t c memo united_states tax_court gerry morris griggs petitioner v commissioner of internal revenue respondent docket no filed date gerry morris griggs pro_se portia n rose for respondent memorandum findings_of_fact and opinion goeke judge respondent determined a deficiency of dollar_figure in petitioner’s federal tax for as well as a penalty of dollar_figure under section and additions to tax of dollar_figure 1unless otherwise indicated all section references are to the internal_revenue_code and all rule references are to the tax_court rules_of_practice and procedure and dollar_figure under sec_6651 and a respectively after concessions the issues left for decision are whether petitioner is entitled to a casualty_loss deduction of dollar_figure whether petitioner is entitled to claimed cost_of_goods_sold in the amount of dollar_figure related to one of the activities for which he filed a schedule c profit or loss from business whether petitioner is entitled to deductions related to another schedule c activity whether petitioner is entitled to a capital_loss carryforward of dollar_figure and whether petitioner is liable for the sec_6662 penalty on the basis of the analysis explained herein we find the casualty losses and the capital_loss carryforward are not allowable for lack of substantiation the costs of goods sold and various schedule c deductions are allowed in part based on the evidence presented and the sec_6662 penalty is applicable findings_of_fact some of the facts have been stipulated and are so found the stipulated facts and the accompanying exhibits are incorporated herein by this reference petitioner resided in texas at the time his petition was filed 2respondent has conceded the additions to tax determined under sec_6651 and petitioner describes himself as a merchant banker petitioner received wages and a form_w-2 wage and tax statement for tax_year in addition during petitioner maintained two activities referred to as management and consulting services mcs and mtem on respective schedules c filed with his form_1040 u s individual_income_tax_return for the tax_year mcs mcs is a business and consulting company responsible for putting together deals during mcs was involved in three primary transactions an attempt by petitioner and his partner sec_3 which petitioner collectively referred to as cooling technologies group ctg to acquire a thermal container business owned by coleman co coleman on behalf of a third party kodiak technologies inc kodiak a company petitioner helped establish in an attempt by petitioner and his partners to set up a small_business_investment_company sbic on behalf of the national veterans business development corp nvbdc and pursuing as part of ctg various transactions on behalf of kodiak at various times since its founding petitioner has been an owner director creditor or employee of kodiak 3although petitioner used the word partners to describe these ventures petitioner testified that these were not partnerships in a legal sense but a loose association of people trying to put these deals together during petitioner as a member of ctg was engaged in an attempt to purchase a unit of coleman which would then be used to further kodiak’s business line petitioner pursued this activity on behalf of kodiak based on two facts that kodiak was engaged in a nonseasonal business and that coleman was primarily a seasonal business with excess capacity during downtime the benefit of the deal appeared to be that kodiak could take advantage of coleman’s excess capacity in order to develop and produce temperature-sensitive shipping containers in a more cost-efficient manner this attempt to purchase coleman did not come to fruition instead of ctg entering into an agreement with coleman kodiak and coleman later attempted to enter into an agreement directly this venture is described in more detail below and occurred after petitioner returned to kodiak in late petitioner’s activities relating to kodiak began prior to the year at issue kodiak was a company formed to explore possible ways to improve the shipping of temperature-sensitive products kodiak initially targeted the pharmaceutical industry as one industry that would benefit from commercial-quality shipping containers that did not require the use of regular or dry ice petitioner was one of the founders of kodiak and was an employee through petitioner left kodiak and was given a year of severance_pay which ran into these wages paid in resulted in the wage income petitioner reported on hi sec_2002 income_tax return in date petitioner was brought back in to help manage the company because existing management was having problems during petitioner was also engaged in pursuing a number of ventures on behalf of kodiak this included the coleman acquisition discussed below once petitioner returned to kodiak as an employee in ctg stopped pursuing the coleman venture described above instead kodiak attempted to enter into an agreement directly with coleman another activity petitioner engaged in during was an attempt to set up a small_business_investment_company sbic on behalf of nvbdc the goal of setting up an sbic would be to provide assistance to veterans who were interested in starting their own businesses petitioner’s attempts to set up a sbic on behalf of nvbdc ended when the small_business administration imposed a moratorium on granting licenses to new sbics petitioner filed a schedule c for mcs showing gross_receipts or sales of dollar_figure petitioner claimed the following deductions item car and truck expense depreciation and sec_179 expense deduction legal and professional services office expense rent or lease vehicles machinery and equipment other business property supplies other expenses total amount dollar_figure big_number big_number big_number big_number after deductions petitioner’s schedule c showed a loss of dollar_figure mtem in mtem’s main function was the purchase and resale of tickets for_the_use_of a luxury suite at minute maid park home stadium of the major league baseball houston astros petitioner began this venture in and it continues to the present each year petitioner would purchase the right to use a luxury box at minute maid park petitioner would then resell the tickets to use the luxury box during the first years he owned the luxury box petitioner would enter into contracts with larger corporate clients in order to mitigate his financial risk during petitioner entered into agreements with two corporations nabisco and chicago title with each agreeing to purchase one-third of the tickets this left petitioner with tickets or one-third of the season to sell on his own petitioner was unable to sell tickets to every game individuals who purchased the use of the luxury box were also able to purchase additional tickets directly from the houston astros’ offices petitioner reported gross_receipts of dollar_figure on the mtem schedule c petitioner testified that he sold about game tickets of the remaining for use of the luxury box petitioner claimed a cost_of_goods_sold of dollar_figure and expenses of dollar_figure for meals and entertainment and dollar_figure for other expenses resulting in a net_loss of dollar_figure petitioner also initially claimed a dollar_figure capital_loss carryforward on his return but after completing the return decided that he did not want to use the carryforward petitioner indicated his desire not to claim a capital_loss carryforward by inserting a handwritten footnote on his return prior to filing it at trial petitioner revisited this issue and stated that if this court decides that respondent’s determinations were correct and as a result he has a higher income he would like to apply the carryforward to offset a portion of that income petitioner also claimed on his return for casualty losses relating to four properties he owned damage sustained by his car during a flood damage to a fence that was hit by a car and the loss of two lithographs petitioner timely requested and was granted an extension of time to file hi sec_2002 income_tax return the return was due on or before date respondent examined petitioner’s return and on date sent petitioner a notice_of_deficiency that disallowed all costs of goods sold and deductions related to petitioner’s schedule c activities disallowed petitioner’s claimed dollar_figure loss carryforward disallowed petitioner’s claimed casualty losses imposed self-employment_tax adjusted the amount of petitioner’s itemized_deductions based on petitioner’s increased income and imposed an accuracy-related_penalty pursuant to sec_6662 at trial respondent’s position was that petitioner had not proven that either of the schedule c activities was conducted for profit that the costs of goods sold and expenses have been paid or if paid are allowable in determining gross_income or as ordinary and necessary business_expenses and that petitioner had not substantiated the other losses claimed on his return on date petitioner timely petitioned this court for a redetermination of his tax_liability a trial was held on date in houston texas opinion burden_of_proof the commissioner’s determinations in a notice_of_deficiency are presumed correct and the taxpayer bears the burden of proving by a preponderance_of_the_evidence that these determinations are incorrect rule a 290_us_111 tax deductions are a matter of legislative grace and a taxpayer has the burden of proving that he is entitled to the deductions claimed rule a 503_us_79 292_us_435 the burden_of_proof on factual issues that affect a taxpayer’s liability for tax may be shifted to the commissioner where the taxpayer introduces credible_evidence with respect to such issue sec_7491 petitioner does not claim that the burden_of_proof shifts to respondent under sec_7491 in any event petitioner has failed to establish that he has satisfied the requirements of sec_7491 on the record before us we find that the burden_of_proof does not shift to respondent under sec_7491 deductions a taxpayer may deduct ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business see sec_162 to do so a taxpayer must demonstrate that he was involved in the activity on a continuous and regular basis and that his purpose for engaging in the activity was for income or profit see 480_us_23 645_f2d_618 8th cir affg tcmemo_1980_62 66_tc_312 65_tc_1 sec_1_183-2 income_tax regs for certain kinds of expenses otherwise deductible under sec_162 a taxpayer must satisfy substantiation requirements as set forth in sec_274 before such expenses will be allowed as a deduction sec_274 disallows deductions for travel_expenses gifts meals and entertainment as well as for listed_property defined by sec_280f unless the taxpayer substantiates by adequate_records or by sufficient evidence corroborating the taxpayer’s own statements the amount of the expense the time and place of the travel or entertainment or the date and description of the gift the business_purpose of the expense and the business relationship to the taxpayer of the persons entertained profit_motive whether the required profit objective exists is determined on the basis of all the facts and circumstances of each case see 315_f2d_731 9th cir affg tcmemo_1961_256 72_tc_411 affd without published opinion 647_f2d_170 9th cir sec_1_183-2 income_tax regs while a reasonable expectation of profit is not required the taxpayer’s objective of making a profit must be bona_fide see wittstruck v commissioner supra pincite 84_tc_227 affd without published opinion 782_f2d_1027 3d cir the court gives greater weight to objective factors in making the factual determination than to a taxpayer’s mere statement of intent see 781_f2d_724 9th cir affg lahr v commissioner tcmemo_1984_472 78_tc_642 affd without published opinion 702_f2d_1205 d c cir sec_1_183-2 income_tax regs the court generally considers nine nonexclusive factors for determining whether taxpayers engaged in an activity for profit sec_1_183-2 income_tax regs the nine factors are the manner in which the taxpayer carried on the activity the expertise of the taxpayer or his advisers the time and effort expended by the taxpayer in carrying on the activity the expectation that the assets used in the activity may appreciate in value the success of the taxpayer in carrying on other activities for profit the taxpayer’s history of income or losses with respect to the activity the amount of occasional profits if any which are earned the financial status of the taxpayer and elements of personal pleasure or recreation id we will take each entity in turn mcs petitioner has proven his profit_motive in searching out deals for his management company petitioner and his witness who was a business partner in many of petitioner’s ventures and also served in a management role at kodiak both testified credibly as to the manner in which they pursued deals and that these types of deals were both petitioner’s and his witness’s main source_of_income petitioner’s witness further testified that it was their general practice to expend their own funds individually in trying to put these deals together with the possibility of reimbursement if the deal went through petitioner and his witness both testified that although the risks were great any profits they might earn could be substantial either through salaries paid_by the resulting entity or any resulting equity_interest they might procure petitioner and his witness explained that their goal in putting together these deals was trifold if a deal was successful petitioner his witness and various other partners could profit in any of three ways petitioner would become an equity owner of the resulting entity petitioner would become a salaried executive of the resulting entity and or petitioner would be paid a monetary fee for helping to put the deal together in support of his argument that petitioner had a business_purpose in mcs petitioner submitted a number of documents including a draft of a letter of intent between kodiak and coleman which related to the venture started after petitioner returned to a management role at kodiak in the letter of intent is dated date included with this letter was a fax cover sheet from coleman to petitioner’s witness petitioner and his witness testified credibly that they both entered into these transactions with a profit_motive accordingly we find that petitioner had a valid business_purpose for the expenses he claimed on his mcs schedule c we will now take each expense in turn and determine whether petitioner has provided the required substantiation car and truck expenses petitioner claimed and respondent disallowed a deduction for car and truck expenses of dollar_figure subsequently after filing his petition petitioner submitted a schedule c showing car and truck expenses of dollar_figure petitioner’s passenger_automobile is listed_property under sec_280f and is subject_to the substantiation requirements of sec_274 the only evidence petitioner submitted in support of this deduction is a chart that purports to list the dates miles and purposes of what appear to be trips petitioner took of the eight trips listed only three appear to be related to the ventures petitioner testified to pursuing a trip of miles from houston to washington d c and surrounding areas regarding the nvbdc deal what appears to be a return trip of miles from washington d c back to houston texas and a trip of miles from houston to brehham texas and back for a visit regarding coleman tundra the remaining five only list generic travel descriptions or reference people and locations petitioner did not address in his testimony the amount petitioner claimed for car and truck expenses was listed as dollar_figure which coincides with the amount claimed on petitioner’s updated schedule c indicating that it was prepared in advance of trial evidence prepared closer in time to the events generating the deduction is given more weight see sec_1_274-5t temporary income_tax regs fed reg date evidence submitted which was prepared long after events giving rise to the expense is therefore accorded less weight see id petitioner has not provided any contemporaneous evidence regarding this claimed deduction the travel log petitioner submitted was prepared almost years after the costs at issue were allegedly incurred and petitioner’s testimony was vague and imprecise as to the dates times and purposes of the trips accordingly petitioner is not entitled to a deduction for car and truck expenses depreciation and sec_179 expense deduction petitioner claimed and respondent disallowed a dollar_figure deduction for depreciation and sec_179 expense sec_179 provides that a taxpayer may elect to treat the cost of any sec_179 property as an expense which is not chargeable to a capital_account if a taxpayer makes this election the cost shall be allowed as a deduction for the taxable_year in which the sec_179 property is placed_in_service sec_179 sec_179 property is defined in pertinent part as tangible_property which is sec_1245 property as defined in sec_1245 and which is acquired by purchase for use in the active_conduct_of_a_trade_or_business sec_179 sec_179 has its own substantiation and election requirements the taxpayer must maintain records reflecting how and from whom the sec_179 property was acquired and when it was placed_in_service sec_1_179-5 income_tax regs a sec_179 election must be made on the taxpayer’s first income_tax return for the taxable_year the property is placed_in_service whether or not the return is timely or on an amended_return filed within the time prescribed by law including extensions for filing the original return for such year sec_179 sec_1_179-5 income_tax regs the sec_179 election must specify the total sec_179 expense deduction claimed and enumerate the portion of that deduction allocable to each specific item sec_179 sec_1_179-5 and income_tax regs the election is normally made by attaching form_4562 depreciation and amortization to the taxpayer’s return visin v commissioner tcmemo_2003_246 affd 122_fedappx_363 9th cir see instructions for schedule c profit or loss from business specific instructions part ii expenses a taxpayer who fails to make the election is denied the benefits of sec_179 see 116_tc_206 visin v commissioner supra verma v commissioner tcmemo_2001_132 fors v commissioner tcmemo_1998_158 starr v commissioner tcmemo_1995_190 affd without published opinion 99_f3d_1146 9th cir petitioner has failed to meet the election or substantiation requirements of sec_179 petitioner did not file a form_4562 with his form_1040 petitioner instead included with his form_1040 a typewritten sheet stating taxpayer hereby elects to deduct all designated expenditures as sec_179 expenses deductible in the current_year petitioner did not testify about this expense the only evidence petitioner submitted consisted of an invoice from the baseball hall of fame and copies of checks he had written even if we were to accept petitioner’s purported sec_179 election the only evidence petitioner submitted does not include records reflecting how and from whom the sec_179 property was acquired and when it was placed_in_service accordingly petitioner is not entitled to the sec_179 deduction legal and professional services petitioner claimed and respondent disallowed a dollar_figure deduction for legal and professional services on his management and consulting business schedule c at trial petitioner submitted an additional schedule c showing a deduction of dollar_figure for legal fees in general legal fees are deductible under sec_162 only if the matter with respect to which the fees were incurred originated in the taxpayer’s trade_or_business and only if the claim is sufficiently connected to that trade_or_business see 372_us_39 kenton v commissioner tcmemo_2006_13 petitioner testified that the legal fees were paid in conjunction with a lawsuit he commenced against his former employer in which petitioner attempted to collect on an employment agreement with that employer petitioner submitted three checks totaling dollar_figure which he claimed were payments for legal fees incurred during the lawsuit petitioner did not testify as to the discrepancy between the dollar_figure claimed on his updated schedule c or the dollar_figure claimed on his original schedule c and the dollar_figure shown on the three checks nor did petitioner testify as to how these legal fees were related to his schedule c business because petitioner testified that these legal fees were paid for the cost of a lawsuit connected with his individual employment contract and not with a schedule c business of his own the mcs legal fees cannot be deducted office expense petitioner claimed and respondent disallowed a deduction for office expenses of dollar_figure petitioner did not testify in regard to this expense petitioner however did submit certain documents which he believes show that he is entitled to a deduction of dollar_figure for office expenses these documents include houston astros ticket and food invoices an invoice from day-timers inc an invoice from hammacher schlemmer for assorted desk lamps a dry-erase board and a shelving system and a number of illegible canceled checks the houston astros ticket invoices appear to be invoices for tickets purchased in addition to petitioner’s ownership of the luxury suite petitioner did not provide any evidence showing how these ticket purchases are related to his mcs business the houston astros food invoices are discussed below the day- timer’s inc invoice is discussed below as to the other documents petitioner submitted petitioner has not substantiated his claimed deduction for office expenses petitioner also has not shown that these costs were ordinary and necessary business_expenses and not personal expenditures accordingly petitioner is not entitled to the office expense deduction rent or lease petitioner claimed and respondent disallowed a deduction for rent or lease expense petitioner’s original schedule c for mcs filed with hi sec_2002 return included a deduction of dollar_figure this figure consisted of dollar_figure for the rent or lease of vehicles machinery and equipment and dollar_figure for the rent or lease of other business property these amounts were higher than those shown on petitioner’s updated schedule c the updated amounts were dollar_figure for vehicles machinery and equipment and dollar_figure for other business property in support of his claimed deduction for rental or lease costs of vehicles machinery and equipment petitioner submitted the following documents an invoice from jones mcclure publishing inc for a book about civil trial procedure in texas an invoice from sam’s club for what appear to be building materials and an illegible canceled check petitioner is not entitled to a deduction for the cost of rental or leasing of vehicles machinery and equipment the only evidence petitioner submitted suggests that the items on the receipts were purchased not rented or leased neither the receipts nor the check petitioner submitted include any type of lease terms or any evidence whatsoever to indicate that the amounts relate to rent or lease payments petitioner’s argument in support of a claimed deduction for rental or lease of other business property also fails because petitioner failed to establish a business_purpose for the expenses accordingly petitioner is not entitled to a deduction for a rental or lease expense of other business property supplies petitioner claimed a deduction of dollar_figure for supplies on his original schedule c this amount increased to dollar_figure on his updated schedule c petitioner did not testify in regard to this deduction in support of his claim petitioner submitted the following documents houston astros ticket and food invoices assorted canceled checks and assorted invoices including invoices from day-timers inc hammacher schlemmer and circuit city which have already been claimed in other sections of petitioner’s return the houston astros ticket invoices are similar to those claimed as a deduction for office expense accordingly the invoices provided as substantiation for supplies fail for the same reason the ticket invoices are illegible and do not show the parties involved or mention any possible business_purpose petitioner has not alleged that these are the tickets used for holding mcs meetings at the luxury box owned as part of petitioner’s mtem business nor has petitioner argued that these costs should have been claimed on the mcs schedule c petitioner also has not argued that the exception contained in sec_274 applies petitioner has not shown that these tickets were sold in a bona_fide transaction for an adequate_and_full_consideration in money or money’s worth the houston astros food invoices petitioner submitted are discussed below the amounts claimed on the other invoices have already been claimed elsewhere on his return the hammacher schlemmer invoice is discussed above while the day-timers inc and circuit city invoices are discussed below the canceled checks are illegible and do not include the business_purpose behind any alleged expenditures accordingly petitioner is not entitled to a deduction for supplies other expenses petitioner claimed a dollar_figure deduction for other expenses on his original schedule c this amount increased to dollar_figure on his updated schedule c petitioner testified and submitted documents in support of this deduction petitioner testified that dollar_figure of the total claimed deduction for other expenses was for mileage but that amount was already claimed as car and truck expenses on the same schedule c we discussed this claimed deduction above finding that petitioner is not entitled to a deduction for car and truck expenses the remainder of petitioner’s evidence for this deduction consisted of houston astros ticket stubs and food invoices an invoice from day-timers inc for a binder costing dollar_figure and a camera costing dollar_figure an invoice for dollar_figure showing the purchase of what is labeled a briefbag an invoice from circuit city stores inc for the purchase of a camera accessory and an invoice from marshall field’s for the purchase of an architect’s desk costing dollar_figure petitioner is not entitled to a deduction for the cost of the houston astros ticket stubs and invoices as discussed above the ticket invoices fall short of the substantiation petitioner was required to submit in order to prove his entitlement to the deduction the houston astros food invoices will be discussed below petitioner is entitled to a deduction in the amount of dollar_figure for the day-timers inc binder which he has established had a business_purpose petitioner is not entitled to a deduction for the cost of the camera and camera accessory because he has not shown a business_purpose for these purchases petitioner is also entitled to a deduction for the cost of the briefbag petitioner has shown the business_purpose for this expenditure petitioner is also entitled to a deduction for the cost of the architect’s desk petitioner has shown that the purchase of an architect’s desk was an ordinary and necessary business_expense related to his business mtem business_purpose we now consider petitioner’s other schedule c activity mtem respondent argues that petitioner has not shown a business_purpose for mtem petitioner’s and his witness’s testimony have convinced us that petitioner had an ongoing profit_motive while engaged in this activity petitioner’s witness testified that petitioner offered him but he declined an opportunity to join in this venture petitioner testified credibly that although he often broke even on the sale of regular season games there was a much higher profit potential for sale of the luxury box for the major league baseball all-star game4 and for sale during houston astros home playoff games when they made the playoffs petitioner’s witness also testified as to petitioner’s belief that he would earn substantial profits if the houston astros were to advance far into the playoffs or make it to the world series petitioner testified that he was able to sell or rent the luxury box for about of the remaining games at trial petitioner testified that the luxury box was occasionally used in relation to his business conducted under msm petitioner’s witne sec_4the major league baseball all-star game was played in houston texas at minute maid park corroborated this testimony stating that the luxury box was used for the business of msm because it was the most convenient place to get everyone involved together petitioner’s witness also testified about a meeting held at petitioner’s luxury box regarding the nvbdc however petitioner did not provide any documentation relating to that meeting since petitioner has continued this business and claimed to have made a profit on the sale of the use of the luxury box in and accordingly we find that petitioner has met his burden of showing a profit_motive for this venture cost_of_goods_sold sec_61 defines gross_income as all income from whatever source derived in determining gross_income however taxpayers may offset gross_receipts by the cost_of_goods_sold sec_1_61-3 income_tax regs taxpayers must maintain adequate books_and_records of their income and other items in order to substantiate amounts claimed sec_6001 sec_1 a income_tax regs petitioner entered into contracts with both chicago title and nabisco to sell each company one-third of the season tickets petitioner was thus left to sell the remaining one-third games himself petitioner testified that he did not use the luxury box on nights when he was unable to lease it out because he had his own personal tickets in addition to the luxury box petitioner however did not provide any evidence concerning these alternate tickets and we find his testimony unconvincing petitioner has provided a number of documents in support of his claim for cost_of_goods_sold including an invoice from the houston astros baseball club showing a cost of dollar_figure and a total amount due after credits of dollar_figure from prior year’s playoff tickets of dollar_figure5 for an average cost of dollar_figure per game a copy of a check signed by petitioner payable to the houston astros for dollar_figure and what purports to be a receipt showing a cash payment of the dollar_figure difference petitioner has also provided catering invoices issued to him by the houston astros that list the food items consumed in the luxury box and its associated costs these catering invoices include information on the companies using the luxury box that night and indicate that frexie kodiak and chicago title all used the luxury box at some point during the baseball season petitioner conceded that some of the food costs claimed on mtem’s schedule c should have been claimed on the mcs schedule c we will address these costs below 5if a season ticket holder purchases playoff tickets but the team does not advance to the playoffs the cost of the unused playoff tickets is often credited towards the purchaser’s next season ticket purchase petitioner did not testify to or provide any documents to support the dollar_figure credit and it is unclear whether he claimed a cost_of_goods_sold including that credited amount in the prior year in addition petitioner testified that on three occasions he used the luxury box for mcs business meetings leaving games petitioner sold or attempted to sell as part of the business of mtem petitioner testified that he was able to sell tickets to about of the remaining games however petitioner has failed to establish a business_purpose for_the_use_of the luxury box on the remaining dates or provide any evidence to substantiate that the luxury box on the remaining dates was not used for personal purposes accordingly petitioner is entitled to claim a cost_of_goods_sold in the amount of dollar_figure or dollar_figure per game for the games he was able to sell food and entertainment on petitioner’s schedule c for mtem he claimed a deduction of dollar_figure for food and entertainment respondent disallowed this deduction in its entirety at trial petitioner testified that some portion of this cost should have been included on the schedule c for mcs because the food and entertainment was consumed during a mcs meeting as stated above meetings relating to mcs were held at the luxury box that formed the basis for mtem petitioner’s witness also credibly testified that meetings related to mcs were held at petitioner’s luxury box and that the witness had in fact attended those meetings petitioner and his witness both credibly testified that the parties to the attempted coleman transaction met one to two times at petitioner’s luxury box at minute maid field petitioner’s witness also testified that the parties to the deal spent most of their time at the luxury box discussing the proposed deal and trying to finalize it petitioner must meet the substantiation requirements of sec_274 before he can deduct the cost of meals and entertainment on the schedule c for mcs sec_1_274-2 income_tax regs provides that expenditures_for entertainment even if connected with a taxpayer’s trade_or_business will generally be considered not directly related to the active_conduct of the taxpayer’s trade_or_business if the entertainment occurred under circumstances where there was little or no possibility of engaging in the active_conduct of trade_or_business a meeting or discussion at a sporting event is generally considered a circumstance where there is little or no possibility of engaging in the active_conduct or a trade_or_business see sec_1_274-2 income_tax regs however sec_1_274-2 income_tax regs provides that any expenditure for entertainment which is not directly related to the active_conduct of the taxpayer’s trade_or_business will not be allowable as a deduction unless it was associated with the active_conduct_of_a_trade_or_business as defined in sec_1_274-2 income_tax regs an expenditure for entertainment shall be considered associated with the active_conduct of a taxpayer’s trade_or_business if the taxpayer establishes that he had a clear business_purpose in making the expenditure such as to obtain new business or to encourage the continuation of an existing business relationship sec_1 d income_tax regs petitioner in support of this deduction submitted four invoices for catering at minute maid park each invoice included the suite number the customer name the company the date and time an itemized list of the food served and its total cost the first invoice is dated date and lists chicago title as the company the total cost was dollar_figure petitioner has not provided any evidence to support that he paid this amount nor has he testified or provided any evidence relating to the business_purpose of this expense or his relationship to the other parties involved as required by sec_274 petitioner also did not argue that the exception provided in sec_274 applies petitioner is not entitled to this deduction for dollar_figure the second invoice is dated date and lists petitioner as the contact and frexie as the company the total cost was dollar_figure petitioner failed to provide any evidence concerning the business_purpose of this expense or the relationship to other parties involved petitioner is not entitled to this deduction the third invoice is dated date and lists kodiak as the company with a total cost of dollar_figure the fourth invoice is dated date and lists kodiak as the company with a total cost of dollar_figure petitioner and his witness both credibly testified that meetings related to kodiak were held at petitioner’s luxury box to discuss potential business deals on behalf of mcs petitioner and his witness both credibly testified as to the business_purpose of these two meetings and the invoices provided by petitioner indicate the date time and amount of the cost incurred petitioner and his witness also testified that meetings were held at the luxury box because it was the only available location to get all of the interested parties together petitioner’s and his witness’s testimony taken together show that petitioner had a clear business_purpose in making these expenditures accordingly petitioner has satisfied his burden under sec_1_274-2 income_tax regs and is entitled to a deduction for these costs as associated entertainment_expenses because petitioner does not fit within any of the exceptions contained in sec_274 his deduction will be limited to percent of the allowable_amount sec_274 petitioner has met his burden under sec_274 only as to the third and fourth invoices and he has provided sufficient evidence of the business_purpose of the meetings accordingly petitioner is entitled only to a deduction of dollar_figure for food and entertainment casualty_loss sec_165 allows a taxpayer a deduction for losses sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise sec_165 provides that any loss of an individual described in sec_165 is allowed only to the extent that the amount of the loss arising from each casualty exceeds dollar_figure sec_165 provides that if the personal casualty losses for a taxable_year exceed the personal casualty gains for the year the losses are allowable only to the extent of the sum of the personal casualty gains for that taxable_year plus so much of the excess as exceeds percent of adjusted_gross_income for that taxable_year thus where there are no personal casualty gains for a taxable_year personal casualty losses in excess of dollar_figure per casualty are allowable to the extent that they exceed percent of adjusted_gross_income for that taxable_year in the case of an item held for personal_use the amount deductible is governed by sec_1_165-7 income_tax regs which provides that the amount of the loss to be taken into account for purposes of sec_165 shall be the lesser_of the amount which is equal to the fair_market_value of the property immediately before the casualty reduced by the fair_market_value of the property immediately after the casualty or the amount of the adjusted_basis for determining the loss from the sale_or_other_disposition of the property involved for individuals sec_165 allows a taxpayer to deduct a loss from theft petitioner claimed the following casualty_loss deductions item damage to automobile damage to fence lithograph lithograph total automobile amount dollar_figure big_number big_number big_number big_number petitioner claimed a casualty_loss for damage to his car and certain possessions of his that were inside the automobile during a flood in texas petitioner submitted two documents in support of this deduction the first is a handwritten list of items damaged in the flood and other losses_incurred including shoes clothes the use of the vehicle and ruined water with what purports to be their values the list also states deductible- dollar_figure the second was an invoice from an automobile repair shop in the amount of dollar_figure at trial petitioner conceded that he was reimbursed dollar_figure by his insurance_company pursuant to sec_165 petitioner is not entitled to a deduction for the amount reimbursed by his insurance_company as to the other expenses petitioner has not met his burden of substantiation petitioner did not provide any evidence of the fair market values of the allegedly damaged property either before or after the damage from the flood was incurred nor did petitioner provide evidence of the adjusted bases of the property involved and any evidence as to whether that property was sold or otherwise_disposed_of because petitioner did not provide any of the evidence required by sec_1_165-7 income_tax regs in order to substantiate his loss petitioner is not entitled to a deduction for damage sustained by flood fence petitioner claimed a casualty_loss of dollar_figure for damage to his fence incurred when it was hit by a car petitioner calculated this figure by multiplying dollar_figure the lowest estimate he received for fixing the fence by feet petitioner claimed that he reported the incident to the police but failed to provide a police report petitioner’s evidence consists of a single sheet of paper listing what he alleges to be a case number and the name of an alleged sergeant with the police force sec_1_165-7 income_tax regs provides that the cost of repairs to the property damaged is acceptable as evidence of the loss of value if the taxpayer shows that a the repairs are necessary to restore the property to its condition immediately before the casualty b the amount spent for such repairs is not excessive c the repairs made are not for more than the damage suffered and d the value of the property after the repairs does not as a result of the repairs exceed the value of the property immediately before the casualty petitioner has not substantiated this loss petitioner has failed to provide any evidence as required by sec_1 a ii income_tax regs and is therefore not entitled to a deduction for any damage sustained by his fence lithographs petitioner claimed on his form_1040 casualty losses of dollar_figure and dollar_figure related to the loss or theft of one lithograph and another lithograph petitioner referred to as missing at trial petitioner only testified and submitted evidence as to one lithograph which he claims he ordered and paid for but never received from the seller petitioner testified that although the company claimed it was delivered and signed for he never received it and that his signature was forged on the fedex paperwork theft losses claimed under sec_165 are calculated in the same manner as provided in sec_1_165-7 income_tax regs see sec_1_165-8 income_tax regs the only evidence petitioner provided was a handwritten letter petitioner sent to the seller and the seller’s response which included a fedex proof of delivery sheet petitioner’s handwritten letter claims that the lithograph was paid for by check but petitioner did not submit the check as evidence in his posttrial brief however petitioner claims to have submitted credit card statements to respondent indicating the price for the lithograph petitioner failed to submit these credit card invoices as evidence accordingly petitioner is not entitled to a casualty_loss deduction for either lithograph because he has not provided sufficient substantiation capital_loss carryforward as stated above petitioner included a dollar_figure capital_loss carryforward on his tax_return but later decided that he did not wish to claim it this was indicated by the inclusion of a handwritten footnote on the front page of his form_1040 at trial he reserved the right to claim this loss if we were to agree with respondent’s determinations and increase his income accordingly generally losses generated by the sale_or_exchange of capital assets are allowed only to the extent allowed in sec_1211 and sec_1212 sec_165 sec_1211 requires a noncorporate taxpayer to first offset capital losses against capital_gains if aggregate capital losses exceed aggregate capital_gains up to dollar_figure of the excess may be deducted against ordinary_income id if a noncorporate taxpayer has capital losses exceeding the limitations of sec_1211 the unused losses may only be carried forward to subsequent tax years not back see sec_1212 petitioner did not produce any evidence at trial substantiating this capital_loss carryforward and failed to provide returns for any other year showing that he incurred a loss which could be carried forward to the tax_year therefore petitioner is not entitled to the dollar_figure capital_loss carryforward deduction employment_tax respondent also argues that petitioner is liable for self- employment_tax sec_1401 imposes a percentage tax on self- employment income of every individual see baker v commissioner tcmemo_2001_283 self-employment_income is defined as the net_earnings_from_self-employment derived by an individual during any taxable_year sec_1402 the term net_earnings_from_self-employment is defined as the gross_income derived by an individual from any trade_or_business carried on by such individual less the deductions which are attributable to such trade_or_business sec_1402 respondent determined self-employment taxes on the basis of petitioner’s income from his schedule c businesses petitioner is also entitled if subject_to self-employment_tax to a deduction for one-half of the amount of self-employment_tax imposed if in a rule calculation petitioner has income of dollar_figure or more from either business he will be liable for self- employment_tax sec_6662 penalty we next consider whether petitioner is liable for accuracy-related_penalties pursuant to sec_6662 pursuant to sec_6662 and b a taxpayer may be liable for a penalty of percent of the portion of an underpayment_of_tax due to negligence or disregard of rules or regulations the term negligence in sec_6662 includes any failure to make a reasonable attempt to comply with the internal_revenue_code this may include a failure to keep adequate books_and_records or to substantiate items properly sec_6662 sec_1_6662-3 income_tax regs negligence has also been defined as the failure to exercise due care or the failure to do what a reasonable person would do under the circumstances see 92_tc_1 affd 925_f2d_348 9th cir 85_tc_934 the term disregard includes any careless reckless or intentional disregard sec_6662 the commissioner has the burden of production with respect to accuracy-related_penalties sec_7491 to meet that burden the commissioner must produce sufficient evidence indicating that it is appropriate to impose the penalty see 116_tc_438 once the commissioner meets his burden of production the taxpayer must come forward with persuasive evidence that the commissioner’s determination is incorrect rule a see higbee v commissioner supra pincite the taxpayer may meet this burden by proving that he or she acted with reasonable_cause and in good_faith see sec_6664 sec_1_6664-4 income_tax regs respondent determined a dollar_figure accuracy-related_penalty under sec_6662 for taxable_year respondent determined that petitioner’ sec_2002 underpayment_of_tax was attributable to negligence or disregard of rules and regulations petitioner testified credibly as to the profit_motive behind his attempted ventures and has convinced the court that he was a legitimate businessman however petitioner’s records were insufficient to substantiate the majority of his claimed deductions and petitioner failed to keep adequate books_and_records therefore respondent has met the burden of production with respect to the penalty for negligence and petitioner having failed to show reasonable_cause or other basis for reducing the underpayment on which the penalty is imposed is liable for the sec_6662 penalty for to reflect the foregoing decision will be entered under rule


third party communication date of communication month dd yyyy cca-07131157-15 id uilc number release date from ------------------------- sent monday date am to -------------------------- cc -------------------- bcc subject exemption from documentary transfer_tax --------- you asked whether the irs is exempt from paying a county documentary transfer_tax upon the sale of seized real_property and if so what it should include in a documentary transfer_tax declaration on the deed to indicate that it is exempt we conclude that the irs is exempt and could include the following statement on the deed the internal_revenue_service as an agency of the united_states government is exempt from the county documentary transfer_tax the real_property in question was seized in california and purchased at an irs tax sale the irs issued the purchaser a deed after the taxpayer failed to redeem the property within days the purchaser attempted to record the deed with the county recorder’s office but the office refused to do so because the deed did not contain required information about a documentary transfer_tax that must be paid_by the seller under local law in california any county may impose a tax on each deed that conveys land within the county cal rev tax the tax must be paid_by the issuer of the deed cal rev tax liability for the tax is not shared between the parties to the transaction recordation of the deed is subject_to payment of the tax the amount of which must appear in a declaration attached to the deed cal rev tax if no tax is due the declaration or a separate signed statement must include the reason why the documentary transfer_tax cannot be imposed on the deed the irs issued the deed it would therefore have to pay the transfer_tax a tax is prohibited by the supremacy clause of the united_states constitution when the incidence of the tax falls squarely on the federal government see 455_us_720 421_us_599 mcculloch v 17_us_316 similar taxes have been held not to apply to deeds in which the united_states is a party see 199_fsupp_48 m d pa aff’d 311_f2d_627 3rd cir the transfer_tax thus can’t be imposed upon the deed in this case the deed is exempt so if the buyer wanting to record the deed wants the irs to indicate its exemption from the transfer_tax on a transfer_tax declaration the irs can do so in steshnko v gayrard wl at n d cal date a seller put the following on statement on the declaration exempt from documentary transfer_tax because this conveyance is to secure a debt here if it chooses to do so the irs could use something similar to either of the following statements no tax is due because the internal_revenue_service as an agency of the united_states government is exempt from the county documentary transfer_tax under the supremacy clause of the united_states constitution or the internal_revenue_service as an agency of the united_states government is exempt from the county documentary transfer_tax let me know if you have any questions --------


department of the treasury internal_revenue_service d e n n a t release number release date legend org name of organization num ein number datel effective date uil org person to contact identification_number contact telephone number in reply refer to te_ge review staff ein num last date for filing a petition with the tax_court dear this is a final adverse determination as to your exempt status under lr c sec_501 as an organization described in sec_501 of the internal_revenue_code our adverse determination was made for the following reasons has not been operated exclusively for exempt purposes within the meaning of internal_revenue_code sec_501 you are not a charitable_organization within the meaning of sec_1_501_c_3_-1 as a result of a recent examination of your organization’s activities and form_990 for the period ended december it was determined that you had ceased all activity based upon the above we are revoking your organization's exemption from federal_income_tax under sec_501 of the internal_revenue_code retroactively to datel contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code you are required to file federal_income_tax returns on form_1120 these returns should be filed with the appropriate service_center for the year ending datel and for all years thereafter processing of income_tax returns and assessment of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the united_states tax_court the united_states claim court or the district_court of the united_states for the district of columbia before the day after the date this determination was mailed to you contact the clerk of the appropriate court for the rules for initiating suits for declaratory_judgment you also have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or you can contact the taxpayer_advocate from the site where the tax_deficiency was determined by writing to internal_revenue_service taxpayer advocates office local office taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling we will notify the appropriate state officials of this action as required by sec_6104 of the internal_revenue_code if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours marsha a ramirez director eo examinations form_886 a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service org legend org name of organization state name of state date1 effective date issue should org ’s tax exemption under sec_501 of the internal_revenue_code be revoked because their activities have not met the requirements of sec_501 of the internal_revenue_code facts org was recognized as a tax exempt_organization under c of the internal_revenue_code the primary activity of the organization was to provide housing to low to medium income families the organization was involved with these activities through the housing and urban development hud program the organization also donated money as well as volunteer time to a youth organization located in state per vice president he stated that the organization donated as much as dollar_figure volunteered as a drama instructor for this youth organization the organization also got involved with the distribution of food to families who were hungry and in need of it to this youth organization vice president also a field_audit was conducted at vice president’s residence the organization does not maintain an office for its operations during the field_audit it was noticed that the organization ceased operations at the end of the calendar_year per vice president he stated that due to the rising prices of homes and the decreased amount of foreclosures for purchase the organization started to decrease its activities with the hud program during the audit year the organization did not own any property nor did it make any sales of any homes to low to medium income families the organization also ceased volunteering and donating money to a youth organization as well as providing food to hungry families vice president indicated that he would like to terminate the operations of the organization as the organization ceased operations at the end of and has no plans in the future to participate in the hud program currently the organization does not participate in any exempt_activities nor does it own any assets agent recommended that the eo provide a statement of dissolution to terminate the organization however the eo still has not provided the statement of dissolution to proceed with the termination process agent informed vice president that we will proceed with revocation of the eo instead of termination as the eo has not been able to provide the statement of dissolution vice president was in agreement with this process law internal_revenue_code sec_501 exempts from federal_income_tax corporations and any community chest fund or foundation organized and operated form 886-amev department of the treasury - internal_revenue_service page -1- form 886a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service org exclusively for religious charitable scientific testing for public safety literary or educational_purposes or to foster national or international amateur sports competition but only if nor part of its activities involve the provision of athletic_facilities or equipment or for the prevention of cruelty to children or animals no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation except as otherwise attempting to influence legislation except as otherwise provided in subsection h and which does not participate in or intervene in including the publishing or distributing of statements and political campaign on behalf of or in opposition to any candidate for public_office regulation sec_1_501_c_3_-1 organizational and operational tests provides that in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt_income tax regulation c -1 c states primary activities an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose regulation sec_1_501_c_3_-1 provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals the words private_shareholder_or_individual refer to persons having a personal and private interest in the activities of the organization the term private_shareholder_or_individual is defined in regulation sec_1_501_a_-1 regulation sec_1_501_c_3_-1 provides an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus to meet the requirement of this subdivision it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests government position org is not operated exclusively for c purposes as defined by the internal_revenue_code and the regulations the organization has ceased its operations at the end of the calendar_year based on the initial interview during the field_audit it appears that the organization has been idle and has no plans to operate in the future vice president indicated that he would like to terminate the operations of the organization due to the organization’s idleness with their exempt_activities the organization is not operating exclusively for one or more exempt form 886-a rev department of the treasury - internal_revenue_service page -2- department of the treasury - internal_revenue_service form_886 a explanation of items name of taxpayer org schedule no or exhibit year period ended purposes specified in c of the internal_revenue_code the organization is not furthering its exempt_purpose by being inactive and not planning to perform any exempt_activities in the future the organization does not qualify for exemption under c of the internal_revenue_code effective date1 due to the organization’s inactivity and the absence of performing any exempt_activities form 886-a mev department of the treasury - internal_revenue_service page -3- tax_exempt_and_government_entities_division org department of the treasury internal_revenue_service commerce street m c 4900-dal dallas tx taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter catalog number 34809f if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at taxpayer_advocate local office if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and thank you for your cooperation sincerely marsha a ramirez director eo examinations enclosures form_6018 form 886-a publication sec_892 letter catalog number 34809f


release number release date date date uil code internal_revenue_service employee_plans technical_advice_memorandum taxpayer’s name rekkkk krkkkkek kkk taxpayer's address reekkkk rekkkk kek krekkekkr rerkkeere taxpayer's ein kekekkkeek date of conference rkekke kkk kkkk years involved reekk keekk rkeee plan kreekekkk kekkkk issues whether sec_54_4975-7 of the income_tax regulations regulations is an operational requirement or a documentary requirement i ii does the fact that the stock ownership plan in operation did not use the principal and interest method cause the loan to be of the regulations in violation of sec_54 ey bnh employee or does the fact that the provisions of the loan document required pledged shares to be released using the principal and interest method cause sec_54_4975-7 of the regulations to be met whether the disqualified_person is liable for the initial taxes under sec_4975 of the internal_revenue_code code for the taxable years ended and whether the prime rate or the actual interest should be used to determine the amount_involved and the excise_taxes under sec_4975 of the code facts on date in order to effectuate the establishment of an esop e company and a major provider of financial services including commercial lending ‘the financial service provider’ entered into a loan and security_agreement the back-to-back_loan effective date the company established the plan the plan is designed to be an esop as described in sec_4975 of the code on date the plan borrowed shares of class a common_stock the loan the terms of the loan were identical to the terms of the back-to-back_loan including the interest charged as provided for below from the company to purchase the note for the loan note stated in relevant part this note shall be payable in equal monthly installments of principal of on the last business_day of each month commencing date and a 60th and final payment of all then unpaid principal and accrued and unpaid interest on the last business_day of june the principal_amount of this note may be prepaid in whole or in part from time to time without prepayment penalty in the event of partial payments the required monthly principal payment will remain the same the principal_amount of this note shall bear interest at a per annum rate equal to the sum of a and b the 30-day commercial paper rate as published in the wall street journal based on actual days elapsed over a 360-day year and in the event such rate is no longer so published such rate will be reasonably determined by the company interest will be payable in arrears on the last business_day of each month commencing date on date the maturity_date of the note was extended to date and on date it was further extended to date prior to january the plan made monthly payments of several prepayments beginning in january the plan limited its monthly payments to in addition to per month the interest rate on the loan was below the prime rate at all times during the years at issue the plan’s pledge agreement pledge agreement dated date pledged the plan’s shares of class a common_stock as collateral for the loan the pledge agreement also stated that the pledged shares would be released from the suspense_account using the principal and interest method the plan also requires shares to be released using the principal and interest method or if the requirements of sec_54_4975-7 are met principal payments only in addition article iv sec_4 of the plan provides that a ny pledge of financed shares must provide for the release of shares so pledged on a basis equal to the principal and interest_paid by the trustee on the acquisition loan the plan received a favorable determination_letter dated date and filed an additional application_for_a_determination_letter on date the application is pending in the department of labor dol conducted a review of the plan and found that in operation the principal-only method not the principal and interest method was used to calculate the release of shares from through in a letter to the company dated date the dol stated that in its opinion the failure to use the method required by the esop pledge agreement for releasing shares from suspense violated erisa act sec_404 sec_404 and a d under sec_406 of erisa the dol also noted in a letter dated date that even if the principal-only method had been permitted by the plan and pledge agreement the loan did not follow the statutory requirements needed to permit such principal-only payments and constituted a prohibited_transaction in that letter the dol also noted that the company agreed to recalculate the release of shares from through using the principal and interest method instead of the principal-only method the recalculation resulted in a net release of additional shares to correct the plan’s failure the company agreed to credit the additional shares to the participant accounts as of date and to use the principal and interest method to calculate the release of shares from until the loan is repaid in full the dol stated that because the taxpayer had taken these corrective actions its office would take no further action on the matter on date the company allocated the additional shares to the participant accounts based on the participant’s pro-rata share of the stock credited to his or her account for each respective year law and analysis issue sec_4975 of the code imposes a tax on each prohibited_transaction as defined in sec_4975 at a rate equal to percent of the amount_involved with respect to the prohibited_transaction for each year or part thereof in the taxable_period the tax imposed by sec_4975 shall be paid_by any disqualified_person who participates in the prohibited_transaction other than a fiduciary acting only as such sec_4975 of the code provides that in any case in which an initial tax is imposed by sec_4975 on a prohibited_transaction and the transaction is not corrected within the taxable_period there is imposed a tax equal to percent of the amount_involved sec_4975 of the code provides that any direct or indirect lending of money or other extension of credit between a plan and a disqualified_person generally is a prohibited_transaction sec_4975 of the code provides that an employer any of whose employees are covered by the plan is a disqualified_person with respect to the plan sec_4975 of the code provides an exemption from the prohibited_transaction rules for any loan to a leveraged employee_stock_ownership_plan as defined in sec_4975 if i the loan is primarily for the benefit of the participants and beneficiaries of the plan and ii the loan is at a reasonable rate of interest and any collateral which is given to a disqualified_person by the plan consists only of qualifying employer_securities sec_4975 of the code stated that the term employee_stock_ownership_plan means a defined_contribution_plan - a which is a stock_bonus_plan which is qualified or a stock_bonus_plan and a money purchase plan both of which are qualified under sec_401 and which are designed to invest primarily i in qualifying employer_securities and b which j is otherwise defined in regulations prescribed by the secretary sec_54_4975-7 of the regulations provides in pertinent part that for each plan_year during the duration of a loan described in sec_4975 of the code the number of securities released must equal the number of encumbered securities held immediately before the release for the current plan_year multiplied by a fraction the numerator of the fraction is the amount of principal and interest_paid for the year the denominator of the fraction is the sum of the numerator plus the principal and interest to be paid for all future years the number of future years under the loan must be definitely ascertainable and must be determined without taking into account any possible extensions or renewal periods if the interest rate under the loan is variable the interest to be paid in future years must be computed by using the interest rate applicable as of the end of the plan_year if collateral includes more than one class of securities the number of securities of each class to be released for a plan_year must be determined by applying the same fraction to each class sec_54_4975-7 of the regulations describes the special rule a loan will not fail to be exempt merely because the number of securities to be released from encumbrance is determined solely with reference to principal payments however if release is determined with reference to principal payments only the following three additional rules apply the first rule is that the loan must provide for annual payments of principal and interest at a cumulative rate that is not less rapid at any time than level annual payments of such amounts for years the second rule is that interest included in any payment is disregarded only to the extent that it would be determined to be interest under standard loan amortization tables the third rule is that this subdivision ii is not applicable from the time that by reason of a renewal extension or refinancing the sum of the expired duration of the exempt loan the renewal_period the extension period and the duration of a new exempt loan exceeds years _ 469_f2d_1318 5th cir held that the law looks not only to the form of the plan but also to its operation in re blais wl at s d fla date held that although the requirements of sec_401 of the code speak to the form of the plan they nevertheless also extend to the manner in which the plan is operated with regard to issue the dol determined that the loan between the company and the plan constituted a prohibited_transaction under erisa sec_406 for failing to follow the release method provided in 408b-3h of the dol regulations the loan is also a prohibited_transaction under code sec_4975 of the code if it fails the exemption requirements under sec_4975 sec_54_4975-7 of the regulations provides that the release method of a loan described in sec_4975 must follow either the general_rule of sec_54_4975-7 or the special rule_of sec_54_4975-7 this requirement includes both an operational and a documentary component see eg cornell-young co v u s pincite 5th cir to conclude otherwise would strip the regulation of its meaning the loan failed to meet the requirements of either the general_rule or the special rule under sec_54_4975-7 of the regulations the general_rule requires a release of shares using a principal and interest method but the dol found that the principal-only method was used to calculate the release of shares from to the special rule allows shares to be released solely with reference to principal payments but the loan must provide for annual payments of principal and interest at a cumulative rate not less rapid at any time than level annual payments of such amounts for ten years here the loan in the amount of required monthly principal payments of only which either would have required years not to pay off in its entirety or would have resulted in a balloon payment thus violating the special rule’s level annual payment requirement consequently even if the language in the plan and pledge agreement met the documentary requirement of sec_54_4975-7 of the regulations the loan violates the regulation in operation and fails to be exempt therefore the loan violated sec_54_4975-7 of the regulations and does not qualify for the exemption from the prohibited_transaction rules under sec_4975 of the code the loan constitutes a prohibited_transaction under code sec_4975 of the code issue sec_4975 of the code defines the term taxable_period as the period beginning with the date on which the prohibited_transaction occurs and ending on the earliest of the date of the mailing of a statutory_notice_of_deficiency the date on which the first_tier_excise_tax is assessed or the date on which correction of the prohibited_transaction is completed sec_4975 of the code defines a correction as undoing the transaction to the extent possible but in any case placing the plan in a financial position not worse than that in which it would be if the disqualified_person were acting under the highest fiduciary standards sec_141_4975-13 of the temporary pension excise_tax regulations _ provides that under paragraphs and of sec_4975 sec_53_4941_e_-1 of the foundation excise_tax regulations is controlling to the extent those regulations describe terms appearing both in sec_4941 e and sec_4975 of the code the terms taxable_period and correction appear in both sec_4941 and sec_4975 sec_53 e -1 c of the regulations provides in general that the correction shall be accomplished by undoing the transaction which constituted the act of self-dealing to the extent possible but in no case shall the resulting financial position of the private_foundation be worse than that which it would be if the disqualified_person were dealing under the highest fiduciary standards for example where a disqualified_person sells property to a private_foundation for cash correction may be accomplished by recasting the transaction in the form of a gift by returning the cash to the foundation sec_53 e -1 c i of the regulations provides that in the case of the use by a disqualified_person of property owned by a private_foundation undoing the transaction includes but is not limited to terminating the use of such property in addition to termination the disqualified_person must pay the foundation- a the excess if any of the fair_market_value of the use of the property over the amount_paid by the disqualified_person for such use until such termination and b the excess if any of the amount which would have been paid_by the disqualified_person for_the_use_of the property on or after the date of such termination for the period such disqualified_person would have used the property without regard to any further extensions or renewals of such period if such termination had not occurred over the fair_market_value of such use for such period in applying b of this subdivision the fair_market_value of the use of property shall be the rate at the time of correction sec_53 e -1 e of the regulations provides that in the instance of a prohibited_transaction that is a loan an additional prohibited_transaction is deemed to occur on the first day of each taxable_year in the taxable_period after the taxable_year in which the use occurred revrul_2002_43 2002_2_cb_85 addresses a prohibited_transaction that spans multiple taxable years in a taxable_period where the first_tier_excise_tax rate changes and illustrates that where interest is not repaid in a given year that interest is added to the principal_amount in the subsequent year 89_tc_1137 held that the taxpayers were liable for excise_taxes on one prohibited_transaction entered into on the date the loans were executed plus an additional prohibited_transaction on the first day of each taxable_year or portion of a taxable_year until such transactions were corrected 112_tc_51 held that a prohibited_transaction that consists of a loan may only be corrected by the repayment of principal plus reasonable interest with regard to issue we concluded in issue that the loan constitutes a prohibited_transaction under sec_4975 of the code therefore the company-as the disqualified_person who participated in the transaction-must pay the excise_tax of of the amount_involved imposed under sec_4975 the taxable_period for the prohibited_transaction began on the date of the loan date and ended on the earliest of a the date a notice_of_deficiency was mailed b the date the excise_tax was assessed or c the date of correction because our first open_year is we will consider the first date of the taxable_period to be date as for the ending date the service has not mailed a notice_of_deficiency but assessed the excise_tax for the prohibited_transactions beginning in taxable years through on date regarding the correction date the taxpayer notes that on date per its agreement with the dol it allocated as of december the additional shares that should have been allocated to participant accounts under the terms of the loan sec_4975 of the code and sec_53 e -1 c of the regulations define correction as undoing the transaction to the extent possible but in no case placing the plan in a worse financial position than that in which it would be if the disqualified_person were acting under the highest fiduciary standards here the loan would have been exempt from the prohibited_transaction rules had it followed the share release method described in sec_54_4975-7 of the regulations the dol found that the taxpayer corrected the loan by allocating the shares to participants that should have been allocated under the proper release method although the temporary sec_4975 regulations look to the sec_4941 regulations for the definition of correction under sec_4975 we think it is important to interpret the regulations in light of the facts of the existing case involving an esop exempt loan transaction while the regulations under sec_4941 contemplate undoing the transaction which constituted the act of self- dealing to the extent possible they also provide that in no case is the foundation to be put in a worse position financially than if the disqualified_person were dealing with the plan under the highest fiduciary standards correction of a prohibited_transaction involving a loan typicaily involves terminating a loan however to require termination of the loan in this case would put the plan and its participants in a worse financial position than if the plan had not entered the loan transaction thus under these particular facts and circumstances we believe it is reasonable to consider the taxpayer as having corrected the prohibited_transaction by allocating the additional shares to participant accounts on date the taxpayer argues that it corrected the loan on date since the shares were credited as of that date we disagree the taxpayer did not undo the transaction until date when it actually allocated the additional shares to the participant accounts and the participants were made whole accordingly with respect to issue the disqualified_person is liable for the initial taxes under sec_4975 of the code for the prohibited_transactions beginning in taxable years through for the period beginning date and ending date issue sec_4975 of the code defines the term amount_involved generally as the greater of the amount of money and the fair_market_value of the other_property given or the amount of money and the fair_market_value of the other_property received for purposes of the first_tier_excise_tax the fair_market_value is determined as of the date on which the prohibited_transaction occurs whereas for purposes of the second tier excise_tax the fair_market_value is the highest fair_market_value during the taxable_period described in sec_4975 sec_141_4975-13 of the temporary pension excise_tax regulations provides that under paragraphs and of sec_4975 sec_53_4941_e_-1 of the foundation excise_tax regulations is controlling to the extent those regulations describe terms appearing both in sec_4941 and sec_4975 the term amount involved’ appears in both sec_4941 and sec_4975 sec_53 e -1 b ii of the regulations provides that where the _ transaction involves the use of money or other_property the amount_involved is the greater of the amount_paid for such use or the fair_market_value of such use for the period for which the money or other_property is used and the amount_involved is determined for the entire period that the money or other_property is used sec_53 e -1 b of the regulations provides that the fair_market_value of the use of property shall be determined as of the date on which the act of self- dealing occurred in the case of the initial taxes imposed by sec_4941 or sec_4975 and shall be the highest fair_market_value during the taxable_period in the case of the additional taxes imposed by sec_4941 or sec_4975 sec_1_170a-1 of the regulations provides that in the case of contributions of property the fair_market_value is the price at which the property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts see also sec_20_2031-1 of the regulations applying the same definition of fair_market_value to an estate and sec_25_2512-1 of the regulations applying the same definition of fair_market_value to a gift of property revrul_2002_43 2002_2_cb_85 provides that where a loan is a prohibited_transaction the excise_tax is determined using the interest rate that was the greater of the interest on the loan or the fair market rate of interest for such loan at that time where a loan is the prohibited_transaction the excise_tax is determined using the interest rate that is the greater of the interest on the loan or the fair market rate of interest see revrul_2002_43 112_tc_51 pincite- holding that the fair market interest rate applied when determining the amount_involved in a prohibited_transaction case involving a loan unless petitioners could show that the fair market interest rate was erroneous when determining a fair market interest rate courts have looked to the prime interest rate for purposes of setting an appropriate benchmark rate see 541_us_465 89_tc_535 874_f2d_431 7th cir with respect to issue the threshold question is whether the interest rate ‘ charged by the loan is a fair market interest rate we believe that the company has offered sufficient documentation to support the use of its proposed interest rate as a fair market interest rate the agreement with regards to the back-io- back loan between the company and the financial service provider substantiates the interest rate used with respect to the loan although the interest rate in this case is set slightly below the prime rate we recognize that fair market interest rates can differ among local markets and believe that the loan agreement with the financial service provider is sufficient to support the company's claim that it was able to obtain such a favorable interest rate because we believe the company has demonstrated that the interest rate on the loan represents a fair market interest rate it is that interest rate that should be used to calculate the amount_involved for determining the excise_tax on the loan conclusions sec_54_4975-7 of the regulations imposes both an operational and a documentary requirement the loan violated this section of the regulations when it failed to release shares in accordance with either the general or the special rule_of sec_54_4975-7 and ii therefore the loan failed the exemption requirements of sec_4975 of the code and - constitutes a prohibited_transaction under sec_4975 the company is liable for excise_taxes under sec_4975 of the code for the prohibited_transactions beginning in the years through for the taxable_period from date to date the excise_taxes under sec_4975 of the code the actual interest should be used to determine the amount_involved and


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 plr-114661-07 date august internal_revenue_service number release date index number --------------------------------------------------- ---------------------------- ----------------------------------- -------- x x ------------------------------------- ---------------------------- ----------------------------- -------------------------------- ------------- ---------------------- state date dear ---------------- --------------------------------------- --------------------------------------- this responds to a letter dated date submitted on behalf of x by x’s sec_1362 provides that a small_business_corporation may elect to be an s authorized representative requesting relief under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated on date under the laws of state it was intended for x to be an s_corporation effective date however no form_2553 election by a small_business_corporation was timely filed for x corporation sec_1362 provides the rule on when an s election will be effective generally 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 sec_1362 provides that if an s 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 any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make sec_1362 provides that if an election under sec_1362 is made for plr-114661-07 such election then the secretary may treat such an election as timely made for such taxable_year based solely on the facts and the 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 be an s_corporation by filing a completed form_2533 with the appropriate service_center effective date within days following the date of this letter then such election will be treated as timely made for x’s taxable_year beginning date a copy of this letter should be attached to the form_2553 federal_income_tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 of the code except as specifically set forth above no opinion is expressed concerning the this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely bradford r poston senior counsel branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes