees with the court in interpreting revrul_54_497 as allowing the deduction in this case and concurs in general with the court's understanding that the correct rule governing the deductibility of such expenses is as follows if the nature of the taxpayer’s employment is such that when away from home during released time it is reasonable for him to need and to obtain sleep or rest in order to meet the exigencies of his employment or business demands of his employment his expenditures including incidental_expenses such as tips for the purpose of obtaining sleep or rest are deductible traveling expenses under sec_162 of the code however the service does not consider the brief interval during which an employee may be released from duty for the purpose of eating rather than sleeping as constituting an adequate rest period to satisfy the overnight_rule as a test for the deductibility of meal expenses on business trips completed within one day supreme court in 389_us_299 observed that the rule contemplated a sleep or rest period of sufficient duration that would ordinarily be related to a significant increase in expenses the supreme court acknowledged the rule provided a definite fair and ascertainable_standard id pincite the tax_court in 54_tc_1210 affd 435_f2d_1290 1st cir indicated that the rest period contemplated by the sleep_or_rest_rule is of the type illustrated by williams and normally involves a rest of sufficient duration to cause an increase in expenses a brief rest period which anyone can at any time without special arrangement and without special expense take in his own automobile or office does not qualify id pincite the court in barry disallowed expenses for meals claimed by a taxpayer on 1-day business trips that lasted between and hours during which the taxpayer rested briefly once or twice in his automobile if the nature of petitioner’s employment was such that when away from home during released time it was reasonable for him to need and to obtain sleep or rest in order to meet the exigencies or business demands of his employment his expenses for this purpose would be traveling expenses under sec_162 see williams v patterson supra pincite revrul_75_170 1975_1_cb_60 however the released time must be of a sufficient duration that it would ordinarily be related to a significant increase in expenses see united_states v correll supra b peak travel season respondent argues that petitioners are not entitled to a deduction for the expenses_incurred in the brief layovers during peak travel season because the layovers were insufficient in duration to require sleep or rest in and during peak-season petitioner’s layovers in victoria and friday harbor never exceeded an hour and he did not produce evidence showing he rested during that time petitioner also did not show he rested during the 5-hour layover in friday harbor during peak- season in instead petitioner testified that during this layover he was operating the ferryboat even though petitioner testified he did sleep or rest while another captain took command of the ferryboat he did not produce evidence showing the rest period was part of a layover released time or was of sufficient duration that it caused him to incur a significant increase in expenses as to the peak-season runs petitioner’s case is indistinguishable from barry v commissioner supra therefore the court finds petitioner was not away from home within the meaning of sec_162 during peak-season victoria friday harbor runs in and and the friday harbor runs in c off-peak travel season respondent citing stevens v commissioner tcmemo_1985_ argues that petitioner is not entitled to a deduction for the expenses_incurred during the off-peak-season to 7-hour layovers in victoria because the layovers were solely the result of scheduling rather than petitioner’s need for sleep or rest however the proper inquiry is into the nature of petitioner’s employment and his need for sleep or rest not whether a layover was the result of scheduling the factors to consider in determining whether petitioner needed sleep or rest include his age his physical condition the length of his workday and the importance of being alert so that he could carry out his job’s responsibilities without fear of injury to others these factors are applied against the background of petitioner’s experience in his employment and the practices and customs of similarly situated individuals see williams v patterson f 2d pincite petitioner’s background is impressive after attending the merchant marine academy he earned a master’s degree in marine transportation and he has been employed in this field for over years in the years at issue petitioner was the director of marine operations and senior captain for the company his workday lasted on average to hours including a to 7-hour layover in victoria during off-peak season he was responsible for his crew and the safety of up to big_number passengers during all voyages because of possible extreme weather conditions high sea levels log tows and other obstacles in the ocean petitioner as captain had to give his full attention at all times and any trouble or incident on the ferryboat was his responsibility petitioner also needed to consider that his workday could be significantly lengthened on account of any of the above situations as a result petitioner’s job was very demanding considering the facts this court finds it was reasonable for petitioner to obtain sleep or rest in order to meet the exigencies and business demands of his employment see williams v patterson f 2d pincite further the released time of to hours during the victoria voyage was sufficient in duration that it would normally be related to an increase in expensesdollar_figure accordingly petitioner was away from home for purposes of sec_162dollar_figure petitioner would have incurred significant out-of-pocket lodging_expenses during his layover but for the fact that he was furnished with a place to sleep see johnson v commissioner t c pincite 18_tc_649 petitioner must deduct his allowable m ie as itemized_deductions for the years at issue see sec_67 revproc_2000_39 sec c b pincite revproc_2001_47 sec continued d m ie respondent argues that if petitioner is found to have been away from home under sec_162 the allowable federal m ie rate should be reduced pursuant to the partial day rule and further reduced by the 50-percent limitation rule_of sec_274 as prescribed in certain revenue procedures sec_274 generally disallows a deduction under sec_162 for any traveling expense including meals_and_lodging while away from home unless the taxpayer complies with certain substantiation requirements sec_274 the section further provides that regulations may prescribe that some or all of the substantiation requirements do not apply to an expense which does not exceed an amount prescribed by those regulations id pursuant to sec_1_274-5 income_tax regs the commissioner is authorized to prescribe rules in pronouncements of general applicability under which allowances for certain types of ordinary and necessary expenses for traveling away from home will be regarded as satisfying the substantiation requirements of sec_274 118_tc_428 sec_1_274-5 and income_tax regs provides the commissioner may establish a method under continued c b pincite revproc_2002_63 sec c b pincite revproc_2003_80 sec c b pincite which a taxpayer may use a specified amount or amounts for m ie paid_or_incurred while traveling away from home in lieu of substantiating the actual costs under sec_274dollar_figure for purposes of sec_1_274-5 and j and income_tax regs revproc_2000_39 2000_2_cb_340 revproc_2001_47 2001_2_cb_332 revproc_2002_63 2002_2_cb_691 and revproc_2003_80 2003_2_cb_1037 hereinafter referred to collectively as the revenue procedures authorize various methods a taxpayer may elect to use in lieu of substantiating actual expenses for deemed substantiation of the taxpayer’s m ie incurred while traveling away from homedollar_figure par j of sec_1_274-5 income_tax regs applies to incidental_expenses incurred after date sec dollar_figure of revproc_2000_39 c b pincite and of revproc_2001_47 c b pincite provides the method a taxpayer may use in lieu of substantiating the costs for incidental_expenses for prior periods revproc_2000_39 supra and revproc_2001_47 supra apply for the years at issue and respectively revproc_2002_63 supra and revproc_2003_80 supra apply for the year at issue revproc_2000_39 supra is effective for m ie allowances paid_or_incurred on or after date revproc_2001_47 supra superseding revproc_2000_39 supra restates the relevant sections of revproc_2000_39 supra revproc_2002_63 supra superseding revproc_2001_47 supra restates the relevant sections of revproc_2001_47 supra except for modifications discussed in this opinion revproc_2003_80 supra superseding revproc_2002_63 supra restates the relevant sections of revproc_2002_63 supra except for modifications discussed in this opinion section dollar_figure of the revenue procedures provides in lieu of using actual expenses in computing the amount allowable as a deduction for ordinary and necessary meal and incidental_expenses paid_or_incurred for travel away from home employees and self-employed individuals who pay or incur meal expenses may use an amount computed at the federal m ie rate for the locality of travel for each calendar day or partial day the employee or self-employed_individual is away from home such amount will be deemed substantiated for purposes of paragraphs b and c of sec_1_274-5 provided the employee or self-employed_individual substantiates the elements of time place and business_purpose of the travel for that day or partial day in accordance with those regulations respondent concedes petitioner substantiated the time place and business_purpose of the travel and may use the federal m ie rate for the locality of travel for each day or partial day that petitioner was away from home however respondent argues that because petitioner was not away from home for as many a sec_24 hours in day only three-fourths of the federal m ie rate is allowable as a deduction during the off-peak-season turnaround voyages completed within hours section dollar_figure of the revenue procedures states that a full federal m ie rate for the locality of travel is available for a full_day of travel from a m to midnight to determine the amount of m ie deemed substantiated under section dollar_figure of the revenue procedures for partial days of travel section dollar_figure of the revenue procedures provides that either of the following methods may be used to prorate the federal m ie rate the rate may be prorated using the method prescribed by the federal travel regulations currently the federal travel regulations allow three-fourths of the applicable federal m ie rate for each partial day during which the employee or self-employed_individual is traveling away from home in_connection_with_the_performance_of_services as an employee or self-employed_individual the same ratio may be applied to prorate the allowance for incidental_expenses described in section dollar_figure of this revenue_procedure or the rate may be prorated using any method that is consistently applied and in accordance with reasonable business practice for example if an employee travels away from home from a m one day to p m the next day a method of proration that results in an amount equal to two times the federal m ie rate will be treated as being in accordance with reasonable business practice even though only one and a half times the federal m ie rate would be allowed under the federal travel regulations the quotation below is from rev procs and supra and differs in minor respects from the comparable provisions of rev procs and supra pursuant to rev procs and supra a taxpayer substantiating his m ie expenses under sec dollar_figure of those revenue procedures generally is limited to using the method in sec of the revenue procedures for proration of the federal m ie rate however if sec dollar_figure of the revenue procedures applies then either method under sec dollar_figure of the revenue procedures may be used to determine the amount deemed substantiated for a partial day of travel petitioner is substantiating his m ie under sec dollar_figure of the revenue procedures and he is employed in the transportation industry as defined under sec_4 of the revenue procedures therefore he may use either method the last sentence does not appear in revproc_2000_39 sec c b pincite or in revproc_2001_47 sec c b pincite and has no effect upon this case in particular the method in section of the revenue procedures allows the taxpayer to prorate the federal m ie rate using any method that is consistently applied and is in accordance with reasonable business practice in the example even though both days are partial days a taxpayer is allowed to use full days of the federal m ie rate for travel away from home for hours the first day a m to midnight and hours the second day midnight until p m petitioner consistently applied the full federal m ie rate to all off-peak-season voyages requiring him to be away from home for to hours a day considering the length of petitioner’s workday allowing petitioner to use the full federal m ie rate may be treated as in accordance with reasonable business practice by analogy to the example therefore the court finds petitioners may treat as substantiated the full federal m ie rate pursuant to section dollar_figure of the revenue procedures for the days petitioner incurred expenses while away from home during the off-peak-season voyages to victoria with to 7-hour layovers e sec_274 50-percent limitation petitioner argues that respondent is precluded from asserting he must reduce the allowable m ie deduction by percent as required by sec_274 because respondent raised it for the first time in his opening brief as a general_rule this court will not consider issues raised for the first time on brief where surprise and prejudice are found to exist 76_tc_708 petitioner was not surprised or prejudiced the revenue procedures petitioner relied upon as discussed above clearly state that sec_274 reduces the allowable federal m ie rate by percent furthermore petitioner raised in his pretrial memorandum and opening brief the issue that if the taxpayer was ‘away from home ’ what amount is allowable as a travel deduction accordingly this court finds petitioner was not surprised and prejudiced by respondent’s posttrial contentions in this regard sec_274 provides that the amount allowable as a deduction for any expense for food or beverages is generally limited to 50-percent of the amount of the expense that would otherwise be allowable the revenue procedures provide rules for applying the sec_274 50-percent limitation to per_diem allowances under section of the revenue procedures a taxpayer who computes the amount of his or her m ie under section dollar_figure of the revenue procedures is required to treat that amount as an expense for food and beverages the expenses are thus subjected to sec_274 petitioner incurred food or beverage and incidental_expenses while traveling away from home for business during the years at issue petitioner also computed and substantiated his m ie under section dollar_figure of the revenue procedures therefore his m ie incurred during the years at issue are subject_to the sec_274 50-percent limitation in the alternative petitioner argues that if the 50-percent limitation under sec_274 applies he is eligible for an exception sec_274 provides that paragraph shall not apply to any expense if e such expense is for food or beverages-- i required by any federal_law to be provided to crew members of a commercial_vessel ii provided to crew members of a commercial vessel-- i which is operating on the great lakes the saint lawrence seaway or any inland waterway of the united_states and ii which is of a kind which would be required by federal_law to provide food and beverages to crew members if it were operated at sea clauses i and ii of subparagraph e shall not apply to vessels primarily engaged in providing luxury_water_transportation determined under the principles of subsection m the evidence failed to show he qualified for an exception to the sec_274 50-percent limitation he did not demonstrate the company was required by any law to provide food or beverages to him or that the clipper the clipper iii or the lewis and clark was a vessel of a kind that would have been required by federal_law to provide food and beverages to its crew members if it operated at sea therefore this court concludes that sec_274 limits petitioner’s deduction of his allowable m ie to percentdollar_figure the court in reaching its holding has considered all arguments made and concludes that any arguments not mentioned above are moot irrelevant or without merit to reflect the foregoing under rule decision will be entered sec_274 allows a taxpayer to deduct a larger percentage of his or her allowable food and beverage expense if the food and beverages are consumed while away from home by an individual during or incident to the period of duty subject_to the hours_of_service limitations of the department of transportation petitioner did not provide evidence that the hours_of_service limitations established by the department of transportation apply to his activities as director of marine operations and senior captain for the company