t c memo united_states tax_court james h hawse and cynthia l hawse petitioners v commissioner of internal revenue respondent docket no filed date during and p-h was the sole shareholder of j an s_corporation j an automotive dealership accounted for its new and used vehicles inventories on the lifo_method of accounting for j sought automatic consent under a revenue_procedure to change its method_of_accounting for its new and used vehicles from lifo to specific identification with vehicles valued at the lower_of_cost_or_market rather than actual cost j never fully implemented the change as requested but thereafter filed federal_income_tax returns as if it had reporting sec_481 lifo_recapture income and paying the tax thereon in j filed amended tax returns for and purporting to correct its prior returns to reflect continued use of lifo ps contend that because j did not change its valuation method for all of its vehicles inventory to lower_of_cost_or_market j never received automatic consent and therefore remained on the lifo_method if so ps reason they are entitled to refunds of the tax paid on lifo_recapture income for and held j failed to satisfy the requirements for automatic consent under revproc_99_49 1999_2_cb_725 because it did not comply with all terms and conditions of the revenue_procedure held further because j consistently accounted for its new and used vehicles inventory using the specific_identification_method on it sec_2001 through income_tax returns a seven-year period j changed its method_of_accounting notwithstanding its failure to secure r’s consent held further j’s attempt to revert to the lifo_method of accounting by filing amended returns is a change in method_of_accounting that requires r’s consent under sec_446 steven ray mather for petitioners halvor r melom for respondent memorandum findings_of_fact and opinion wherry judge respondent determined deficiencies and sec_6662 accuracy-related_penalties with respect to petitioners’ and taxable years as follows unless otherwise indicated section references are to the internal_revenue_code code of as amended and in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure throughout this opinion we refer to the income_tax regulations in effect for the tax years at issue year deficiency dollar_figure big_number penalty sec_6662 dollar_figure dollar_figure after the parties’ filing of a stipulation of facts a stipulation of settled issues and a supplemental stipulation of settled issues which are by this reference incorporated herein the only remaining issues for decision are whether for and the tax years at issue jhh motor cars inc jhh petitioner james h hawse’s wholly owned s_corporation received automatic consent to change its method_of_accounting for its new and used vehicles inventories vehicles inventory from lifo to specific identification if not whether jhh changed that method_of_accounting for the year sec_2001 through notwithstanding its failure to secure respondent’s automatic consent and if so whether jhh’s attempt in to revert to the lifo_method of accounting for its vehicles inventory by filing amended income_tax returns for and constitutes a proposed second change in accounting_method which would be permissible only with respondent’s consent findings_of_fact petitioners james h hawse and cynthia l hawse resided in california on the date the petition was filed at all relevant times mr hawse was the president and sole shareholder of jhh a subchapter_s_corporation jhh was incorporated under the laws of the state of california in its original name was taylaurel motors inc which it changed to sierra toyota inc in and then to jhh motor cars inc in during the tax years at issue jhh sold new toyota and mitsubishi vehicles and used vehicles and operated a full service automobile repair and parts department jhh’s method_of_accounting on date jhh under its former name sierra toyota inc elected to use the last-in_first-out lifo_method of accounting for its vehicles inventory jhh made that election by filing form_970 application to use lifo the venue for appeal of this case is the u s court_of_appeals for the ninth circuit both because petitioners resided within its jurisdiction when they filed their petition see sec_7482 and because in any event the parties have so stipulated see sec_7482 following the general_rule for s_corporations see sec_1378 jhh was a calendar_year taxpayer lifo is one of two alternative cost flow assumptions generally used for financial_accounting and tax purposes to compute a taxpayer’s cost_of_goods_sold continued inventory_method with the internal_revenue_service irs jhh did not make a similar lifo election for its parts inventory non-lifo inventory which it identified using the specific_identification_method and valued on the basis of lower_of_cost_or_market in early mr hawse anticipating that he might sell his dealership at some point given the interest expressed by potential buyers sought to terminate continued under the other assumption first-in_first-out fifo it is assumed that the first goods acquired or produced are the first goods sold and that the goods remaining in ending inventory are the last goods acquired or produced under lifo it is assumed that the last goods acquired or produced are the first goods sold t he overriding purpose of lifo is to match current costs against current income 92_tc_1314 for a taxpayer in an inflationary environment whose ending inventory computed under lifo reflects the lower prices of antecedent purchases rather than the higher prices of current purchases and as a consequence a higher cost_of_goods_sold lifo boasts an obvious advantage a reduction in current income leading generally to a reduction in current income_tax the potential for increased gain on account of the allocation of the lower costs of antecedent purchases to ending inventory is not eliminated however it is simply deferred until in time there is a liquidation of the items to which those lower costs have been allocated see 126_tc_322 providing a detailed explanation of the lifo_method of accounting aff’d 518_f3d_357 6th cir an inventory identification method differs from an inventory_valuation method on form_3115 application_for change in accounting_method the taxpayer must provide information for both his present and proposed inventory identification methods lifo fifo or specific identification and inventory_valuation methods cost cost or market whichever is lower retail cost retail lower_of_cost_or_market or other jhh’s lifo election because he viewed the lifo_method as an impediment to the eventual sale of his business mr hawse’s specific concern as he framed it at trial germinated from the accumulated lifo reserve that either he or the purchaser might have to recapture if he sold the dealership mr hawse felt that generally buyers prefer an asset sale to a stock purchase because they do not want to take on the potential corporate or personal income_tax_liability associated with an unrecaptured lifo reserve in the event of an asset sale jhh would have to recapture the entire lifo reserve and mr hawse as its sole shareholder would have to pay tax on it in a single tax_year because a taxpayer generally must obtain irs consent to any change in its method_of_accounting see sec_446 jhh attempted to follow the automatic consent procedure in revproc_97_37 1997_2_cb_455 jhh filed with the irs an application_for automatic consent to revoke its lifo election for the vehicles inventory in favor of the specific_identification_method it did so principally by attaching form_3115 to its timely filed form_1120s u s income_tax return for an s_corporation on that form_3115 jhh the lifo reserve with respect to a pool of inventory is the difference between the accounting cost of that inventory calculated using the fifo method and the cost calculated using the lifo_method it measures the potential built-in_gain in the inventory as a result of using the lifo_method in an inflationary or rising price economy stated that it was requesting permission to change its method_of_accounting for its vehicles inventory pursuant to the automatic consent provisions of revproc_97_37 supra and that the change would take effect for tax_year jhh further stated that it currently identified its vehicles inventory using the lifo_method and valued it at cost and that going forward it would identify that inventory using the specific_identification_method and would value it at the lower_of_cost_or_market form_3115 made clear that jhh’s use of the specific_identification_method for its non-lifo inventory and its valuation of that inventory at the lower_of_cost_or_market would remain unchanged the table below summarizes the information jhh presented on form inventory identification method used before lifo termination identification method used after lifo termination vehicles inventory non-lifo inventory lifo specific identification specific identification specific identification inventory_valuation method used before lifo termination valuation method used after lifo termination vehicles inventory non-lifo inventory actual cost lower_of_cost_or_market lower_of_cost_or_market lower_of_cost_or_market jhh also stated on form_3115 that it would make the necessary sec_481 adjustment by including in income or recapturing its stored lifo reserve of dollar_figure over a period of four years--dollar_figure per year for each of and jhh did not attach a statement explaining how its proposed new methods of identifying and valuing its vehicles inventory were consistent with the requirements of sec_1_472-6 income_tax regs or how these methods conformed to the requirements of revproc_97_37 app sec c b pincite mr hawse jhh’s president and sole shareholder signed form_3115 and jhh filed a copy with the irs national_office jhh’s form_3115 shows values for the ending vehicles inventory for year computed under the old method lifo at cost and the new method specific identification at the lower_of_cost_or_market nothing in the record explains how the ending vehicles inventory value under the new method was calculated jhh’s accountant’s generalized statements during the trial seem to indicate that the difference between the two ending inventories should be equal to the accumulated lifo reserve dollar_figure that was recaptured the difference however is not equal to the accumulated recaptured lifo reserve the record does not provide an explanation for the apparent discrepancy in the case of a change from lifo to some other method_of_accounting sec_481 requires the recapture of lifo reserve for the year_of_the_change and thus prevents the accumulated lifo reserve from escaping taxation revproc_97_37 sec dollar_figure and 1997_2_cb_455 permits a taxpayer to recapture this lifo reserve over a period of four years--the four-year spread accord revproc_99_49 sec_5 1999_2_cb_725 consistent with its affirmations on form_3115 on it sec_2001 through income_tax returns jhh used the specific_identification_method of accounting for all of its inventory vehicles and non-lifo inventory jhh also made the sec_481 adjustment reporting income of dollar_figure under recapture lifo reserve on each of it sec_2001 sec_2002 and income_tax returns however contrary to its representation on form_3115 that it would value all of its inventory at the lower_of_cost_or_market jhh in fact used different valuation approaches for its various inventories it used actual cost for new vehicles lower_of cost or wholesale market for used vehicles and lower_of_cost_or_market for parts neither jhh’ sec_2001 income_tax return nor its form_3115 disclosed these various approaches that jhh used these various inventory_valuation approaches could be gleaned only from its yearend financial statements at no point after jhh filed form_3115 did respondent advise jhh in writing or otherwise that the irs had rejected jhh’s application_for automatic consent or that its application was in any way defective jhh’s amended returns during the year sec_2001 sec_2002 and kruse mennillo llp kruse mennillo provided accounting services to jhh jhh had worked with kruse mennillo since kruse mennillo reviewed jhh’s financial statements provided tax preparation services and inventory valuations and worked on various other special projects that might come up during the year with respect to inventory valuations all inventory valuations on the operational level were done in-house by jhh personnel except that at the end of the year kruse mennillo would calculate the lifo yearend inventory and determine the lifo reserve amount on the basis of that calculation during the year sec_2001 sec_2002 and victor kawana was the managing partner of the cerritos california office of kruse mennillo and was in charge of jhh’s account at some point before date mr kawana attended an online seminar or webinar petitioners and mr kawana contend that irs motor_vehicle technical specialist terri harris participated in that webinar and ms harris represented during the webinar that the irs was rejecting forms filed by taxpayers whose post-lifo-termination methods of inventory_valuation were not identical for all inventory employed in their businesses we do not and need not make any finding of fact as to whether these events occurred as petitioners and mr kawana contend because the accuracy of their contentions will not affect the outcome of this case we note however that mr kawana does not recall the specific day week or month in which the webinar allegedly occurred and no recording transcript or other corroborative record of the webinar was offered into evidence moreover ms harris has attended approximately two webinars since assuming the position of irs motor_vehicle technical specialist in she credibly testified that she does not recall continued after allegedly hearing ms harris’ statements during the webinar mr kawana met with willard de fillips an auto dealership industry professional who advises on lifo accounting_method issues to discuss the status of jhh’s lifo termination from his conversation with mr de fillips mr kawana understood that mr de fillips considered jhh’s lifo termination problematic mr de fillips also publishes a newsletter the lifo lookout that addresses various issues related to lifo_inventories mr kawana’s firm kruse mennillo subscribes to it the spring edition of the lifo lookout addressed the validity of automatic lifo termination applications specifically mr de fillips advised his readers in the lifo lookout that recently the irs national_office had been rejecting forms that were filed for automatic terminations of lifo elections this fact had been further confirmed by his meeting with an irs motor_vehicle technical adviser and it appeared that the irs’ position was that dealerships could not use the automatic change provisions to terminate the lifo_method if after filing their lifo termination applications the dealerships did not use the same method of inventory_valuation for all of their continued attending any webinar where she discussed the subjects alleged or otherwise had any specific discussions with petitioners or their representatives concerning lifo termination non-lifo inventory mr de fillips posited that in such a case filing amended returns might be one acceptable way of reverting to the lifo_method and correcting a defective lifo termination on the basis of the foregoing information mr kawana advised mr hawse that jhh should file amended returns to reinstate the lifo_method for vehicles inventory and to reverse the related sec_481 adjustments on date with mr hawse’s approval jhh filed amended income_tax returns for tax_year sec_2002 through stating that the amended tax returns reflect the valuation of the taxpayer’s new inventory at lifo consistent with its prior election jhh did not file an amended_return for because the period of limitations for that year had presumably expired instead jhh included the adjustments for in its amended_return for on its amended returns for and the years at issue here consistent with its goal of reverting to the lifo_method jhh reversed the sec_481 adjustment that it had earlier made computed additional lifo reserve amounts lifo layers for year sec_2001 sec_2002 and and claimed deductions for these additional lifo reserve amounts on it sec_2002 and amended returns year sec_2002 and were still open because jhh’s returns for those years were under examination by the irs and period of limitations extensions had apparently been obtained the adjustments on jhh’ sec_2002 and amended returns attributable to its attempted reversion to the lifo_method and the resulting disputed income adjustments are in the following amounts reversal of sec_481 adjustment dollar_figure big_number year lifo reserve lifo layers dollar_figure big_number contested reduction in income dollar_figure big_number on it sec_2002 amended_return jhh deducted dollar_figure for the reversal of the sec_481 adjustment dollar_figure for and dollar_figure for because the original and tax returns did not use lifo for vehicles inventory on it sec_2002 amended_return jhh deducted dollar_figure for its approximated lifo reserve of this amount dollar_figure was for and dollar_figure was for the dollar_figure lifo reserve amount for was also an approximation jhh claimed refunds on it sec_2002 and amended returns as a result of these adjustments on date respondent mailed petitioners a notice_of_deficiency for tax_year sec_2002 and petitioners timely filed a petition with this court the parties resolved all deficiency issues before trial leaving only petitioners’ refund claims for litigationdollar_figure in a deficiency case such as this one sec_6512 grants this court continued opinion as a general_rule a taxpayer’s t axable income shall be computed under the method_of_accounting on the basis of which the taxpayer regularly computes his income in keeping his books sec_446 if the taxpayer desires to change the method_of_accounting on the basis of which he regularly computes his income in keeping his books he must before computing his taxable_income under the new method secure the consent of the secretary sec_446 consent must be secured whether or not such method is proper or is permitted under the internal_revenue_code or the regulations thereunder sec_1 e i income_tax regs to secure the commissioner’s consent to an accounting_method change a taxpayer may either file a properly completed form with the commissioner during the taxable_year in which the taxpayer desires to make the change in method_of_accounting and await an affirmative grant of consent see id subpara i or comply with the terms and conditions for obtaining consent under any administrative procedures promulgated by the commissioner for that purpose see id subdiv ii revproc_99_49 1999_2_cb_725 provides for continued jurisdiction to determine the amount of a taxpayer’s overpayment if any and provides that any overpayment so determined shall be refunded to the taxpayer automatic consent upon compliance with its terms and conditions and embodies those administrative procedures for the tax_year for which jhh attempted to terminate its lifo electiondollar_figure we first consider whether jhh complied with these terms and conditions and thereby secured automatic consent i automatic consent under revproc_99_49 petitioners’ threshold contention is that jhh never received automatic consent to the revocation of its lifo election petitioners point to revproc_97_ app sec b i a which they contend conditions automatic consent at trial and in their posttrial briefs the parties consistently referenced revproc_97_37 supra and framed their arguments on the basis of its provisions that revenue_procedure was superseded by revproc_98_60 1998_2_cb_759 revproc_98_60 supra was by its terms effective for tax years ending on or after date id sec c b pincite we refer to its effective date in the past tense because revproc_98_60 supra was itself superseded by revproc_99_49 supra effective for tax years ending on or after date including jhh’ sec_2001 tax_year revproc_99_49 sec_1 c b pincite revproc_99_49 supra was later superseded by revproc_2002_9 2002_1_cb_327 effective for tax years ending on or after date revproc_2002_9 sec_1 c b pincite when jhh sought to change its method_of_accounting for its tax_year ending date revproc_99_49 supra provided the applicable procedure for obtaining automatic consent we will rely upon it in our analysis rather than upon the superseded procedure cited by the parties who now agree that it rather than revproc_97_37 supra exclusively governed jhh’s automatic consent application the relevant portions of the two procedures differ only minimally and we note such differences in our analysis on jhh’s adoption in practice of the same inventory_valuation method for all of its vehicles inventory as it used for its non-lifo inventory revproc_99_ app sec b i a c b pincite contains wording identical to that cited by petitioners compare revproc_97_37 c b pincite with revproc_99_49 c b pincite as we found for and subsequent years jhh did not use the same valuation method for all of its vehicles and non-lifo inventory in petitioners’ view a taxpayer must actually follow through on its representations on form_3115 for automatic consent to be granted consequently they reason jhh’s application was fatally defective and jhh retained its historic lifo_method during the tax years at issue in respondent’s view a taxpayer need only comply with the applicable revenue procedure’s requirements in filing form_3115 to obtain automatic consent for the consent to be effective the taxpayer need not as a factual matter implement the changes requested on the form respondent asserts that jhh complied with all relevant provisions of revproc_97_37 supra and that as a result consent was automatically granted to resolve this dispute we must identify the terms and conditions of revproc_99_49 supra and then determine whether jhh met them a what the revenue_procedure said as with any question of textual interpretation the starting point for our analysis must be the text itself see eg 768_f3d_580 6th cir assessing parties’ competing interpretations of a revenue_procedure on the basis of its specific wording before considering their consistency with its general policy and structure 875_f2d_293 fed cir examining wording of revenue_procedure and interpreting it by applying maxim of statutory construction see also 447_us_102 observing that the starting point for interpreting a statute is the language of the statute itself the revenue procedure’s text reveals that to use the automatic consent procedure a taxpayer must be seeking consent to change from a method_of_accounting described in the revenue procedure’s appendix to a method_of_accounting described in that appendix revproc_99_49 sec_1 c b pincite pursuant to the appendix a taxpayer using the lifo inventory_method is eligible to seek automatic consent if the taxpayer proposes to change from the lifo_method for all of its lifo inventory to the permitted method see id app sec a c b pincite for a non-farmer non- securities-dealer taxpayer a permitted method is one which identifies inventory using fifo or specific identification and values that inventory at cost at the lower_of_cost_or_market or if the taxpayer is a retail merchant via the retail_method id sec b ii if the taxpayer has non-lifo inventory for which it already uses one of these permitted methods then that method constitutes the only permitted method to which the taxpayer may seek to change its lifo inventory under the revenue_procedure see id sec b i a dollar_figure petitioners misinterpret these eligibility requirements as terms and conditions actual compliance with which is required to obtain automatic consent the wording and structure of the revenue_procedure do not support their interpretation more to the point adopting that interpretation would vitiate the revenue procedure’s scheme of automatic consent and run contrary to the clear mandate of sec_446 by placing final determinative power over the issuance of the commissioner’s consent in the taxpayer’s hands revproc_99_49 supra refers to automatic consent but this label is something of a misnomer the automatic consent procedure merely allows a taxpayer to assume consent once all predicate procedures have been properly followed and requirements met subject_to the commissioner’s oversight after a taxpayer secures automatic consent to a change in method_of_accounting the district_director may thereafter recommend that the change be modified or revoked if upon review he or she discovers that the change was based on inaccurate factual representations that taxable_income adjustments required for a change in accounting_method were not made under sec_481 or that applicable procedures were not followed revproc_99_49 sec c b pincite consent granted automatically remains revocable for cause petitioners’ theory would effectively shift the commissioner’s power to grant automatic consent to the taxpayer the taxpayer would determine after filing a complete and accurate form_3115 along with the relevant return whether or not to follow through on his affirmations on form_3115 and consequently continued a taxpayer meeting these eligibility requirements may secure automatic consent to change its method_of_accounting by complying with the applicable provisions of the revenue_procedure see revproc_99_49 sec c b pincite more specifically to obtain automatic consent a taxpayer must submit before or with its timely filed income_tax return for the year_of_the_change form_3115 signed by an individual with authority to bind the taxpayer id sec a c b pincite file a copy of that form_3115 with the irs national_office no later than the date on which the original tax_return is filed id sec a cite on form_3115 the applicable_section of the revenue procedure’s appendix id sec a continued whether the commissioner in fact consented where as here the taxpayer files returns consistent with those affirmations but does not abide by them in practice the commissioner would have no way of knowing that he never consented the commissioner’s consent would turn on the taxpayer’s unreported undisclosed inventory practices such an absurd result would render sec_446 toothless sec_1_446-1 income_tax regs requires that form_3115 be filed with the commissioner during the taxable_year in which the taxpayer desires to make the change in method_of_accounting the revenue_procedure issued under the authority of sec_1_446-1 income_tax regs modifies this requirement revproc_99_49 sec c b pincite attach to form_3115 statements a identifying the taxpayer’s new method of identifying its inventory b identifying the taxpayer’s new method of valuing its inventory and c describing in detail how those methods conform to the requirements of revproc_99_49 app sec c b pincite and if a sec_481 adjustment is required make that adjustment over a period of four years beginning with the year of the election id sec_5 c b at dollar_figure b what jhh did on its form_3115 jhh showed that it was eligible to apply for automatic consent jhh unambiguously represented that it currently identified its vehicles inventory using the lifo_method and valued that inventory at cost that it identified its non-lifo inventory using the specific_identification_method and in addition to these listed provisions both revproc_97_37 sec a c b pincite and revproc_98_60 sec a c b pincite required a taxpayer to include with form_3115 an attachment stating that the taxpayer agreed to the revenue procedure’s terms and conditions jhh did not comply with this requirement but as of the date jhh applied for automatic consent the requirement had been eliminated see revproc_99_49 sec_2 c b pincite jhh used the date revision of form_3115 at line 6b of part ii change in valuing inventories of schedule c change in the treatment of long- term contracts inventories or other sec_263a assets that version of form_3115 directs a taxpayer changing from the lifo_method to attach a statement describing how the proposed method is consistent with the requirements of regulations sec_1_472-6 jhh did not attachment this statement valued that inventory using the lower_of_cost_or_market approach and that it proposed to identify its vehicles inventory using the specific_identification_method and to value it at lower_of_cost_or_market jhh also complied with some--but not all--of the revenue procedure’s application requirements jhh attached form_3115 to its timely filed income_tax return designating as the year for which the change was to take effect and also filed a copy with the irs national_office on its form_3115 jhh stated that the form was filed pursuant to the automatic consent procedure of revproc_97_37 supra mr hawse who as jhh’s president ostensibly had authority to bind the corporation signed the form further jhh agreed on the form that it would make the necessary sec_481 adjustment and stated that the sec_481 adjustment resulting from the change_of_accounting_method would be a recapture of lifo reserve of dollar_figure over a period of four years consistent with its statements on form_3115 on it sec_2001 tax_return jhh accounted for its vehicles and non-lifo inventory according to the specific_identification_method and reported income of dollar_figure for that year’ sec_25 share of the lifo reserve recapture jhh did not however cite on form_3115 the applicable_section of the revenue procedure’s appendix nor did it attach to form_3115 a separate statement describing how its new methods of identifying and valuing its inventory conformed to the requirements of revproc_97_37 app sec b i at first blush these two defects may appear trivial but the revenue_procedure itself demands strict compliance a taxpayer that changes to a method_of_accounting without complying with all the applicable provisions of this revenue_procedure has not obtained the commissioner’s consent see revproc_99_49 sec c b pincite emphasis added this strict compliance standard makes sense sec_446 mandates that taxpayers seek the commissioner’s consent to changes in their methods_of_accounting the commissioner is vested with a wide discretion in deciding when the court determined that revproc_97_37 supra had been superseded by revproc_99_49 supra we sought comment from the parties on which procedure should apply and on the effect of any differences between them in the status report he submitted in response to the court’s request respondent argues that we should disregard jhh’s omission of the attachment under the substantial compliance doctrine see eg staples v commissioner tcmemo_2013_262 at explaining that where in making an election a taxpayer omits one or more regulatory requirements if the requirements are procedural or directory in that they do not go to the essence of the thing to be done but rather are given with a view to the orderly conduct of business they may be fulfilled by substantial compliance respondent contends that the requirement for the attachment to revproc_99_49 supra is merely procedural that the information that should have been included in the attachment appeared elsewhere on jhh’s form_3115 and that jhh therefore substantially complied for the reasons set forth in the text we decline to adopt this reasoning whether to permit or to forbid a change 291_us_193 as a general_rule when a taxpayer requests consent to a change in method_of_accounting the commissioner’s consent to that request must be affirmative to be effective--that is the commissioner must notify the taxpayer its request has been granted see sec_1_446-1 income_tax regs although the commissioner has elected to define the terms under which his consent to a request may be presumed see id subdiv ii revproc_99_49 supra presuming consent when a taxpayer’s request varies from those terms would be antithetical to the concept of discretion and would undermine the purposes of sec_446 see eg 64_tc_314 explaining that treatment of a taxpayer’s election of an accounting_method as binding absent consent of the commissioner to a change serves to inter alia prevent administrative burdens and inconvenience in administering the tax laws as well as to promote consistent accounting practice thereby securing uniformity in collection of the revenue consequently we hold that because jhh did not comply with all the terms and conditions of revproc_99_49 supra its application_for automatic consent faileddollar_figure petitioners additionally argue that the irs through its agent and representative ms harris acceded to their view that jhh’s failure to in fact adopt the method_of_accounting change it sought on form_3115 precluded it from obtaining automatic consent this argument implicates the equitable_estoppel doctrine because we have held on another basis that jhh did not receive automatic consent we need not closely scrutinize this argument nevertheless we note that petitioners have not established the elements of an equitable_estoppel claim against respondent see 104_tc_13 describing the requirements for an equitable_estoppel claim against the government as a false representation or wrongful misleading silence by the party against whom estoppel is claimed an error in a statement of fact and not in an opinion or statement of law ignorance of the true facts by the taxpayer reasonable reliance by the taxpayer on the acts or statements of the one against whom estoppel is claimed and adverse effects suffered by the taxpayer as a result of the acts or statement of the one against whom estoppel is claimed supplemented by 104_tc_417 aff’d 140_f3d_240 4th cir we find petitioners’ evidence of ms harris’ representative status and alleged statements unpersuasive see supra note moreover petitioners have not refuted her testimony that at speaking engagements she always advises her audience that her statements represent her personal views not those of the irs petitioners could not have relied reasonably upon ms harris’ personal opinions moreover whether or not ms harris said what petitioners and mr kawana claim she said a government agency like the irs is not bound by the unauthorized statements of its agents see eg 449_f2d_228 5th cir i t is well established that the government is not bound by the unauthorized or incorrect statements of its agents 225_f2d_629 10th cir t he united_states may not be estopped by the unauthorized acts of its agents nor may such agents waive the rights of the united_states by their unauthorized acts aff’g 21_tc_1012 and rev’g continued ii changes in accounting_method we have concluded jhh did not receive automatic consent to terminate lifo for its vehicles inventory and to use specific identification lower_of_cost_or_market for all inventory as a result we must resolve two further issues first we must decide whether notwithstanding its failure to secure respondent’s automatic consent in jhh’s filing of it sec_2001 through tax returns in accordance with a new method_of_accounting was a change in method_of_accounting if so second we must ascertain whether the amended returns reflect a further change in method_of_accounting for which respondent’s consent is again required if it is then because respondent has not consented to the change jhh may not revert to the lifo_method simply by filing amended returns see eg 34_tc_1070 a change to specific identification in their posttrial briefs petitioners simply assume that because respondent did not automatically consent to jhh’s requested accounting_method change no change in fact occurred and jhh was still on the lifo_method for its vehicles continued 121_fsupp_584 w d okla 76_tc_209 concluding that an oral agreement entered into by an authorized agent was not binding on the irs because applicable regulations required a written_agreement aff’d 810_f2d_209 d c cir inventory notwithstanding its filing of tax returns using another method petitioners misconstrue sec_446 that section provides that a taxpayer shall secure consent before computing his taxable_income under a new method sec_446 the statute’s use of the word shall creates a legal duty to seek advance consent to a change in accounting_method it does not foreclose as a factual matter any unconsented change sec_446 itself and our caselaw make this point crystal clear sec_446 defines certain consequences of a taxpayer’s failure to seek consent to a change in method of accounting--to wit the taxpayer may not cite the absence of consent as a basis for reducing or eliminating any determined penalty or addition_to_tax if it were factually impossible for a taxpayer to change its method_of_accounting without first securing consent sec_446 would serve no apparent purpose under the surplusage canon we are to give effect to every provision congress has enacted 141_tc_376 citing 348_us_528 w e decline to read words out of the statute see 135_tc_114 aff’d 676_f3d_1129 d c cir or in this instance an entire subsection moreover as we have expressly recognized if a taxpayer changes the method_of_accounting used in computing taxable_income without first requesting the commissioner’s consent then the commissioner would appear to have at least two choices sunoco inc v commissioner tcmemo_2004_29 t c m cch first the commissioner could assert sec_446 and require the taxpayer to abandon the new method_of_accounting and to report taxable_income using the old method_of_accounting second the commissioner could accept the change_of_accounting_method and require the taxpayer to make any adjustments which might be necessary to prevent amounts from being duplicated or omitted id t c m cch pincite citations omitted accord 130_tc_147 aff’d 659_f3d_316 4th cir indeed sec_446 affords the commissioner the power to grant retroactive changes in accounting methods as well as prospective ones see 64_tc_314 respondent elected the latter course for through jhh accounted for its inventory on its income_tax returns using the specific_identification_method respondent examined jhh’ sec_2002 and returns and in the notice_of_deficiency mailed date determined that jhh had revoked its lifo election effective date to the extent that jhh changed its method_of_accounting respondent has plainly accepted the changedollar_figure we qualify the foregoing statement only because we have not yet established that by filing returns using the specific_identification_method jhh did in fact change its method_of_accounting petitioners contend that their manner of accounting for inventory on jhh’s original returns represented mere error such that filing amended returns was necessary to correct that error this argument begs the question whether jhh ever changed its method_of_accounting historically this court and others have held that the commissioner’s consent to a change in method_of_accounting may be implied if the commissioner has over a sufficient period of years accepted without response or comment a taxpayer’s income_tax returns filed using a new method_of_accounting see eg 138_f2d_774 6th cir aff’g 47_bta_103 113_f2d_652 2d cir rev’g 40_bta_1274 26_tc_301 14_tc_725 we have alluded to this implied consent doctrine without applying it in more recent cases see 64_tc_314 perry v commissioner tcmemo_1990_228 59_tcm_533 we need not apply the doctrine in the instant case because respondent in the notice_of_deficiency and throughout this litigation has taken the position that jhh’s application_for automatic consent was effective--that is that he did give consent sec_446 empowers the commissioner to grant consent retroactively see barber v commissioner t c pincite thus notwithstanding the failure of jhh’ sec_2001 application_for automatic consent respondent evidently approved the applied-for change at some point thereafter the code does not define the phrase method_of_accounting the court has held that the phrase includes the consistent treatment of any recurring material_item whether that treatment be correct or incorrect see 120_tc_174 aff’d in part vacated in part on other grounds and remanded sub nom j p morgan chase co v commissioner 458_f3d_564 7th cir 53_tc_439 aff’d 443_f2d_965 6th cir the regulations under sec_446 define method_of_accounting as including not only the over-all method_of_accounting of the taxpayer but also the accounting treatment of any item sec_1_446-1 income_tax regs those same regulations explain that a change in accounting_method includes a change in the overall plan of accounting for gross_income or deductions or a change in the treatment of any material_item used in such overall plan id para e ii a a material_item in turn is any item that involves the proper time for the inclusion of the item in income or the taking of a deduction id that is an item is a material_item if a change in its treatment will not change a taxpayer’s lifetime income but will instead merely postpone or accelerate the taxpayer’s reporting of income see eg 93_tc_500 with respect to inventories specifically a change in an overall plan or system of identifying or valuing items in inventory or a change in the treatment of any material_item used in the overall plan for identifying or valuing items in inventory constitutes a change in accounting_method sec_1_446-1 income_tax regs conversely a change in method_of_accounting does not include correction of mathematical or posting errors or errors in the computation of tax_liability id subdiv ii b a mathematical error is an error in addition subtraction multiplication or division sec_6213 capital one fin corp v commissioner t c pincite 126_tc_322 aff’d 518_f3d_357 6th cir a posting error is an error in ‘the act of transferring an original entry to a ledger ’ wayne bolt nut co v commissioner t c pincite quoting black’s law dictionary 5th ed where error correction results in a change_of_accounting_method however the consent requirement of sec_446 applies see huffman v commissioner t c pincite the line between a change in accounting_method and mere error or its correction is a fine one in huffman we exhaustively reviewed our caselaw and that of other courts dealing with what constitutes an accounting_method change see id pincite recognizing inconsistencies in our prior caselaw we emphasized that it is the consistent treatment of an item involving a question of timing that establishes such treatment as a method_of_accounting id pincite for that reason a short-lived deviation from an already established method_of_accounting need not be viewed as a establishing a new method_of_accounting id and in that case neither the deviation from nor the subsequent adherence to the method_of_accounting would be a change in method_of_accounting id as we observed in huffman the question of course is what is short- lived id the court has answered this question in various ways we have suggested that a two-year deviation can establish a new method_of_accounting see 108_tc_448 if the change in reporting method affects the amount of taxable_income for or more taxable years without altering the taxpayer’s lifetime taxable_income then it is strictly a matter of timing and constitutes a change in method_of_accounting aff’d in part rev’d in part on other grounds 184_f3d_786 8th cir see also capital one fin corp v commissioner f 3d pincite treatment of a material_item consistently in two or more consecutively filed tax returns constitutes a method_of_accounting for which consent is required to change--even if that treatment is erroneous or an incorrect application of a chosen method we have also firmly held that a 10-year deviation consistently followed reflects a change in method_of_accounting huffman v commissioner t c pincite as we said in huffman we need not today determine how long is short id jhh deviated from its previously established lifo_method on seven consecutively filed tax returns from through before seeking to amend its returns jhh consistently used the specific_identification_method for its vehicles inventory for a seven-year period because use of the specific_identification_method rather than the lifo_method accelerated jhh’s recognition of vehicle sales income see supra note it involved a question of timing regardless of the upper temporal boundary of a short-lived deviation we think that seven years lies beyond it jhh’s consistent treatment of an item involving a question of timing establishes such treatment as a method_of_accounting see huffman v commissioner t c pincite notwithstanding its failure to secure respondent’s automatic consent jhh changed its method_of_accounting from lifo by accounting for its vehicles inventory on the specific_identification_method on it sec_2001 through tax returns b reversion to lifo petitioners hang their hats on the argument that they did not receive respondent’s consent to terminate lifo in and the assumption that in the absence of such consent a change in accounting_method simply cannot occur from these premises they reason that jhh’s attempt to restore the lifo_method reflects simply the correction of error for which no consent is needed they do not confront whether if jhh did change its method_of_accounting in albeit without the required consent jhh’s amended returns reflect a second change in method_of_accounting respondent contends that at least some of the changes on jhh’s amended returns are changes in the treatment of material items and thus changes in method_of_accounting for which respondent’s consent was required but not granteddollar_figure in their briefs the parties debate whether changing from an erroneous method_of_accounting to a proper one requires the commissioner’s consent as framed their dispute would appear to be resolved by sec_446 which by its terms applies to all changes in method_of_accounting and by sec_1_446-1 income_tax regs which expressly brings a change from an improper or unpermitted method_of_accounting within the ambit of sec_446 the more relevant question is whether a taxpayer’s change in reporting constitutes a change in method_of_accounting within the scope of the statute pointing to a footnote in s pac transp co v commissioner 75_tc_497 n supplemented by 82_tc_122 petitioners insist that governing caselaw holds that changing from an erroneous method to a proper method does not require consent as petitioners expressly recognize however the actual issue in that case was not whether the taxpayer could change its accounting_method without the commissioner’s consent but rather whether the proposed change in reporting was in fact a change in accounting_method so the footnote on which petitioners rely is merely dictum moreover the tax years at issue in that case were see id pincite so this court had no need to consider the effect of t d 1970_2_cb_98 which brought change from an improper or continued as we have concluded above although jhh did not receive automatic consent it nevertheless changed from the lifo_method of accounting to the specific_identification_method for its vehicles inventory in jhh’s attempt to revert to the lifo_method with its amended returns constitutes a second attempted change in method_of_accounting under our caselaw and both alternative definitions in the regulations we have held that a taxpayer does change its method_of_accounting when it changes its treatment of an item in order to adhere to a method adopted pursuant to a prior accounting election see capital one fin corp v commissioner t c pincite citing sunoco inc v commissioner tcmemo_2004_29 and 88_tc_1069 see also huffman v commissioner t c pincite analyzing whether and under what circumstances a taxpayer does not change its method_of_accounting when it merely conforms to a prescribed but ignored method_of_accounting recognizing inconsistencies in prior caselaw and concluding that by ignoring the prescribed method the taxpayer had established a new method_of_accounting on its amended returns jhh changed its treatment of its vehicles inventory to adhere to continued unpermitted method expressly within the scope of sec_1_446-1 income_tax regs its previously elected lifo_method and this change constituted a change in method_of_accounting second a change from specific identification to lifo is a change in an overall plan or system of identifying items in inventory and thus qualifies as a change in method_of_accounting see sec_1_446-1 income_tax regs providing that a change in an overall plan or system of identifying or valuing items in inventory constitutes a change in method_of_accounting for purposes of sec_446 third the two changes that jhh proposed to make with its amended returns involve material items the first change reversed the sec_481 recapture of lifo reserve that jhh had earlier included on it sec_2001 sec_2002 and income_tax returns the second change computed lifo reserve amounts for tax_year sec_2001 sec_2002 and and deducted them sec_481 adjustments constrain the extent of income deferral attained through use of the lifo_method when a taxpayer terminates lifo sec_481 mandates inclusion in income of the lifo reserve absent lifo termination inclusion of the lifo reserve would occur only upon liquidation or reduction of inventory jhh’s reversal of the sec_481 adjustment and deduction of additional lifo reserve amounts retroactively postponed its recognition of lifo reserve hence both changes relate to the proper timing of income and so amount to changes in the treatment of material items see sec_1_446-1 c income_tax regs accordingly under our caselaw and under either prong of the definition in sec_1_446-1 income_tax regs the changes that jhh made on its amended returns constitute a retroactive change in method_of_accounting for which respondent’s consent was required respondent was well within his discretion to refuse such consent and to refuse to accept jhh’s amended returns see 464_us_386 observing that the internal_revenue_code does not explicitly provide either for a taxpayer’s filing or for the commissioner’s acceptance of an amended_return and that consequently an amended_return is a creature of administrative origin and grace 96_tc_204 describing whether to permit a taxpayer to change its method_of_accounting as a matter within the discretion of the commissioner iii conclusion jhh did not receive automatic consent under revproc_99_49 supra to change its method_of_accounting for its lifo inventory to specific identification notwithstanding its failure to obtain the consent required by sec_446 by consistently accounting for that inventory on it sec_2001 through income_tax returns using the specific_identification_method jhh changed its method_of_accounting jhh’s proffered amended returns on which it attempted to revert to the lifo_method reflect a second change in method_of_accounting to which respondent may refuse consent under sec_446 jhh did not obtain that consent accordingly respondent was entitled to reject jhh’s amended returns and petitioners are not entitled to their claimed refunds to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number ------------------------------------ ------------------------------------ ----------------------------------------------- ---------------------------------- legend department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------- id no ----------------- telephone number --------------------- refer reply to cc psi b01 plr-146385-12 date january x ------------------------------------------ ----------------------------- d ---------------------- state ------------------- dear mr ---------- this responds to a letter dated date submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a corporation for federal tax purposes and relief to file a late s_corporation_election under sec_1362 of the internal_revenue_code facts according to the information submitted x was incorporated on d as a limited_liability_company under the laws of state x‘s sole member intended to treat x as an association_taxable_as_a_corporation and to elect to be treated as an s_corporation for federal tax purposes with both elections effective d however neither form_8832 entity classification election nor form_2553 election by a small_business_corporation was timely filed for x x represents that it acted reasonably and in good_faith x further represents that hindsight is not involved in seeking relief to file a late election finally x represents that the interests of the government will not be prejudiced by granting the requested relief plr-146385-12 law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes elections are necessary only when an eligible_entity does not want to be classified under the default classification or when an eligible_entity chooses to change its classification sec_301_7701-3 provides that except for certain existing entities described in sec_301_7701-3 unless a domestic eligible_entity elects otherwise the entity is a a partnership if it has two or more members or b disregarded as an entity separate from its owner if it has a single owner sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 by filing form_8832 with the appropriate service_center under sec_301_7701-3 this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified the date specified on form_8832 cannot be more than days prior to the date on which the election is filed and no more than months after the date the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301 b provides that the term regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for the regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when a taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government sec_1362 provides that a small_business_corporation may make an election to be an s_corporation plr-146385-12 sec_1362 provides the rule as to when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under sec_1362 an s election made after the first two and one-half months of a corporation's taxable_year results in the corporation not be treated as an s_corporation until the taxable_year following the year in which the s election is filed sec_1362 b provides that if a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for such taxable_year and sec_1362 shall not apply conclusion based solely on the facts submitted and representations made we conclude that x has satisfied the requirements of sec_301 and accordingly x is granted an extension of time of one hundred twenty days from the date of this letter to elect to be treated as an association_taxable_as_a_corporation for federal tax purposes effective d the election should be made by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the election in addition we conclude that x has established reasonable_cause for failing to timely make an election to be an s_corporation and thus is eligible for relief under sec_1362 provided that x otherwise qualifies as an s_corporation we conclude that x will be recognized as an s_corporation effective d if x files a completed form_2553 effective d with the appropriate service_center within one hundred and twenty days from the date of this letter a copy of this letter should be attached to the election except as expressly set forth herein no opinion is expressed or implied concerning the federal tax consequences of the facts described above under any other provision of the code including whether x is otherwise eligible to be an s_corporation for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-146385-12 pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x's authorized representative sincerely associate chief_counsel passthroughs special industries by laura fields laura fields senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes cc


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc intl br 1-plr-119324-98 date date legend tax_year a country b dear this is in response to your letter dated date requesting a ruling under sec_877 of the internal_revenue_code_of_1986 code that a’s loss of u s citizenship did not have for one of its principal purposes the avoidance of u s taxes under subtitle a or subtitle b of the code the information submitted for consideration is substantially as set forth below the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by penalty of perjury statements executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination a was born in country b and has dual citizenship in country b and the united_states a applied for citizenship in the united_states in connection with her husband’s employment with a company in the united_states and obtained her citizenship in date a will formally renounce her united_states citizenship soon after the issuance of this private_letter_ruling on the date of a's expatriation her net_worth will exceed dollar_figure sec_877 generally provides that a citizen who loses u s citizenship or a u s long-term_resident who ceases to be taxed as a lawful permanent resident individuals who expatriate within the 10-year period immediately preceding the close of the taxable_year will be taxed on u s source income as modified by sec_877 for plr-119324-98 such taxable_year unless such loss did not have for one of its principal purposes the avoidance of u s taxes sec_2l07and a provide special estate and gift_tax regimes respectively for individuals who expatriate with a principal purpose to avoid u s taxes a former citizen or former long-term_resident will be treated as having expatriated with a principal purpose to avoid u s taxes for purposes of sec_877 sec_2107 and sec_2501 if the individual’s average income_tax_liability or the individual’s net_worth on the date of expatriation exceed certain thresholds see sec_877 sec_2107 and sec_2501 a former u s citizen whose net_worth or average tax_liability exceeds these thresholds however will not be presumed to have a principal purpose of tax_avoidance if that former citizen is described within certain statutory categories and submits a request for a ruling within one year of the date of loss of u s citizenship for the secretary’s determination as to whether such loss had for one of its principal purposes the avoidance of u s taxes see sec_877 sec_2107 and sec_2501 under notice_98_34 1998_27_irb_40 modifying notice_97_19 1997_1_cb_394 an eligible former citizen will not be presumed to have a principal purpose of tax_avoidance if that former citizen submits a complete and good_faith request for a ruling as to whether such loss had for one of its principal purposes the avoidance of u s taxes notice_98_34 requires that certain information be submitted with a request for a ruling that an individual’s expatriation did not have for one of its principal purposes the avoidance of u s taxes a is eligible to request a ruling under sec_877 because she was a citizen of both the united_states and country b and continues to be a citizen of country b the country in which she was born her husband was born and her parents were born see sec_877 a submitted all the information required by notice_98_34 including any additional information requested by the service after review of the submission accordingly based solely on the information submitted and the representations made it is held that a has made a complete and good_faith submission in accordance with sec_877 and notice_98_34 and therefore a will not presumed to have expatriated with a principal purposes of tax_avoidance however because the information submitted does not clearly establish the existence or lack of a principal purpose to avoid taxes under subtitle a or b of the code no opinion is expressed as to whether a’s expatriation had for one of its principal plr-119324-98 purposes the avoidance of such taxes while this ruling rebuts the presumption of tax_avoidance under sec_877 it is not conclusive as to whether a subsequently may be found to have a principal purpose of tax_avoidance under sec_877 sec_2107 and sec_2501 based on all the facts and circumstances see sec_877 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in addition no opinion is expressed as to a’s u s tax_liability for taxable periods prior to her loss of u s citizenship or for taxable periods after her loss of u s citizenship under sections of the code other than sec_877 sec_2107 and sec_2501 a copy of this letter must be attached to a’s u s income_tax return for the year in which a obtained the ruling whether or not a is otherwise required to file a return this ruling is directed only to the taxpayer requesting it section of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to a sincerely __________________ allen goldstein reviewer office of the associate chief_counsel international cc assistant_commissioner international chief international district operations


t c summary opinion united_states tax_court charles a foster and susan c foster petitioners v commissioner of internal revenue respondent docket no 12024-08s filed date charles a foster and susan c foster pro sese scott l little for respondent summary opinion carluzzo special_trial_judge this case was heard pursuant to the provisions of sec_7463 pursuant to sec_7463 the decision to be entered 1unless otherwise indicated subsequent section references are to the internal_revenue_code_of_1986 as amended in effect for the relevant period rule continued is not reviewable by any other court and this opinion shall not be treated as precedent for any other case in a notice_of_deficiency dated date notice respondent determined a dollar_figure deficiency in petitioners’ federal_income_tax and imposed a dollar_figure addition_to_tax under sec_6651 the issue for decision is whether petitioners are entitled to a charitable_contribution_deduction for the donation of a facade easement easement to l’enfant trust inc l’enfant background some of the facts have been stipulated and are so found petitioners who are and were at all times relevant here married to each other resided in the district of columbia when the petition was filed continued references are to the tax_court rules_of_practice and procedure 2petitioners now concede liability for a sec_6651 addition_to_tax as appropriate 3l’enfant a district of columbia nonprofit corporation chartered in qualifies as a sec_501 organization organized and operated for the purpose of holding and enforcing conservation easements on historic designated properties in washington d c on date maria p logan and james wade logan logans and charles a foster petitioner purchased as tenants in common a two-story residence on 34th street in the georgetown historic_district of washington d c 34th street at all times relevant 34th street was and is subject_to restrictions imposed pursuant to the old georgetown act and the historic landmark and historic_district protection act of preservation acts the dollar_figure purchase_price of 34th street was paid in part by cash contributed by the logans and petitioner--petitioner contributed dollar_figure--and in part by the proceeds of a dollar_figure loan loan from branch banking trust co the loan is secured_by a deed_of_trust executed by petitioner and the logans and guaranteed by petitioners immediately following the purchase of 34th street the logans held an undivided ownership_interest in it and petitioner held an undivided ownership_interest in petitioner and the logans conveyed an easement to l’enfant that among other things prohibits changes to the facade of 34th street without the express written consent of l’enfant according to the deed granting the easement easement deed the easement’s purpose is to preserve an open space for the scenic enjoyment of the general_public and to preserve a historically important land area the easement deed although executed on date was not tendered to l’enfant until date a lender acknowledgment - conservation_easement acknowledging the grant of the easement deed to l’enfant is attached to and was recorded with the easement deed in the appropriate office of the district of columbia as occurred in this case l’enfant requires all donors to affix a bronze plaque to the donated facade the plaque serves to inform the public that the facade will be preserved and l’enfant often receives calls or tips from local citizens about any construction or alterations to the facades of historic buildings bearing the l’enfant plaque l’enfant actively and periodically inspects buildings on which it holds easements l’enfant routinely reviews all building permits received by the district of columbia historic preservation office annually inspects its properties and when necessary takes legal action to enforce its rights under the easements according to l’enfant its role is not to prohibit changes to a property subject_to a facade easement it holds but to mediat e change over the years and decades l’enfant allows renovations updates and improvements when appropriate furthermore the restrictions imposed upon a property subject_to a facade easement held by l’enfant overlap in many respects with restrictions placed upon a property subject_to the preservation acts according to l’enfant its facade easement restrictions are enforced more robustly on date an employee of j lee donnelly son inc donnelly appraised 34th street in connection with the planned donation of the easement according to donnelly the fair_market_value of 34th street without taking into account the easement which had not yet been effected was dollar_figure before-donation value donnelly found that the sales comparison approach was the most appropriate valuation method for estimating the market_value of 34th street before the donation of the easement according to donnelly if things went as planned the historic architectural facade easement would reduce the value of 34th street by approximately dollar_figure to dollar_figure after-donation value donnelly’s determination of the after-donation value relies extensively if not solely on an article prepared by mark primoli an internal_revenue_service employee which stated that internal_revenue_service engineers have concluded that the proper valuation of a facade easement should range from approximately to of the value of the property primoli article in contrast to the analysis of the before-donation value included in the donnelly report the 4rounded to the nearest hundred dollars after-donation value is summarized in a single paragraph reproduced in its entirety as follows as defined and certified by the u s department of interior national register of istoric sic places and the l’enfnt sic trust the subject property is an example of historic residential real_estate located in an historic market area it is now generally recognized by the internal_revenue_service irs that the donation of a facade easement of a single family property results in a loss of value dedicated charitable_contribution between and the donation of a commercial property results in a loss of value of between and or higher if development rights are lost the inclusive data support at least these ranges since the subject is a very valuable building and land parcel with extensive facade area we estimate that the subject’s loss of value from the donation of the easement i sec_11 of the value before the easement dollar_figure which equates in a loss of ninety-eight thousand five hundred and dollars dollar_figure rounded on date donnelly issued a letter updating the appraisal and reaffirming its findings on date petitioner and the logans executed an agreement reallocating their interests in 34th street the agreement called for the easement to be taken entirely from petitioner’s interest in 34th street resulting in a reduction from to petitioner realized the economic consequences of this reallocation of interests when 34th street was sold in date for approximately dollar_figure and his share of the proceeds reflected his reduced ownership_interest petitioners’ joint federal_income_tax return return due with extension on date was not filed until date and thus was untimely as relevant here on the return petitioners claimed a dollar_figure charitable_contribution_deduction for the donation of the easement according to the notice petitioners are not entitled to the deduction for the donation of the easement respondent supports the disallowance of that deduction with an appraisal report prepared by brian j flynn on date respondent’s appraisal report although respondent’s appraisal report is dated date it is a retrospective valuation of 34th street as of date according to respondent’s appraisal report the before-donation value of 34th street was dollar_figure concluding that there was no reduction in value due to the 5the parties used the same valuation method to determine the fair_market_value of 34th street before the donation of the easement and except for some nitpicking on points not particularly determinative to the specific issue before us the parties agree more or less on the before-donation value of 34th street donation of the easement however respondent’s appraisal report shows the after- donation value of 34th street to be the same as the before-donation value and concludes that the easement has no value discussion sec_170 provides that there shall be allowable as a deduction any charitable_contribution payment of which is made within the taxable_year sec_170 further provides that a charitable_contribution shall be allowable as a deduction only if verified under regulations prescribed by the secretary generally sec_170 does not permit a deduction for a charitable gift of property consisting of less than the donor’s entire_interest in that property sec_170 however provides an exception to this general_rule in the case of a qualified_conservation_contribution sec_170 provides that a contribution may constitute a qualified_conservation_contribution if the contribution is of a qualified_real_property_interest the donee is a qualified_organization and the contribution is exclusively for conservation purposes the parties disagree on many points according to respondent petitioners are not entitled to a deduction for the contribution of the easement because the easement granted to l’enfant was not a qualified_conservation_contribution within the meaning of sec_170 petitioners failed to meet the substantiation requirements of sec_170 and its corresponding regulation petitioners have not met their burden_of_proof to establish the fair_market_value of the easement at most petitioners are entitled to a deduction equal to only of the fair_market_value of the easement at the time of the contribution and assuming petitioners are entitled to a deduction for the contribution of the easement the deduction is subject_to the limitations of sec_170 petitioners disagree and have responded point by point to each of respondent’s positions under the circumstances we think it appropriate to first address the disagreement between the parties with respect to the fair_market_value of the easement although the parties disagree on the fair_market_value of the easement at the time of its donation they agree that the appropriate valuation method is the before-donation and after-donation method see 85_tc_677 griffin v commissioner tcmemo_1989_130 aff’d 911_f2d_1124 5th cir stotler v commissioner tcmemo_1987_275 see also sec_1_170a-14 income_tax regs they also agree on the method used to arrive at the fair_market_value of 34th street before the donation of the easement they sharply part ways on the valuation method used to arrive at the fair_market_value of 34th street after the donation of the easement according to donnelly’s report elements that generally reduce the after- donation value of a property subject_to a facade easement include the loss of development rights up to the maximum density allowed and the loss that may occur if market preference changes as to exterior design color windows and doors roof lines etc we have some concerns with the influence on value that the donnelly report attributes to the restrictions imposed on 34th street by l’enfant first the restrictions imposed on 34th street by l’enfant as explained at trial by the president of l’enfant are not as inflexible as the report seems to suggest second the same or similar restrictions imposed on 34th street as a result of the preservation acts are for the most part ignored in the report third the date sale of 34th street as encumbered by the easement suggests that the value of the easement as determined by donnelly was overstated see trout ranch llc v commissioner ___ fed appx ___ wl 10th cir date aff’g tcmemo_2010_283 donnelly’s report explains the operation and purpose of l’enfant but the explanations support more the reason or reasons that a facade easement is created and donated rather than show how the after-donation value of a property and in particular the after-donation value of 34th street is determined donnelly’s generalized discussions aside the report as noted relies extensively if not solely on the primoli article in arriving at an reduction in the value of 34th street as a result of the charitable_contribution of the easement to l’enfant we are unable to distance ourselves from the notion that donnelly considered the range set forth in the primoli article as a safe_harbor for establishing the value of the easement in effect the donnelly report does not so much determine the after-donation value of 34th street in order to determine the value of the easement as much as it values the easement in order to determine the after-donation value of 34th street we recognize that in other cases we found that encumbering a property with a facade easement reduced the property’s fair_market_value and therefore allowed for the easement to be valued using the before-donation and after-donation method needless to say we are unfamiliar with the evidence included in the records of those cases we assume that such evidence supported the values of the encumbered properties as determined through the use of a recognized method of valuation see eg simmons v commissioner tcmemo_2009_208 aff’d 646_f3d_6 d c cir griffin v commissioner tcmemo_1989_130 losch v commissioner tcmemo_1988_230 we have no such evidence here instead petitioners rely upon what they apparently consider to be a safe_harbor estimate to determine the value of the easement and resulting after-donation value of 34th street as we noted in nicoladis v commissioner tcmemo_1988_163 we do not mean to imply that a general 10-percent rule has been established with respect to facade donations we did not do so in hilborn and do not here the after-donation value for 34th street shown in the donnelly report is largely unsupported by any analysis of qualitative factors that support that value instead the after-donation value is determined by applying a percentage reduction within a range suggested by the primoli article to the before-donation value of 34th street the valuation method employed in the donnelly report to arrive at the after- donation value of 34th street is not persuasive respondent disallowed the charitable_contribution_deduction for the donation of the easement to l’enfant and the burden is on petitioners to show that this disallowance was in error see rule a 757_f2d_1208 11th cir taxpayer had the burden of proving that the valuation of donated property should have been higher than that stated in the notice_of_deficiency aff’g 80_tc_872 all things considered we find that they have failed to satisfy their burden in that regard furthermore to the extent that the easement might have value there is insufficient evidence in the record that would allow us to establish that value because the value of the easement cannot be determined respondent’s disallowance of the deduction for the donation of that easement is sustained because of this finding we need not address the other issues addressed by the parties to reflect the foregoing and petitioners’ concession of the sec_6651 addition_to_tax decision will be entered for respondent