internal_revenue_service national_office technical_advice_memorandum date number release date index uil no 263a case mis no tam-100748-00 cc psi b5 taxpayer’s name taxpayer’s address taxpayer’s identification no years involved date of conference legend taxpayer state a state b state c city a project gp lp1 lp2 developer developer agreement bank lender tam-100748-00 b c d e f g h k issue what costs incurred by taxpayer in constructing the project are includable in the project’s eligible_basis under sec_42 of the internal_revenue_code specifically are certain partnership syndication and formation costs land preparation costs developer fees construction loan costs construction contingency and rent-up costs and certain developer fees incurred by taxpayer with respect to the project includable in eligible_basis under sec_42 conclusion eligible_basis costs incurred by taxpayer in constructing the project are includable in eligible_basis under sec_42 if they are included in the adjusted_basis of depreciable_property subject_to sec_168 and the property qualifies as residential_rental_property under sec_103 or included in the adjusted_basis of depreciable_property subject_to sec_168 that is used in a common area or provided as a comparable amenity to all residential rental units in the building this test does not exclude the application of other requirements that affect eligible_basis under sec_42 for example the cost for constructing a parking area would qualify under this test however this cost would not be permitted in eligible_basis if a separate fee were charged for use of the area h_r conf_rep no 99th cong 2d sess ii-90 vol c b tam-100748-00 partnership syndication and formation if developer engaged in organizational or syndication activities relating to and on behalf of the taxpayer then the corresponding percentage of the developer fees paid_by the taxpayer should be treated as nondeductible expenses_incurred in either the organization or syndication of the partnership under sec_709 and would not be includable in eligible_basis under sec_42 land preparation costs for the cost of a land preparation to be includable in the project’s eligible_basis under sec_42 the cost must be for property of a character subject_to the allowance for depreciation under sec_168 the cost of a land preparation is a depreciable_property if the land preparation is so closely associated with a particular depreciable asset that the land preparation will be retired abandoned or replaced contemporaneously with that depreciable asset whether the land preparation will be retired abandoned or replaced contemporaneously with the depreciable asset is a question of fact if it is determined upon further factual development that a land preparation cost is depreciable such cost may be included in eligible_basis if it is also determined as part of the adjusted_basis of sec_168 property that qualifies as residential_rental_property under sec_103 or sec_168 property used in a common area or provided as a comparable amenity to all residential rental units in the building developer fees allocated to land amounts paid to developers for services in acquiring the land should not be includable in eligible_basis the principles relating to the land preparation fees in the conclusion above are applicable therefore to the extent the costs relate to the land the costs are not includable in eligible_basis under sec_42 construction loan costs taxpayer’s third-party costs and fees incurred in obtaining a construction loan are capitalized and amortized over the life of the loan the taxpayer’s construction loan intangible is not subject_to sec_168 and therefore not includable in the project’s eligible_basis sec_263a requires the amortization deductions relating to the construction loan intangible be capitalized to the produced property during the construction_period the deductions must be reasonably allocated to all property produced to the extent the amortization deductions are allocable under sec_263a to the adjusted bases of sec_168 property that qualifies as residential_rental_property under sec_103 or sec_168 property used in a common area or provided as a comparable amenity to all residential units in the building the amortization deductions are includable in the project’s eligible_basis under sec_42 tam-100748-00 construction contingency costs and rent-up costs taxpayer has not provided any records that substantiate whether the construction contingency costs were in fact incurred further there are no facts to adequately describe the nature of these costs these questions of material facts must be resolved at the examination level before technical_advice can be rendered rent-up costs are not related to the construction of the buildings but for the securing of tenants consequently these costs do not establish or add to the basis of depreciable_property subject_to sec_168 thus rent-up costs are not includable in eligible_basis under sec_42 developer fees generally the amount of developer fees are not at issue when determining eligible_basis under sec_42 however the revenue_agent challenges whether developer can substantiate performance of the services underlying the fees this question of fact must be resolved at the examination level before technical_advice may be rendered facts taxpayer is a state a limited_partnership that owns the project a city a low- income housing project consisting of b residential rental units taxpayer’s general_partner is gp a state b limited_partnership taxpayer’s limited partners are lp1 and lp2 state c corporations the project was developed and constructed by a number of interrelated entities owned by the same individuals the initial developer for the project was developer subsequently developer replaced developer as the developer for the project the agent asserts that developer was involved in the finding of a limited_partner for the partnership the negotiation of a partnership_agreement and related terms and the acquisition of a partnership_interest in return for contributed capital to support this assertion the agent states that developer created numerous financial spreadsheets among its developer duties these financial pro formas included annual operating budgets and annual rental income projections cash_flow analysis work papers and return on investment calculations according to the agent these projections were the facts relevant to these issues are subject_to disagreement between taxpayer and the district director’s office pursuant to dollar_figure of revproc_2000_1 i r b the national_office if it chooses to issue technical_advice will base that advice on the facts provided by the district_office thus the facts as submitted by the agent have been provided tam-100748-00 computed numerous times with different factors for example calculations were done based on expected mortgage interest rates the price paid for credits the apartment mix median income of the area and many additional criteria the partnership_agreement details payment of developer notes based on various contingencies it addresses the available cash_flow and repayment of general_partner advances on operating deficits also covered in taxpayer’s partnership_agreement is the sharing of cash and capital_gain when the property is sold at the end of the compliance_period the agent cites provisions of the agreement between developer and taxpayer as further evidence of developer 2's activities in promoting the sale of partnership interests one section of the agreement provides that developer developed a preliminary budget for the project and consulted with various professional advisors relevant to the structuring of project ownership taxpayer’s developer fee payment schedule dated c contains four line items that the agent believes should be capitalized under sec_709 these items are as follows preliminary cost estimates pro forma which lists a fee of dollar_figured equity consulting which lists a fee of dollar_figuree equity commitment which lists a fee of dollar_figuref and equity closing which lists a fee of dollar_figureg the agent asserts that these fees relate to activities that constituted syndication activities and thus are nondeductible syndication expenses likewise gp incurred legal and professional fees during gp’s acquisition of its partnership_interest in taxpayer according to agent these legal expenses relating to the acquisition of partnership interests or partnership organization are not includable in eligible_basis taxpayer incurred two separate and distinct loans in connection with the project the first loan was a construction loan which was closed with bank on h the costs associated with the loan include title fees commitment_fees legal fees search fees and recording costs the proceeds of the loan were used for the construction of the project the taxpayer included the costs in the project’s eligible_basis under sec_42 the second loan occurred on k with lender this permanent financing occurred after the completion of the project none of the costs associated with the permanent loan were included in the project’s eligible_basis under sec_42 the agent points out that the development agreement and developer fee payment schedule indicate that developer had been credited for services performed in securing construction and permanent loans for the project taxpayer included these costs in eligible_basis as well the agent maintains that costs relating to the loans require capitalization and amortization over the life of the loans because costs of this nature create separate and distinct assets that are not eligible for the low-income_housing tax_credit the agent asserts that certain land preparation costs relating to the project are not includable in eligible_basis because they are more closely related to the land than the buildings these costs include for example surveys boundary topographic mortgage tree architectural and environmental plat recording earthwork sitework clearing and grubbing fill dirt staking impact fees architectural services engineering tam-100748-00 services soil tests soil and erosion control and landscaping costs further the agent asserts that a portion of the developer fees were paid for land acquisition services performed by the developers and for services performed by the developers in securing construction and permanent loans the agent concludes that portions of the developer fees are attributable to land costs and the financing of land related activities primarily sitework which are not includable in eligible_basis the agent questions whether certain fees are unreasonable or excessive and should be excluded from eligible_basis the agent states that the initial developer developer rather than developer performed most of the required developer duties relating to the project including the following acquiring the land preliminary cost estimates and pro formas market research and project feasibility preliminary site and building plans equity consulting development plan approval and building permits construction loan financing equity commitment and closing and construction supervision the agent suggests that the developer fees collected by developer should not be included in eligible_basis because developer had actually performed the tasks the agent also questions whether amounts in a construction contingency account created by taxpayer for unexpected construction overruns should be includable in eligible_basis under sec_42 finally the agent suggests that costs for securing tenants for unit vacancies should not be includable in eligible_basis law and analysis eligible_basis sec_42 provides that the amount of the low-income_housing tax_credit determined for any_tax year in the credit_period is an amount equal to the applicable_percentage of the qualified_basis of each low-income building sec_42 defines the qualified_basis of any qualified_low-income_building for any_tax year as an amount equal to the applicable_fraction determined as of the close of the tax_year of the eligible_basis of the building determined under sec_42 sec_42 provides that the term qualified_low-income_building means in part any building to which the amendments made by section a of the tax_reform_act_of_1986 apply the act section a of the act modified property subject_to the accelerated_cost_recovery_system acrs under sec_168 for property placed_in_service after date except for property covered by transition_rules sec_42 provides that the eligible_basis of a new_building is its adjusted tam-100748-00 basis as of the close of the first tax_year of the credit_period sec_42 provides that except as provided in sec_42 the adjusted_basis of any building is determined without regard to the adjusted_basis of any property that is not residential_rental_property sec_42 provides that the adjusted_basis of any building includes the adjusted_basis of property of a character subject_to the allowance for depreciation used in common areas or provided as comparable amenities to all residential rental units in the building the legislative_history of sec_42 states that residential_rental_property for purposes of the low-income_housing_credit has the same meaning as residential_rental_property within sec_103 the legislative_history of sec_42 further states that residential_rental_property thus includes residential rental units facilities for use by the tenants and other facilities reasonably required by the project h_r conf_rep no 99th cong 2d sess ii-89 vol c b under sec_1_103-8 of the income_tax regulations facilities that are functionally related and subordinate to residential rental units are considered residential_rental_property sec_1_103-8 provides that facilities that are functionally related and subordinate to residential rental units include facilities for use by the tenants such as swimming pools and similar recreational facilities parking areas and other facilities reasonably required for the project the examples given by sec_1_103-8 of facilities reasonably required for a project specifically include units for resident managers or maintenance personnel based on the above a cost is incurred in the construction of a low-income_housing building under sec_42 if it is included in the adjusted_basis of depreciable_property subject_to sec_168 and the property qualifies as residential_rental_property under sec_103 or included in the adjusted_basis of depreciable_property subject_to sec_168 that is used in a common area or provided as a comparable amenity to all residential rental units in the building the taxpayer contends that each state housing_credit_agency determines what costs are includable in eligible_basis when determining the financial feasibility of a project under sec_42 consequently the taxpayer concludes that once the agency has verified and accepted the taxpayer’s costs the service is bound by the agency’s determination we disagree sec_42 provides in part that the housing_credit_dollar_amount allocated to a project shall not exceed the amount the housing_credit_agency determines is necessary for the financial feasibility of the project and its viability as a qualified_low-income_housing_project through the credit_period a state housing_credit agency’s responsibility under sec_42 to determine the financial feasibility and viability of a project in no way abrogates the service’s authority and responsibility to tam-100748-00 administer the low-income_housing tax_credit and its various provisions the taxpayer also cites notice_88_116 1988_2_cb_449 as authority for its position that all construction costs are costs includable in eligible_basis the taxpayer’s interpretation of notice_88_116 is misplaced notice_88_116 in part provides guidance on what costs will be considered construction reconstruction or rehabilitation costs for the limited purpose of qualifying certain buildings for post-1989 credits after the then sec_42 statutory sunset of a state’s authority to allocate post-1989 credit for this limited purpose the notice provides that certain costs would satisfy the definition of construction reconstruction or rehabilitation costs- but only if these costs are included in the eligible_basis of the building in other words under the notice a condition to qualifying a new_building for post-1989 credit was that construction costs must also be included in eligible_basis the notice does not define what costs are included in eligible_basis nor as the taxpayer proposes does it stand for the proposition that all construction-related costs are included in eligible_basis partnership syndication and formation with certain exceptions sec_709 provides that fees incurred to organize or to syndicate a partnership must be capitalized thus sec_709 provides that except as provided in sec_709 no deduction shall be allowed under chapter to the partnership or to any partner for any amounts paid_or_incurred to organize a partnership or to promote the sale of or to sell an interest in the partnership sec_709 provides that amounts paid_or_incurred to organize a partnership may at the election of the partnership be treated as deferred expenses these deferred expenses shall be allowed as a deduction ratably over such period of not less than months as may be selected by the partnership beginning with the month in which the partnership begins_business or if the partnership is liquidated before the end of the 60-month period the deferred expenses to the extent not deducted under this section may be deducted to the extent provided in sec_165 sec_709 defines organizational_expenses as expenditures which are a incident to creating the partnership b chargeable to capital_account and c of a character that if expended incident to the creation of a partnership having an ascertainable life would be amortized over that life sec_1_709-1 provides that except as provided in sec_1_709-1 the amortization of organizational_expenses no deduction shall be allowed under chapter of the code to a partnership or to any partner for any amounts paid_or_incurred directly or indirectly in partnership taxable years beginning after date to organize a partnership or to promote the sale of or to sell an interest in the tam-100748-00 partnership sec_1_709-2 defines organizational_expenses as expenses that are incident to the creation of the partnership chargeable to capital_account and of a character that if expended incident to the creation of a partnership having an ascertainable life would but for sec_709 be amortized over that life an expenditure that fails to meet one or more of the three tests does not qualify as an organizational expense for purposes of sec_709 and sec_1_709-2 to satisfy the statutory requirement described in sec_1_709-2 the expense must be incurred during the period beginning at a point which is a reasonable_time before the partnership begins_business and ending with the date prescribed by law for filing the partnership return excluding extensions for the taxable_year the partnership begins_business in addition the expenses must be for the creation of the partnership and not for operation or starting operation of the partnership trade_or_business to satisfy the statutory requirement described in sec_1_709-2 the expense must be for an item of a nature normally expected to benefit the partnership throughout the entire life of the partnership the following are examples of organizational_expenses within the meaning of sec_709 and this section legal fees for services incident to the organization of the partnership such as negotiation and preparation of a partnership_agreement accounting fees for services incident to the organization of the partnership and filing fees examples of organization_expenses within the meaning of sec_709 are legal fees for services incident to the organization of the partnership such as negotiation and preparation of a partnership_agreement accounting fees for services incident to the organization of the partnership and filing fees examples of expenses that are not organizational_expenses within the meaning of sec_709 regardless of how the partnership characterizes them are expenses connected with acquiring assets for the partnership or transferring assets to the partnership expenses connected with the admission or removal of partners other than at the time the partnership is first organized expenses connected with a contract relating to the operation of the partnership trade_or_business even where the contract is between the partnership and one of its members and syndication expenses sec_1_709-2 defines syndication expenses as expenses connected with the issuing and marketing of interests in the partnership examples of syndication expenses are brokerage fees registration fees legal fees of the underwriter or placement agent and the issuer the general_partner or the partnership for securities advice and for advice pertaining to the adequacy of tax disclosures in the prospectus or placement memorandum for securities law purposes accounting fees for preparation of representations to be included in the offering materials and printing costs of the prospectus placement memorandum and other selling and promotional material these expenses are not subject_to the election under sec_709 and must be capitalized tam-100748-00 thus neither the taxpayer nor any partner would be allowed a deduction for any amounts paid_or_incurred directly or indirectly to organize the partnership or to promote the sale of or to sell an interest in the partnership organizational_expenses must be capitalized although a partnership may elect to amortize these expenses however since no election was made by the taxpayer in this case no amortization of organizational_expenses by the partnership under sec_709 would be allowed syndication expenses are those expenses connected with issuing and marketing interests in the partnership these expenses cannot be amortized and must therefore likewise be capitalized the issue we are asked to consider in this case involves neither how the rules under sec_709 are applied nor what kinds of costs constitute organizational or syndication expenses rather the issue presented by the agent involves a factual determination of whether developer actually engaged in organizational or syndication activities the costs for which should be capitalized pursuant to sec_709 this however is a determination we cannot make based on the facts submitted moreover we believe that such a factual determination is more properly made by the agent rather than the national_office we believe however that the agent does present facts that raise the possibility that developer may have engaged in organizational or syndication activities on behalf of the taxpayer thus we can address the issue only by stating that if developer engaged in organizational or syndication activities on behalf of the taxpayer then those expenditures must be capitalized accordingly a corresponding portion of the developer fees paid_by taxpayer would be allocable to those activities and treated as nondeductible costs and expenses_incurred in either the organization or syndication of the partnership under sec_709 if developer engaged in organizational or syndication activities relating to and on behalf of the taxpayer then the corresponding portion of the developer fees paid_by the taxpayer should be treated as nondeductible expenses_incurred in either the organization or syndication of the partnership under sec_709 and should not be included in eligible_basis under sec_42 land preparation costs taxpayer incurred a variety of land preparation costs in constructing the project that taxpayer included in eligible_basis under sec_42 these costs included for example the following land surveys boundary topographic mortgage tree architectural gopher tortoise and alta taxpayer also incurred costs for the following environmental surveys contamination studies and suitability study additionally taxpayer incurred costs for earthwork and sitework and landscaping the following is a general discussion of when land preparation costs are depreciable and consequently may qualify for inclusion in eligible_basis whether the taxpayer’s specific costs are includable in eligible_basis will depend upon further factual tam-100748-00 development by the revenue_agent sec_167 provides that there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion wear_and_tear including a reasonable allowance for obsolescence of property_used_in_the_trade_or_business of the taxpayer or of property_held_for_the_production_of_income sec_1_167_a_-2 provides that the depreciation allowance in the case of tangible_property applies only to that part of the property which is subject_to wear_and_tear to decay or decline from natural causes to exhaustion and to obsolescence the allowance does not apply to land apart from the improvements of physical development added to it generally the depreciation deduction provided by sec_167 for tangible_property is determined under sec_168 by using the applicable_depreciation_method the applicable_recovery_period and the applicable convention in the case of residential_rental_property the applicable_depreciation_method is the straight_line method sec_168 the applicable_recovery_period i sec_27 years sec_168 and the applicable convention is the mid-month_convention sec_168 land improvements whether sec_1245 property or sec_1250 property are included in asset class land improvements of revproc_87_56 1987_2_cb_674 and have a class_life of years for the general depreciation system thus for land improvements the applicable_depreciation_method is the percent declining balance method sec_168 the applicable_recovery_period i sec_15 years sec_168 and the applicable convention is the half-year_convention sec_168 the grading of land involves moving soil for the purpose of changing the ground surface it produces a more level surface and generally provides an improvement that adds value to the land revrul_65_265 1965_2_cb_52 clarified by revrul_68_193 1968_1_cb_79 holds that such expenditures are inextricably associated with the land and therefore fall within the rule that land is a nondepreciable asset revrul_65_265 further holds that excavating grading and removal costs directly associated with the construction of buildings and paved roadways are not inextricably associated with the land and should be included in the depreciable basis of the buildings and roadways accordingly the costs attributable to the general grading of the land not done to provide a proper setting for a building or a paved roadway become a part of the cost_basis of the land and therefore are not subject_to a depreciation allowance see 29_tc_1205 acq 1958_2_cb_4 as such the costs are not includable in eligible_basis under sec_42 revrul_74_265 1974_1_cb_56 involves the issue of whether landscaping for an apartment complex is depreciable_property the area surrounding the apartment complex was landscaped according to an architect’s plan to conform it to the general design of the apartment complex the expenditures_for landscaping included the cost tam-100748-00 of top soil seeding clearing and grading and planting of perennial shrubbery and ornamental trees around the perimeter of the tract of land and also immediately adjacent to the buildings the replacement of these apartment buildings will destroy the immediately adjacent landscaping consisting of perennial shrubbery and ornamental trees this revenue_ruling held that land preparation costs may be subject_to a depreciation allowance if such costs are so closely associated with a depreciable asset so that it is possible to establish a determinable period over which the preparation will be useful in a particular trade_or_business a useful_life for land preparation is established if it will be replaced contemporaneously with the related depreciable asset whether land preparation will be replaced contemporaneously with the related depreciable asset is necessarily a question of fact but if the replacement of the depreciable asset will require the physical destruction of the land preparation this test will be considered satisfied accordingly landscaping consisting of the perennial shrubbery and ornamental trees immediately adjacent to the apartment buildings is depreciable_property because the replacement of the buildings will destroy the landscaping however the balance of the landscaping including the necessary clearing and general grading top soil seeding finish grading and planting of perennial shrubbery and ornamental trees around the perimeter of the tract of land is general land improvements that will be unaffected by the replacement of the apartment buildings and therefore will not be replaced contemporaneously therewith accordingly these types of property are not depreciable_property but rather are considered inextricably associated with the land and as such are not includable in eligible_basis under sec_42 revrul_80_93 1980_1_cb_50 involves the issue of whether a taxpayer is allowed to take a depreciation deduction for costs incurred in the construction of electrical and natural_gas distribution systems and for land preparation costs incurred in connection with the development of a mobile home park regarding the distribution systems the taxpayer made expenditures_for the distribution systems but the utility company retained full ownership of them and would repair and replace the systems as necessary the taxpayer also incurred costs for the clearing grubbing cutting filling and rough grading necessary to bring the land to a suitable grade in addition the land preparation costs incurred in the digging and the rough and finish grading necessary to construct certain depreciable assets will not be repeated when the depreciable assets are replaced however the excavation and backfilling required for the construction of the laundry facilities and the storm sewer system are so closely associated with those depreciable assets that replacement of the depreciable assets will require the physical destruction of that land preparation this revenue_ruling held that the land preparation costs clearing grubbing cutting filling rough and finish grading and digging that are unaffected by replacement of the components of the mobile home park and will not be replaced tam-100748-00 contemporaneously therewith are nonrecurring general land improvement costs and therefore are considered to be inextricably associated with the land and are added to the taxpayer’s cost_basis in the land these land preparation costs are not depreciable and therefore not includable in eligible_basis under sec_42 however the land preparation costs that are so closely associated with depreciable assets laundry facilities and storm sewer system such that the land preparation will be retired abandoned or replaced contemporaneously with those depreciable assets are capitalized and depreciated over the estimated useful lives of the assets with which they are associated the amounts paid to the utility for the electrical and natural_gas distribution systems are nonrecurring costs for betterments that increase the value of the land and are includable in the taxpayer’s cost_basis of the land these costs likewise are not depreciable and not includable in eligible_basis under sec_42 in eastwood mall inc v u s ustc big_number n d ohio aff’d by unpublished disposition 59_f3d_170 6th cir the issue before the court was whether the taxpayer a developer should depreciate the cost of reshaping land as part of the cost of a building the court stated that costs for land preparation may or may not be depreciable depending on whether the costs incurred are inextricably associated with the land nondepreciable or with the buildings constructed thereon depreciable it further asserted that the key test for determining whether land preparation costs are associated with nondepreciable land or the depreciable building thereon is whether these costs will be reincurred if the building were replaced or rebuilt land preparation costs for improvements that will continue to be useful when the existing_building is replaced or rebuilt are considered inextricably associated with the land and therefore are to be added to the taxpayer’s cost_basis in the land and are not depreciable on the other hand land preparation costs for improvements that are so closely associated with a particular building that they necessarily will be retired abandoned or replaced contemporaneously with the building are considered associated with the building and therefore are added to the taxpayer’s cost_basis in the building and are depreciable the cost of a land preparation inextricably associated with the land is added to a taxpayer’s cost_basis in the land and is not depreciable_property see revrul_65_265 algernon blair eastwood mall land preparation costs that are nonrecurring or that will continue to be useful when the related depreciable asset is replaced or rebuilt are considered to be inextricably associated with the land see revrul_80_93 eastwood mall however the cost of a land preparation inextricably associated with a particular depreciable asset for example an apartment building is added to a taxpayer’s cost_basis in that depreciable asset and is depreciable_property the cost of a land preparation that is so closely associated with a particular depreciable asset that the land preparation will be retired abandoned or replaced contemporaneously with that depreciable asset is considered inextricably associated with the depreciable asset see revrul_74_265 revrul_80_93 eastwood mall tam-100748-00 in applying this standard the issue of whether a land preparation will be retired abandoned or replaced contemporaneously with a particular depreciable asset is a question of fact in the present case further factual development is needed to determine whether each land preparation cost at issue is so closely associated with a particular depreciable asset for example building that the land preparation will be retired abandoned or replaced contemporaneously with that depreciable asset this test is satisfied if it is reasonable to assume the replacement of the depreciable asset will require the actual physical destruction of the land preparation see revrul_74_265 it is irrelevant that a state housing_credit_agency may require a taxpayer to incur a particular land preparation cost for example the planting of trees on the perimeter of the tract of land similarly it is irrelevant that an ordinance may require a taxpayer to incur a particular land preparation cost for example tree preservation or endangered species survey under these guidelines the costs of clearing grubbing and general grading to prepare a site suitable for any type of structure are inextricably associated with the land and are added to the cost of land and therefore are not depreciable similarly costs incurred for fill dirt that is used to raise the level of the site are considered to be inextricably associated with the land and therefore are not depreciable therefore the costs are not includable in eligible_basis under sec_42 however earth-moving costs incurred for digging spaces and trenches for a building’s foundation and utilities generally are considered to be inextricably associated with the building and are added to the cost of the building and therefore are depreciable similarly costs incurred for fill dirt that is used to set the foundation of a depreciable asset generally are considered to be inextricably associated with the related depreciable asset and therefore are depreciable land and environmental surveys are generally conducted over the entire property of the development not just where the buildings and improvements will specifically be placed some surveys such as boundary or mortgage surveys help to define the property whereas other surveys such as percolation tests and contamination studies are used to determine if the improvements can properly be built on the site costs incurred for the former type of survey are clearly related to the land itself and are inextricably associated thereto and therefore are not depreciable and not includable in eligible_basis under sec_42 the latter type of survey is performed on the land to determine its suitability for supporting the improvements to be constructed thereon if this type of survey will not necessarily need to be redone contemporaneously when the depreciable improvement is replaced the costs incurred for the survey are inextricably associated with the land and therefore are not depreciable and not includable in eligible_basis under sec_42 a survey is considered to be redone contemporaneously with the replacement of the depreciable improvement if the physical replacement of the depreciable improvement mandates a reperformance of the survey although an ordinance may require reperformance of the survey such tam-100748-00 requirement is irrelevant as to whether the physical replacement of a depreciable improvement necessarily mandates a reperformance of the survey if a cost of land preparation is associated with both nondepreciable_property for example land and depreciable_property for example building the cost should be allocated among the nondepreciable_property and depreciable_property using any reasonable method for example if staking costs are incurred to demarcate a variety of items related to the development of the project and such items may be depreciable improvements for example sidewalks and nondepreciable improvements for example landscaping not immediately adjacent to a building the staking costs should be allocated among the depreciable and nondepreciable assets similarly if engineering services are performed partly for nondepreciable assets and partly for depreciable assets the cost of such services should be allocated among the nondepreciable and depreciable assets the taxpayer’s main argument as to why the land preparation costs should be depreciable_property is that without construction of the buildings and other infrastructure for the project none of these expenses would have been incurred however the court in eastwood mall specifically denounced this argument as being incorrect the court noted that in almost every instance some costs-whether it be the cost of moving a single tree or the larger costs of raising a site-will be incurred in preparing the land for the construction of the building the court further noted that under the taxpayer’s argument all costs incurred in preparing a site are depreciable and that the only situation where land preparation costs would not be depreciable is where nothing is constructed on the land the court stated that t his interpretation is illogical and contrary to the law eastwood mall at para juxtaposing the taxpayer’s main argument with the argument made by the taxpayer in eastwood mall the arguments are the same thus the taxpayer’s main argument is without merit the taxpayer further asserts that some of the land preparation costs may need to be redone if the building was replaced due to possible changes in applicable ordinances the court in eastwood mall stated that land preparation costs for improvements that are so closely associated with a particular building that they necessarily will be retired abandoned or replaced contemporaneously with the building are considered associated with the building eastwood mall at para see also revrul_74_265 and revrul_80_93 the taxpayer’s argument however does not satisfy the test that the costs necessarily will be replaced contemporaneously with the building the fact that an ordinance may require a taxpayer to incur a particular land preparation cost does not mean that it thereby is considered to be inextricably associated with a building based upon the above once a land preparation cost is determined to be depreciable that cost may be included in eligible_basis to the extent it is treated as part of the adjusted_basis of sec_168 property that qualifies as residential_rental_property under sec_103 or sec_168 property used in a common area or provided as a comparable amenity tam-100748-00 to all residential rental units in the building developer fees allocated to land the agent asserts that taxpayer paid the developers for services in acquiring the land and that such land costs should not be includable in eligible_basis because they are land costs the principles in the land issues analysis above are applicable to the extent the costs relate to the land the costs are not includable in eligible_basis construction loan costs taxpayer incurred two separate and distinct loans in connection with the project the first loan was a construction loan which was closed with bank on h the costs associated with the loan include title fees commitment_fees legal fees search fees and recording costs the proceeds of the loan were used for the construction of the project the taxpayer included the costs in the project’s eligible_basis under sec_42 the second loan occurred on k with lender this permanent financing occurred after the completion of the project none of the costs associated with the permanent loan were included in the project’s eligible_basis under sec_42 the agent points out that the development agreement and developer fee payment schedule indicate that developer had been credited for services performed in securing construction and permanent loans for the project taxpayer included these costs in eligible_basis as well the agent maintains that costs relating to the loans require capitalization and amortization over the life of the loans because costs of this nature create separate and distinct assets that are not eligible for the low-income_housing tax_credit costs incurred in obtaining a loan are capitalized and amortized over the life of the loan see 57_tc_781 acq on this issue 1974_2_cb_2 see also revrul_70_360 1970_2_cb_103 revrul_75_172 1975_1_cb_145 and revrul_81_160 1981_1_cb_312 accordingly the taxpayer’s third- party costs and fees incurred in obtaining a construction loan for the project are not capitalized to depreciable_property but are treated as an amortizable sec_167 intangible only property subject_to sec_168 is included in eligible_basis under sec_42 however to the extent some of the amortization deductions relating to the construction loan are capitalized under sec_263a to the produced property and the produced property is subject_to sec_168 some of the amortization deductions indirectly may qualify for inclusion in the project’s eligible_basis in addition to the two loans the revenue agent’s submission mentions a bridge loan in connection with the project however because of the insufficient factual development we are limiting our review to the two loans as described above tam-100748-00 sec_263a generally requires direct costs and an allocable portion of indirect_costs of real or tangible_personal_property produced by a taxpayer to be capitalized to the property produced costs subject_to sec_263a capitalization are discussed in sec_1_263a-1 in sec_1_263a-1 indirect_costs are defined as all costs that are not direct costs in the case of produced property all such costs must be capitalized under sec_263a if the costs are properly allocable to the produced property costs are properly allocable when the costs directly benefit or are incurred by reason of the performance of production activities a nonexclusive list of indirect_costs to be capitalized is provided in sec_1_263a-1 and included in this list are depreciation amortization and cost_recovery allowances on equipment and facilities sec_1_263a-1 sec_1_263a-1 discusses various cost allocation_methods that can be used to allocate direct and indirect_costs to produced property for example a taxpayer can use the specific_identification_method sec_1_263a-1 the burden rate and standard cost methods sec_1_263a-1 and ii and any other reasonable method sec_1_263a-1 whichever method is used to allocate costs to the produced property the method selected must satisfy the requirements of sec_1_263a-1 sec_263a defines produce as including constructing building installing manufacturing developing or improving see also sec_1_263a-2 taxpayer is producing real_property within the meaning of sec_263a taxpayer owns the underlying land and constructs on the land the housing areas as well as common areas further taxpayer improves the land by installing items such as sidewalks and curbs and by landscaping taxpayer’s intangible asset consists of third-party costs and fees incurred in obtaining a loan that was used to fund construction activities these costs would not have been incurred by the taxpayer but for its housing construction activities thus the costs were incurred by reason of the production of property and are properly allocable to the property as indirect_costs sec_263a requires that the costs that are capitalized be reasonably allocated to the property produced sec_1_263a-1 describes when an allocation method will be judged reasonable the taxpayer has capitalized all of its costs to the buildings in the project it constructed and has failed to allocate any of these costs to the other_property it was producing whether the taxpayer’s method is reasonable depends on the taxpayer's facts and circumstances and thus this decision is best left for the revenue_agent however the costs for obtaining a construction loan relate to the land acquired as well as the land improvements in addition to the buildings further the property being produced includes land land improvements and the buildings thus a reasonable allocation method would allocate the amortization deductions among all of the produced property using some reasonable basis to the extent the amortization deductions are allocable under sec_263a to the adjusted bases of sec_168 property that tam-100748-00 qualifies as residential_rental_property under sec_103 or sec_168 property used in a common area or provided as a comparable amenity to all residential units in the building the amortization deductions are includable in the project’s eligible_basis under sec_42 construction contingency costs and rent-up costs the agent questions whether amounts in a construction contingency account created by taxpayer for unexpected construction overruns should be includable in eligible_basis under sec_42 according to the revenue_agent the amount is an estimate the taxpayer has not provided any records that substantiate costs for this estimate demonstrating that they were in fact incurred further there are no facts to adequately describe the nature of these costs the taxpayer included the amount in the project’s eligible_basis under sec_42 consequently this issue lacks sufficient factual development to determine whether such costs are includable in eligible_basis under sec_42 the agent also questions whether costs of taxpayer associated with securing tenants for the unit vacancies are includable in eligible_basis under sec_42 rent-up costs are not related to the construction of the buildings but for the securing of tenants consequently these costs do not establish or add to the basis of depreciable_property subject_to sec_168 thus rent-up costs are not includable in eligible_basis under sec_42 developer fees the agent states that certain fees charged by developer are unreasonable or excessive under sec_42 and should be excluded from eligible_basis under sec_42 the agent states that the initial developer developer rather than developer performed most of the required developer duties relating to the project and that fees were paid to developer for services that included land acquisition preliminary cost estimates and pro-formas market research and project feasibility preliminary site and building plans equity consulting development plan approval and building permits construction loan financing equity commitment and closing and construction supervision the agent suggests that the developer fees collected by developer should not be included in eligible_basis because developer already had performed the required developer duties sec_42 provides that the housing_credit_dollar_amount allocated to a project shall not exceed the amount the housing_credit_agency determines is necessary for the financial feasibility of the project and its viability as a qualified_low-income_housing_project throughout the credit_period sec_42 provides that in making the determination under sec_42 the housing_credit_agency shall consider among other things the reasonableness of the developmental and operational costs of the project taxpayer represents that the fees at issue have been received verified and tam-100748-00 accepted by the state housing_credit_agency as eligible costs which meet the requirements of sec_42 taxpayer therefore contends that the costs are properly includable in the project’s eligible_basis under sec_42 a state housing_credit agency’s responsibility under sec_42 to determine the financial feasibility and viability of a project in no way abrogates the service’s authority and responsibility to administer the low-income_housing tax_credit and its various provisions on its face these kinds of costs generally satisfy the test for eligible_basis under sec_42 however the revenue_agent challenges whether developer can substantiate performance of the services underlying the fees this question of fact must be resolved at the examination level before technical_advice may be rendered caveat no opinion is expressed on whether the project otherwise qualifies for the low- income housing tax_credit under sec_42 a copy of this technical_advice_memorandum is to be given to taxpayer sec_6110 of the code provides that it may not be used or cited as precedent - end -


internal_revenue_service number release date index number -------------------------------------- --------------------------------------- ------------------------------- -------------------------- legend legend department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-123131-08 date date x --------------------------------------------------- date --------------------- --------------------------------------- state ------------ dear ----------------------- this responds to a letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts the information submitted states that x was incorporated on date under the laws of state x intended to elect to be an s_corporation for federal tax purposes effective date however x failed to timely file a form_2553 election by a small_business_corporation law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides that if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made if the election is made after the first two and one-half months of a corporation's taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if no election is made pursuant to sec_1362 or if plr-123131-08 made the election is made after the date prescribed for making such an election and the secretary determines there was reasonable_cause for the failure to timely make the election then the secretary may treat such election as timely made for such taxable_year and effective as of the first day of that year conclusion based solely on the facts and representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation effective date accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 effective date along with a copy of this letter with the appropriate service_center within days from the date of this letter then such election will be treated as timely made for date except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed or implied concerning whether x otherwise qualifies as an s_corporation for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer's authorized representative sincerely audrey w ellis audrey w ellis senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


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 intl plr-140818-10 date date ty -------------- legend a ------------------------------------------------------------------------------ -------------------- b ------------------------------------------------------------------------------ -------------------- company -------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------- ---------------------------------------- company tax years year dear --------------------- ------------------------------- --------------- ------- this is in reply to a letter dated date requesting an extension of time under sec_301_9100-3 for a and b to elect the provisions of revproc_2002_23 2002_1_cb_744 for tax years the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted plr-140818-10 in support of the requested rulings it is subject_to verification on examination the information submitted for consideration is substantially as set forth below facts a and b have been lawful permanent residents of the united_states since year prior to becoming residents of the united_states a and b were residents of canada prior to year a established one canadian registered retirement savings_plan rssp with company and b established two rrsps with company company prepares the joint income_tax returns for a and b however company did not prepare their returns at the time a and b became u s residents while researching a’s and b’s u s tax obligations regarding their canadian investments company discovered that a and b had failed to make elections under revproc_2002_23 to defer u s taxation on income accrued in their rrsps based on article xviii of the united_states - canada income_tax convention convention company then advised a and b of the need to make the elections and suggested that they request an extension of time to make elections pursuant to rev pro as of the date of this ruling_request the internal_revenue_service has not communicated with a or b in any way regarding their rrsps ruling requested a and b request the consent of the commissioner of the internal_revenue_service for an extension of time under sec_301_9100-3 to make an election for tax years pursuant to revproc_2002_23 to defer u s federal income_taxation on income accrued in their rrsps law and analysis sec_301_9100-1 provides that the commissioner has discretion to grant a taxpayer a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301 -1 b provides that an election includes an application_for relief in respect of tax and defines a regulatory election as an election whose due_date is prescribed by a regulation a revenue_ruling revenue_procedure notice or announcement plr-140818-10 sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government in the present situation the election provided in revproc_2002_23 is a regulatory election within the meaning of sec_301_9100-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant a and b an extension of time provided that a and b satisfy the standards set forth in sec_301_9100-3 based solely on the information submitted and representations made we conclude that a and b satisfy the standards of sec_301_9100-3 accordingly a and b are granted an extension of time until days from the date of this ruling letter to elect the provisions revproc_2002_23 for tax years as provided in sec_301 a the granting of an extension of time is not a determination that a and b are otherwise eligible to make the above-described election pursuant to section dollar_figure of revproc_2002_23 the election once made cannot be revoked except with the consent of the commissioner for tax years and all subsequent tax years until the tax_year in which a final distribution is made from each rrsp a and b must file form_8891 for each rrsp for which the election is made and from which a final distribution has not been made except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter a copy of this letter must be attached to a’s and b's u s income_tax return for the year in which a and b obtained the ruling and should be associated with a’s and b’s amended returns for tax years this letter_ruling is directed only to the taxpayers who requested it sec_6110 provides that it may not be used or cited as precedent plr-140818-10 pursuant to a power_of_attorney on file with this office a copy of this letter will be sent to your authorized representatives sincerely- _______________ m grace fleeman senior technical reviewer branch office of associate chief_counsel international enclosure copy for purposes cc


t c memo united_states tax_court william m leggett petitioner v commissioner of internal revenue respondent docket no filed date p failed to file a federal_income_tax return for r determined a deficiency and additions to tax pursuant to sec_6651 and sec_6654 i r c held p is liable for the deficiency determined by r and additions to tax pursuant to sec_6651 and sec_6654 i r c held further a penalty pursuant to sec_6673 i r c is due from p and awarded to the united_states in the amount of dollar_figure william m leggett pro_se monica j miller for respondent memorandum findings_of_fact and opinion wherry judge respondent determined a federal_income_tax deficiency for petitioner’ sec_2002 taxable_year in the amount of dollar_figure and additions to tax pursuant to sec_6651 and sec_6654 of dollar_figure and dollar_figure respectively the issues for decision are whether petitioner is liable for a deficiency and additions to tax on unreported income for the taxable_year and whether the court should impose a penalty under sec_6673 findings_of_fact some of the facts have been deemed stipulated pursuant to rule f and additional facts have been stipulated by the parties the stipulations with accompanying exhibits are 1unless otherwise indicated all section references are to the internal_revenue_code code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure 2the court found petitioner’s objection to the proposed stipulation of facts based primarily on fifth_amendment assertions to be meritless respondent assured petitioner and the court that to the best of respondent’s knowledge petitioner has not currently nor has he ever been the subject of any criminal tax or other criminal investigation by respondent that no criminal tax or other criminal investigation of petitioner is contemplated or anticipated by respondent and that there are no indications that respondent ever even considered the imposition of civil_fraud penalties in petitioner’s several cases the fifth_amendment protects against real dangers not remote and speculative possibilities 406_us_472 furthermore in a civil tax case the taxpayer must accept the consequences of continued incorporated herein by this reference at the time the petition was filed petitioner resided in sorrento florida petitioner failed to file a federal_income_tax return for hi sec_2002 taxable_year during petitioner was self-employed and installed residential and commercial heating and air- conditioning units petitioner received compensation from maronda homes inc and victoria investment properties inc in the amounts of dollar_figure and dollar_figure respectively petitioner also received dollar_figure in social_security_benefits during petitioner was married to martha leggett respondent issued to petitioner a notice_of_deficiency on date for the above-mentioned deficiency and additions to tax petitioner filed a timely petition disputing the deficiency and additions to tax petitioner argued at trial and in documents submitted to the court that he does not and has not engaged in an activity that produces ‘taxable income’ but only continued asserting the fifth_amendment and cannot avoid the burden_of_proof by claiming the privilege and attempting to convert ‘the shield which it was intended to be into a sword’ lee v commissioner tcmemo_2002_95 citing 460_us_752 affd 61_fedappx_471 9th cir see also stang v commissioner tcmemo_2005_154 affd fed appx 9th cir date 3the parties filed posttrial a supplemental stipulation of facts which stipulated that petitioner had additional income of dollar_figure and was entitled to deduct expenses of dollar_figure respondent conceded that the deficiency and additions to tax determined in the notice_of_deficiency would remain unaffected an exchange of intellectual and physical property for an agreed upon perceived value in the only medium of exchange of the day ie frn’s federal reserve notes petitioner also contended that he is a ‘native born american national’ not to be mistaken as a ‘u s citizen’ or taxpayer petitioner is no stranger to the court petitioner has litigated two cases very similar to this instant case in which petitioner did not file federal_income_tax returns respondent determined deficiencies and additions to tax and petitioner presented arguments similar to those asserted here in a trial trial that resulted in a bench opinion the court explained to petitioner that taxable_income includes money and other goods received in exchange for services and urged petitioner to file returns in a trial trial the court again rejected petitioner’s arguments and awarded the united_states a penalty pursuant to sec_6673 in the amount of dollar_figure leggett v commissioner tcmemo_2005_185 i deficiency opinion in general respondent’s determination_of_a_deficiency in the notice_of_deficiency is presumed correct and petitioner bears the burden of showing that such determination was in error see rule a 290_us_111 pursuant to sec_7491 the burden_of_proof on factual issues that affect the taxpayer’s tax_liability may be shifted to the commissioner where the taxpayer introduces credible_evidence with respect to any factual issue the burden will shift only if the taxpayer has inter alia complied with substantiation requirements pursuant to the internal_revenue_code and cooperated with reasonable requests by the secretary for witnesses information documents meetings and interviews sec_7491 sec_7491 does not apply in this case because petitioner did not produce any credible_evidence in unreported income cases the commissioner must come forward with evidence establishing a minimal foundation which may consist of evidence linking the taxpayer to an income- producing activity 596_f2d_358 9th cir revg 67_tc_672 92_tc_661 if the commissioner introduces some evidence that the taxpayer received unreported income then the burden shifts to the taxpayer to show by a preponderance_of_the_evidence that the deficiency was arbitrary or erroneous 181_f3d_1002 9th cir affg tcmemo_1997_97 the court concludes based on the stipulated facts that respondent has established a minimal foundation accordingly the burden shifts to petitioner in petitioner’s previous cases the court specifically rejected as meritless petitioner’s argument that taxable_income does not include an exchange of personal services for property the court shall not further address petitioner’s repeated argument with somber reasoning and copious citation of precedent to do so might suggest that these arguments have some colorable merit 737_f2d_1417 5th cir therefore the court sustains respondent’s determination of petitioner’ sec_2002 tax_deficiency ii additions to tax the commissioner bears the burden of production in any court_proceeding with respect to an individual’s liability for penalties or additions to tax sec_7491 to meet this burden the commissioner must present sufficient evidence indicating that it is appropriate to impose the relevant penalty or addition_to_tax 116_tc_438 in instances where an exception to the penalty or addition_to_tax is afforded upon a showing of substantial_authority reasonable_cause or similar provisions the taxpayer bears the burden of raising and prevailing on these issues id pincite sec_6651 imposes a 5-percent addition_to_tax for each month or portion thereof a required return is filed after the prescribed due_date not to exceed percent in the aggregate unless such failure_to_file timely is due to reasonable_cause and not due to willful neglect although not defined in the code reasonable_cause is described by the applicable regulations as the exercise of ordinary business care and prudence sec_301_6651-1 proced admin regs see also 469_us_241 w illful neglect is interpreted as a conscious intentional failure or reckless indifference united_states v boyle supra pincite respondent has met the burden of production as petitioner admitted he never filed a federal_income_tax return for petitioner did not present any evidence to suggest that his failure_to_file was due to reasonable_cause therefore the court sustains respondent’s determination of the addition_to_tax pursuant to sec_6651 sec_6654 imposes an addition_to_tax for failure to pay estimated income_tax where there has been underpayment of estimated_tax by the taxpayer petitioner did not remit any payment as he did not file a federal_income_tax return the record reflects that no taxes were withheld as petitioner was self-employed and that no payments of estimated_tax were made any burden of production on the part of respondent is satisfied 4the court takes judicial_notice of leggett v commissioner tcmemo_2005_185 which together with the holding in this case establishes that estimated_tax was due see sec_6654 and the flush language where as here no return was filed for the previous tax_year the court also concludes that petitioner does not fit within any of the exceptions enumerated in sec_6654 therefore the court sustains respondent’s determination of the addition_to_tax pursuant to sec_6654 iii sec_6673 penalty sec_6673 authorizes the tax_court to impose a penalty not in excess of dollar_figure on a taxpayer for proceedings instituted primarily for delay or in which the taxpayer’s position is frivolous or groundless a petition to the tax_court or a tax_return is frivolous if it is contrary to established law and unsupported by a reasoned colorable argument for change in the law 791_f2d_68 7th cir respondent on brief has asked the court to impose a penalty under sec_6673 in petitioner’s trial petitioner was ordered to pay dollar_figure to respondent for asserting meritless and frivolous arguments leggett v commissioner sec_6654 provides two mechanical exceptions to the addition_to_tax first the addition is not applicable if the tax shown on the taxpayer’s return for the year in question or if no return is filed the taxpayer’s tax for that year reduced for these purposes by any allowable credit for wage withholding is less than dollar_figure sec_6654 second the addition is not applicable if the taxpayer’s tax for the full 12-month preceding_taxable_year was zero and the taxpayer was a citizen or resident_of_the_united_states sec_6654 the court has concluded that petitioner is liable for a deficiency for that net of withholding exceeds dollar_figure petitioner’s tax_liability for was greater than zero see leggett v commissioner supra supra petitioner asserted similar arguments in the instant case despite repeated warnings by the court that his arguments were meritless and frivolous therefore the court concludes that a penalty of dollar_figure should be imposed on petitioner the court has considered all of petitioner’s contentions arguments requests and statements to the extent not discussed herein we conclude that they are meritless moot or irrelevant to reflect the foregoing an appropriate decision will be entered


t c summary opinion united_states tax_court leroy vernon and anne j satrang petitioners v commissioner of internal revenue respondent docket no 1459-00s filed date leroy v satrang pro_se j anthony hoefer for respondent laro judge this case was heard pursuant to the provisions of sec_7463 in effect when the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority respondent determined a dollar_figure deficiency in petitioners’ federal_income_tax and a related dollar_figure accuracy-related_penalty for negligence under sec_6662 following the parties’ concessions and our dismissal of the case as to anne j satrang for lack of prosecution we must decide whether leroy vernon satrang petitioner may deduct his alleged gambling_losses we hold he may not we also must decide whether petitioner is liable for the accuracy-related_penalty determined by respondent we hold he is unless otherwise indicated section references are to the internal_revenue_code as applicable to the subject year rule references are to the tax_court rules_of_practice and procedure and dollar amounts are rounded to the nearest dollar some facts have been stipulated and are so found the stipulated facts and the exhibits submitted therewith are incorporated herein by this reference petitioners are husband and wife and they resided in sioux city iowa when their petition was filed petitioner a civil engineer by profession is a recreational gambler who bets primarily on horse races during the subject year he won at least of his gambling bets and received a total of at least dollar_figure in gambling winnings he reported none of those winnings on his federal_income_tax return even though he received forms w2-g gambling winnings listing those winnings he asserts that none of the winnings are taxable to him because his gambling_losses during that year totaled more than dollar_figure his employer paid dollar_figure to petitioner during and withheld dollar_figure of that amount for federal and state taxes respondent determined that petitioner’s gross_income includes the dollar_figure in gambling winnings shown on the forms w2- g petitioner admits that he received those winnings and that he did not report any of them on his federal_income_tax return petitioner contends that he also had gambling_losses for that year which exceeded his winnings petitioner’s gambling winnings are includable in his gross_income sec_61 348_us_426 as to his alleged gambling_losses petitioner bears the burden of proving that he sustained gambling_losses and if so the amount of those losses 322_f2d_78 5th cir affg tcmemo_1962_19 sec_165 provides that losses from wagering transactions shall be allowed only to the extent of the gains from such transactions petitioner relies primarily on his testimony to prove his allegation we find his testimony to be incredible and decline to rely on it ’ although we acknowledge that petitioner most likely had some gambling_losses during the year we are unable to ' for example petitioner testified that during he had taken home approximately dollar_figure of his salary from his employer and that he gambled away most of that amount and some of his savings the record however reveals clearly that petitioner’s gross salary was only dollar_figure and that of that amount he took home at the most dollar_figure q4e- determine either with specificity or by estimation the amount of those losses on the basis of the record at hand given the fact that petitioner bears the burden_of_proof on this issue we sustain respondent’s determination with respect to it see mayer v commissioner tcmemo_2000_295 zielonka v commissioner tcmemo_1997_81 see also finesod v commissioner tcmemo_1994_66 as to the accuracy-related_penalty for negligence sec_6662 and b imposes a 20-percent accuracy-related_penalty on the portion of an underpayment that is due to negligence or intentional disregard of rules or regulations negligence includes a failure to attempt reasonably to comply with the code sec_6662 disregard includes a careless reckless or intentional disregard id an underpayment is not attributable to negligence or disregard to the extent that the taxpayer shows that the underpayment is due to the taxpayer’s reasonable_cause and good_faith sec_1_6662-3 sec_1_6664-4 income_tax regs reasonable_cause requires that the taxpayer exercise ordinary business care and prudence as to the disputed item 469_us_241 see also 110_tc_297 on the basis of the record we sustain respondent’s determination of the accuracy-related_penalty petitioner has failed to prove respondent’s determination wrong to reflect respondent’s concession decision will be entered under rule


department of the treasury_department of the treasury internal_revenue_service internal_revenue_service washington d c washington d c december uilc number release date cc ebeo br2 jbrichards wta-n-118554-98 memorandum for thomas r hull national director specialty taxes attn thomas burger director office of employment_tax administration and compliance from subject patricia m mcdermott senior technical reviewer office of associate chief_counsel ebeo br memorandum received from the district_office regarding assistance previously provided in connection with the state and local_government employer compliance initiative this is in response to your memorandum dated date by which you forwarded a request from a revenue_agent for clarification of advice that our office had previously provided in connection with the state and local_government employer compliance initiative we understand that you will forward this response to the agent the following is general information only and does not address the liability of specific taxpayers are elected school district board members employees for purposes of sec_106 sec_106 of the code provides that gross_income of an employee does not include employer-provided coverage under an accident_or_health_plan sec_1_106-1 of the income_tax regulations provides that the gross_income of an employee does not include contributions which his employer makes to an accident_or_health_plan for compensation through insurance or otherwise to the employee for personal injuries or sickness incurred by him his spouse or his dependents as defined in sec_152 neither sec_106 nor the regulations thereunder define the term employee in revrul_56_400 1956_2_cb_116 the service stated that sec_106 applies to individuals who are employees under the common_law wta-n-118554-98 we do not agree with the revenue agent’s assumption that elected officials generally are not employees under the common_law in addition a statutory_employee under a particular code provision is not necessarily an employee for purposes of other code provisions as in all worker-classification cases an independent determination must be made based upon the facts in each case see the training materials on employee versus independent_contractor status independent_contractor or employee training rev tpds 84238i the revenue_agent correctly states however that the service must analyze whether direction and control exists and in this regard the service must determine the degree to which the laws of the state_or_local_government vest some body with the authority to direct and control the elected school board members we would encourage the agent to consult the local district_counsel in determining worker classification are health plan benefits received by elected school board members under a school district’s employee health plan subject_to fica and income_tax_withholding sec_3121 of the code provides that the term wages does not include the amount of any payment made to or on behalf of an employee or any of his dependents under a plan established by an employer which makes provision for his employees on account of medical or hospitalization expenses in connection with sickness or accident disability or death therefore employer-provided health benefits received by school board members are not subject_to fica sec_3401 of the code provides that for income_tax_withholding purposes the term wages means all remuneration other than fees paid to a public official for services performed by an employee for his employer including the cash_value of all remuneration including benefits paid in any medium other than cash sec_3401 provides that the term employee includes an officer employee or elected official of the united_states a state or any political_subdivision thereof or any agency_or_instrumentality of any one or more of the foregoing if a board member is a common_law_employee employer-provided health plan benefits are excludible under sec_106 and are therefore not subject_to income_tax_withholding conversely if a board member is not a common_law_employee health benefits which are includible in gross_income are subject_to income_tax_withholding because elected school board members as public officers are statutory employees for income_tax_withholding purposes wta-n-118554-98 when is a retiree under a qualified retirement_system excepted from fica upon returning to work a retiree under a retirement_system who returns to work for the same employer and who is either in pay status or has reached normal_retirement_age is deemed to be a qualified_participant regardless of whether he continues to accrue a benefit in addition this rule also applies in the case of a retiree who returns to work for another governmental employer_provided that employer maintains the same retirement_system as the former employer sec_31 b - d ii the revenue_agent asks how the above rule would be applied when a retiree under a qualified retirement_system is rehired as an independent_contractor by the same employer and is subsequently reclassified by the examination_division as an employee provided the employee is in pay status when rehired or has reached the normal_retirement_age the employee is excepted from fica coverage the fact that the employee was rehired as an independent_contractor does not change the application of the rules under sec_31_3121_b_7_-2 we hope the foregoing information is helpful in answering the revenue agent’s questions if we can provide further assistance please contact john richards of this office pincite0 in addition for future reference the office_of_chief_counsel has regional coordinators who may be of assistance in answering general questions is the regional coordinator for the region sincerely yours patricia m mcdermott senior technical reviewer cc ebeo br


internal_revenue_service number release date index number ------------------------------------ ----------------------------------------- --------------------------- --------------------------- - department of the treasury washington dc person to contact --------------------- id no ------------- telephone number --------------------- refer reply to cc psi b1 - plr-130420-03 date date ---------------------- ---------------------- ----------------------------------- legend x ----------------------------------------- d1 d2 dear --------------------- sec_301_7701-3 of the procedure and administration regulation that x’s purported entity classification as in effect on the date prior to date remained the same after date and that x may elect under sec_1362 of the internal_revenue_code to be an s_corporation effective on d2 facts effective date of current sec_301_7701-1 through the check-the-box_regulations under the entity classification rules in existence prior to the effective date of the check-the-box_regulations x was classified as an association_taxable_as_a_corporation because it had more corporate than partnership characteristics x attempted to make an s_corporation_election under sec_1362 effective d2 however it was not accepted because of uncertainty surrounding x’s entity classification on that date according to the information submitted x was formed d1 a date prior to the this responds to your letter dated date requesting a ruling under sec_1362 allows a small_business_corporation to elect to be treated as an plr-130420-03 law and analysis s_corporation sec_1362 provides the rules as to when an s_corporation_election will become effective sec_1362 states in relevant part that if an s election is made within the first two and one-half months of a corporation’s taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under sec_1362 however if an s election is made after the first two and one- half months of a corporation’s taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed a or if the election is made after the date prescribed for making such an election and the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat such an election as timely made for such taxable_year and effective as of the first day of that year date and entities formed prior to date that file an entity classification election under sec_301_7701-3 sec_301_7701-3 provides that unless an entity elects otherwise an eligible_entity in existence prior to the effective date of this section will have the same classification that the entity claimed under sec_301_7701-1 through as in effect on the date prior to the effective date of this section sec_1362 b provides that if no election is made pursuant to section sec_301_7701-2 provides the classification of all entities formed after sec_301_7701-3 provides that the effective date of the check-the-box_regulations is date sec_301_7701-3 provides that a business_entity that is not described in sec_301_7701-2 or and that was in existence prior to date will be respected for all periods prior to date if i the entity had a reasonable basis within the meaning of sec_6662 for its claimed classification ii the entity and all members of the entity recognized the federal tax consequences of an change in the entity’s classification within sixty months prior to date and iii neither the entity nor any member was notified in writing on or before date that the classification of the entity was under examination in which case the entity’s classification will be determined in the examination conclusion that under sec_301_7701-3 x’s classification as an association_taxable_as_a_corporation in effect on the date prior to date remained the same after based solely on the facts submitted and the representations made we conclude except as expressly provided herein no opinion is expressed or implied plr-130420-03 date in addition we rule that provided x otherwise qualifies as an s_corporation x is entitled to relief under sec_1362 consequently x is classified as a corporation and may elect to be an s_corporation effective d2 within days from the date of this letter x should submit a properly completed form_2553 with a copy of this letter attached to the relevant service_center concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter provides that it may not be used or cited as precedent letter is being sent to your authorized tax representative in accordance with the power_of_attorney on file with this office a copy of this this ruling is directed only to the taxpayer requesting it sec_6110 sincerely s dianna k miosi dianna k miosi chief branch office of the associate chief_counsel passthroughs and special industries copy of this letter copy for sec_6110 purposes enclosures cc


internal_revenue_service index no number release date cc dom p si - plr-122168-98 date a b c d f city state country x y z d1 dear this is in reply to your letter written on behalf of a dated date and subsequent correspondence requesting a ruling with respect to the federal tax classification of the the information submitted provides that a a united_states citizen intends to contribute a collection of paintings and drawings which she inherited from her father f who was a citizen of country to the f died on d1 f had amassed a significant collection of paintings and drawings during his lifetime and expressed a desire to have this art collection displayed in an appropriate building in city in order to carry out their father’s wishes a’s three siblings b c and d who are citizens of country formed the b c and d will also contribute a collection of paintings and drawings to the the was organized under country law as a public foundation with a charitable or public purpose sec_2 of the articles of the provides that the purpose of the is to preserve and administer the stock of paintings and drawings of the art collection of f in particular to treat and conserve this stock scientifically further to make this stock accessible to the public through exhibitions and otherwise the purpose of the will be attained through the exhibition of the stock in a museum to be built by city or by another corporate entity under public law whereby it is provided that the stock shall be given on perpetual loan to such museum and that financial assistance may be granted to such museum with cash income from the property of the sec_3 of the articles of the provides that the is organized and is to be operated exclusively and directly for charitable purposes in accordance with country law it further provides that the is charitable and its primary purpose is not business no legal entity or individual may be given benefits through distributions outside of the performance of the purposes of the articles of the or through unreasonably high support payments gifts or compensation sec_4 of the articles of the provides that the basic property of the is a core stock of paintings and drawings of the collection f as set forth in the exhibit attached to the articles and an amount of x in cash it further provides that it is an intention to transfer until date an additional y amount of cash or of property with a value of y which may consist of other paintings and drawings which are not part of the core stock contributed to the it is the intention that the additional paintings and drawings be sold by the in order to raise y in addition it provides that the is entitled to sell paintings and drawings of the core stock if this is unavoidable for the preservation of its economic viability the y amount is to be maintained unimpaired and invested profitably sec_11 of the articles of the provides that in the case of the termination or liquidation of the the property of the shall be transferred to state within country with the requirement that it be used exclusively for charitable purposes in accordance with country tax law and the internal_revenue_code as much as possible in accordance with the purposes of the founders of the in order to carry out its charitable purpose the has entered into a joint_venture with city to build a museum to hold and display the art collection the will make the art collection available to the museum by perpetual loan state is donating z to city to finance the building of the museum on land belonging to city will have no interest in the museum real_estate sec_301_7701-1 of the procedure and administration regulations provides that the internal_revenue_code prescribes the classification of various organizations for federal tax purposes whether an organization is an entity separate from its owners for federal tax purposes is a matter of federal tax law and does not depend on whether the organization is recognized as an entity under local law sec_301_7701-1 of the regulations provides that the classification of organizations that are recognized as separate entities is determined under sec_301_7701-2 sec_301_7701-3 and sec_301_7701-4 unless a provision of the internal_revenue_code such as sec_860a addressing real_estate mortgage investment conduits remics provides for special treatment of that organization sec_301_7701-2 of the regulations provides that for purposes of sec_301_7701-2 and sec_301_7701-3 a business_entity is any entity recognized for federal tax purposes including an entity with a single owner that may be disregarded as an entity separate from its owner under sec_301_7701-3 that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the internal_revenue_code sec_301_7701-3 provides that except as provided in sec_301_7701-3 unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-4 of the regulations provides that in general the term trust as used in the internal_revenue_code refers to an arrangement created either by will or by an inter_vivos declaration whereby trustees take title to property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules provided in chancery or probate courts usually the beneficiaries of such a_trust do no more than accept the benefits thereof and are not the voluntary planners or creators of the trust arrangement however the beneficiaries of such a_trust may be the persons who create it and it will be recognized as a_trust under the internal_revenue_code if it was created for the purpose of protecting or conserving the trust property for beneficiaries who stand in the same relation to the trust as they would if the trust had been created by others for them generally speaking an arrangement will be treated as a_trust under the internal_revenue_code if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and therefore are not associates in a joint enterprise for the conduct of business for profit based on the facts and circumstances presented the is not a_trust under sec_301_7701-4 of the regulations because its primary purpose is not protecting and preserving the paintings and drawings for beneficiaries but rather it is to carry out a number of activities including the following displaying the art collection in the museum which the will help build with city through the joint_venture educating the public concerning the art collection through exhibitions and other activities and investing the y amount profitably and thereby raising money to operate the museum further the is not subject_to special treatment under the code therefore the is classified as a business_entity under sec_301_7701-2 except as specifically ruled above we express no opinion concerning the federal tax consequences of the transactions described above under the cited code provisions or any other provision of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office copies of this ruling are being sent to a and a’s authorized representative sincerely yours j thomas hines senior technician reviewer branch office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for purposes