t c memo united_states tax_court bianca gross donor petitioner v commissioner of internal revenue respondent docket no filed date kathryn keneally and jeffrey m marks for petitioner gerard mackey for respondent memorandum findings_of_fact and opinion halpern judge by notice_of_deficiency dated date the notice respondent determined a deficiency in petitioner’s federal gift_tax of dollar_figure unless otherwise indicated all section references are to the internal_revenue_code in effect for the principal issue for decision is whether petitioner’s transfer of securities to a family limited_partnership constituted indirect gifts of a portion of those securities to the other members of the partnership findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts with accompanying exhibits is incorporated herein by this reference at the time she filed the petition petitioner resided in the state of new york background petitioner a widow has two adult children diane gross marks and marian gross over the years petitioner an investor has bought and sold securities by she had acquired a sizable portfolio of publicly_traded_securities earlier following her husband’s death in she had begun to consider her own mortality and her desire to involve her daughters in managing what someday would become theirs ie her securities portfolio because she deemed one of her daughters extravagant she considered a_trust arrangement but she rejected that because her other daughter declined to serve as a trustee she settled on a family limited_partnership which she believed would encourage her daughters to work together and learn from her experience while preserving in her as sole general_partner control_over the partnership’s assets she had several discussions with her daughters about the partnership arrangement culminating in an agreement among petitioner and her daughters by date to form a limited_partnership she and her daughters agreed to the following -- each would contribute a small amount of cash to the partnership dollar_figure from petitioner and dollar_figure from each daughter and petitioner would contribute securities -- as the general_partner and majority owner petitioner would retain ultimate control_over management of the partnership including the authority to make decisions about sales purchases and other dispositions of the partnership’s assets and petitioner would have exclusive discretion concerning the timing and amounts of distributions to the partners -- the daughters would not be able to transfer their interests in the partnership without petitioner’s approval -- the daughters could not withdraw from the partnership nor were they entitled to a return of their capital contributions -- the daughters could not force a dissolution of the partnership -- each partner’s interest in the partnership would be based on the amount of her contribution of capital to the partnership dimar holdings l p on date petitioner caused a certificate of limited_partnership for dimar holdings l p the dimar certificate and dimar or the partnership respectively to be filed with the new york department of state she also caused notice of the formation of dimar as a limited_partnership to appear in new york newspapers and on date she caused an affidavit of publication to be filed with the new york department of state on date petitioner’s daughters each drew checks for dollar_figure to the order of dimar on date petitioner drew a check for dollar_figure to the order of dimar from the beginning of date through date petitioner transferred ownership of shares of stock from her name to dimar’s name the dimar securities the dimar securities were mostly if not all common shares of well-known publicly traded companies as the redesignated stock certificates were returned to her she recorded the transfers in a notebook titled dimar that she maintained to record various transactions with respect to dimar by mid-date petitioner had recorded dimar’s portfolio on a computer_program that tracked the performance of the portfolio on a continuous basis the fair_market_value of the portfolio on date was dollar_figure while the value of all of dimar’s assets on that date was dollar_figure the dollar_figure difference was due to the cash contributions from petitioner and her two daughters dimar filed a form_1065 u s partnership return of income for signed by petitioner as general_partner the return shows that dimar commenced business on date the deeds of gift petitioner and her daughters assembled for a family holiday either on or shortly before date at that meeting the december meeting petitioner and each of her daughters executed a document styled deed_of_gift among other things each such document provides that petitioner is transferring to the named daughter a 25-percent interest as a limited_partner in dimar the dimar partnership_agreement also at the december meeting petitioner and her daughters executed a document styled limited_partnership agreement of dimar holdings l p the dimar agreement among other things the dimar agreement provides that petitioner is the general_partner the daughters are limited partners the purposes of the partnership include managing the partnership’s investments in securities limited partners are restricted both in disposing of their partnership interests and in withdrawing capital from the partnership_distributions are at the discretion of the general_partner the powers of the partnership are to be exercised by or under the direction of the general_partner and except as specifically provided in the agreement or as required_by_law the limited partners are to take no part in the management of the business and affairs of the partnership the gift_tax_return petitioner filed a form_709 united_states gift and generation-skipping_transfer_tax return for the form_709 on which she reported date gifts of a 25-percent limited_partnership_interest in dimar to each of her daughters petitioner reported that the value of each of those gifts was dollar_figure a schedule attached to the form_709 contains information pertinent to the gifts it includes a list of the dimar securities under the heading securities contributed to partnership on it states that the market_value of those securities on date was dollar_figure it includes computations of the partners’ capital accounts showing initial contributions of dollar_figure dollar_figure and dollar_figure for petitioner and her daughters respectively it shows that petitioner’s capital_account was credited in the amount of dollar_figure because of her contribution of the dimar securities to the partnership and was then debited in the amount of dollar_figure because of her gifts dollar_figure each to her daughters whose capital accounts were credited because of the gifts in the amount of dollar_figure each the schedule also shows that the reported value of each gift results from applying an approximately 35-percent discount to a prediscount value of dollar_figure for each gift the 35-percent the pre-discount value of dollar_figure for each gift apparently is derived by applying dollar_figure percent to the reported fair_market_value of the dimar securities on date dollar_figure x dollar_figure discount is attributed to minority interest lack of control and lack of marketability the notice following an examination of the form_709 respondent issued the notice the notice explains that respondent’s adjustments giving rise to the deficiency in tax resulted from his determination that petitioner made indirect gifts to each of her daughters of securities when she contributed the dimar securities to dimar rather than direct gifts of 25-percent interests in dimar the notice claims that the value of each indirect gift was dollar_figure i introduction opinion we must determine whether petitioner made indirect gifts of securities to her daughters respondent’s theory of the case begins with his supposition that on date three events occurred petitioner and her daughters formed dimar a family limited_partnership each daughter acquired a 25-percent limited_partnership_interest in dimar and petitioner then contributed the dimar securities to the partnership with dollar_figure percent of the value of the contribution dollar_figure being credited to each daughters’ capital_account on that basis respondent concludes that petitioner made an indirect gift of dollar_figure worth of securities to each daughter taking account of petitioner’s and the daughters’ cash contributions of dollar_figure dollar_figure and dollar_figure respectively respondent continued petitioner’s theory of the case differs from respondent’s principally with respect to the timing of the key events she argues that dimar was formed on date the dimar securities were all contributed by date and the gifts which were of partnership interests occurred long enough thereafter on date that no indirect gift of securities can be supposed petitioner also relies on a stipulation that if the court finds that on date petitioner made direct gifts of limited_partnership interests to the daughters then taking into account applicable discounts the value of each gift was dollar_figure as petitioner reported on the form_709 we shall first describe the indirect gift theory we shall then discuss whether it has any application to the facts before us and resolve any remaining valuation questions ii indirect gifts sec_2501 imposes a tax on an individual’s transfer of property by gift during the year the tax is imposed on the value of the gifts made during the year see sec_2502 the value of a gift of property is the value thereof on the date of transfer sec_2512 the value of a gift of property is determined by the value of the property passing from the donor and not necessarily by the measure of enrichment resulting to the continued calculates the indirect gift to each daughter to be dollar_figure but in the notice he calculated the indirect gifts to be dollar_figure and he does not assert an increased deficiency donee from the transfer sec_25_2511-2 gift_tax regs where property is transferred for less than adequate_and_full_consideration in money or money’s worth hereafter simply adequate_consideration then the excess of the value of the property transferred over the consideration received is generally deemed a gift sec_2512 the gift_tax applies whether the gift is direct or indirect sec_2511 sec_25_2511-1 gift_tax regs illustrates an indirect gift made by a shareholder of a corporation to the other shareholders of the corporation the shareholder transfers property to the corporation for less than adequate_consideration the regulation concludes that generally such a transfer represents gifts by the shareholder to the other individual shareholders to the extent of their proportionate interests in the corporation similarly if a partner transfers property to a partnership for less than adequate_consideration the transfer generally will be treated as an indirect gift by the transferor to the other partners see eg 115_tc_376 affd 283_f3d_1258 11th cir indeed in affirming the tax_court the court_of_appeals said g ifts to a partnership like gifts to a corporation are deemed to be indirect gifts to the stakeholders ‘to the extent of their proportionate interests’ in the entity see sec_25_2511-1 gift_tax regs shepherd v commissioner f 3d pincite iii discussion a introduction whether petitioner made indirect gifts of securities to her daughters depends on whose version of events we accept did all of the relevant events occur on date as respondent claims or was dimar formed and funded a substantial time before as petitioner claims we begin by examining new york partnership law respondent’s position is that execution of a partnership_agreement is a condition_precedent to the formation of a limited_partnership under new york law and since the dimar agreement was not executed until date dimar did not come into existence until that date petitioner counters that dimar was properly formed as a limited_partnership on date when petitioner caused a certificate of limited_partnership for dimar to be filed with the new york department of state or alternatively if dimar did not qualify as a limited_partnership until date then it was a general_partnership under new york law as of date while the parties skirmish over the date or dates on which petitioner contributed the dimar securities to dimar we think that if petitioner is right that dimar was established on date she is also right that the securities were contributed by date because we think that she is right on both counts we conclude that petitioner did not make indirect gifts of securities to her daughters we also agree with petitioner’s valuation conclusion our reasons follow b formation of dimar introduction new york limited_partnerships formed after date are subject_to the revised limited_partnership act n y pship law secs through mckinney in pertinent part n y pship law sec certificate of limited_partnership provides a in order to form a limited_partnership the general partners shall execute a partnership_agreement and a certificate of limited_partnership shall be executed in accordance with section of this article the certificate shall be filed with the department of state in accordance with section of this article b a limited_partnership is formed at the time of the filing of the initial certificate of limited_partnership with the department of state or at any later time not to exceed sixty days from the date of filing specified in the certificate of limited_partnership the filing of the certificate shall in the absence of actual fraud be conclusive evidence of the formation of the limited_partnership as of the time of filing or effective date if later except in an action or special proceeding brought by the attorney_general additionally subsection c of n y pship law sec contains a publication requirement that must be satisfied within days after the filing of the certificate of limited_partnership discussion petitioner caused the dimar certificate to be filed with the new york department of state on date and neither party argues that the publication requirement found in n y pship law sec c is unsatisfied petitioner and her daughters did not however execute the dimar agreement until date as stated respondent argues that execution of a partnership_agreement is a condition_precedent to the formation of a limited_partnership pursuant to new york partnership law see n y pship law sec a he argues therefore that dimar did not come into existence until date petitioner argues that new york partnership law attaches no limitation to the time in which the partnership_agreement must be executed and she directs us to the language in n y pship law sec b providing that except in circumstances not applicable here the filing of the certificate shall be conclusive evidence of the formation of the limited_partnership as of the time of filing or effective date if later noting that the publication requirement found in n y pship law sec cannot be satisfied until after the certificate of limited_partnership is filed petitioner argues the act thus contemplates that a limited_partnership may be formed before all statutory formalities are completed continuing that the dimar certificate did not contain a delayed effective date petitioner respondent argues on brief that because the dimar agreement was signed more than days after the dimar certificate was filed see n y pship law sec b mckinney it is questionable whether dimar was validly formed under new york law the argument that dimar was not formed is inconsistent with the basis of respondent’s adjustment in the notice that petitioner made an indirect gift to her daughters when she contributed the dimar securities to the partnership nor has respondent pled an alternative basis for the deficiency he determined we do not further consider the argument that dimar was not validly formed argues that dimar was formed on date the date the certificate was filed neither party makes a compelling argument for their interpretation of new york partnership law and we have found no persuasive authority on our own since we agree with petitioner that were we to conclude that the dimar agreement was not timely executed so as to constitute dimar a limited_partnership on date we must consider whether new york law would deem petitioner and her daughters to have formed a general_partnership on that date we shall proceed to that consideration under new york law when parties seeking to form a limited_partnership do not satisfy the requirements necessary to form a limited_partnership they may be deemed to have formed a general_partnership if their conduct indicates that they have agreed whether orally and whether expressly or impliedly on all the essential terms and conditions of their partnership arrangement 527_f2d_445 n 2d cir 917_fsupp_969 e d n y we agree with petitioner that the record contains sufficient evidence for us to conclude that at the time petitioner caused the dimar certificate to be filed on date she and her daughters had agreed to form a partnership essentially on the terms set forth in the dimar agreement petitioner and her daughters gave uncontradicted testimony that they had agreed upon the essential terms and conditions of their partnership arrangement just before the filing of the dimar certificate we have set forth those terms and conditions in our findings_of_fact and they are consistent with the terms and conditions of the dimar agreement the daughters made their dollar_figure cash contributions on date and petitioner began contributing securities to the partnership no later than date and made her dollar_figure cash contribution on date she contributed the bulk of the dimar securities to the partnership by the end of date petitioner kept a record of her contributions in a notebook titled dimar and she kept computer records of the performance of the dimar portfolio petitioner signed an income_tax return for dimar on date reporting that dimar commenced business on date together petitioner’s and her daughters’ testimony and their conduct indicate to us that on date they agreed to all the essential terms of their partnership arrangement and we so find if they failed to satisfy the requirements necessary to form a limited_partnership we deem them to have formed a general_partnership on that date and on those terms conclusion dimar was formed as a partnership on date c contribution of the dimar securities we have found that from the beginning of date through date petitioner transferred the dimar securities from her name to dimar’s name respondent can have no quarrel with that finding since it is based on a stipulation nevertheless respondent argues that since dimar was not formed until date petitioner could not have contributed the securities to an entity that did not yet exist respondent buttresses his argument by pointing out that a schedule attached to the form_709 includes a list of dimar securities under the heading securities contributed to the partnership on petitioner relies on the argument that dimar was formed on date whether as a limited or general_partnership and the schedule in question was included with the form_709 solely in support of the valuation of the partners’ capital accounts on date petitioner argues that the schedule was clearly intended to be a list of the securities all contributed by petitioner before date held by dimar on that date and was not intended to show that the securities had in fact been contributed on that date considering the form_709 as a whole petitioner is convincing as to the purpose of the schedule and we have already concluded that dimar was formed on date we conclude that petitioner contributed the dimar securities to dimar during a period commencing in early date and ending on date in further support of his claim that the dimar securities were not contributed to the partnership until date respondent points out that a schedule attached to the form_709 filed by petitioner shows that as of date petitioner’s capital_account reflected the full value of the dimar securities notwithstanding that the partnership had enjoyed dollar_figure of net appreciation in its portfolio that should in part have been reflected in the values of the daughters’ capital accounts petitioner responds that after petitioner’s contribution of the dimar securities and before she made gifts of limited_partnership interests to the daughters the daughters’ combined interest in the appreciation was slight less than percent and the failure to allocate the appreciation may be ignored we agree d indirect gift sec_1 introduction respondent argues that petitioner made indirect gifts to her daughters because she contributed the dimar securities to dimar for inadequate consideration she received inadequate consideration respondent argues because proportionate to her interest in the partnership only dollar_figure percent of the value of the securities was credited to her capital_account she made indirect gifts to her daughters respondent continues because proportionate to their interests in the partnership the remaining value of the securities was credited to their capital accounts dollar_figure percent apiece respondent assumes that petitioner’s transfer of interests in dimar to her daughters either preceded her contribution of the dimar securities to dimar or should be deemed to have preceded that contribution under the step_transaction_doctrine petitioner argues that she made no indirect gift of any portion of the dimar securities to her daughters since percent of the value of the dimar securities was credited to her capital_account well in advance of her gifts of interests in dimar to her daughters and no grounds exist to reorder those steps under the step_transaction_doctrine indirect gifts in fact in 116_tc_121 the decedent had formed two family limited_partnerships with his children and had contributed assets to the partnerships in exchange for substantially_all of the limited_partnership interests in the partnerships his contributions were credited to his capital accounts on the day the partnerships were formed petitioner gave to his children substantially_all of his interests in the partnerships the decedent reported the gifts for federal gift_tax purposes discounting the values of the gifts substantially on account of lack of marketability and for other reasons in the case before us the estate_tax case the commissioner argued that the sizable discounts applied to the gifts indicated that the decedent had made taxable_gifts upon contributing his property to the partnerships the gifts being equal in value to the difference between the value of the property contributed and the value of the limited_partnership interests received we found that the contributions of property were properly reflected in the capital accounts of the decedent and the value of the other partners’ interests was not enhanced by the decedent’s contributions id pincite therefore we held the contributions did not constitute taxable_gifts id in shepherd v commissioner t c pincite the taxpayer transferred real_property and stock to a newly formed family_partnership in which he was a 50-percent owner and his two sons were each 25-percent owners rather than allocating contributions to the capital_account of the contributing_partner the partnership_agreement provided that any contributions would be allocated pro_rata to the capital accounts of each partner according to ownership because the contributions were reflected partially in the capital accounts of the noncontributing partners the value of the noncontributing partners’ interests was enhanced by the contributions of the taxpayer therefore we held the transfers to the partnership were indirect gifts by the taxpayer to his sons of undivided 25-percent interests in the real_property and stock id pincite we have concluded supra in section iii b and c of this report that dimar was formed as a partnership on date and that petitioner transferred the dimar securities to dimar during a period commencing in early date and ending on date petitioner testified and her daughters confirmed that as she contributed the dimar securities to dimar her percentage interest in the partnership increased and theirs decreased a schedule attached to the form_709 shows that petitioner’s capital_account was increased because of her contribution of the dimar securities to the partnership and was then decreased because of her gifts to her daughters whose capital accounts were increased on account thereof the parties agree that petitioner made gifts to her daughters on date the contributions of property in the case at hand are similar in form to the contributions in estate of jones and are distinguishable in form from the gifts in shepherd petitioner made a series of contributions of securities to dimar and received increasing partnership interests in return all of the contributions were reflected in her capital_account and the value of her daughters’ capital accounts was not enhanced because of her contributions after she contributed the dimar securities to the partnership she made gifts of interests in the partnership to her daughters before concluding that form and substance agree however we shall consider respondent’s step transaction argument indirect gifts under the step_transaction_doctrine the step_transaction_doctrine embodies substance over form principles it treats a series of formally separate steps as a single transaction if the steps are in substance integrated interdependent and focused toward a particular result where an interrelated series of steps are taken pursuant to a plan to achieve an intended result the tax consequences are to be determined not by viewing each step in isolation but by considering all of them as an integrated whole holman v commissioner t c __ __ slip op pincite citations and quotation marks omitted holman is a family limited_partnership case in which the taxpayers made the first of a series of gifts of limited_partnership interests days after forming and funding the partnership with shares of a publicly traded company id at __ slip op pincite we described the commissioner’s argument with respect to that gift as being that the taxpayers’ formation and funding of the partnership should be treated as occurring simultaneously with the gift since the events were interdependent and the separation in time between the first two steps formation and funding and the third the gift served no purpose other than to avoid making an indirect gift under sec_25_2511-1 gift_tax regs id at __ slip op pincite without intending to draw any bright lines we rejected the commissioner’s argument because of our conclusion that the taxpayers bore a real economic risk of a change in value of the partnership for the days that separated their transfer of the shares to the partnership and the gift id at __ slip op pincite we concluded w e shall not disregard the passage of time and treat the formation and funding of the partnership and the subsequent gifts as occurring simultaneously under the step_transaction_doctrine id at __ slip op pincite we reach the same result here where days passed between petitioner’s conclusion of her transfer of the dimar securities to the partnership and her gifts of interests in the partnership to her daughters and the dimar securities were mostly if not all common shares of well-known companies the step_transaction_doctrine does not cause us to change the actual order of the transactions before us and conclude that petitioner made indirect gifts of dollar_figure percent of the value of the dimar we caution however in terms similar to those as we used in holman v commissioner t c n slip op pincite the real economic risk of a change in value arises from the nature of the dimar securities as heavily traded relatively volatile common stocks we might view the impact of a 11-day hiatus differently in the case of another type of investment eg a preferred_stock or a long-term government bond securities to each of her daughters the form of the transactions here in question accords with their substance conclusion on date petitioner made gifts of interests in dimar to her daughters and did not make indirect gifts of portions of the dimar securities that she had contributed to the partnership we have deemed that if petitioner and her daughters failed to satisfy the requirements necessary to form a limited_partnership they formed a general_partnership on date sec iii b of this report supra respondent’s position is that dimar came into existence as a limited_partnership when petitioner and her daughters signed the dimar agreement on date the parties have not explored the tax consequences of the dimar agreement being effective to convert dimar from a general to a limited_partnership sec_708 provides the circumstances under which a partnership will be considered as terminated if dimar were considered as terminated as a general_partnership before being reconstituted under the dimar agreement as a limited_partnership then respondent might argue that petitioner received the dimar securities from the terminated general_partnership before contributing them to the reconstituted limited_partnership while at the same time making gifts of limited_partnership interests to her daughters see 433_f3d_1044 8th cir relying on the step_transaction_doctrine in affirming the tax court’s finding that taxpayers made indirect gifts of shares of stock to partners in family limited_partnerships since transfers of securities to partnerships and gifts of partnership interests were integrated and simultaneous transactions affg tcmemo_2004_160 respondent has perhaps not made that argument because he has ruled that generally a partnership does not terminate upon its conversion from a general to a limited_partnership revrul_84_52 1984_1_cb_157 see also revrul_95_37 1995_1_cb_130 treating the conversion of an interest in a domestic_partnership into an interest in a domestic l l c that is classified as a partnership as a partnership to partnership conversion e valuation the parties have stipulated that if petitioner is found by the court to have made gifts of limited_partnership interests in dimar to her daughters on date then petitioner was correct in reporting the value of each of those gifts as dollar_figure on the form_709 we have found only that on date petitioner made gifts of interests not necessarily limited_partnership interests in dimar to her daughters petitioner’s expert witness gave uncontradicted testimony that if dimar were a general rather than a limited_partnership and petitioner and her daughters had agreed that the daughters would be subject_to the same limitations as set forth in the dimar agreement viz neither daughter could dispose_of all or any portion of her interest in the partnership neither would have the right to withdraw either her capital or participation in the partnership or to receive distributions from the partnership and neither would have control of management or the business and affairs of the partnership then the fair_market_value of a 25-percent interest in the partnership received by each of the daughters would be worth the same as a 25-percent limited_partnership_interest in a limited_partnership governed by the dimar agreement he pegged that value as dollar_figure petitioner states however that she is not claiming a value for the gifts any less than the value dollar_figure reported on the form_709 we have found that by the time petitioner caused the dimar certificate to be filed on date she and her daughters had agreed to form a partnership essentially on the terms set forth in the dimar agreement on the basis of petitioner’s expert witness’s uncontradicted testimony we find that if on date dimar was a general_partnership the fair_market_value of the interest in the partnership that petitioner gave to each of her daughters was dollar_figure iv conclusion to reflect the foregoing decision will be entered for petitioner


index number date control number tam-119753-98 cc dom it a b6 number release date internal_revenue_service national_office technical_advice_memorandum taxpayer’s name taxpayer’s address taxpayer’s ein years involved conferences held taxpayer date a date b date c date d date e date f date g date h issue are the molds manufactured by taxpayer unique items under sec_460 of the internal_revenue_code resulting in the subject contracts being accounted for using the percentage-of-completion method_of_accounting under sec_460 pcm tam-119753-98 cc dom it a facts taxpayer manufactures metal molds wood molds and fixtures for the production of plastic parts most of these molds are used by first-tier suppliers of vehicle subassemblies or manufacturing equipment for the automobile industry typical products include injection molds used to produce a variety of interior and exterior parts such as instrument panel components and door panels each mold is designed to produce a part that is used on one particular automobile model or car-body configuration thus the molds produce parts that generally are not interchangeable between any two vehicle models when one of taxpayer’s customers is not the successful bidder on a parts-supply contract with an original equipment manufacturer however taxpayer’s mold generally is usable by the successful bidder on that contract occasionally taxpayer will manufacture a second identical mold for a customer but this typically occurs several months after the first mold is manufactured taxpayer is responsible for designing fabricating and assembling a complete injection mold that the customer can use with its own processing equipment to make the parts this entire process requires approximately months though some of this time is needed because of customer-caused delays eg engineering changes taxpayer contends that it can complete the typical mold in about months if customer- caused delays do not occur the first few months of the process are devoted to preparing a design for manufacturing using the customer’s electronic cad data which describes the surfaces of the molded part taxpayer’s cad cam programmers develop a mold that will yield a product of the desired dimensions quality and production rate included in the mold design are specialized electro-mechanical devices for injecting raw plastic material into the mold and ejecting the cured part from the mold a customer can specify some components eg valves electrical components that are compatible with its existing systems taxpayer also needs to verify how the mold equipment will be installed at the customer’s plant to ensure that the mold’s mechanical and electrical devices will properly interface with the customer’s equipment once the design has been finalized taxpayer’s employees prepare a complete set of engineered drawings and specifications and then order the necessary raw materials during the next several months taxpayer fabricates and assembles the mold fabrication and assembly are performed manually by employees highly experienced in the mechanical and electrical professions they cut molds from stainless steel production molds or kirksite aluminum prototype molds during this phase machinists operate computer numerical control cnc milling machines and programmable boring mills when machine cutting tools cannot cut the entire surface area of a mold taxpayer has to use an electron-discharge machine edm that tam-119753-98 cc dom it a literally removes material molecule by molecule before taxpayer’s employees can operate an edm however taxpayer has to design and fabricate the carbon electrodes that work with the edm over time these electrodes are consumed in the edm process die makers perform the final finishing and checkout benching of each mold this process entails manually finishing and polishing the die surfaces to bring the mold into acceptable tolerances to the extent that taxpayer’s manufacturing process is automated taxpayer does not have to reconfigure it each time a new mold is begun furthermore taxpayer’s employees do not have to learn new techniques or receive special training to manufacture each mold the time required to design and fabricate a mold is decreasing because of technological changes such as cad cam that permit taxpayer to use customer- supplied computer data that describes the part to be made by the mold and real-time machining which eliminates the need for a worker to operate a cnc milling machine on date a taxpayer filed a form_3115 application_for change in accounting_method for the taxable_year beginning date b and ending date c taxpayer sought the commissioner’s consent to change its method_of_accounting for long-term_contracts from an impermissible hybrid method to the accrual-shipment method described in sec_1_446-1 of the income_tax regulations in the application taxpayer represented that the average model contract has a duration of approximately four weeks and a mold contract has a duration of approximately three to four months on date d the service issued a letter_ruling granting consent for taxpayer to change to the accrual- shipment method and to the method of reporting advance_payments for goods according to sec_1_451-5 financial conformity rule beginning with the taxable_year ending date c on date g taxpayer had open contracts whose total_contract_price exceeded dollar_figure eight of these contracts had been in progress at date h as part of the examination the revenue_agent requested assistance from an irs engineer whose report concluded that the molds manufactured by taxpayer are unique items under sec_460 after considering the characteristics of uniqueness described in 90_tc_341 acq 1990_2_cb_1 and in the service's action on decision in sierracin sierracin aod the engineer based his conclusion on the following factors the molds are custom designed to meet the particular needs of the buyer first-tier supplier and would not be of use to another customer or be produced for taxpayer's inventory mold pre-production costs taxpayer changed its annual_accounting_period from the taxable_year ending date e to the taxable_year ending date f when it elected s_corporation status tam-119753-98 cc dom it a ranged from to percent of the total cost except for duplicate molds the manufacturing operation is considered nonautomated and the time to construct a machine is approximately months which is relatively long compared to the time to construct an item for inventory thus the revenue_agent tentatively proposed to require taxpayer to change from the accrual-shipment method_of_accounting to the percentage-of-completion method_of_accounting mandated by sec_460 taxpayer requested that the revenue_agent submit a request for technical_advice applicable law sec_460 provides that in the case of any long-term_contract the taxable_income from such contract shall be determined under the pcm as modified by sec_460 the determination of whether the long-term_contract rules apply is made on a contract-by-contract basis sec_460 provides generally that in the case of any long-term_contract for which the pcm is used the percentage of completion shall be determined by comparing costs allocated to the contract and incurred before the close of the tax_year with the estimated total contract costs any income under the contract to the extent not previously includible in gross_income shall be included in gross_income for the taxable_year following the taxable_year in which the contract was completed sec_460 provides that the term long-term_contract means any contract for the manufacture building installation or construction_of_property if such contract is not completed within the taxable_year in which such contract is entered into sec_460 further provides however that a contract for the manufacture of property shall not be treated as a long-term_contract unless such contract involves the manufacture of any unique item of a type that is not normally included in the finished goods inventory of the taxpayer or any item that normally requires more than calendar months to complete without regard to the period of the contract analysis in determining whether the molds are unique for purposes of sec_460 we believe that the characteristics set forth by the court in sierracin are relevant even though that case was concerned with the application of the long-term_contract method prior to sec_460 as the service stated in its sierracin aod aod cc-1990-16 date the following characteristics generally distinguish unique items from non-unique items custom design items that are custom designed to fulfill the particular needs of a buyer are usually unique items unless they would be of use to tam-119753-98 cc dom it a a number of potential buyers and share a basic design with items previously produced_by_the_taxpayer pre-production costs performance of a contract to produce unique items often requires the taxpayer to design the items or to develop the production process or both prior to the beginning or during the actual production of the items therefore performance of a contract to produce unique items often requires extensive research development design engineering retooling or similar activities such activities are extensive if costs incurred or time required to perform these activities are significant compared to the total costs or time to perform the contract nature of manufacturing operation a unique item is generally produced in a nonautomated manufacturing operation or in a specialized manufacturing operation that must be developed or extensively modified in order to perform the contract length of production_period if the production_period of an item is relatively long it is more likely to be a unique item custom design many of the contracts obligate taxpayer to manufacture a single mold to meet the needs of a particular customer though the process of creating and manufacturing molds generally is the same for each mold the result of that effort the mold itself is unique because the mold is designed to produce a part that is used on one particular automobile model or car-body configuration the molds are generally not interchangeable between car models or car manufacturers occasionally a contract obligates taxpayer to manufacture an additional mold for the same customer or to manufacture a mold for the second supplier of the same part in both cases the molds are designed to meet the needs of a particular customer furthermore in the latter case two molds to produce the same part can be different because of the two parts suppliers using different production equipment pre-production costs a unique item typically requires activities related to research development design engineering retooling etc before the production process begins pre- production activities after reviewing taxpayer’s job cost detail reports the service’s engineer determined that four cost categories relate to pre-production activities design cnc programming parting line and laminate and electrodes parting line and laminate activities involve the fabrication of tooling aids that are used to tam-119753-98 cc dom it a trace and cut a shape from a steel block by controlling the path of the machine cutting head tooling aids were commonly used in and but have been gradually replaced by the cnc milling machines as described previously electrodes are needed when taxpayer has to use an edm because ordinary cutting tools cannot cut the entire surface area of a mold the service’s engineer determined that taxpayer’s pre- production_costs ranged from to percent of the total cost with a mean of percent taxpayer’s pre-production costs are declining because of the new technologies discussed previously but remain in the percent range nature of manufacturing operation though mold-making is becoming more automated every year it still requires a substantial amount of manual labor as described previously some fabrication eg edm preparation and assembly eg finishing benching is performed manually length of production_period the production_period for taxpayer’s molds ranged from eight months to months with a mean of approximately months while some of the production_period may be related to customer change orders such delays are a normal occurrence that should be considered in determining whether a contract is a long-term_contract see sec_1 b i b completion determined on basis of all facts and circumstances sec_1 b iv a initial classification requires reasonable allowances for delay rework and change orders conclusion we conclude taxpayer's molds subject_to the typical contracts described above are unique items because taxpayer cannot reasonably expect to sell a finished mold to anyone other than the identified first-tier supplier taxpayer incurs a significant amount of pre-production costs to produce a mold important parts of the taxpayer's manufacturing operations are performed manually and taxpayer's production_period is relatively long all four factors favor the service's position that taxpayer's molds are unique items under sec_460 thus taxpayer must account for the related long-term_contracts using the pcm the unique item determination must be made for each contract items with lower preproduction costs and shorter production periods than those discussed above might not be unique items under sec_460 and consequently the related contracts would not be long-term_contracts tam-119753-98 cc dom it a the consent agreement dated date d is modified to the extent it applies to taxpayer’s long-term_contracts taxpayer must cease reporting the gross_income from its long-term_contracts under the accrual-shipment method_of_accounting described in sec_1_446-1 and begin reporting this gross_income under the pcm under the authority of sec_7805 the service will not apply this modification retroactively taxpayer may continue reporting the gross_income from its long-term_contracts under the accrual- shipment method for any contract entered into before the date that this technical_advice_memorandum is issued a copy of this technical_advice_memorandum is to be given to the taxpayer sec_6110 of the code provides that it may not be used or cited as precedent


t c summary opinion united_states tax_court gabriel mora and mirna silverio petitioners v commissioner of internal revenue respondent docket no 6732-07s filed date gabriel mora and mirna silverio pro sese anne m craig for respondent armen special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any unless otherwise indicated all subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure other court and this opinion shall not be treated as precedent for any other case respondent determined a deficiency in petitioners’ federal_income_tax of dollar_figure an addition_to_tax of dollar_figure under sec_6651 for failure to timely file a tax_return and an accuracy-related_penalty of dollar_figure under sec_6662 in an affirmative pleading respondent asserts that petitioners are not entitled to the filing_status of married_filing_jointly for after concessions the issues for decision are whether petitioners are entitled to the filing_status of married_filing_jointly whether petitioners are entitled to dependency_exemption deductions for petitioner mora’s two parents two nieces and nephew whether petitioners are entitled to the child_tax_credit and additional_child_tax_credit for the two nieces and nephew whether petitioners are liable for the addition_to_tax for failure to timely file and whether petitioners are liable for the accuracy-related_penalty background none of the facts have been stipulated by the parties petitioners resided in the state of florida when the petition was filed petitioners have limited english proficiency and their testimony was given through an interpreter at trial references to petitioner in the singular are to petitioner gabriel mora at all relevant times petitioners were not married but lived together as husband and wife during petitioner worked for a landscaping company but petitioner silverio did not work outside the home and had no income petitioners have a daughter s m who lived with them and was a minor in during petitioner wired approximately dollar_figure to family members in mexico petitioner sent the money to help support his parents two nieces and nephew who resided together on a farm in mexico the nieces and nephew were between the ages of and during the year in issue petitioners’ federal_income_tax return was completed by a professional tax_return_preparer and untimely filed in date the return is dated date and was received by respondent on date petitioners filed the return using it is the policy of the court to refer to minors only by their initials see rule a the record includes receipts for six wire transactions totaling dollar_figure petitioner indicated that he was unable to locate receipts for all of the wire transactions for the filing_status of married_filing_jointly and claimed six dependency_exemption deductions one for their daughter and five for petitioner’s relatives in mexico two parents two nieces and a nephew petitioners also claimed the child_tax_credit and the additional_child_tax_credit for four children their daughter and petitioner’s two nieces and nephew in a notice_of_deficiency respondent denied the dependency_exemption deductions for petitioner’s parents nieces and nephew and denied the child_tax_credit and additional_child_tax_credit for petitioner’s nieces and nephew respondent also determined that petitioners are liable for the addition_to_tax for failure to timely file a tax_return and the accuracy-related_penalty based on negligence or disregard of rules or regulations in respondent’s amendment to answer respondent alleges that petitioners were not entitled to file a joint_return because petitioners were not married in but concedes that petitioner is entitled to head-of-household filing_status and two exemption deductions one for petitioner silverio and one for petitioner’s daughter s m petitioner is also entitled to the child_tax_credit for his daughter discussion a burden_of_proof generally the commissioner’s determinations are presumed correct and the taxpayer bears the burden of proving that those determinations are erroneous rule a 290_us_111 deductions and credits are a matter of legislative grace and the taxpayer bears the burden_of_proof to establish that he or she is entitled to any deduction or credit claimed rule a 308_us_488 292_us_435 under sec_7491 the burden_of_proof may shift from the taxpayer to the commissioner if the taxpayer produces credible_evidence with respect to any factual issue relevant to ascertaining the taxpayer’s liability petitioners have not alleged that sec_7491 applies nor did they introduce the requisite evidence to invoke that section therefore the burden_of_proof remains on petitioners b filing_status pursuant to sec_6013 a husband and wife may generally file a joint federal_income_tax return married individuals as defined in sec_7703 who elect to file a joint_return under sec_6013 are eligible for the filing_status of married_filing_jointly sec_1 the determination of whether an individual is married shall be made as of the close of the taxable_year sec_7703 whether a taxpayer is married for federal_income_tax purposes is determined by reference to the laws of the state of the taxpayer’s marital domicile see 256_f2d_664 4th cir affg 29_tc_71 70_tc_361 affd without published opinion 601_f2d_599 7th cir 64_tc_552 affd 550_f2d_1201 9th cir petitioners admit that they were not married at the close of in addition florida state law does not recognize common_law marriage fla stat ann sec_741 west in view of the foregoing we hold that petitioners are not entitled to married_filing_jointly filing_status for accordingly and as allowed by respondent petitioner shall be given head-of-household filing_status as petitioner silverio had no income in she has no tax_liability for that year however by virtue of sec_6211 there is a deficiency in her income_tax for equal to the disallowed additional_child_tax_credit as petitioner is likewise liable for the disallowed additional_child_tax_credit respondent concedes that such amount will be collected only once c dependency_exemption deductions6 petitioner claims that he is entitled to dependency_exemption deductions for his parents two nieces and nephew who lived in mexico throughout a taxpayer may be entitled to claim a dependency_exemption deduction for each individual who qualifies as the taxpayer’s dependent under sec_151 and sec_152 sec_151 c as relevant herein an individual must meet the following tests in order to qualify as a dependent of the taxpayer gross_income_test support_test relationship_test and citizenship or residency test sec_151 and sec_152 a taxpayer is entitled to a dependency_exemption deduction for each dependent as defined in sec_152 whose gross_income for the taxable_year is less than the exemption_amount sec_151 the exemption_amount for was dollar_figure sec_151 revproc_2003_85 sec_3 2003_2_cb_1184 sec_152 provides that the term dependent means an individual over half of whose support for the year was received from the taxpayer dependent may include a taxpayer’s parent or niece or nephew sec_152 a dependent must be a u s citizen or national or resident_of_the_united_states we note that the working families tax relief act of publaw_108_311 118_stat_1166 amended inter alia sec_151 sec_152 sec_24 and sec_2 effective for tax years beginning after date thus we apply the law as it was applicable to tax_year ie as it existed prior to such amendment canada or mexico at some time during the calendar_year in which the taxable_year of the taxpayer begins sec_152 sec_1_152-2 income_tax regs in order to prove that a taxpayer provided more than half of the support for his dependents the taxpayer must establish the entire amount expended for their support from all sources 73_tc_963 56_tc_512 in addition the taxpayer must demonstrate that the dependents’ gross_income did not exceed the exemption_amount sec_151 d the record in the present case is devoid of evidence regarding either the total amount spent for the support of petitioner’s parents nieces and nephew by petitioner and from other sources or the gross_income of petitioner’s parents in thus although petitioner’s parents nieces and nephew satisfy the relationship and residency tests petitioner has not proven either that he satisfies the support_test or that his parents satisfy the gross_income_test we commend petitioner for contributing to the support of his relatives in mexico however he has not shown either the extent of such support or the gross_income of his parents accordingly we hold that petitioner is not entitled to dependency_exemption deductions for his parents nieces and nephew for d child_tax_credit and additional_child_tax_credit sec_24 allows taxpayers a credit against tax imposed for each qualifying_child sec_24 provides that a qualifying_child for purposes of sec_24 is any individual if the taxpayer is allowed a deduction under sec_151 with respect to such individual for the taxable_year sec_24 provides that a portion of the credit may be refundable which portion is commonly referred to as the additional_child_tax_credit because petitioner is not entitled to dependency_exemption deductions for his two nieces and nephew under sec_151 he is not entitled to a child_tax_credit or additional_child_tax_credit for them under sec_24 e addition_to_tax for failure_to_file sec_6651 imposes an addition_to_tax for failure_to_file a return by its due_date the addition equal sec_5 percent of the tax required to be shown on the return for each month or fraction thereof that the return is late not to exceed percent sec_6651 b sec_7491 generally provides that the commissioner bears the burden of production with respect to the liability of an individual for any penalty or addition_to_tax the commissioner may meet his burden of production by coming forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty or addition_to_tax 116_tc_438 respondent has met his burden of production in the absence of an extension the last date for petitioner to have timely filed a federal_income_tax return was friday date see sec_6072 petitioner’s federal_income_tax return was dated date and was not received by respondent until date a failure_to_file a tax_return on the date prescribed leads to a mandatory penalty unless the taxpayer shows that such failure was due to reasonable_cause and not due to willful neglect 114_f3d_366 2d cir affg tcmemo_1995_547 a showing of reasonable_cause requires a taxpayer to show that he exercised ordinary business care and prudence but was nevertheless unable to file the return within the prescribed time 469_us_241 sec_301_6651-1 proced admin regs petitioner has not offered any evidence to establish that the late filing was due to reasonable_cause and not due to willful neglect see sec_6651 accordingly we hold that petitioner is liable for the addition_to_tax under sec_6651 f sec_6662 penalty sec_6662 and b imposes a penalty equal to percent of the amount of any underpayment attributable to negligence or disregard of rules or regulations the term negligence includes any failure to make a reasonable attempt to comply with tax laws and disregard includes any careless reckless or intentional disregard of rules or regulations sec_6662 the commissioner bears the burden of production with respect to the accuracy-related_penalty see sec_7491 higbee v commissioner supra sec_6664 provides an exception to the imposition of the accuracy-related_penalty if the taxpayer establishes that there was reasonable_cause for and the taxpayer acted in good_faith with respect to the underpayment sec_1_6664-4 income_tax regs the determination of whether the taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account the pertinent facts and circumstances sec_1_6664-4 income_tax regs circumstances that may indicate reasonable_cause and good_faith include the extent of the taxpayer’s effort to properly assess the tax_liability and an honest misunderstanding of fact or law that is reasonable in light of the taxpayers’s experience knowledge and education id reliance on the advice of a professional tax adviser does not necessarily demonstrate reasonable_cause and good_faith however professional advice constitutes reasonable_cause and good_faith if under all the circumstances such reliance was reasonable and the taxpayer acted in good_faith id the taxpayer bears the burden of proving that he or she did not act negligently or disregard rules or regulations rule a welch v helvering u s pincite higbee v commissioner supra pincite see sec_7491 regarding the commissioner’s burden of production we are satisfied that petitioner whose command of the english language is limited at best made a good_faith effort to properly determine his federal_income_tax liability and that his underpayment results from reliance on the advice of a professional tax adviser combined with an honest misunderstanding of fact or law that is reasonable in light of his experience knowledge and education accordingly we hold that petitioner is not liable for the sec_6662 accuracy-related_penalty for conclusion we have considered all of the arguments made by petitioners and to the extent that we have not specifically addressed those arguments we conclude that the arguments do not support a result contrary to those reached herein to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number -------------------- ------------------------------ -------------------- ------------------------------------------------ ------------------------------ -------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------------- id no ----------------- ------------------------------------------------------ telephone number --------------------- refer reply to cc corp b03 plr-143780-11 date january ----------- ----------- legend parent ------------------------------------------------------------------- ----------------------------------------------------------- --------------------- purchaser -------------------------------------------------------------------- ------------------------------------------------- ----------------------------------------- target --------------------------------------------------------- ------------------------------------------------------ ----------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- date a date b -------------------------- --------------------------- company official ------------------------------------------------------------------ -------------------------------------------------------- -------------------- tax professional ------------------------------------------------------------------------------ -------------------------------------------------------- ------------------------------ dear ------------- plr-143780-11 this letter responds to a letter dated date submitted on behalf of parent the common parent of a consolidated_group and the u s shareholder of purchaser the foreign purchasing_corporation requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election parent is requesting an extension to file a sec_338 election under sec_338 of the internal_revenue_code with respect to purchaser's acquisition of the stock of target on date a sometimes hereinafter referred to as the election additional information was received in letters dated november and date the material information is summarized below purchaser was a wholly-owned subsidiary of parent on date a purchaser acquired all of the stock of target a controlled_foreign_corporation in what parent represents qualified as a qualified_stock_purchase as defined in sec_338 parent also represents that purchaser is a controlled_foreign_corporation as defined in sec_957 taking into account sec_953 and is not required under sec_1_6012-2 other than sec_1_6012-2 to file a united_states income_tax return for its taxable_year that includes the acquisition_date the election was due on date b but for various reasons a valid election was not filed after the due_date for the election it was discovered that the election had not been filed subsequently this request was submitted under sec_301_9100-3 for an extension of time to file the election parent has represented that neither parent purchaser nor target is seeking to alter a return position for which an accuracy-related_penalty has been or could have been imposed under sec_6662 at the time parent requested relief and the new position requires or permits a regulatory election for which relief is requested sec_338 permits certain stock purchases to be treated as asset acquisitions if the purchasing_corporation makes or is treated as having made a sec_338 election or a sec_338 election and the acquisition is a qualified_stock_purchase under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner uses to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of plr-143780-11 the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the election is fixed by the regulations ie sec_1_338-2 therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time for parent to file the election provided that parent acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by parent company official and tax professional explain the circumstances that resulted in the failure timely to file a valid election the information establishes that parent was unaware of the necessity for the election and that the request for relief was filed before the failure to make the election was discovered by the internal_revenue_service see sec_301 b i and iii based on the facts and information submitted including the representations made we conclude that parent has shown that it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-3 until days from the date on this letter for parent to file the election with respect to the acquisition of the stock of target within days of the date on this letter parent must file the election on form_8023 in accordance with sec_1_338-2 and the instructions to the form a copy of this letter must be attached to form_8023 within days of the date on this letter all relevant parties must file or amend as applicable all returns and amended returns if any necessary to report the transaction as a sec_338 transaction for the taxable_year in which the transaction was consummated and for any other affected taxable years a copy of this letter and a copy of form_8883 must be attached to any_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy the requirement of attaching a copy of this letter by attaching a statement to their return that provides the date and control number of the letter_ruling parent must also deliver written notice of the election and a copy of form sec_8023 and their attachments and instructions to u s persons selling or holding stock in target see sec_1_338-2 the above extension of time is conditioned on parent's purchaser’s and target’s tax_liability being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into plr-143780-11 account the time_value_of_money no opinion is expressed as to the taxpayer's tax_liability for the years involved a determination thereof will be made by the applicable director's office upon audit of the federal_income_tax returns involved we express no opinion as to whether the acquisition of the target stock qualified as a qualified_stock_purchase under sec_338 or any_tax consequences arising from the election in addition we express no opinion as to the tax consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in the above rulings for purposes of granting relief under sec_301_9100-3 we relied on certain statements and representations made by parent company official and tax professional the director however should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-3 to file the election penalties and interest that would otherwise be applicable if any continue to apply this letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file in this office a copy of this letter is being sent to your authorized representatives sincerely ______________________ ken cohen senior technician reviewer branch office of associate chief_counsel corporate cc


internal_revenue_service department of the treasury number info release date index number washington dc person to contact telephone number refer reply to cc psi 6-cor-135958-01 date date re request to revoke sec_179 election tax_year dear this letter is in response to your letter dated date to commissioner of internal revenue on behalf of taxpayer an s_corporation requesting permission to revoke the election made under sec_179 of the internal_revenue_code on taxpayer’s federal_income_tax return in order for us to respond to taxpayer’s specific request taxpayer must submit a request for a private_letter_ruling the request must comply with all the requirements of section of revproc_2001_1 2001_1_irb_4 we hope that you find the following general information to be helpful revproc_2001_1 provides the general procedures the internal_revenue_service follows in issuing rulings and the related instructions for the submission of ruling requests by taxpayers in addition taxpayers are required by statute to pay user fees for requests for letter rulings under sec_15 of revproc_2001_1 the user_fee must accompany the request in order to be processed by the service in general the user_fee is dollar_figure for private letter rulings mailed before date and is dollar_figure for private letter rulings mailed on or after date however there is a reduced fee of dollar_figure for a request involving a business-related tax issue from a taxpayer with a gross_income of less than dollar_figure million see appendix a of revproc_2001_1 i am enclosing a copy of sec_179 of the code and the regulations under that section you may find sec_179 of particular interest under sec_179 an election made under sec_179 and any specification contained in any such election may not be revoked except with the consent of the commissioner such consent to revoke an election under sec_179 however will be granted only in cor-135958-01 extraordinary circumstances emphasis added see sec_1_179-5 of the income_tax regulations if taxpayer should decide to request a private_letter_ruling section of revproc_2001_1 provides information as to where to send the request also as we have noted above section of revproc_2001_1 provides general instructions for requesting a private_letter_ruling this letter has called your attention to certain general principles of tax law it is intended for informational purposes only and does not constitute a ruling see sections dollar_figure and dollar_figure of revproc_2000_1 we hope the materials enclosed will be helpful to you however if you should have any additional questions or comments please contact our office at in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to taxpayer’s authorized representative sincerely yours charles b ramsey charles b ramsey chief branch office of associate chief_counsel passthroughs and special industries enclosures


t c memo united_states tax_court harrison r hunter petitioner v commissioner of internal revenue respondent docket no filed date harrison r hunter pro_se heather k mccluskey for respondent memorandum findings_of_fact and opinion laro judge the instant case involves petitioner’s federal_income_tax returns for and years at issue in a notice_of_deficiency respondent determined deficiencies and accuracy-related_penalties under sec_6662 as follows deficiency dollar_figure big_number big_number year penalty sec_6662 n a dollar_figure dollar_figure petitioner timely petitioned this court for redetermination of the determined deficiencies and accuracy-related_penalties see sec_6213 petitioner resided in california at the time the petition was filed after petitioner’s concessions we decide the following issues whether petitioner was entitled to deductions claimed on schedule e supplemental income and loss for the years at issue we hold he is not and whether petitioner is liable for accuracy-related_penalties for the years at issue we hold he is unless otherwise indicated all section references are to the internal_revenue_code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure for the tax_year petitioner claimed a dependency_exemption deduction for m c c a person he claimed was his nephew for tax_year sec_2010 and sec_2011 petitioner claimed a dependency_exemption deduction for m c a person he claimed was his grandchild before trial petitioner conceded that he was not entitled to the claimed dependency_exemption deductions for the years at issue additionally respondent conceded that petitioner did not underreport social_security income by dollar_figure for each of his tax years and findings_of_fact some of the facts have been stipulated and they are so found we incorporate by reference the parties’ stipulation of facts and the accompanying exhibits petitioner was employed as a merchant marine with the military sealift command during all the years at issue and until his retirement on date petitioner reported total income of dollar_figure dollar_figure and dollar_figure for the years at issue respectively though petitioner’s formal education ended in the eighth grade he earned his general education development while working for the navy petitioner’s occupation required him to be at sea for long periods from date to date petitioner was deployed on the usns alan shepard in petitioner purchased a three-bedroom house pincite8 indiana avenue in lemoore california lemoore property for the years at issue petitioner used the address of his brother james hunter on his tax returns james hunter resides pincite west 126th street los angeles california it is unclear from the record whether petitioner stayed with his brother when he was not at sea the lemoore property was occupied by petitioner’s friend minerva corfman from to but he was unsure exactly when ms corfman moved into and out of the property petitioner’s furniture was kept in the lemoore property during this period ms corfman had an agreement with petitioner to pay james hunter petitioner’s brother monthly rent of dollar_figure and dollar_figure for utilities james hunter did not have an ownership_interest in the lemoore property but managed the property on behalf of petitioner james hunter received one payment of dollar_figure in or but did not receive any rent payments in or petitioner made no attempts to collect rent from ms corfman nor did he take any steps to evict ms corfman on the grounds of failure to pay rent petitioner moved into the lemoore property in petitioner did not research comparable rental rates in the lemoore california area and instead based the rental rate on what he believed ms corfman could afford the dollar_figure rental rate was less than petitioner’s monthly mortgage payment for the property but it is unclear how much more the mortgage was petitioner timely filed his tax returns for the years at issue for each return petitioner attached a schedule e on which he claimed a deduction for rental real_estate losses on his return petitioner reported zero rental real_estate income and claimed deductions totaling dollar_figure which included a mortgage interest_deduction of dollar_figure and a tax deduction of dollar_figure on hi sec_2010 return petitioner reported zero rental real_estate income and claimed deductions totaling dollar_figure which included a mortgage interest_deduction of dollar_figure and a tax deduction of dollar_figure on hi sec_2011 return petitioner reported zero rental real_estate income and claimed deductions totaling dollar_figure which included a mortgage interest_deduction of dollar_figure and a tax deduction of dollar_figure in total petitioner claimed dollar_figure of rental expenses and reported zero rental income for the years at issue in the notice_of_deficiency respondent disallowed deductions for the mortgage interest_expenses under schedule e but allowed the deductions in full under schedule a itemized_deductions in addition respondent allowed a deduction for dollar_figure of interest_expense for each of the years at issue petitioner did not maintain books_or_records for his rental activities opinion i burden_of_proof in general the commissioner’s determination in a notice_of_deficiency is presumed correct and the taxpayer bears the burden of proving that the determination is incorrect rule a 290_us_111 pursuant to sec_7491 the burden_of_proof as to factual matters shifts to the commissioner under certain circumstances petitioner has neither alleged that sec_7491 applies nor has he established his compliance with its requirements accordingly petitioner bears the burden_of_proof ii schedule e real_estate loss deductions deductions are allowed solely as a matter of legislative grace 308_us_488 292_us_435 a taxpayer bears the burden of proving entitlement to any deduction claimed see rule a 503_us_79 welch v helvering u s pincite in addition a taxpayer is required to maintain records sufficient to substantiate deductions claimed on a federal_income_tax return sec_6001 sec_1_6001-1 e income_tax regs a personal_use of the lemoore property sec_212 allows for a deduction of ordinary and necessary expenses paid_or_incurred while managing or maintaining property held out for the production_of_income where a taxpayer uses a dwelling as a personal_residence during the taxable_year however deductions under sec_212 are not allowed sec_280a d osborne v commissioner tcmemo_1987_553 pursuant to sec_280a a dwelling is used as a personal_residence if the taxpayer resides in the dwelling for the greater of days or of the number of days the dwelling is rented at fair rental value further a dwelling is treated as a personal_residence for each day that the dwelling is rented for less than fair rental value sec_280a fair rental value is determined under a facts and circumstances analysis id to determine fair rental value the court will look at comparable rental rates in the rental property’s area see didonato v commissioner tcmemo_2013_11 at where there is no evidence to substantiate a taxpayer’s claim that property was rented at fair_market_value the trier of fact may determine that the property was not rented at fair rental value id at citing epstein v commissioner t c memo petitioner has failed to establish that he did not use the lemoore property as a personal_residence while he was in california during the years at issue at trial petitioner admitted that his furniture was left in the lemoore property from to petitioner did not provide any information regarding how much time he was not at sea if any and where he stayed during those times petitioner has failed to establish that he did not reside at the lemoore property for the greater of days or of the number of days the dwelling was rented at fair rental value during the years at issue even if petitioner did not reside at the lemoore property we still find that he used the property for personal purposes because he rented the dwelling for less than fair rental value petitioner stated that he based the amount of rent on what ms corfman could pay rather than on the fair rental value rates for comparable properties in the lemoore california area in fact petitioner collected only dollar_figure in rent from to petitioner is deemed to have used the property as a personal_residence under sec_280a because we find that he used the property as a personal_residence he is not entitled to claimed deductions other than deductions that are allowable without regard to its connection to the taxpayer’s income producing activity ie interest and taxes sec_280a sec_164 sec_163 and a b failure to substantiate claimed deductions petitioner claimed tax deductions for dollar_figure dollar_figure and dollar_figure for the years at issue respectively in the notice_of_deficiency respondent allowed a deduction for dollar_figure of property_tax for each of the years at issue respondent also argues that the claimed deductions should be disallowed under sec_183 sec_280a was enacted to address congressional concern that the use of rental property by a taxpayer as a residence gave the taxpayer unwarranted opportunities to deduct personal expenses 77_tc_104 citing s rept no 94th cong 2d sess and h_r rept no 94th cong 1st sess aff’d 694_f2d_556 9th cir sec_280a was intended to provide ‘definitive rules to specify the extent to which personal_use of a home would result in the disallowance of certain deductions in excess of gross income’ from the property id because we determined that petitioner is not entitled to certain deductions under sec_280a we need not conduct a sec_183 analysis petitioner also claimed mortgage interest deductions of dollar_figure dollar_figure and dollar_figure for the years at issue respectively respondent allowed the interest deductions in full as itemized_deductions under schedule a accordingly the mortgage interest deductions are not at issue to be entitled to a deduction a taxpayer must meet applicable substantiation requirements whether generally imposed or imposed with respect to a specific item sec_6001 62_tc_834 a taxpayer is required to maintain records sufficient to substantiate deductions claimed on a federal_income_tax return sec_6001 sec_1_6001-1 e income_tax regs taxpayers who fail to substantiate any item may be denied the claimed deduction petitioner did not substantiate the property_tax deductions he claimed for the years at issue accordingly we deny petitioner’s interest deductions beyond what respondent has already allowed iii accuracy-related_penalty sec_6662 and b imposes a accuracy-related_penalty on any underpayment attributable to any substantial_understatement_of_income_tax an understatement is substantial if it exceeds the greater of dollar_figure or of the tax required to be shown on the return sec_6662 the commissioner bears the burden of production with respect to this penalty sec_7491 the accuracy-related_penalty is not imposed with respect to any portion of an underpayment as to which the taxpayer acted with reasonable_cause and in good_faith see sec_6664 the decision as to whether the taxpayer acted with reasonable_cause and in good_faith depends upon all the relevant facts and circumstances see sec_1_6664-4 income_tax regs relevant factors include the taxpayer’s efforts to assess his proper tax_liability including the taxpayer’s reasonable and good_faith reliance on the advice of a professional such as an accountant id further an honest misunderstanding of fact or law that is reasonable in the light of the experience knowledge and education of the taxpayer may indicate reasonable_cause and good_faith see remy v commissioner tcmemo_1997_72 respondent’s notice_of_deficiency whose determinations we have sustained determined an underpayment of dollar_figure for the understatement of income_tax exceeds the greater of dollar_figure and of the total_tax required to be shown on petitioner’ sec_2010 return likewise respondent determined an underpayment of dollar_figure on petitioner’ sec_2011 return the understatement of income_tax exceeds the greater of dollar_figure and of the total_tax required to be shown on that return we find that petitioner’s understatements of income_tax for and are substantial and thus he is liable for sec_6662 and b accuracy-related_penalties petitioner has not provided any evidence that he acted with reasonable_cause and in good_faith for the years at issue at trial petitioner claimed to have relied upon the advice of a tax_return_preparer during the years at issue but he failed to provide the tax_return preparer’s name credentials contact information or any other information to show that he reasonably relied on the advice of a professional and is thus not liable for sec_6662 penalties the taxpayer must prove the adviser was a competent professional who had sufficient expertise to justify the reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment 115_tc_43 aff’d 299_f3d_221 3d cir petitioner has failed to establish that any of the above requirements are satisfied accordingly we sustain respondent’s imposition of the accuracy-related_penalties for and we have considered all of the arguments advanced by petitioner and to the extent not expressly addressed we conclude that those arguments do not support a result contrary to that reached herein to reflect the foregoing decision will be entered under rule


tcmemo_2006_59 united_states tax_court henry nino petitioner v commissioner of internal revenue respondent docket no filed date henry nino pro_se timothy s murphy for respondent memorandum opinion laro judge this case is before the court on respondent’s motion to dismiss for failure to state a claim upon which relief can be granted petitioner did not file federal_income_tax returns for or respondent prepared a form 4549a income_tax examination changes and issued to petitioner a notice_of_deficiency dated date that determined the following deficiencies in petitioner’s federal_income_tax and additions to tax additions to tax_year deficiency sec_6651 sec_6651 sec_6654 dollar_figure big_number big_number big_number dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure petitioner while residing in northville michigan timely petitioned this court in his petition petitioner claimed that respondent’s determination was based on the following errors the commissioner’s examiner revenue_officer and technical services was unable and or unwilling to properly execute its collection activities as is statutorily annotated in agency law as herein stated a the paper work reduction act as is statutorily implemented by the agency in title_26 code of federal regulation part the revenue_officer failed to lawfully b execute its collection activity prescribed in title_26 cfr part technical services failed to lawfully c authenticate the letter do in accordance to its legal responsibility and chose to issue a non statutory_notice_of_deficiency in contravention to title_26 cfr part c neither the examiner and or technical services d have a lawfully executed a legal collection activity in compliance to title_26 usca chapter subchapter_b section references are to the applicable versions of the internal_revenue_code rule references are to the tax_court rules_of_practice and procedure petitioner relied on the following as the basis of his case a the examiner who is the revenue_officer moved a collection activity in violation to title_26 cfr part b the technical services officer knows and or should have known that a non statutory collection activity is demonstrative of an inappropriate collection activity title_26 of usca chapter subchapter_d the examiner’s tax payer delinquency investigation c substantiates it has moved an inappropriate collection activity that stands in contradistinction to the paper work reduction act title_26 cfr part d the technical services territory manager is attempting to perfect an inappropriate collection action as it is unwilling and or unable to produce a lawfully filed and or legally executed tax_return title_26 usca chapter subchapter_a respondent filed a motion to dismiss the case for failure to state a claim upon which relief can be granted on date the court ordered petitioner to file an amended petition in which petitioner sets forth with specificity each error petitioner alleges was made by respondent in the determination of the deficiency and additions to tax and separate statements of every fact upon which petitioner bases the assignment of errors on date petitioner filed with this court an amended petition in which he listed the following assignments of error of respondent the respondent failed to substantiate a lawful a collection of information for the issuance of statutory_notice_of_deficiency the respondent has not lawfully substantiated its b collection of information in accordance to the paperwork reduction act annotated specifically by the secretary in title_26 cfr part b in compliance to title usca sec_3501 et seq the respondent is attempting to use a non c statutory_notice_of_deficiency to accrue an assessment without a lawful collection of information in violation to the paperwork reduction act which stipulates the statutory provisions for an agency’s collection of information the respondent’s internal_revenue_manual d specifically states a substitute for return is not a valid collection of information as said manual stipulates this substitute for return is an invalid return which is why the respondent is unable to produce a lawfully signed tax_return executed and legally the respondent is statutorily empowered to collect e information in accordance to law not to create fictitious presentments in violation to the law authorizing information collection requests and collection of information for determining legal assessments the respondent issued a non statutory notice of f deficiency and wavier to obfuscate its statutory failure to lawfully execute an information collection request for the legal collection of information in accordance to the procedural rules annotated by the secretary in title_26 cfr part c petitioner relied on the following as the basis of his case in his amended petition the letter do is a deliberated attempt by the a respondent to suppress its evidentiary failure to execute an information collection request in compliance to securing the collection of information to substantiate its issuance of a notice_of_deficiency which is self evident as it forthwith issued as a non statutory_notice_of_deficiency and waiver presented as this letter do the respondent has no lawful evidence to b substantiate its issuance of a statutory_notice_of_deficiency in compliance to law as specified by the secretary in title_26 crf part c and the federal rules of evidence as expressed in court rule the respondent has issued a non statutory letter c do to fraudulently induce the petitioner to secure re-determination of a non existent notice_of_deficiency the respondent has not lawfully determined a legal d assessment substantiating an issuance of a notice_of_deficiency in accordance to its administrative rules and regulations it has chosen to issue a non statutory_notice_of_deficiency and waiver as this letter do purporting to be the respondent’s day letter following the filing of petitioner’s amended petition respondent filed a supplement to his motion to dismiss for failure to state a claim upon which relief can be granted respondent reiterated in his supplement that petitioner has still failed to state a claim upon which relief can be granted petitioner has filed a response to respondent’s motion rule b requires that a petition filed in this court contain clear and concise assignments of each and every error that the petitioning taxpayer alleges to have been committed by the commissioner in the determination of any deficiency addition_to_tax or penalty in dispute rule b further requires that the petition shall contain clear and concise lettered statements of the facts on which the taxpayer bases the assignments of error see 123_tc_213 78_tc_646 any issue not raised in the pleadings is deemed to be conceded see rule b funk v commissioner supra further the failure of a party to plead or otherwise proceed as provided in the court’s rules may be grounds for the court to hold such party in default either on the motion of another party or on the initiative of the court see rule a meeker v commissioner tcmemo_2005_146 ward v commissioner tcmemo_2002_147 the court also may dismiss a case and enter a decision against a taxpayer for the failure properly to prosecute or to comply with the rules of this court see rule b meeker v commissioner supra ward v commissioner supra we agree with respondent that petitioner has failed to state a claim upon which relief can be granted see funk v commissioner supra pincite meeker v commissioner supra petitioner has failed to present the court with a petition containing clear and concise assignments of error that petitioner alleges the commissioner has committed in the determination of the deficiency or the additions related thereto petitioner has likewise failed to include in his petition clear and concise statements of the facts on which he bases his assignments of error rather than making factual claims of error petitioner argues only frivolous conclusions the petition neither conforms to this court’s rules_of_practice and procedure nor states a claim upon which relief can be based due to the absence from the petition of specific justiciable allegations of error and of supporting facts this court shall grant respondent’s motion see funk v commissioner supra sec_6673 authorizes this court to require a taxpayer to pay to the united_states a penalty not in excess of dollar_figure whenever it appears that proceedings have been instituted or maintained by the taxpayer primarily for delay or that the taxpayer's position in such proceeding is frivolous or groundless the court has considered imposing sanctions on petitioner under sec_6673 but declines to do so at this time with this in mind we note that petitioner is now on notice that he may be liable for sanctions if he continues to make frivolous arguments and maintain proceedings before this court for the purpose of delay accordingly we shall dismiss petitioner’s case and enter a decision sustaining respondent’s determinations contained in the notice_of_deficiency dated date see sec_7459 to reflect the foregoing an appropriate order of dismissal and decision will be entered for respondent