t c summary opinion united_states tax_court william herbert whitehurst iii and carla cherlene whitehurst petitioners v commissioner of internal revenue respondent docket no 8479-01s filed date william herbert whitehurst iii and carla cherlene whitehurst pro_se innessa glazman-molot for respondent panuthos chief special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated subsequent 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 respondent determined deficiencies in petitioners’ federal income taxes of dollar_figure for dollar_figure for and dollar_figure for after concessions by the parties ’ the issues for decision are whether petitioner carla whitehurst’s bowling activity constitutes an activity_not_engaged_in_for_profit if the activity was engaged in for profit to what extent petitioners are entitled to deduct the claimed schedule c expenses and whether petitioners are entitled to certain claimed itemized_deductions petitioners resided in annapolis maryland and in bermuda at the time they filed their petition some of the facts have been stipulated and are so found for clarity and convenience we have combined our findings_of_fact and conclusions ' petitioners concede that they are not entitled toa deduction for an additional personal_exemption for claimed on their return and that they are not entitled to the deductions claimed for mr whitehurst’s work_clothes and shoes for and respondent concedes that petitioners are entitled to deductions for state taxes of dollar_figure for union dues of dollar_figure for dollar_figure for and dollar_figure for cleaning expenses of dollar_figure for dollar_figure for and dollar_figure in subscription expenses of dollar_figure for dollar_figure for and dollar_figure for job agency expenses of dollar_figure for and tax preparation fees of dollar_figure for respondent also adjusted petitioners’ additional child tax_credits for and and petitioners’ education credits for and these adjustments are computational therefore we need not address them issue l bowling activity petitioner carla whitehurst mrs whitehurst has been an avid bowler since she wa sec_5 years old as a child growing up in bermuda she bowled nearly every day mrs whitehurst competed internationally as a top junior bowler in bermuda her parents also competed in bowling tournaments in mrs whitehurst began competing in amateur bowling tournaments in which cash prizes were awarded to the top-scoring competitors the bowling tournaments that she competed in generally offered cash prizes that ranged from dollar_figure for first place to dollar_figure for a lower place finish though some of the larger tournaments offered prize winnings as high as dollar_figure dollar_figure or dollar_figure for first place she competed in tournaments for amateur bowlers with a handicap that is points added to the competitor’s score tournaments for professional or scratch bowlers without handicaps offered smaller prize winnings than the tournaments for amateur bowlers because they had fewer participants most of the tournaments in which she competed were sponsored by national amateur bowling inc nabi for which the entry fees ranged from dollar_figure up to dollar_figure mrs whitehurst was a member of nabi she believed that the entry fees for professional bowling tournaments which were up to dollar_figure were too high in comparison to the prize winnings offered which ranged q4e- from dollar_figure to dollar_figure therefore she did not compete in professional tournaments mrs whitehurst practiced bowling several times during the week including evenings and lunch breaks from her full-time job she also bowled in a league except for one tournament in las vegas nevada to which she flew mrs whitehurst drove to bowling tournaments in delaware maryland virginia north carolina south carolina and florida although she usually traveled alone on occasion she traveled with her husband children or james godwin her father and coach most tournaments began on either a thursday or friday and ended on a sunday mrs whitehurst competed in bowling tournaments in in and in she placed first in three tournaments second in five tournaments and in the top in eight tournaments from through discouraged by her lack of success in winning tournaments mrs whitehurst did not compete in bowling tournaments after and her bowling activity ceased at the time of trial she continued to bowl with a bowling league petitioners reported income and claimed deductions for expenses with respect to the bowling activity as follows income prize winnings dollar_figure dollar_figure dollar_figure bxpenses car and truck big_number big_number big_number repairs and maintenance supplies travel big_number big_number big_number meals and entertainment big_number big_number big_number other entry fees big_number big_number total expenses big_number big_number loss big_number big_number big_number petitioners claimed deductions for the standard mileage rate for the years at issue in the notice_of_deficiency respondent disallowed the claimed schedule c deductions for and and determined that mrs whitehurst did not engage in the bowling activity for a profit respondent asserts that the element of personal pleasure is inherently present in the bowling activity as an alternative position in the notice_of_deficiency respondent disallowed the following claimed deductions car and truck dollar_figure dollar_figure dollar_figure supplies repairs and maintenance travel big_number big_number big_number meals and entertainment other entry fees big_number big_number big_number respondent disallowed the claimed deductions because either petitioners did not provide books_and_records reflecting the -- - claimed amounts or the expense deductions were not otherwise allowable a taxpayer seeking to deduct trade_or_business_expenses under sec_162 must establish that the underlying activity was engaged in with an actual and honest profit objective 78_tc_642 affd without published opinion 702_f2d_1205 d c cir the taxpayer must have entered into or continued the activity with the actual honest and bona_fide objective of making a profit 224_f3d_16 1st cir affg tcmemo_1999_92 dreicer v commissioner supra pincite sec_1 a income_tax regs in determining whether the taxpayer has the objective of making a profit it may be sufficient that there is a small chance of making a large profit sec_1_183-2 income_tax regs objective indicia may be considered to establish the taxpayer’s true intent id we consider all of the facts and circumstances in determining whether a taxpayer entered into the activity for a profit placing greater weight upon objective facts than the taxpayer’s statements of intent dreicer v commissioner supra pincite the following nine nonexclusive factors are relevant in determining whether the taxpayer engaged in the activity for profit the manner in which the taxpayer carries on the activity the expertise of the taxpayer or her advisers the time and effort expended by the taxpayer in carrying on the activity the expectation that 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 which are earned the financial status of the taxpayer and the elements of personal pleasure or recreation sec_1_183-2 income_tax regs we now consider whether mrs whitehurst’s bowling activity was an activity she pursued with the objective of making a profit not all of the factors listed above are applicable to the facts of this case therefore we focus on only those factors that are relevant a manner in which the taxpayer carries on the activity when considering the manner in which the taxpayer carried on the activity we may consider whether she carried on the activity in a businesslike manner and maintained complete and accurate books_and_records that indicate that she engaged in the bowling activity for a profit sec_1_183-2 income_tax regs a change_of operating methods adoption of new techniques or abandonment of unprofitable methods may indicate a profit_motive id --- - mrs whitehurst did not maintain or produce to either respondent’s agent or the court a journal or a book of accounts for the bowling activity mrs whitehurst however maintained and produced numerous hotel restaurant gasoline credit card and rental car receipts airplane tickets copies of canceled checks bank records and bowling tournament score sheets that reflect the expenses_incurred with respect to the bowling activity mrs whitehurst recorded her expenses by just jotting information down on the tournament flyer because the tournaments were hectic while her records were somewhat disorganized and partially incomplete they generally reflect her receipts and expenses petitioners did not maintain a separate bank account for the bowling activity because mrs whitehurst had not been able to win any of the large tournaments offering large prize winnings ie dollar_figure or dollar_figure she changed her strategy during and decided to compete in more local and smaller tournaments in mrs whitehurst changed her strategy again and she decided to compete in more tournaments in florida that offered the larger prize winnings she stopped competing in tournaments in her changes in strategy and ultimate decision to stop competing in tournaments both support her claim that she entered into the activity with a profit objective see id b expertise of the taxpayer or her advisers preparation for the activity by extensive study of its accepted business and economic practices or consultation with experts may indicate that the taxpayer has a profit objective where the taxpayer carries on the activity in accordance with those practices sec_1_183-2 income_tax regs before mrs whitehurst began competing in bowling tournaments she consulted with other bowlers and tournament directors to determine the likelihood of her success in the tournaments mrs whitehurst was concerned that she would not be able to successfully compete against the male bowlers a nabi tournament director assuaged her concerns by discussing bowling lane conditions that were favorable to women and the women’s records of winnings petitioners consulted with a tax_return_preparer upon the advice of the tax_return_preparer petitioners amended their return and filed a form 1040x on which they claimed a loss from the bowling activity the tax adviser also advised mrs whitehurst to keep receipts the consultations with experts support the claim that mrs whitehurst entered into the bowling activity with a profit objective see id on time and effort expended by the taxpayer the fact that a taxpayer devotes much of her personal time -- - and effort to carrying on the activity may indicate an intent to profit particularly if the activity does not have substantial personal or recreational aspects sec_1_183-2 income_tax regs the fact that mrs whitehurst has devoted much of her personal time and effort to bowling generally supports her claim that she entered into the bowling activity with a profit objective see id nevertheless as we discuss in greater detail below bowling has substantial personal or recreational aspects for mrs whitehurst see id this factor is neutral d history of income or losses a series of losses during the initial stage of an activity is not necessarily an indication that the activity is not engaged in for profit sec_1_183-2 income_tax regs however continued losses which cannot be explained may be indicative that the activity is not engaged in for profit id mrs whitehurst did not earn prize winnings in excess of her expenses during the years that she engaged in the bowling activity petitioners claimed a loss of dollar_figure for anda loss of dollar_figure for with respect to the bowling activity her bowling scores had improved and were better in than they were in and her handicap was lower yet she won fewer tournaments that offered large prize winnings and received less prize money she explained that her lack of success in winning tournaments was essentially attributable to bad luck but not to her skills as a bowler which had improved we find her explanation of the reason for her losses to be reasonable and we conclude that this factor neither supports nor undercuts the claim that she entered into the bowling activity with a profit objective see id e amount of occasional profits if any an opportunity to earn a substantial profit ina highly speculative venture is ordinarily sufficient to indicate that the activity 1s engaged in for profit even though losses or only occasional small profits are actually generated sec_1 b income_tax regs mrs whitehurst earned prize winnings of dollar_figure in dollar_figure in dollar_figure in dollar_figure in and dollar_figure in but as discussed above her expenses exceeded her winnings although she did not win one of the top prizes of dollar_figure dollar_figure or dollar_figure we are satisfied that she had an objective to win and we find her testimony to be credible her stated objective is supported by the fact that she would have earned significant prize winnings had she won one or more tournaments that offered a large prize see 50_tc_1007 canale v commissioner tcmemo_1989_619 sec_1_183-2 income_tax regs the fact that these tournaments were for amateur bowlers is not relevant because the prize winnings offered were significant while mrs whitehurst did not earn a profit with respect to the activity opportunity for profit existed these facts support the claim that she entered into the bowling activity with a profit objective f financial status of the taxpayer the fact that the taxpayer does not have substantial income from sources other than the activity may indicate that the activity is engaged in for profit sec_1_183-2 income_tax regs substantial income from other sources may indicate that the activity is not engaged in for profit especially if there are personal or recreational elements in the activity id petitioners’ combined wages totaled dollar_figure in dollar_figure in and dollar_figure in although mrs whitehurst explained that she and her husband did not earn as much income as they wanted their combined wage income for each of the years at issue is not insignificant given that personal and recreational elements are involved in the bowling activity as we discuss below this factor does not support an intent to profit see id g ehlements of personal pleasure the presence of personal motives in carrying on an activity may indicate that the activity is not engaged in for profit especially where there are recreational or personal elements involved sec_1_183-2 income_tax regs the fact that the taxpayer derives personal pleasure from engaging in the activity is not sufficient to cause the activity to be classified as not engaged in for profit id mrs whitehurst has been an avid bowler nearly all of her life during the years at issue and at the time of trial she was a member of a bowling league and she bowled with her family mrs whitehurst testified that the bowling tournaments were long tiring and difficult but not pleasurable and that driving to tournaments in florida was especially difficult although we recognize that driving long hours to a bowling tournament is an arduous task we are not convinced that mrs whitehurst does not derive personal pleasure from or recreation in bowling the personal pleasure or recreation that she derives from the bowling activity however is not sufficient to cause the bowling activity to be classified as not engaged in for profit see id therefore this factor is neutral having considered the above factors and recognizing that no one factor is controlling we conclude that mrs whitehurst entered into the bowling activity with a profit objective and thus hold for petitioners on this issue see 72_tc_659 issue expense deductions we now consider respondent’s alternative position that petitioners are not entitled to certain claimed schedule c expenses related to the bowling activity we will consider the -- expenses in the order and by the categories as deducted on petitioners’ returns generally the burden_of_proof is on the taxpayer rule a the burden_of_proof may shift to the commissioner under sec_7491 if the taxpayer establishes that he introduced credible_evidence and complied with the requirements of sec_7491 a a and b to substantiate items maintain required records and fully cooperate with the secretary’s reasonable requests sec_7491 is effective with respect to court proceedings arising in connection with examinations by the commissioner commencing after date the date of its enactment by section a of the internal_revenue_service restructuring and reform act of publaw_105_206 112_stat_726 petitioners timely filed their return for the year petitioners have not alleged and it is not clear from the record that the examination of the return commenced after date accordingly we conclude that the burden remains on petitioners for the returns for and were filed after the effective date of sec_7491 therefore the examinations necessarily commenced after the effective date of sec_7491 petitioners have argued neither that sec_7491 is applicable nor that they have satisfied the requirements of - - sec_7491 therefore the burden_of_proof remains on petitioners for and a car and truck expenses a taxpayer may be allowed to deduct all ordinary and necessary expenses paid_or_incurred during the taxable_year sec_162 deductible business_expenses include actual operating_expenses of automobiles used_in_the_trade_or_business and traveling expenses while away from home solely in the pursuit of a trade_or_business sec_1_162-1 income_tax regs although generally a taxpayer is required to keep records to establish the amount of his deductions under sec_6001 and sec_1_6001-1 income_tax regs if there is evidence that deductible expenses were incurred the court may estimate the amount of expenses and allow a deduction based upon an approximation of expenses notwithstanding the lack of substantiating documentary_evidence in the record 39_f2d_540 2d cir 85_tc_731 deductions claimed with respect to certain expenses are subject_to additional substantiation requirements as provided under sec_274 no deduction or credit shall be allowed under sec_162 with respect to among other items any listed_property as defined under sec_280f unless the taxpayer substantiates the expense sec_274 sec_1 - 5t a temporary income_tax regs fed reg date listed_property includes any passenger_automobile sec_280f a the taxpayer must substantiate the expense as follows by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement a the amount of such expense or other item b the time and place of the travel entertainment amusement recreation c the business_purpose of the expense or other item and sec_274 see sec_1_274-5t temporary income_tax regs fed reg date the taxpayer must substantiate each element of an expenditure by adequate_records or sufficient evidence corroborating his statements sec_1_274-5t temporary income_tax regs fed reg date written evidence has more probative value than oral evidence alone id the taxpayer must establish that the expenditure was directly related to the active_conduct of the taxpayer’s trade_or_business sec_1_274-2 income_tax regs a self-employed_individual may deduct a mileage_allowance for ordinary and necessary expenses of local transportation and travel away from home sec_62 sec_1_62-2 income_tax regs sec_1_62-2t e temporary income_tax regs fed reg date sec_1 d -1 a income_tax regs sec_1 d -1t temporary income_tax regs fed reg date the commissioner is authorized to establish the standard mileage rate that is deemed to satisfy the - substantiation requirements sec_1 d -1 a income_tax regs supra a taxpayer may use the standard mileage rate in lieu of actual operating and fixed costs of the automobile allocable to business purposes including depreciation maintenance and repairs tires gasoline oil and insurance sec_1 d -1 a income_tax regs sec_1 d - 1t b temporary income_tax regs supra revproc_96_63 sec_5 1996_2_cb_420 revproc_97_58 sec_5 1997_2_cb_587 revproc_98_63 sec_5 1998_2_cb_818 tolls attributable to the use of an automobile for business purposes may be deducted as separate items revproc_96_63 sec_5 c b pincite revproc_97_58 sec_5 c b pincite revproc_98_63 sec_5 c b pincite petitioners claimed deductions for an amount equal to the standard mileage rate times the miles that mrs whitehurst drove in her automobile to and from bowling tournaments on the basis of a review of the record we are satisfied that she drove approximately big_number miles in big_number miles in and big_number miles in with respect to her bowling activity petitioners also produced receipts for tolls paid while driving to and from bowling tournaments for dollar_figure in dollar_figure in and dollar_figure in -- - b supplies and repairs and maintenance_expenses petitioners did not produce any documentary_evidence or provide any testimony with respect to the deductions for supplies and repairs and maintenance therefore we sustain respondent’s disallowance on travel_expenses lodging airfare and rental automobile deductible travel_expenses include fares lodging and expenses incident to travel sec_1_162-2 income_tax regs no deduction shall be allowed with respect to traveling away from home unless the taxpayer substantiates each element of the expenditure or use as described in sec_1_274-5t temporary income_tax regs fed reg date in the manner provided in sec_1_274-5t temporary income_tax regs fed reg date sec_274 sec_1_274-5t temporary income_tax regs supra the elements to be substantiated are the amount of each separate expenditure dates of departure and return and number of days spent away from home on business destination or locality of travel and the business reason for travel sec_1_274-5t temporary income_tax regs supra documentary_evidence such as receipts or paid bills shall be required for any expenditure for lodging while traveling away from home and any expenditure of dollar_figure or more except with respect to transportation charges if not - - readily available sec_1_274-5t b temporary income_tax regs fed reg date petitioners claimed deductions for actual travel_expenses that mrs whitehurst incurred while she traveled to and from and competed in bowling tournaments during the years at issue petitioners produced hotel bills and credit card receipts for hotel bills totaling dollar_figure for mrs whitehurst’s airplane tickets to las vegas and letters from a travel agent and the director of a bowling group reflect that the airfare in was dollar_figure a receipt reflects an expense of dollar_figure fora rental car in we are satisfied that petitioners are entitled to a deduction of dollar_figure for travel_expenses incurred in petitioners produced hotel bills and receipts totaling dollar_figure in and we are satisfied that petitioners are entitled to a deduction in this amount for travel_expenses incurred in petitioners produced hotel bills and receipts totaling dollar_figure in and we are satisfied that petitioners are entitled to a deduction in this amount for travel_expenses incurred in d meals and entertainment a taxpayer may be allowed to deduct percent of any expense incurred for food or beverages sec_274 a no - deduction shall be allowed under sec_162 for any traveling expense which includes meals unless the taxpayer substantiates each element of the expenditure or use as described in sec_1_274-5t temporary income_tax regs supra in the manner provided in sec_1_274-5t temporary income_tax regs supra sec_1_274-5t temporary income_tax regs supra the elements to be substantiated with respect to meals are the amount of each separate expenditure dates of departure and return and number of days spent away from home on business destination or locality of travel and the business reason for travel sec_1_274-5t temporary income_tax regs supra a self-employed taxpayer may use the federal meal and incidental_expenses m ie rate for meal expenses paid_or_incurred while traveling away from home in lieu of substantiating the actual cost of meals however the taxpayer must substantiate the time place and business_purpose of the travel sec_1 5t j3 temporary income_tax regs fed reg date revproc_96_64 sec_2 1996_2_cb_427 revproc_97_59 1997_2_cb_594 revproc_98_64 1998_2_cb_825 the m ie rate depends upon the locality of travel c f_r ch revproc_96_64 sec_3 c b pincite revproc_97_59 sec_3 c b pincite revproc_98_64 sec_3 c b pincite a self- employed individual may use an amount computed at the federal - m ie rate for the locality of travel for each calendar day or part thereof that she is away from home for the tax_year under revproc_96_64 sec_5 c b pincite ora prorated amount for the and tax years under revproc_97_59 sec_5 c b pincite and revproc_98_64 sec_5 c b pincite respectively petitioners deducted percent of the actual expenses that mrs whitehurst incurred for meals consumed while she traveled to and from and competed in bowling tournaments respondent allowed petitioners deductions for the m ie rate only for days that mrs whitehurst actually competed in a bowling tournament but not for days when she traveled to and from each tournament mrs whitehurst produced a small number of receipts from grocery stores and restaurants because respondent has already conceded that petitioners are entitled to use the m ie rate in lieu of actual expenses we allow petitioners deductions for the m ie rate in lieu of actual meal expenses during days mrs whitehurst traveled to and from and competed in bowling tournaments mrs whitehurst is entitled to use the m ie rate for days in days in and days in and the m ie rate for travel to a high-cost locality for days of travel in and days in e other entry fees petitioners produced fliers from bowling tournaments and - bowling scoring sheets that reflected most but not all of the claimed deductions for the entry fees for the bowling tournaments in which mrs whitehurst competed on the basis of a review of the evidence in the record we are satisfied that petitioners are entitled to deductions for entry fees of dollar_figure in dollar_figure in and dollar_figure in issue schedule a itemized_deductions a charitable_contributions petitioners claimed deductions for charitable_contributions of dollar_figure made in cash or by check and dollar_figure made other than in cash or by check for dollar_figure made in cash or by check and dollar_figure made other than in cash or by check for and dollar_figure made in cash or by check and dollar_figure made other than in cash or by check for the notice_of_deficiency disallowed the claimed deductions for charitable_contributions in part as follows dollar_figure for dollar_figure for and dollar_figure for respondent disallowed portions of the claimed charitable_contributions because petitioners did not substantiate the claimed amounts sec_170 allows as a deduction a charitable_contribution payment of which is made within the taxable_year a charitable_contribution includes a contribution or gift to or for_the_use_of a corporation trust community chest fund or foundation organized and operated exclusively for religious - - charitable scientific literary or educational_purposes sec_170 b if a taxpayer makes a charitable_contribution in cash or by check the taxpayer shall maintain for each contribution either a canceled check a receipt or letter from the donee charitable_organization or other reliable written records showing the name of the donee and the date and amount of the contribution cavalaris v commissioner tcmemo_1996_308 sec_1 170a- a income_tax regs if the contribution is made in property other than money the taxpayer must also maintain a receipt or letter from the donee showing the name of the donee the date and location of the contribution and a description of the property sec_1_170a-13 income_tax regs in the case where a receipt would be impractical to obtain the taxpayer shall maintain reliable written records with respect to each item of donated property id a deduction for a contribution of dollar_figure or more will not be allowed unless the taxpayer substantiates the contribution with a contemporaneous written acknowledgment from the donee organization sec_1_170a-13 income_tax regs petitioners did not provide any documentary_evidence that reflects their claimed charitable_contributions mrs whitehurst provided conflicting testimony at trial concerning receipts for the claimed charitable_contributions on the one hand she alleged that she was in possession of receipts but she also -- - explained that at the time of trial she resided in bermuda and could not find her receipts she also testified that she contributed money to her church but did not provide any details to support these contributions accordingly respondent is sustained on this issue b telephone expenses petitioners claimed deductions for and for unreimbursed employee_expenses for a second telephone line in their home respondent disallowed the claimed telephone line expense deductions in full because petitioners did not substantiate the claimed amounts also respondent was not satisfied that mrs whitehurst worked out of a home_office that she had a home_office for the convenience of her employer and that she had a business_purpose for_the_use_of the computer mrs whitehurst was employed full time during the years at issue as an environmental specialist for horne engineering services inc horne an engineering company from to horne had a contract with the u s army and mrs whitehurst worked at the aberdeen proving ground in edgewood maryland mrs whitehurst operated the army’s environmental hotline and issued daily environmental regulatory summaries for army staff in date around the time that horne’s contract with the army ended mrs whitehurst worked at horne’s offices in bel air maryland because horne did not have a desk or computer at - - its office for mrs whitehurst to use while she worked she requested permission from her supervisor to work at home although her supervisor initially resisted the idea he eventually approved her request mrs whitehurst produced a letter dated date and signed by her office manager which states given the insufficient office work space and lack of a computer carla worked in her home this was convenient for the company in that we did not have to lease more office space or purchase a computer to accommodate the needs of her project she visited horne’s offices approximately once a week for an hour she installed a second telephone line in her home to access the internet and her e-mail and so her clients could call her when they needed horne did not reimburse her for either the additional telephone line or the computer petitioners produced a copy of a telephone bill for dollar_figure dated date on which dollar_figure work related was handwritten petitioners also produced carbon copies of checks made payable to the telephone company reflecting the same account number as that on the aforementioned telephone bill for the following amounts on the following dates dollar_figure dated date dollar_figure dated date dollar_figure dated what appears to be date and dollar_figure dated date - - performance of services as an employee constitutes a trade_or_business 91_tc_352 telephone expenses may be deductible under sec_162 if the expenses_incurred are ordinary and necessary in carrying_on_a_trade_or_business hairston v commissioner tcmemo_1995_566 affd without published opinion 116_f3d_492 lith cir green v commissioner tcmemo_1989_599 any charge for basic local_telephone_service with respect to the first telephone line provided to any residence of the taxpayer shall be treated as a personal_expense sec_262 we conclude that petitioners are entitled to deductions for expenses for the second telephone line used in connection with mrs whitehurst’s trade_or_business of dollar_figure for dollar_figure for and dollar_figure for petitioners also produced carbon copies of checks made payable to the telephone company that reflect an account number different from the account number written on the bill discussed above these checks were not written to pay for the telephone line used by mrs whitehurst in connection with her trade_or_business but were for a personal home telephone therefore the amounts reflected therein are not deductible id cc equipment and supplies petitioners claimed deductions for unreimbursed employee_expenses for equipment and supplies for and -- p7 - specifically for a computer and computer-related equipment mrs whitehurst purchased and work-related supplies mr whitehurst purchased respondent disallowed the claimed deductions for equipment and supplies in full a copy of a checking account statement from the tax_year reflects the following a purchase of dollar_figure anda handwritten notation of work fax machine a purchase from x technologies of dollar_figure and a handwritten notation of work computer and a purchase from x technologies of dollar_figure which is encircled but otherwise bears no notation a sales receipt from for computer_software diskettes reflects a shipping charge totaling dollar_figure a copy of a check carbon copy dated date indicates a computer monitor purchase a receipt from from best buy reflects a purchase of dollar_figure and bears a handwritten notation of printer cable a service activity report from reflects the repair of computer_software problems for dollar_figure mr whitehurst was employed full time during the years at issue by the prince george’s county government in maryland as a construction standards inspector his duties related to building construction and site development inspection and included weighing inspection monitoring and regulating wetlands and sediment control monitoring his employer did not provide new equipment and did not replace worn-out equipment that was - required or helpful for the position mr whitehurst testified that he purchased for example respirators cleaning supplies for his automobile insect repellant ratchet wrenches shovels safety glasses hard hats tape measures and flashlights mr whitehurst’s employer_provided him with an annual dollar_figure allowance for uniforms or whatever a taxpayer may be entitled to a depreciation deduction for exhaustion wear_and_tear of property used in a trade_or_business sec_167 503_us_79 a taxpayer may be entitled to a depreciation deduction for computer_software under sec_167 a computer_or_peripheral_equipment which is defined in sec_168 b is listed_property under sec_274 as defined under sec_280f a iv and will be subject_to the substantiation requirements of sec_274 a computer_or_peripheral_equipment may be excepted from the sec_274 requirements under sec_280f b if it is used exclusively at a regular business establishment and owned or leased by the person operating such establishment and only if the requirements of sec_280a are met with respect to the regular business establishment petitioners have not elected to deduct the cost of the computer or the computer-related equipment as a current_expense under sec_179 - a regular business establishment includes a portion of a dwelling_unit that is exclusively used on a regular basis as the principal_place_of_business for the taxpayer’s trade_or_business sec_280a a for tax years beginning after date in the case of an employee the exclusive use must be for the convenience of his employer and the term principal_place_of_business includes a place of business which is used by the taxpayer for the administrative or management activities of a trade_or_business if there is no other fixed location of such trade_or_business where the taxpayer conducts substantial administrative or management activities sec_280a ’ although mrs whitehurst regularly worked in her home for the convenience of her employer it is not clear that she used any portion of the home exclusively for the purpose of carrying on her trade_or_business see sec_280a a because mrs whitehurst’s computer and computer-related equipment do not fall under the home_office exception to sec_274 under sec_280f d b and 280a c a they are listed_property under sec_274 and their deductibility is subject_to the strict substantiation requirements of sec_274 e amount time and place and business_purpose of the expense congress amended sec_280a to read as reflected above in the taxpayer_relief_act_of_1997 publaw_105_34 111_stat_881 -- - petitioners have established that mrs whitehurst purchased and used the computer and computer-related equipment in her trade_or_business and have satisfied the requirements of sec_274 we conclude that petitioners are entitled to a depreciation deduction for the fax machine the computer and the software diskettes purchased in for dollar_figure we also conclude that petitioners are entitled to a deduction for computer services of dollar_figure for and a depreciation deduction for the printer cable purchased in for dollar_figure mr whitehurst did not provide any testimony or written evidence as to the amount spent on supplies purchased and used in the course of his employment it is not clear that the expenses if any were unreimbursed by his employer or that they were ordinary and necessary to the carrying on of his trade_or_business under sec_162 we conclude that petitioners are not entitled to a deduction for unreimbursed employee_expenses for equipment and supplies purchased with respect to mr whitehurst’s employment reviewed and adopted as the report of the small_tax_case division to reflect the foregoing decision will be entered under rule


id office uilc cca-722203-08 ------------------ number release date from ----------------------- sent tuesday date pm to --------------- cc --------------------------------------------------------------- subject inserts for template here is material prepared by ----- for use in the 6707a template law for use in nopas imposing the sec_6707a penalty for listed transactions look through the headings in bold below to determine which version of the regulations applies to the transaction the penalty is based upon and include only that version in the nopa the version that applies may depend upon when the transaction was entered into or when a return was filed in some instances the taxpayer may choose to rely upon a certain version of the regulations prior to td the regulations applied only to corporations optional language is in brackets and highlighted use the highlighted language when it is relevant to the case for transactions entered into on or after date and transactions of interest entered into on or after date td all references to sec_1_6011-4 are to that regulation as modified by td 2007_38_irb_607 every taxpayer that has participated as described in sec_1_6011-4 in a reportable_transaction within the meaning of sec_1_6011-4 and who is required to file a tax_return must file within the time prescribed in sec_1_6011-4 a disclosure statement in the form prescribed by sec_1_6011-4 sec_1_6011-4 a reportable_transaction is a transaction described in sec_1_6011-4 through the term transaction includes all of the factual elements relevant to the expected tax treatment of any investment_entity plan or arrangement and includes any series of steps carried out as part of a plan sec_1_6011-4 a listed_transaction is a transaction that is the same as or substantially_similar to one of the types of transactions that the internal_revenue_service irs has determined to be a tax_avoidance transaction and identified by notice regulation or other form of published guidance as a listed_transaction sec_1_6011-4 a taxpayer has participated in a listed_transaction if the taxpayer's tax_return reflects tax consequences or a tax strategy described in the published guidance that lists the transaction under sec_1_6011-4 a taxpayer also has participated in a listed_transaction if the taxpayer knows or has reason to know that the taxpayer's tax benefits are derived directly or indirectly from tax consequences or a tax strategy described in published guidance that lists a transaction under sec_1_6011-4 published guidance may identify other types or classes of persons that will be treated as participants in a listed_transaction published guidance also may identify types or classes of persons that will not be treated as participants in a listed_transaction sec_1_6011-4 the term substantially_similar includes any transaction that is expected to obtain the same or similar types of tax consequences and that is either factually similar or based on the same or similar tax strategy receipt of an opinion regarding the tax consequences of the transaction is not relevant to the determination of whether the transaction is the same as or substantially_similar to another transaction further the term substantially_similar must be broadly construed in favor of disclosure for example a transaction may be substantially_similar_to_a_listed_transaction even though it involves different entities or uses different internal_revenue_code provisions sec_1_6011-4 the disclosure statement for a reportable_transaction form_8886 reportable_transaction_disclosure_statement or successor form must be attached to the taxpayer's tax_return for each taxable_year for which a taxpayer participates in a reportable_transaction in addition a disclosure statement for a reportable_transaction must be attached to each amended_return that reflects a taxpayer's participation in a reportable_transaction a copy of the disclosure statement must be sent to otsa at the same time that any disclosure statement is first filed by the taxpayer pertaining to a particular reportable_transaction if a reportable_transaction results in a loss which is carried back to a prior year the disclosure statement for the reportable_transaction must be attached to the taxpayer's application_for tentative refund or amended tax_return for that prior year in the case of a taxpayer that is a partner in a partnership a shareholder in an s_corporation or a beneficiary of a_trust the disclosure statement for a reportable_transaction must be attached to the partnership s_corporation or trust's tax_return for each taxable_year in which the partnership s_corporation or trust participates in the transaction under the rules of sec_1_6011-4 if a taxpayer who is a partner in a partnership a shareholder in an s_corporation or a beneficiary of a_trust receives a timely schedule_k-1 less than calendar days before the due_date of the taxpayer's return including extensions and based on receipt of the timely schedule_k-1 the taxpayer determines that the taxpayer participated in a reportable_transaction within the meaning of sec_1_6011-4 the disclosure statement will not be considered late if the taxpayer discloses the reportable_transaction by filing a disclosure statement with otsa within calendar days after the due_date of the taxpayer's return including extensions sec_1_6011-4 in general if a transaction becomes a listed_transaction or a transaction_of_interest after the filing of a taxpayer's tax_return including an amended_return reflecting the taxpayer's participation in the listed_transaction or transaction_of_interest and before the end of the period of limitations for assessment of tax for any taxable_year in which the taxpayer participated in the listed_transaction or transaction_of_interest then a disclosure statement must be filed regardless of whether the taxpayer participated in the transaction in the year the transaction became a listed_transaction or a transaction_of_interest with otsa within calendar days after the date on which the transaction became a listed_transaction or a transaction_of_interest sec_1_6011-4 for transactions entered into on or after date but taxpayers may rely on these regulations for transactions entered into on or after date and before date td and td all references to sec_1_6011-4 are to that regulation as modified by td c b or as modified by td 2006_49_irb_1030 cite to the applicable td every taxpayer that has participated as described in sec_1_6011-4 in a reportable_transaction within the meaning of sec_1_6011-4 and who is required to file a tax_return must attach to its return for the taxable_year described in sec_1_6011-4 a disclosure statement in the form prescribed by sec_1_6011-4 sec_1_6011-4 a reportable_transaction is a transaction described in sec_1_6011-4 through the term transaction includes all of the factual elements relevant to the expected tax treatment of any investment_entity plan or arrangement and includes any series of steps carried out as part of a plan there are six categories of reportable_transactions listed transactions confidential transactions transactions with contractual protection loss transactions transactions with a significant book-tax difference and transactions involving a brief asset holding_period sec_1_6011-4 a listed_transaction is a transaction that is the same as or substantially_similar to one of the types of transactions that the internal_revenue_service irs has determined to be a tax_avoidance transaction and identified by notice regulation or other form of published guidance as a listed_transaction sec_1_6011-4 a taxpayer has participated in a listed_transaction if the taxpayer's tax_return reflects tax consequences or a tax strategy described in the published guidance that lists the transaction under sec_1_6011-4 a taxpayer also has participated in a listed_transaction if the taxpayer knows or has reason to know that the taxpayer's tax benefits are derived directly or indirectly from tax consequences or a tax strategy described in published guidance that lists a transaction under sec_1_6011-4 published guidance may identify other types or classes of persons that will be treated as participants in a listed_transaction sec_1_6011-4 the term substantially_similar includes any transaction that is expected to obtain the same or similar types of tax consequences and that is either factually similar or based on the same or similar tax strategy receipt of an opinion regarding the tax consequences of the transaction is not relevant to the determination of whether the transaction is the same as or substantially_similar to another transaction further the term substantially_similar must be broadly construed in favor of disclosure sec_1_6011-4 the disclosure statement for a reportable_transaction form_8886 reportable_transaction_disclosure_statement or successor form must be attached to the taxpayer's tax_return for each taxable_year for which a taxpayer participates in a reportable_transaction in addition the disclosure statement for a reportable_transaction must be attached to each amended_return that reflects a taxpayer’s participation in a reportable_transaction a copy of the disclosure statement must be sent to otsa at the same time that any disclosure statement is first filed by the taxpayer if a reportable_transaction results in a loss which is carried back to a prior year the disclosure statement for the reportable_transaction must be attached to the taxpayer's application_for tentative refund or amended tax_return for that prior year in the case of a taxpayer that is a partnership or s_corporation the disclosure statement for a reportable_transaction must be attached to the partnership's or s corporation's tax_return for each taxable_year in which the partnership or s_corporation participates in the transaction under the rules of sec_1_6011-4 sec_1_6011-4 if a transaction becomes a listed_transaction after the filing of a taxpayer's tax_return including an amended_return reflecting either tax consequences or a tax strategy described in the published guidance listing the transaction or a tax_benefit derived from tax consequences or a tax strategy described in the published guidance listing the transaction and before the end of the period of limitations for the final return whether or not already filed reflecting the tax consequences tax strategy or tax_benefit then a disclosure statement must be filed as an attachment to the taxpayer's tax_return next filed after the date the transaction is listed regardless of whether the taxpayer participated in the transaction in that year sec_1_6011-4 for transactions entered into on or after date but taxpayers may rely on these regulations for transactions entered into on or after date and before date td all references to sec_1_6011-4 are to that regulation as modified by td 2003_1_cb_614 every taxpayer that has participated as described in sec_1_6011-4 in a reportable_transaction within the meaning of sec_1_6011-4 and who is required to file a tax_return must attach to its return for the taxable_year described in sec_1_6011-4 a disclosure statement in the form prescribed by sec_1_6011-4 sec_1_6011-4 a reportable_transaction is a transaction described in sec_1_6011-4 through the term transaction includes all of the factual elements relevant to the expected tax treatment of any investment_entity plan or arrangement and includes any series of steps carried out as part of a plan there are six categories of reportable_transactions listed transactions confidential transactions transactions with contractual protection loss transactions transactions with a significant book-tax difference and transactions involving a brief asset holding_period sec_1_6011-4 a listed_transaction is a transaction that is the same as or substantially_similar to one of the types of transactions that the internal_revenue_service irs has determined to be a tax_avoidance transaction and identified by notice regulation or other form of published guidance as a listed_transaction sec_1_6011-4 a taxpayer has participated in a listed_transaction if the taxpayer's tax_return reflects tax consequences or a tax strategy described in the published guidance that lists the transaction under sec_1_6011-4 b a taxpayer also has participated in a listed_transaction if the taxpayer knows or has reason to know that the taxpayer's tax benefits are derived directly or indirectly from tax consequences or a tax strategy described in published guidance that lists a transaction under sec_1_6011-4 published guidance may identify other types or classes of persons that will be treated as participants in a listed_transaction sec_1_6011-4 the term substantially_similar includes any transaction that is expected to obtain the same or similar types of tax consequences and that is either factually similar or based on the same or similar tax strategy receipt of an opinion regarding the tax consequences of the transaction is not relevant to the determination of whether the transaction is the same as or substantially_similar to another transaction further the term substantially_similar must be broadly construed in favor of disclosure sec_1_6011-4 the disclosure statement for a reportable_transaction form_8886 reportable_transaction_disclosure_statement or successor form must be attached to the taxpayer's tax_return for each taxable_year for which a taxpayer participates in a reportable_transaction in addition a copy of the disclosure statement must be sent to otsa at the same time that any disclosure statement is first filed with the taxpayer's tax_return if a reportable_transaction results in a loss which is carried back to a prior year the disclosure statement for the reportable_transaction must be attached to the taxpayer's application_for tentative refund or amended tax_return for that prior year in the case of a taxpayer that is a partnership or s_corporation the disclosure statement for a reportable_transaction must be attached to the partnership's or s corporation's tax_return for each taxable_year in which the partnership or s_corporation participates in the transaction under the rules of sec_1_6011-4 sec_1_6011-4 if a transaction becomes a listed_transaction after the filing of the taxpayer's final tax_return reflecting either tax consequences or a tax strategy described in the published guidance listing the transaction or a tax_benefit derived from tax consequences or a tax strategy described in the published guidance listing the transaction and before the end of the statute_of_limitations period for that return then a disclosure statement must be filed as an attachment to the taxpayer's tax_return next filed after the date the transaction is listed sec_1 e i for transactions entered into on or after date td this language will apply only in limited circumstances see td all references to sec_1_6011-4t are to that regulation as modified by td 2002_2_cb_815 every taxpayer that has participated directly or indirectly in a reportable_transaction within the meaning of sec_1_6011-4t b must attach to its return for the taxable_year described in sec_1 4t e a disclosure statement in the form prescribed by sec_1_6011-4t d sec_1_6011-4t a a reportable_transaction is a transaction described in sec_1_6011-4t b through the term transaction includes all of the factual elements relevant to the expected tax treatment of any investment_entity plan or arrangement and includes any series of steps carried out as part of a plan and any series of substantially_similar transactions entered into in the same taxable_year there are six categories of reportable_transactions listed transactions confidential transactions transactions with contractual protection loss transactions transactions with a significant book- tax difference and transactions involving a brief asset holding_period sec_1 4t b a listed_transaction is a transaction that is the same as or substantially_similar to one of the types of transactions that the internal_revenue_service has determined to be a tax_avoidance transaction and identified by notice regulation or other form of published guidance as a listed_transaction sec_1_6011-4t b a taxpayer will have indirectly participated in a reportable_transaction if the taxpayer's federal tax_liability is affected or in the case of a partnership or an s_corporation if a partner's or shareholder's federal tax_liability is reasonably expected to be affected by the transaction even if the taxpayer is not a direct party to the transaction eg the taxpayer participates as a partner in a partnership as a shareholder in an s_corporation or through a_trust or a controlled_entity moreover a taxpayer will have indirectly participated in a reportable_transaction if the taxpayer knows or has reason to know that the tax benefits claimed from the taxpayer's transaction are derived from a reportable_transaction sec_1_6011-4t c i the term substantially_similar includes any transaction that is expected to obtain the same or similar types of tax consequences and that is either factually similar or based on the same or similar tax strategy receipt of an opinion regarding the tax consequences of the transaction is not relevant to the determination of whether the transaction is the same as or substantially_similar to another transaction further the term substantially_similar must be broadly construed in favor of disclosure sec_1_6011-4t c the disclosure statement for a reportable_transaction form_8886 reportable_transaction_disclosure_statement or successor form must be attached to the taxpayer's federal_income_tax return for each taxable_year for which the taxpayer's federal_income_tax liability is affected by the taxpayer's participation in the transaction in addition a copy of the disclosure statement must be sent to otsa at the same time that any disclosure statement is first filed with the taxpayer's federal_income_tax return if a reportable_transaction results in a loss which is carried back to a prior year the disclosure statement for the reportable_transaction must be attached to the taxpayer's application_for tentative refund or amended federal_income_tax return for that prior year in the case of a taxpayer that is a partnership or s_corporation the disclosure statement for a reportable_transaction must be attached to the partnership's or s corporation's federal_income_tax return for each taxable_year ending with or within the taxable_year of any partner or shareholder whose income_tax_liability is affected or is reasonably expected to be affected by the partnership's or s corporation's participation in the transaction if a transaction becomes a reportable_transaction eg the transaction subsequently becomes one identified in published guidance as a listed_transaction described in sec_1_6011-4t b or there is a change in facts affecting the expected federal_income_tax effect of the transaction such that the transaction is reportable under any of sec_1_6011-4t b through on or after the date the taxpayer has filed the return for the first taxable_year for which the transaction affected the taxpayer's or a partner's or a shareholder's federal_income_tax liability the disclosure statement must be filed as an attachment to the taxpayer's federal_income_tax return next filed after the date the transaction becomes a reportable_transaction whether or not the transaction affects the taxpayer's or any partner's or shareholder's federal_income_tax liability for that year sec_1_6011-4t e for transactions entered into on or after date unless the transaction is reported on a tax_return of the taxpayer that is filed on or before date td prior to this version the regulations applied only to corporations all references to sec_1_6011-4t are to that regulation as modified by td 2002_2_cb_87 every corporate taxpayer that is required to file a return for a taxable_year with respect to a tax imposed under sec_11 sec_594 sec_801 or sec_831 and that has participated directly or indirectly in a reportable_transaction within the meaning of sec_1_6011-4t b must attach to its return for the taxable_year described in sec_1_6011-4t d a disclosure statement in the form prescribed by sec_1_6011-4t c every individual trust partnership and s_corporation that has participated directly or indirectly in a reportable_transaction within the meaning of sec_1_6011-4t b must attach to its return for the taxable_year described in sec_1_6011-4t d a disclosure statement in the form prescribed by sec_1_6011-4t c for this purpose a taxpayer will have indirectly participated in a reportable_transaction if the taxpayer's federal_income_tax liability is affected or in the case of a partnership or an s_corporation if a partner's or shareholder's federal_income_tax liability is reasonably expected to be affected by the transaction even if the taxpayer is not a direct party to the transaction eg the taxpayer participates as a partner in a partnership as a shareholder in an s_corporation or through a controlled_entity moreover a taxpayer will have indirectly participated in a reportable_transaction if the taxpayer knows or has reason to know that the tax benefits claimed from the taxpayer's transaction are derived from a reportable_transaction sec_1 4t a for purposes of sec_1_6011-4t b and the term taxpayer means a corporation required to file a return under sec_11 sec_594 sec_801 or sec_831 for all other purposes of sec_1_6011-4t the term taxpayer also includes an individual trust partnership or s_corporation sec_1_6011-4t a a reportable_transaction is either a transaction that is described in sec_1_6011-4t b or is a transaction that is described in sec_1_6011-4t b and that meets the projected tax effect test in sec_1_6011-4t b the term transaction includes all of the factual elements necessary to support the tax benefits that are expected to be claimed with respect to any entity plan or arrangement and includes any series of related steps carried out as part of a prearranged plan and any series of substantially_similar transactions entered into in the same taxable_year sec_1_6011-4t b for purposes of sec_1_6011-4t the term substantially_similar includes any transaction that is expected to obtain the same or similar types of tax benefits and that is either factually similar or based on the same or similar tax strategy receipt of an opinion concluding that the tax benefits from the taxpayer's transaction are allowable is not relevant to the determination of whether the taxpayer's transaction is the same as or substantially_similar_to_a_listed_transaction further the term substantially_similar must be broadly construed in favor of disclosure sec_1_6011-4t b i a transaction is described in sec_1_6011-4t b if the transaction is the same as or substantially_similar to one of the types of transactions that the internal_revenue_service irs has determined to be a tax_avoidance transaction and identified by notice regulation or other form of published guidance as a listed_transaction for purposes of sec_6011 however a listed_transaction is not treated as a reportable_transaction if it has affected the taxpayer’s federal_income_tax liability as reported on any_tax return filed on or before date sec_1_6011-4t b the disclosure statement as described in sec_1_6011-4t c for a reportable_transaction must be attached to the taxpayer's federal_income_tax return for each taxable_year for which the taxpayer's federal_income_tax liability is affected by the taxpayer's participation in the transaction in the case of a taxpayer that is a partnership or an s_corporation the disclosure statement for a listed_transaction must be attached to the taxpayer's federal_income_tax return for each taxable_year ending with or within the taxable_year of any partner or shareholder whose income_tax_liability is affected or is reasonably expected to be affected by the partnership's or the s corporation's participation in the transaction in addition at the same time that any disclosure statement is first attached to the taxpayer's federal_income_tax return the taxpayer must file a copy of that disclosure statement with the office of tax_shelter analysis otsa if a transaction becomes a reportable_transaction eg the transaction subsequently becomes one identified in published guidance as a listed_transaction described in sec_1_6011-4t b or there is a change in facts affecting the expected federal_income_tax effect of the transaction on or after the date the taxpayer has filed the return for the first taxable_year for which the transaction affected the taxpayer's or a partner's or a shareholder's federal_income_tax liability the disclosure statement must be filed as an attachment to the taxpayer's federal_income_tax return next filed after the date the transaction becomes a reportable_transaction whether or not the transaction affects the taxpayer's or any partner's or shareholder's federal_income_tax liability for that year if a disclosure statement is required as an attachment to a federal_income_tax return that is filed after date but on or before days after date the taxpayer must either attach the disclosure statement to the return or file the disclosure statement as an amendment to the return no later than days after date sec_1_6011-4t d for federal corporate_income_tax returns filed after date td and td all references to sec_1_6011-4t are to that regulation as modified by td 2000_2_cb_249 or as modified by td 2001_2_cb_194 cite to the applicable td every taxpayer that is required to file a return for a taxable_year with respect to a tax imposed under sec_11 sec_594 sec_801 or sec_831 and that has participated directly or indirectly in a reportable_transaction within the meaning of sec_1_6011-4t b must attach to its return for the taxable_year described in sec_1_6011-4t d a disclosure statement in the form prescribed by sec_1_6011-4t c for this purpose a taxpayer will have indirectly participated in a transaction if its federal_income_tax liability is affected by the transaction even if it is not a direct party to the transaction eg it participates through a partnership or through a controlled_entity sec_1_6011-4t a a reportable_transaction is a transaction that is described in either sec_1_6011-4t b or and that meets the projected tax effect test in sec_1_6011-4t b the term transaction includes all of the factual elements necessary to support the tax benefits that are expected to be claimed with respect to any entity plan or arrangement and includes any series of related steps carried out as part of a prearranged plan and any series of substantially_similar transactions entered into in the same taxable_year sec_1_6011-4t b a transaction is described in sec_1_6011-4t b if the transaction is the same as or substantially_similar to one of the types of transactions that the internal_revenue_service irs has determined to be a tax_avoidance transaction and has identified by notice regulation or other form of published guidance as a listed_transaction for purposes of sec_6011 however a listed_transaction is not treated as a reportable_transaction if it has affected the taxpayer’s federal_income_tax liability as reported on any_tax return filed on or before date sec_1_6011-4t b a transaction described in sec_1_6011-4t b meets the projected tax effect test if at the time the taxpayer enters into the transaction or at any time thereafter the taxpayer reasonably estimates that the transaction will reduce the taxpayer’s federal_income_tax liability by more than dollar_figure million in any single taxable_year or by a total of more than dollar_figure million for any combination of taxable years in which the transaction is expected to have the effect of reducing the taxpayer’s federal_income_tax liability sec_1 4t b i the disclosure statement as described in sec_1_6011-4t c for a reportable_transaction shall be attached to the taxpayer’s federal corporate_income_tax return for each taxable_year for which the taxpayer’s federal_income_tax liability is affected by its participation in the transaction in addition at the same time that the disclosure statement is first attached to the taxpayer’s federal_income_tax return a copy of that disclosure statement must be sent to the irs large_and_mid-size_business_division if a transaction becomes a reportable_transaction on or after the date the taxpayer has filed its return for the first taxable_year for which the transaction affected the taxpayer’s federal_income_tax liability eg there is a change in facts affecting the expected federal_income_tax effect of the transaction or the transaction subsequently becomes one identified in published guidance as a listed_transaction described in sec_1 4t b the disclosure statement shall be filed as an attachment to the taxpayer’s federal corporate_income_tax return next filed after the date the transaction becomes a reportable_transaction if a disclosure statement is required as an attachment to a federal corporate_income_tax return that is filed earlier than days after date the taxpayer may either attach the disclosure statement to the return or file the disclosure statement as an amendment to the return no later than days after date sec_1_6011-4t d for federal corporate_income_tax returns filed after date td all references to sec_1_6011-4t are to that regulation as published in td 2001_1_cb_747 every taxpayer that is required to file a return for a taxable_year with respect to a tax imposed under sec_11 and that has participated directly or indirectly in a reportable_transaction within the meaning of sec_1_6011-4t b must attach to its return for the taxable_year described in sec_1_6011-4t d a disclosure statement in the form prescribed by sec_1_6011-4t c for this purpose a taxpayer will have indirectly participated in a transaction if its federal_income_tax liability is affected by the transaction even if it is not a direct party to the transaction eg it participates through a partnership or through a controlled_entity sec_1_6011-4t a a reportable_transaction is a transaction that is described in either sec_1_6011-4t b or and that meets the projected tax effect test in sec_1_6011-4t b the term transaction includes all of the factual elements necessary to support the tax benefits that are expected to be claimed with respect to any entity plan or arrangement and includes any series of related steps carried out as part of a prearranged plan and any series of substantially_similar transactions entered into in the same taxable_year sec_1_6011-4t b a transaction is described in sec_1_6011-4t b if the transaction is the same as or substantially_similar to one of the types of transactions that the internal_revenue_service irs has determined to be a tax_avoidance transaction and has been identified by notice regulation or other form of published guidance as a listed_transaction for purposes of sec_6011 however a listed_transaction is not treated as a reportable_transaction if it has affected the taxpayer’s federal_income_tax liability as reported on any_tax return filed on or before date sec_1_6011-4t b a transaction described in sec_1_6011-4t b meets the projected tax effect test if at the time the taxpayer enters into the transaction or at any time thereafter the taxpayer reasonably estimates that the transaction will reduce the taxpayer’s federal_income_tax liability by more than dollar_figure million in any single taxable_year or by a total of more than dollar_figure million for any combination of taxable years in which the transaction is expected to have the effect of reducing the taxpayer’s federal_income_tax liability sec_1 4t b i the disclosure statement as described in sec_1_6011-4t c for a reportable_transaction shall be attached to the taxpayer’s federal corporate_income_tax return for each taxable_year for which the taxpayer’s federal_income_tax liability is affected by its participation in the transaction in addition at the same time that the disclosure statement is first attached to the taxpayer’s federal_income_tax return a copy of that disclosure statement must be sent to the irs large_and_mid-size_business_division if a transaction becomes a reportable_transaction on or after the date the taxpayer has filed its return for the first taxable_year for which the transaction affected the taxpayer’s federal_income_tax liability eg there is a change in facts affecting the expected federal_income_tax effect of the transaction or the transaction subsequently becomes one identified in published guidance as a listed_transaction described in sec_1 4t b the disclosure statement shall be filed as an attachment to the taxpayer’s federal corporate_income_tax return next filed after the date the transaction becomes a reportable_transaction if a disclosure statement is required as an attachment to a federal corporate_income_tax return that is filed earlier than days after date the taxpayer may either attach the disclosure statement to the return or file the disclosure statement as an amendment to the return no later than days after date sec_1_6011-4t d


internal_revenue_service department of the treasury number release date index number in re washington dc person to contact telephone number refer reply to cc psi 7-plr-167576-01 date april legend p a b c d e f g h i j k l m x y date year date dear this letter responds to a letter dated date and subsequent correspondence submitted on behalf of p by its authorized representative requesting rulings under sec_29 and sec_702 of the internal_revenue_code facts the facts as represented by p and p’s authorized representative are as follows p is a limited_liability_company formed for the purpose of acquiring and operating a facility facility for the production of solid synthetic_fuel from coal p is classified as a plr-167576-01 partnership for federal_income_tax purposes the members of p are a and b a holds a ownership_interest in p and b holds a ownership_interest in p p owns the facility through its interest in c a wholly owned limited_liability_company that is disregarded for federal_income_tax purposes a is a limited_liability_company that is classified as a partnership for federal_income_tax purposes a is owned by d and d’s wholly owned subsidiary e d is engaged in a number of businesses directly and through affiliates including investments in the energy sector b is a corporation engaged in the business of acquiring and developing various energy- related projects and investments b owns its interest in p through its interest in f a wholly owned limited_liability_company that is disregarded for federal_income_tax purposes before date f was owned by g and b on date b acquired g’s interest in f f built the facility pursuant to a construction_contract entered into before date by h which was assigned to f on date based upon an opinion of counsel provided by p as of date the construction_contract was a legal valid and binding obligation of h under applicable state law enforceable against h in accordance with its terms in addition the construction_contract i did not limit the amount of damages that could be paid in the event of a default under the contract to any specific amount ii included a description of the facility to be constructed iii provided for a completion date and iv specified the price for the facility p represents that the facility was placed_in_service within the meaning of sec_29 before date as described in the ruling_request and subsequent correspondence from p’s authorized representative the facility consists of a pug mill and three roll briquetters in the process process by which synthetic_fuel is produced in the facility coal feedstock and a chemical reagent are mixed thoroughly in the pug mill and transported to the briquetters the mixture is gravity-fed into the three briquetters through one of three feed hoppers where final processing occurs in year f relocated and reassembled the facility to the site of x located in state y p has represented that following the relocation the fair_market_value of the original property comprising the facility was more than percent of the facility’s total fair_market_value the cost of the new property plus the value of the original property on date b acting through f conveyed the facility to p indirectly by transferring to p all of the interest in c in exchange for a cash payment plus the issuance of a membership interest in p the cash portion of the purchase_price is subject_to adjustment under certain circumstances the members of p have made and will continue to make periodic cash capital contributions to p to pay its operating costs in accordance with their respective ownership interests a member may elect to produce less than its ownership_interest share of synthetic_fuel in which case its obligation to pay plr-167576-01 operating costs will be proportionately reduced p has entered into a number of auxiliary agreements with i j k l and m which are unrelated to p i owns x and has granted to p an easement at the site of x to enable p to operate the facility at that site under the easement p has agreed to pay i a fixed monthly rent and an additional rental fee based on the amount of synthetic_fuel sold to third parties pursuant to a feedstock supply agreement i has agreed to sell coal feedstock to p if i fails to deliver the coal feedstock it is required to deliver p can purchase its feedstock from other suppliers p has entered into an agreement with j for the operation and maintenance of the facility p has the sole authority to set production levels and make other strategic decisions p may remove j as operator for cause for breach of its obligations and without cause under certain circumstances j is paid a fixed fee adjusted for inflation per ton of synthetic_fuel produced any capital costs associated with the facility will be paid_by p and must be authorized by p p as owner of the facility is responsible for supplying feedstock and chemical reagent for the facility j will also provide material handling services to p pursuant to a separate agreement for a fixed fee per ton adjusted each year for inflation p has entered into synthetic_fuel sales agreements with k and l pursuant to which k and l have each agreed to purchase a minimum amount of synthetic_fuel each year subject_to p’s sole discretion to set the level of synthetic_fuel sales if either k or l does not purchase the synthetic_fuel it is obligated to purchase p can sell the synthetic_fuel to third parties p has represented that all sales of synthetic_fuel will be to unrelated persons m will act as p’s agent in arranging for sales of synthetic_fuel to third parties pursuant to an agency agreement p has supplied a detailed description of the process employed at the facility p has also proposed that from time to time several alternative chemical reagents identified in p’s submissions may be used in the process as described the facility and the process implemented in the facility including the use of alternative chemical reagents meet the requirements of revproc_2001_34 i r b recognized experts in coal combustion chemistry conducted numerous tests on the synthetic_fuel produced from coal feedstock using the process including the alternative chemical reagents that may be used at the facility the experts have submitted multiple reports concluding that significant chemical changes take place with the application of the process to the coal feedstock under the limited_liability_company agreement of p all items of income gain loss deduction and credit including the sec_29 credit of p are generally allocated and any distributions made in proportion to the members’ ownership interests to a and to b income and sec_29 credits arising from sales of synthetic_fuel produced during a particular quarter and deductions for operating costs incurred in such quarter are allocated to the members in accordance with the ratio of their respective capital contributions to fund operating costs for that quarter plr-167576-01 the rulings requested by p are as follows p with the use of the process and the chemical reagents will produce a qualified_fuel within the meaning of sec_29 the production of the qualified_fuel from the facility will be attributable solely to p entitling p to the sec_29 credit for the production of qualified_fuel from the facility that is sold to an unrelated_person the contract for the construction of the facility constitutes a binding written contract within the meaning of sec_29 the sec_29 credit attributable to p may be passed through to and allocated among the members of p under the principles of sec_702 in accordance with each member’s interest in p at the time the sec_29 credit arises for the sec_29 credit a member’s interest in p is determined based on a valid allocation of the receipts from the sale of the sec_29 qualified_fuel the acquisition of the facility by p will not affect the placed-in-service date of the facility for purposes of sec_29 any termination of p under sec_708 arising from sales or exchanges of interests in p will not preclude p as reconstituted from taking the sec_29 credit for the production and sale of qualified_fuel to unrelated persons and if the facility was placed_in_service prior to date within the meaning of sec_29 the relocation of the facility to the x site or other location after date or replacement of parts of the facility after that date will not result in a new placed-in-service date for the facility for purposes of sec_29 provided the fair_market_value of the original property of the facility is more than percent of the facility’s total fair_market_value at the time of the relocation or replacement ruling_request sec_1 and sec_29 allows a credit for qualified_fuels sold by the taxpayer to an unrelated_person during the taxable_year the production of which is attributable to the taxpayer the credit for the taxable_year is an amount equal to dollar_figure adjusted for inflation multiplied by the barrel-of-oil_equivalent of qualified_fuels sold sec_29 defines qualified_fuels to include liquid gaseous or solid synthetic fuels produced from coal including lignite including such fuels when used as feedstocks in revrul_86_100 1986_2_cb_3 the internal_revenue_service ruled that the definition of the term synthetic_fuel under sec_48 and its regulations are relevant to the interpretation of the term under sec_29 former sec_48 provided a credit for the cost of equipment used for converting an alternate_substance plr-167576-01 into a synthetic liquid gaseous or solid fuel revrul_86_100 notes that both sec_29 and former sec_48 contain almost identical language and have the same overall congressional intent namely to encourage energy conservation and aid development of domestic energy production under sec_1_48-9 of the income_tax regulations a synthetic_fuel is one that differs significantly in chemical composition as opposed to physical composition from the alternate_substance used to produce it coal is an alternate_substance under sec_1_48-9 based on the representations of p and p’s authorized representative including the preponderance of p’s test results we agree that the fuel to be produced in the facility using the process on the coal feedstock including the use of alternative chemical reagents will result in a significant chemical change in coal transforming the coal feedstock into a solid synthetic_fuel because p owns the facility and because j on behalf of p operates and maintains the facility we conclude that p will be entitled to the sec_29 credit for the production of the qualified_fuel from the facility that is sold to an unrelated_person ruling_request sec_29 and f provide that sec_29 applies with respect to qualified_fuels that are produced in a facility placed_in_service after date and before date and which are sold before date sec_29 modifies sec_29 in the case of a facility producing qualified_fuels described in sec_29 sec_29 provides that for purposes of sec_29 a facility shall be treated as placed_in_service before date if the facility is placed_in_service before date pursuant to a binding written contract in effect before date sec_29 provides that if the facility is originally placed_in_service after date sec_29 shall be applied by substituting date for a date a contract is binding only if it is enforceable under local law against a taxpayer and does not limit damages to a specified amount eg by use of a liquidated_damages provision a contract provision limiting damages to an amount equal to at least five percent of the total_contract_price is treated as not limiting damages the construction_contract executed prior to date includes such essential features as a description of the facility to be constructed a completion date and a price p provided an opinion of counsel that the construction_contract is binding under the applicable state law neither the construction_contract nor applicable state law limits damages for default to any specific amount therefore we conclude that the facility was constructed pursuant to a binding written contract for purposes of sec_29 ruling_request under sec_7701 the term taxpayer means any person subject_to any internal revenue tax sec_7701 provides that when used in title_26 where not otherwise distinctly expressed or manifestly incompatible with the intent thereof the plr-167576-01 term person will be construed to mean and include an individual trust estate partnership_association company or corporation sec_702 provides that each partner determines the partner’s income_tax by taking into account separately the partner’s distributive_share of the partnership’s other items of income gain loss deduction or credit to the extent provided by regulations prescribed by the secretary under sec_1_702-1 the distributive_share is determined as provided in sec_704 and sec_1_704-1 sec_704 provides that a partner’s distributive_share of income gain loss deduction or credit is except as otherwise provided in chapter of subtitle a of title_26 determined by the partnership_agreement sec_704 provides that a partner’s distributive_share of income gain loss deduction or credit or item thereof is determined in accordance with the partner’s interest in the partnership determined by taking into account all facts and circumstances if i the partnership_agreement does not provide for the partner’s distributive_share of income gain loss deduction or credit or item thereof or ii the allocation to a partner under the agreement of income gain loss deduction or credit or item thereof lacks substantial economic_effect under sec_1_704-1 allocations of tax_credits and tax_credit recapture except for sec_38 property are not reflected by adjustments to the partners’ capital accounts thus these allocations cannot have economic_effect under sec_1 b ii b and the tax_credits and tax_credit recapture must be allocated in accordance with the partners’ interests in the partnership as of the time the tax_credit or tax_credit recapture arises if a partnership expenditure whether or not deductible that gives rise to a tax_credit in a partnership taxable_year also gives rise to valid allocations of partnership loss or deduction or other downward capital_account adjustments for the year then the partners’ interests in the partnership regarding the credit or the cost giving rise to it are in the same proportion as the partners’ respective distributive shares of the loss or deduction and adjustments see sec_1_704-1 example identical principles apply in determining the partners’ interests in the partnership regarding tax_credits that arise from receipts of the partnership whether or not taxable based on the information submitted and the representations made we conclude that the sec_29 credit attributable to p may be passed through to and allocated to the members of p in accordance with each member’s interest in p when the sec_29 credit arises for the sec_29 credit a member’s interest in p is determined based on a valid allocation of the receipts from the sale of the sec_29 qualified_fuel we express no opinion however regarding how the members’ interests in p are determined ruling_request the sec_29 credit has always been a time sensitive credit in that eligibility for the credit is determined when facilities or wells producing qualified_fuels are placed in plr-167576-01 service and when the qualifying fuels are produced and sold to unrelated persons for example the sec_44d credit as originally enacted in the crude_oil windfall profit tax act of was generally available for the production and sale of alternative fuels after date and before date from facilities placed_in_service after date and before date on property which first began production after date the sec_29 credit has been extended by congress four times the placed-in- service deadline and the period for claiming the sec_29 credit were extended in the technical_and_miscellaneous_revenue_act_of_1988 for placed_in_service omnibus budget reconciliation act of for placed_in_service and for the end of the credit_period energy policy act of for placed_in_service and for the end of the credit_period and small_business job protection act of date for placed_in_service it is clear from the legislative_history of sec_44d that congress intended the credit to apply to facilities placed_in_service after and that the placed-in-service deadline in sec_29 must be read as applying to when the facility is first placed_in_service within the applicable dates the placed-in-service deadlines contained in sec_29 and sec_29 focus on the facility and not the owner of the facility the legislative_history of sec_44d clearly shows that congress wanted to encourage the production of new alternative fuels from facilities first placed_in_service after and not provide tax incentive for production capacity in service before sec_29 demonstrates that congress knows how to preclude transferees of facilities from claiming the sec_29 credit that provision provides that extension of the period for placing facilities in service after does not apply to any facility that produces coke or coke gas unless the original_use of the facility commences with the taxpayer there is no such limitation on facilities for producing synthetic_fuel from coal accordingly the determination of whether a facility has satisfied the placed-in-service deadline under either sec_29 or sec_29 is made by reference to when the facility is first placed_in_service not when the facility is transferred or sold to a different taxpayer therefore the acquisition of the facility by p will not affect the placed-in-service date of the facility for purposes of sec_29 when property is placed_in_service is a factual determination and we express no opinion on when the facility was placed_in_service ruling_request sec_708 provides that a partnership shall be considered as terminated if within a twelve-month period there is a sale_or_exchange of percent or more of the total interest in partnership capital and profits sec_1_708-1 provides that if a partnership is terminated by a sale_or_exchange of an interest the following is deemed to occur the partnership contributes all of its assets and liabilities to a new partnership in exchange for an interest in the new plr-167576-01 partnership and immediately thereafter the terminated partnership distributes interests in the new partnership to the purchasing partner and the other remaining partners in proportion to their respective interests in the terminated partnership in liquidation of the terminated partnership either for the continuation of the business by the new partnership or for its dissolution and winding up sec_1_708-1 applies to terminations of partnerships under sec_708 occurring on or after date as discussed above the placed_in_service deadline in sec_29 and sec_29 must be read as applying to when the facility is first placed_in_service within the applicable dates the placed-in-service deadlines contained in sec_29 and sec_29 focus on the facility and not the taxpayer owning the facility accordingly the determination of whether a facility has satisfied the placed-in-service deadline under sec_29 and sec_29 is made by reference to when the facility is first placed_in_service not when the facility is placed_in_service by a transferee taxpayer therefore we conclude that any termination of p under sec_708 arising from sales or exchanges of interests in p will not preclude the reconstituted partnership from claiming the sec_29 credit for the production and sale of synthetic_fuel to unrelated persons ruling_request to qualify for the sec_29 credit the facility must be placed_in_service before date pursuant to a binding written contract in effect before date while sec_29 does not define placed_in_service the term has been defined for purposes of the deduction for depreciation and the investment_tax_credit property is placed_in_service in the taxable_year the property is placed in a condition or state of readiness and availability for a specifically assigned function sec_1 a - e i and d ii of the income_tax regulations placed_in_service has consistently been construed as having the same meaning for purposes of the deduction for depreciation and the investment_tax_credit see revrul_76_256 1976_2_cb_46 revrul_94_31 1994_1_cb_16 concerns sec_45 which provides a credit for electricity produced from certain renewable resources including wind the credit is based on the amount of electricity produced_by_the_taxpayer at a qualified_facility during the 10-year period beginning on the date the facility was originally placed_in_service and sold by the taxpayer to an unrelated_person during the taxable_year revrul_94_31 holds that for purposes of sec_45 a facility qualifies as originally placed_in_service even though it contains some used_property provided the fair_market_value of the used_property is not more than percent of the facility’s total value the cost of the new property plus the value of the used_property revrul_94_31 concerns a factual context similar to the present situation consistent with the holding in revrul_94_31 if the facility was placed_in_service prior to date within the meaning of sec_29 the relocation of the facility to the x site or other location after date or replacement of parts of the facility after that plr-167576-01 date will not result in a new placed_in_service_date for the facility for purposes of sec_29 provided the fair_market_value of the original property of the facility is more than percent of the facility’s total fair_market_value at the time of the relocation or replacement when property is placed_in_service is a factual determination and we express no opinion on when the facility was placed_in_service conclusions accordingly based on the representations of p and p’s authorized representative we conclude as follows p with the use of the process and the chemical reagents will produce a qualified_fuel within the meaning of sec_29 the production of the qualified_fuel from the facility will be attributable solely to p entitling p to the sec_29 credit for the production of qualified_fuel from the facility that is sold to an unrelated_person the contract for the construction of the facility constitutes a binding written contract within the meaning of sec_29 the sec_29 credit attributable to p may be passed through to and allocated among the members of p in accordance with the principles of sec_702 in accordance with each member’s interest in p at the time the sec_29 credit arises for the sec_29 credit a member’s interest in p is determined based on a valid allocation of the receipts from the sale of the sec_29 qualified_fuel the acquisition of the facility by p will not affect the placed-in-service date of the facility for purposes of sec_29 any termination of p under sec_708 arising from sales or exchanges of interests in p will not preclude p as reconstituted from taking the sec_29 credit for the production and sale of qualified_fuel to unrelated persons and if the facility was placed_in_service prior to date within the meaning of sec_29 the relocation of the facility to the x site or other location after date or replacement of parts of the facility after that date will not result in a new placed-in-service date for the facility for purposes of sec_29 provided the fair_market_value of the original property of the facility is more than percent of the facility’s total fair_market_value at the time of the relocation or replacement we express no opinion on when the facility was placed_in_service except as specifically ruled upon above we express no opinion concerning the federal_income_tax consequences of the transaction described above specifically we express no opinion on when p’s facility was placed_in_service or how the partners’ interests in p plr-167576-01 are determined this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted therefore this ruling may be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in this ruling see section dollar_figure of revproc_2002_1 2002_1_irb_1 however when the criteria in section dollar_figure of revproc_2002_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to p’s authorized representative sincerely yours joseph h makurath senior technician reviewer branch office of associate chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes