internal_revenue_service number release date index number 7702b ---------------------------- ------------------------------------------------ ---------------------------------------- ---------------------------------- 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 fip b04 plr-107228-17 date date insurer a insurer b parent state court x date date date date ----------------------------------------------------------------------------------------------- ---------------------------------- ----------------------------------------------------------------------------------------------- --------------------------- ----------------------------------------------------------------------------------------------- ---------------------------- ------------------- ---------------------------------------------------- ---- ------------------- ---------------------- -------------------- -------------------- dear ------------------ this letter is in response to the letter and supplemental correspondence submitted by your authorized representative that requested rulings on the application of sec_104 sec_803 sec_805 sec_807 sec_1001 sec_1011 and sec_7702b of the internal_revenue_code the code to the liquidation of insurer a and insurer b each an insurer facts corporate structure and insurance_business of insurers plr-107228-17 parent is a holding_company that is the common parent of a life non-life consolidated_group that includes the insurers parent owns all of the stock of insurer a insurer a in turn owns all of the stock of lnsurer b both insurers are state-domiciled stock insurance_companies and are life_insurance_companies under sec_816 the insurers have issued primarily long-term care policies and certain other accident_and_health_insurance policies each a policy none of the policies has any cash_value many of the long-term care policies are tax-qualified under sec_7702b but others are not neither insurer has written any new business since date but both insurers have been required to renew their existing business pursuant to and subject_to the terms of the policies and applicable law overview of liquidation proceedings and liquidator’s authority on date under approval by the court the state insurance commissioner the commissioner ordered the insurers into rehabilitation due to the insurers’ deteriorating financial conditions and other relevant considerations the commissioner requested that the court convert the insurers' rehabilitation to a liquidation on date the effective date the court entered orders of liquidation for the insurers the liquidation orders the court appointed the commissioner as the statutory liquidator the liquidator as of or soon after the effective date state insurance guaranty associations gas were required to provide coverage to the insurers’ policyholders for covered benefits covered benefits are the amount of a policy’s benefits that are within the limits conditions and scope of coverage of the responsible ga taking into account the residence and other attributes of the policyholder as determined by the responsible ga in accordance with applicable law uncovered benefits are the amount of a policy’s benefits that exceed covered benefits planned restructuring as part of the liquidation the estimated liabilities under the policies will be restructured as provided in a restructuring statement filed with and approved by the court the restructuring statement each policy’s provisions shall be subject_to certain modification provisions as described in the restructuring statement to determine the extent of restructuring a determination will be made as to what portion of each insurer’s assets will be required for costs of administration and contingencies and the rest of its assets the allocated assets will be notionally allocated to each policy in proportion to the estimated liability associated with each policy as determined by each policy’s gross premium reserve before any restructuring or modification of the policy following the liquidation orders each insurer has estimated liabilities with respect to its policies policy liabilities that vastly exceed its assets and therefore are not fully funded by that insurer the amount of a policy’s liabilities before the restructuring is referred to as the plr-107228-17 unmodified policy value the amount of the unmodified policy value that an insurer can reasonably expect to fund based on future premiums and allocated assets is the initial funded restructured policy value the amount of the unmodified policy value that exceeds the initial funded restructured policy value is the unfunded benefit liability as of the effective date each policy’s unmodified policy value will be restructured into a covered benefits component a covered benefits component and an uncovered benefits component an uncovered benefits component each policy’s covered benefits component and uncovered benefits component will be further divided into an initial funded restructured policy value subcomponent and an unfunded benefit liability subcomponent this will allow the insurers to have separate policy components timely assumed or guaranteed as appropriate by the gas and by another insurance_company reinsurer which could provide coverage for uncovered benefits this is intended to prevent any policy coverages from being unnecessarily terminated also as of the effective date a policy’s uncovered benefits component will be restructured by reducing the uncovered benefits component to its initial funded restructured policy value subcomponent in return for an amount of indebtedness from the insurer to the policy’s owner the owner that is equal to the unfunded benefit liability by which the uncovered benefits component is reduced within x days after this restructuring the initial funded restructured policy value subcomponent of the uncovered benefits component will be transferred to and reinsured by reinsurer which will have a liability only to the extent that reinsurer will have obtained sufficient funding from the policy’s insurer as of the final restructuring date which is date unless a different date is approved by the court a policy’s covered benefits component will be restructured by reducing the covered benefits component to its initial funded restructured policy value subcomponent in return for an amount of indebtedness from the insurer to the owner that is equal to the unfunded benefit liability by which the covered benefits component is reduced the gas and reinsurer will separately continue reinsure assume or guarantee the respective covered benefits and uncovered benefits and receive transfers of allocated assets to fund these benefits through their rights of subrogation in accordance with their agreements with the liquidator the transfer of policy liabilities to a ga or reinsurer will be effected by a court-approved transaction described by the restructuring statement that will extinguish the insurer’s liability with respect to such policy generally such a termination of the insurer’s liability will occur when allocated assets are transferred to or for the benefit of the transferee to fund the payment of such a liability the liquidator will seek an order from the court discharging the insurers for any remaining unfunded benefit liability debt to the owners and the gas plr-107228-17 pursuant to and at the time of the final discharge order as defined in the restructuring statement following completion of all of the other steps in the liquidation law and analysis sec_104 provides that except in the case of amounts attributable to and not in excess of deductions allowed under sec_213 for any prior taxable_year gross_income does not include amounts received through accident_or_health_insurance or through an arrangement having the effect of accident_or_health_insurance for personal injuries or sickness other than amounts received by an employee to the extent such amounts a are attributable to contributions by the employer which were not includible in the gross_income of the employee or b are paid_by the employer under sec_213 premiums_paid under a qualified_long-term_care_insurance_contract are generally treated as payments for insurance for purposes of the deduction allowed under sec_213 for expenses paid for medical_care under sec_7702b a qualified_long-term_care_insurance_contract is treated as an accident_and_health_insurance contract and amounts received as benefits under such a contract generally are treated as amounts received for personal injuries and sickness and as reimbursement for expenses actually incurred for medical_care sec_7702b defines a qualified_long-term_care_insurance_contract as an insurance_contract that a provides protection only for coverage of qualified_long-term_care_services b does not pay or reimburse expenses_incurred for certain services or items reimbursable under title xviii of the social_security act c is guaranteed renewable d does not provide for a cash_surrender_value e permits premium refunds or policyholder dividends to be applied only as a reduction in future premiums or an increase in future_benefits and f meets the consumer protection requirements of sec_7702b in revproc_92_57 1992_2_cb_410 the service recognized that i nsurance companies that issue or assume through reinsurance annuity life_insurance or endowment contracts can become financially troubled and subject_to rehabilitation conservatorship insolvency or similar state proceedings and that the o rderly rehabilitation of these insurance_companies may require modification or restructuring of these annuity life_insurance or endowment contracts revproc_92_57 provides administrative relief with respect to the these contracts by treating the modification or restructuring of certain contracts as not resulting in a loss of grandfathered status for purposes of sec_72 sec_101 sec_264 sec_7702 and sec_7702a and as not requiring retesting or the beginning of a new test period under sec_264 d f b - e and 7702a c to qualify for this administrative relief the modification or restructuring of an affected contract must satisfy the following conditions plr-107228-17 the modification or restructuring by endorsement or otherwise of the affected contract must occur as an integral part of the rehabilitation conservatorship insolvency or similar state proceeding modification or restructuring may include but is not limited to reductions in benefits adjustments to mortality or other expense charges reductions in the rate of interest credited to the contract and restrictions on the policyholder’s ability to receive benefits under the affected contract the modification or restructuring of an affected contract must be approved by the state court the state insurance commissioner or any other responsible state official with authority to act in a rehabilitation conservatorship insolvency or similar state proceeding revproc_92_57 sec_2 the proposed modifications and restructuring of the policies pursuant to the restructuring statement are within the scope of the relief provided by revproc_92_57 because these modifications and restructuring are an integral part of the rehabilitation conservatorship insolvency or similar state proceeding and will be approved by the appropriate state authorities as part of such proceedings under sec_1001 the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in such section for determining loss over the amount_realized sec_1_1001-1 of the income_tax regulations provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or as loss sustained sec_1011 provides the general_rule that the adjusted_basis for determining the gain_or_loss from the sale_or_other_disposition of property whenever acquired shall be the basis determined under sec_1012 or other applicable sections of this subchapter and subchapters c relating to corporate_distributions and adjustments k relating to partners and partnerships and p relating to capital_gains_and_losses adjusted as provided in sec_1016 under sec_803 gross_income of a life_insurance_company includes the gross_amount_of_premiums_and_other_consideration on insurance and annuity_contracts the net decrease in reserves which is required by sec_807 and all other_amounts not included under or which are includible in gross_income plr-107228-17 under sec_805 a life_insurance_company is entitled to a deduction for all claims and benefits accrued and all losses_incurred whether or not ascertained during the taxable_year on insurance and annuity_contracts and a net increase in reserves required by sec_807 to be taken into account sec_807 permits an increase in the amount of life_insurance_reserves as calculated under sec_807 for the taxable_year to be deducted under sec_805 holding sec_1 any court-approved policy restructuring or modification described in the restructuring statement will not affect the policy's issue_date for purposes of sec_7702b any court-approved policy restructuring or modification described in the restructuring statement will not be treated as a material_change of the policy or an exchange of property for other_property differing materially either in_kind or in extent and thus will not result in a taxable disposition of any interest in such policy by its owner under sec_1001 any court-approved policy restructuring or modification described in the restructuring statement will not result in any amount includible in gross_income by its owner under sec_104 the owner’s adjusted_basis under sec_1011 in any policy will remain the same immediately after any court-approved restructuring modification guarantee assumption continuation reinsurance or enhancement of any of the policy’s provisions or benefit liabilities as such adjusted_basis was immediately before such transaction when any policy is initially restructured as of the effective date to reduce the policy’s unfunded liabilities for purposes of subchapter_l of chapter of the code as of the effective date a the restructuring insurer will include in income under sec_803 the total amount of the existing tax_reserves under sec_807 attributable to the policy’s unmodified policy value b the restructuring insurer will be able to deduct under sec_805 as accrued_benefits an amount equal to the policy’s unmodified policy value c the restructuring insurer will include in premium income under sec_803 the sum of the restructured policy’s covered benefits component and plr-107228-17 initial funded restructured policy value subcomponent of the uncovered benefits component and d the restructuring insurer will be able to deduct under sec_805 the increase in tax_reserves under sec_807 attributable to the sum of the restructured policy’s covered benefits component and initial funded restructured policy value subcomponent of the uncovered benefits component when any policy is finally restructured as of the final restructuring date to reduce its unfunded liabilities for purposes of subchapter_l of chapter of the code as of the final restructuring date a the restructuring insurer will include in income under sec_803 the total amount of the existing tax_reserves under sec_807 attributable to the then current covered benefits component of the policy b the restructuring insurer will be able to deduct under sec_805 as accrued_benefits an amount equal to the then current covered benefits component of the policy c the restructuring insurer will include in premium income under sec_803 the restructured policy’s then current initial funded restructured policy value subcomponent of the covered benefits component and d the restructuring insurer will be able to deduct under sec_805 the increase in tax_reserves under sec_807 attributable to the policy’s then current initial funded restructured policy value subcomponent of the covered benefits component except as expressly provided herein no opinion is expressed concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter we decline to rule on whether the restructuring insurer excludes from gross_income under sec_108 any income from the discharge_of_indebtedness to policyholders or the gas by court order resulting from the restructuring or modification of the policies pursuant to the restructuring statement the unfunded benefit liability to the extent that the restructuring insurer is insolvent at the time of the discharge see revproc_2018_1 sec the rulings contained in this letter are based upon information and representations submitted by the insurers and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on plr-107228-17 examination this ruling is directed only to the taxpayer who requested it a copy of this ruling must be attached to any_tax return to which it is relevant 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 your authorized representatives sincerely rebecca l baxter senior technician reviewer branch financial institutions products cc


t c summary opinion united_states tax_court samer mikhail and mariana mikhail petitioners v commissioner of internal revenue respondent docket no 20199-12s filed date samer mikhail and mariana mikhail pro sese william r brown jr for respondent summary opinion guy special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by unless otherwise indicated section references are to the internal revenue continued any other court and this opinion shall not be treated as precedent for any other case respondent determined a deficiency of dollar_figure in petitioners’ federal_income_tax for and an accuracy-related_penalty of dollar_figure pursuant to sec_6662 petitioners husband and wife filed a timely petition for redetermination with the court pursuant to sec_6213 the issues for decision are whether petitioners engaged in sales and recruiting activities for profit within the meaning of sec_183 if so whether petitioners substantiated deductions they claimed for vehicle and travel_expenses and whether petitioners are liable for an accuracy-related_penalty under sec_6662 to the extent not discussed herein other adjustments are computational and flow from our decision in this case background some of the facts have been stipulated and are so found the stipulation of facts and the accompanying exhibits are incorporated herein by this reference at the time the petition was filed petitioners resided in florida continued code code as amended and in effect for and rule references are to the tax_court rules_of_practice and procedure all monetary amounts are rounded to the nearest dollar i petitioners dr mikhail graduated from the new york college of osteopathic medicine in and completed his medical residency at the university of south florida in since then he has worked full time as a physician practicing internal medicine at a hospital operated by the u s department of veterans affairs in florida the wages that dr mikhail earns as a physician are petitioners’ primary source_of_income during the final year of his medical residency dr mikhail earned dollar_figure his wages during and were dollar_figure dollar_figure dollar_figure and dollar_figure respectively mrs mikhail graduated from baruch college in new york with a bachelor’s degree in international marketing in she worked for myers international and later r j reynolds in new york city between and petitioners are the parents of two children a son born in and a daughter born in since mrs mikhail has had some short-term part- time jobs but she has primarily been a homemaker ii amway amway corp amway is a supplier of household cosmetic and nutritional products that are sold by individuals distributors through direct marketing amway’s compensation of its distributors is based on the volume of the distributors’ sales to customers and the volume of sales made by downline distributors amway distributors are permitted to purchase amway products for personal consumption at a discounted price amway’s compensation system for distributors results in a pyramidlike network of distributors under this system an upline or sponsor distributor is encouraged to recruit new downline distributors to become part of his or her organization downline distributors likewise are encouraged to recruit new distributors who in turn become legs of the original upline distributor’s organization downline distributors recruited by the same upline distributor are referred to as crossline distributors an upline distributor receives bonus payments from amway based on the volume of sales as opposed to profits generated by the downline distributors who are part of his or her organization see nissley v commissioner tcmemo_2000_178 for a more complete description of amway’s compensation system iii petitioners’ amway activities dr mikhail was recruited as an amway distributor by his dentist in and he began to operate a distributorship under the name the logos at the time petitioners had no experience in direct marketing or operating a small_business dr mikhail testified that he conducted independent research to learn more about amway he concluded that negative assessments about the amway business model are attributable to individuals who did not follow the system petitioners conducted their amway activities in accordance with instructions from their upline distributors educational materials obtained from an amway-related educational system known as leadership team development ltd and information obtained while attending amway seminars workshops and conferences petitioners did not seek advice from disinterested professionals develop a business plan prepare profit projections or undertake any type of market analysis petitioners attended weekly and monthly amway meetings held locally and elsewhere in florida during they attended five national amway ltd sells books and cds that contain instruction and training for amway distributors conferences most of which were held out of state petitioners also hosted some weekly meetings for amway distributors and recruits in their home petitioners took trips to new york and texas to discuss amway with family and friends dr mikhail testified that the time he devotes to amway activities is largely directed at recruiting new distributors he further testified that he usually spends his lunch hour as well as an hour or two after work and approximately three hours every weekend on amway activities and that amway is always at the forefront of his mind dr mikhail spent more time on amway activities than mrs mikhail mrs mikhail testified that she is responsible for bookkeeping business management and organization of amway parties and events during she maintained records of the couple’s amway-related expenses including a mileage log a spreadsheet listing monthly expenses and credit card statements petitioners did not use their amway records to prepare a formal budget or conduct a break-even analysis petitioners sold amway products to family members close friends and coworkers at the time of trial petitioners had customers who purchased amway products from them sporadically petitioners testified that approximately of their amway sales volume was attributable to products and services that they purchased for personal consumption such as food diapers clothing and household products they also enjoyed amway-related discounts on products and services purchased from businesses and retailers such as disney sony nike and best buy petitioners initially attempted to recruit family members and friends as downline distributors but found that most of them were unable to overcome their life circumstances and continue to build amway with us petitioners later altered their recruitment strategy by frequenting upscale restaurants and shopping areas and striking up conversations with people they encountered with the aim of identifying what they termed learners petitioners purchased books and cds from ltd and gave them to potential recruits although petitioners testified that they registered some downline distributors along the way by the end of they had no downline distributors dr mikhail acknowledged that he was unable to spend sufficient time on amway activities while he was fulfilling his medical residency requirements between and in petitioners recruited a downline distributor who apparently began to register her own downline distributors thereby expanding petitioners’ organization iv petitioners’ amway losses petitioners filed joint federal_income_tax returns for the years through petitioners attached to each of those returns a schedule c profit or loss from business identifying dr mikhail as the proprietor of a sales and recruiting business as of the time of trial petitioners had never reported an annual profit from their amway activity from to petitioners reported cumulative net losses attributable to the amway activity of dollar_figure as follows tax_year total gross_receipts net_loss dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number petitioners testified that they believed that they would eventually earn profits from the amway activity over the long run and that the activity would provide financial benefits to their family for years to come petitioners further testified that the losses they have incurred will be offset by gains that they expect to earn in and the years thereafter v petitioners’ tax_return petitioners timely filed a joint federal_income_tax return for reporting that dr mikhail and mrs mikhail earned wages of dollar_figure and dollar_figure respectively petitioners attached to the return a schedule c reporting gross_receipts of dollar_figure expenses of dollar_figure and a net_loss of dollar_figure in respect of the amway activity petitioners reported the following amway-related expenses item amount vehicle dollar_figure legal professional services big_number office expenses big_number supplies travel big_number meals and entertainment other expenses big_number total big_number this item represents the amount petitioners paid to ltd for amway training materials petitioners reported total_tax of dollar_figure for vi notice_of_deficiency and increased deficiency respondent issued a notice_of_deficiency to petitioners disallowing the deductions they claimed on schedule c for vehicle and travel_expenses for lack of substantiation respondent determined a tax_deficiency of dollar_figure and an accuracy-related_penalty under sec_6662 after filing an initial answer to the petition respondent filed an amended answer alleging that petitioners did not engage in the amway activity with the intent of earning a profit in and they are not entitled to deductions in excess of their gross_receipts from the activity in accordance with the provisions of sec_183 in conjunction with these allegations respondent asserted that petitioners are liable for an additional deficiency and an increased accuracy-related_penalty under sec_6662 vii tax_return preparation petitioners delivered their tax records for to ron hienstand a certified_public_accountant c p a who has prepared their tax returns since mr hienstand prepared the return in accordance with petitioners’ tax records and filed the return electronically petitioners testified that they relied on mr hienstand to properly prepare their return discussion the commissioner’s determination of a taxpayer’s liability in a notice_of_deficiency normally is presumed correct and the taxpayer bears the burden of proving that the determination is incorrect rule a 290_us_111 the commissioner bears the burden_of_proof however in respect of an increased deficiency rule a as previously mentioned respondent filed an amended answer asserting that petitioners are liable for an increased deficiency and accuracy-related_penalty on the ground they did not engage in the amway activity with the requisite profit objective consequently respondent bears the burden_of_proof on that issue see sec_7491 and 116_tc_438 i sec_183 under sec_183 if an activity is not engaged in for profit then no deduction attributable to that activity is allowed except to the extent provided by sec_183 in pertinent part sec_183 allows those deductions that would have been allowable had the activity been engaged in for profit only to the extent of gross_income derived from the activity reduced by deductions attributable to the activity that are allowable without regard to whether the activity was engaged in for profit sec_183 defines an activity_not_engaged_in_for_profit as any activity other than one with respect to which deductions are allowable for the taxable_year under sec_162 or under paragraph or of sec_212 deductions are allowable under sec_162 or under sec_212 or if the taxpayer is engaged in the activity with the actual and honest objective of making a profit 78_tc_642 aff’d without published opinion 702_f2d_1205 d c cir 72_tc_411 aff’d without published opinion 647_f2d_170 9th cir the existence of the requisite profit objective is a question of fact that must be decided on the basis of the entire record 84_tc_227 aff’d without published opinion 782_f2d_1027 3d cir dreicer v commissioner t c pincite sec_1_183-2 income_tax regs in resolving this factual question greater weight is given to objective facts than to a taxpayer’s statement of intent see 68_f3d_868 5th cir aff’g tcmemo_1993_634 sec_1_183-2 income_tax regs for purposes of deciding whether the taxpayer has the requisite profit objective profit means economic profit independent of tax savings 81_tc_210 the regulations set forth a nonexhaustive list of factors that may be considered in deciding whether a profit objective exists these factors are the manner in which the taxpayer carries 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 taxpayer’s success in carrying on other similar or dissimilar activities the taxpayer’s history of income or losses with respect to the activity the amount of occasional profits if any which are earned the financial status of the taxpayer and any elements indicating personal pleasure or recreation sec_1_183-2 income_tax regs no single factor nor even the existence of a majority of factors supporting or rebutting the existence of a profit objective is controlling id rather all facts and circumstances with respect to the activity are to be taken into account golanty v commissioner t c pincite sec_1_183-2 income_tax regs a manner in which petitioners carried on the amway activity if a taxpayer carries on the activity in a businesslike manner and maintains complete and accurate books_and_records it may indicate a profit objective sec petitioners did not identify any assets used in the amway activity that they expected to appreciate in value thus this factor is not relevant to our analysis b income_tax regs however if there is a lack of evidence that the taxpayer’s records were used to improve the performance of a losing operation such records generally do not indicate a profit objective golanty v commissioner t c pincite see campbell v commissioner tcmemo_2011_ wl at keeping records only for purposes of preparing tax returns is not indicative of a profit objective see rowden v commissioner tcmemo_2009_41 kinney v commissioner tcmemo_2008_287 although petitioners kept records of their amway expenses they did not use those records to analyze their business performance or to prepare profit projections a break-even analysis or a formal budget despite several years of activity during which they realized cumulative net losses of dollar_figure petitioners failed to make any meaningful change in their strategy or tactics in an effort to increase the likelihood of earning a profit on this record it is a fair inference that petitioners used their records only to compute the amounts of losses attributable to the amway activity when preparing their tax returns considering all the facts and circumstances we conclude that petitioners did not conduct the amway activity in a businesslike manner b expertise of petitioners or their advisers preparation for the activity by extensive study of its accepted business practices or consultation with those who are expert therein may indicate a profit objective where the taxpayer carries on the activity in accordance with such practices sec_1_183-2 income_tax regs petitioners had no experience in direct marketing activities or operating a small_business before dr mikhail was recruited as an amway distributor in petitioners obtained advice only from upline distributors--persons who had a direct financial interest in the maximization of petitioners’ sales volume without regard to whether they would realize a profit see ogden v commissioner tcmemo_1999_397 amway upline distributors’ advice may be biased because of financial interest in downline distributor’s sales volume aff’d 244_f3d_970 5th cir moreover considering their lack of expertise we find it noteworthy that petitioners did not attempt to educate themselves by conducting an independent market analysis or drafting a business plan for the amway activity this factor weighs against petitioners c the time and effort expended by petitioners in carrying on the activity the fact that the taxpayer devotes substantial time and effort to carrying on an activity may indicate an intention to derive a profit sec_1_183-2 income_tax regs petitioners attended local amway meetings weekly and monthly and they attended amway conferences often out of state regularly nevertheless dr mikhail candidly admitted that he was not able to devote sufficient time and effort to the amway activity during to 2007--the period of his medical residency as we see it he likewise was not able to devote sufficient time to the activity after taking into account his obligations as a full-time physician petitioners acknowledged that dr mikhail spent more time on the activity than mrs mikhail under the circumstances we conclude petitioners did not spend a significant amount of time on the amway activity see kinney v commissioner tcmemo_2008_287 this factor weighs against petitioners d petitioners’ success in carrying out other similar or dissimilar activities the fact that the taxpayer has engaged in similar activities in the past and converted them from unprofitable to profitable enterprises may indicate that the activity in question was engaged in for profit even though the activity is presently unprofitable sec_1_183-2 income_tax regs petitioners had no prior experience engaging in a direct marketing distributorship or managing a small_business of any sort this factor weighs against petitioners e petitioners’ history of income or loss a series of losses during the initial or startup stage of an activity may not necessarily be an indication that the activity is not engaged in for profit sec_1_183-2 income_tax regs see golanty v commissioner t c pincite however where losses continue to be sustained beyond the period which customarily is necessary to bring the operation to profitable status such continued losses if not explainable may indicate that the activity is not engaged in for profit sec_1_183-2 income_tax regs the goal must be to realize a profit on the entire operation which presupposes not only future net_earnings but also sufficient net_earnings to recoup the losses which have meanwhile been sustained in the intervening years 45_tc_261 aff’d 379_f2d_252 2d cir see also nissley v commissioner tcmemo_2000_178 at the time of trial petitioners had never reported an annual profit in respect of the amway activity to the contrary they reported cumulative net losses of dollar_figure from through the modest gross_receipts that petitioners derived from the activity have been eclipsed by the substantial expenses they incurred over the years although petitioners testified that they believe the amway activity will eventually generate profits we cannot discern on this record any definitive trend to the upside for petitioners and there certainly is no indication that they are on their way to the level of profitability that would allow them to recoup the substantial cumulative losses they have incurred to date in sum petitioners’ history of consistent and substantial losses is indicative of a lack of profit objective see golanty v commissioner t c pincite ogden v commissioner tcmemo_1999_397 this factor weighs against petitioners f occasional profits the amount of profits in relation to the amount of losses_incurred and in relation to the amount of the taxpayer’s investment and the value of the assets used in the activity may provide useful criteria in determining the taxpayer’s intent sec_1_183-2 income_tax regs as discussed above petitioners’ amway activity has produced little in the way of annual receipts and no profits and resulted in a sustained pattern of substantial losses petitioners’ inability to earn a profit is indicative of their lack of profit_motive see golanty v commissioner t c pincite nissley v commissioner tcmemo_2000_178 this factor weighs against petitioners g petitioners’ financial status the fact that the taxpayer does not have substantial income or capital from sources other than the activity may indicate that an activity is engaged in for profit sec_1_183-2 income_tax regs substantial income from sources other than the activity particularly if the losses from the activity generate substantial tax benefits may indicate that the activity is not engaged in for profit id dr mikhail is a successful physician and his wages are the primary source of petitioners’ income during the final year of his residency he earned wages of dollar_figure during and his wages increased to dollar_figure dollar_figure dollar_figure and dollar_figure respectively the losses that petitioners have claimed from the amway activity served to offset substantial amounts of dr mikhail’s wages decreasing petitioners’ taxable_income and achieving substantial tax savings this factor weighs against petitioners h elements of personal pleasure or recreation the presence of personal motives in carrying on an activity may indicate that the activity is not engaged in for profit especially where there are elements of recreation or personal pleasure sec_1_183-2 income_tax regs we have previously observed that there are significant elements of personal pleasure attached to the activities of an amway distributorship and that ‘an amway distributorship presents taxpayers with opportunities to generate business deductions for essentially personal expenditures’ campbell v commissioner tcmemo_2011_42 quoting brennan v commissioner t c memo the record shows that petitioners used their amway distributorship as a means to generate deductions for essentially personal expenditures and to enjoy discounts on items they purchased for personal consumption the availability of consumer product discounts for personal_use merchandise is a factor supporting the conclusion that petitioners lacked a profit objective see campbell v commissioner tcmemo_2011_42 nissley v commissioner tcmemo_2000_178 ogden v commissioner tcmemo_1999_397 we also note that petitioners traveled together to attend amway seminars and conferences in various cities took trips to new york and texas to discuss amway with family and friends and hosted meetings that had a social component all things considered we conclude that petitioners derived personal benefits and pleasure from the amway activity this factor weighs against petitioners i conclusion considering all the facts and circumstances we hold that petitioners did not conduct the amway activity in a businesslike manner and respondent has demonstrated by a preponderance_of_the_evidence that they did not engage in the activity with the requisite profit objective during the taxable_year consequently we sustain respondent’s assertion set forth in his amendment to answer that petitioners are not entitled to a deduction for the net_loss of dollar_figure that they reported on schedule c in respect of the amway activity for ii accuracy-related_penalty sec_6662 and b and imposes a penalty equal to of the amount of any underpayment_of_tax that is attributable to negligence or disregard of rules or regulations or any substantial_understatement_of_income_tax the term negligence includes any failure to make a reasonable attempt to comply with tax laws and disregard includes any careless reckless or intentional disregard of rules or regulations sec_6662 an understatement means the excess of the amount of the tax required to be shown on the return over the amount of the tax imposed which is shown on the return reduced by any rebate sec_6662 an understatement is substantial in the case of an individual if the amount of the understatement for the taxable_year exceeds the greater of of the tax required to be shown on the return or dollar_figure sec_6662 sec_6664 provides an exception to the imposition of the accuracy- related penalty if the taxpayer establishes that there was reasonable_cause for and the taxpayer acted in good_faith with respect to the underpayment sec_1 a income_tax regs the determination of whether the taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account the pertinent facts and circumstances sec_1_6664-4 income_tax regs reliance on a tax professional may demonstrate that the taxpayer had reasonable_cause and acted in good_faith where the taxpayer establishes that the adviser was a competent professional with sufficient expertise to justify the taxpayer’s reliance the taxpayer provided the adviser with necessary and accurate information and the taxpayer actually relied in good_faith on the adviser’s judgment 133_tc_112 115_tc_457 with respect to an individual taxpayer’s liability for any penalty sec_7491 places on the commissioner the burden of production thereby requiring the commissioner to come forward with sufficient evidence indicating that it is appropriate to impose the penalty higbee v commissioner t c pincite once the commissioner meets his burden of production the taxpayer must come forward with persuasive evidence that the commissioner’s determination is incorrect id pincite see rule a welch v helvering u s pincite respondent has discharged his burden of production under sec_7491 by showing that petitioners had a substantial_understatement_of_income_tax for within the meaning of sec_6662 before filing their tax_return for petitioners had claimed deductions in respect of losses attributable to the amway activity for several years without challenge by the internal_revenue_service petitioners maintained records of their annual amway-related expenses and on this record we cannot say that those records were incomplete inaccurate or in any way misleading petitioners relied on mr hienstand a c p a to prepare a complete and correct return for the year in issue considering all the facts and circumstances we conclude that there was reasonable_cause for and petitioners acted in good_faith with respect to the underpayment sec_1_6664-4 income_tax regs consequently we hold that petitioners are not liable for an accuracy-related_penalty for respondent originally determined a deficiency of dollar_figure for the year in issue--an amount that exceeds of the tax required to be shown on the return the understatement of income_tax attributable to the disallowance of a deduction equal to petitioners’ net_loss from the amway activity for will exceed the original deficiency amount to reflect the foregoing decision will be entered under rule


t c memo united_states tax_court t p and najieh r crigler petitioners v commissioner of internal revenue respondent docket no filed date t p crigler pro_se james r rich for respondent memorandum findings_of_fact and opinion colvin judge respondent determined a deficiency in petitioners’ federal_income_tax of dollar_figure and an accuracy- related penalty under sec_6662 of dollar_figure for - - the issues for decision are whether petitioners may deduct an ordinary_loss of dollar_figure under sec_1244 for loss in value of petitioner’s fabuglass stock in we hold that they may not whether petitioners are liable for the accuracy-related_penalty for negligence under sec_6662 for we hold that they are unless otherwise provided section references are to the internal_revenue_code in effect for and rule references are to the tax_court rules_of_practice and procedure references to petitioner are to mr crigler findings_of_fact some of the facts have been stipulated and are so found petitioners resided in chapel hill north carolina when they filed their petition a fabuglass inc b f lists inc in petitioner incorporated b f lists inc b f lists in arkansas to obtain rent and market mailing lists for the retail_sale of professional uniforms and accessories petitioner converted a rodeo arena in conway arkansas into a mail order office warehouse and shipping facility the conway premises at a date not specified in the record fabuglass inc and crigler co petitioner changed the name of b f lists to fabuglass inc fabuglass in and he changed the name of fabuglass to crigler co in petitioner owned all of the stock of fabuglass from the articles of incorporation adopted in state that fabuglass was formed to manufacture market and distribute fiberglass-reinforced plastic products accessories and related items fabuglass’ activities fabuglass manufactured fiberglass jeep tops and related parts in and at the conway premises fabuglass had serious business problems in and which petitioner tried to correct in date fabuglass agreed to supply pender boat co pender a north carolina company with fiberglass molds for jeep parts and pender agreed to furnish jeep parts to fabuglass fabuglass bought sixteen fiberglass jeep parts from pender in october and date petitioner was not satisfied with the parts that pender produced drug enforcement administration dea officials in north carolina apparently confiscated fabuglass’ molds from pender on a date not stated in the record ' for purposes of this opinion we refer to the entity originally known as b f lists as fabuglass for all years q4e- fabuglass reported dollar_figure sales or costs of goods sold in it rented the conway premises to an unidentified tenant for dollar_figure in fabuglass purchased dollar_figure of securities for investment in in fabuglass also had receivables of dollar_figure liquid_assets of dollar_figure and owned a building with a book_value of dollar_figure less accumulated depreciation of dollar_figure in fabuglass derived income from renting real_property and trading stocks and securities petitioner operated fabuglass as a business consulting company in and fabuglass was an arkansas corporation that had filed all required reports and paid all required fees and taxes as of the date of trial it had not liguidated its assets or filed for bankruptcy protection as of the date of trial b amruss ltd in or raymond sawyer sawyer petitioners’ accountant and petitioner attempted to do business in russia through amruss ltd amruss fabuglass was not involved in petitioner’s efforts to do business in russia in charles layman layman owned a company called murphy body co murphy body co amruss and a russsian entity named association vnedrenie agreed to do business converting vehicles into refrigerated or armored trucks ambulances and other specially used vehicles in the contract between murphy body co amruss and association vnedrenie is not in evidence an addendum to charter and by-laws of vnedrenie- murphy was prepared for petitioner’s signature in his capacity as chairman of amruss on date amruss agreed to sell an armored vehicle to a russian entity named bank baltisky petitioner signed the sales contract as president of amruss c tax returns for fabuglass sawyer or his employees prepared the federal corporate_income_tax returns for fabuglass for petitioner gave sawyer information relating to income expenses and various stock transactions to use in preparing the returns fabuglass reported on its returns for that it was an investment_company and that its business activity was investing in financial securities and real_estate petitioner prepared and signed the original return for fabuglass fabuglass reported on its return that its business activity was investments sawyer or his employees prepared the first amended return for fabuglass and added a net_operating_loss_carryback but did not change other parts of the return fabuglass reported that its total liabilities exceeded its assets for the period fabuglass reported the following amounts of gross_income and deductions for fabuglass’ reported gross_income and deductions for year gross_income deductions sdollar_figure big_number dollar_figure big_number big_number big_number -- big_number -- big_number big_number total big_number big_number fabuglass reported dollar_figure gross_receipts or sales in and dollar_figure in and dollar_figure on the original and first amended returns fabuglass reported dollar_figure costs of goods sold on its and original and first amended returns fabuglass claimed no deductions for salaries wages rents and advertising on its returns fabuglass reported assets on its returns as follows item cash -- inventories -- --- --- dollar_figure big_number investments dollar_figure dollar_figure dollar_figure big_number big_number buildings and depreciable asset sec_248 sec_681 -- -- less accumulated depreciation big_number big_number total assets big_number big_number big_number big_number big_number ' fabuglass reported these amounts on its original and first amended returns fabuglass’ tax returns for a real_estate contract and a stipulated rental receipt show that less than percent of fabuglass’ aggregate gross_receipts for were from sources other than royalties rents dividends interest annuities and - j- sales or exchanges of stock_or_securities nonoperating sources as follows nonoperating other sources sources dividends dollar_figure -- rent receipts big_number -- gains from stock transactions big_number -- commissions -- dollar_figure totals big_number big_number dividends dollar_figure -- rent receipt sec_2 -- gains from stock transactions big_number --- real_estate sale -- dollar_figure totals big_number big_number dividends dollar_figure --- interest --- rent receipts’ big_number -- gains from stock transaction sec_611 --- real_estate sales -- dollar_figure totals big_number big_number dividends dollar_figure -- gains from stock transactions big_number --- sale -- big_number real_estate sales -- dollar_figure totals big_number big_number dividends dollar_figure -- boat sales - dollar_figure total sec_304 big_number total from total from nonoperating sources other sources dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number totals big_number big_number ' fabuglass did not report this item on its tax_return however the parties stipulated to the contract which shows that fabuglass received dollar_figure in from a real_estate sale the parties stipulated that fabuglass received rent receipts of dollar_figure in sawyer prepared fabuglass’ tax_return for petitioner gave sawyer a summary of income expenses and various transactions eg sales of stock and real_property to use in preparing the return fabuglass reported that it was an investment_company fabuglass reported the following on its return assets and liabilities beginning item of year end of year cash -- dollar_figure inventories dollar_figure depreciable big_number big_number depletable and intangible assets total asset sec_169 loans from stockholders big_number big_number capital stock big_number big_number retained earnings big_number big_number total liabilities and big_number big_number stockholders’ equity - on their return petitioners reported a dollar_figure loss attributable to petitioner’s fabuglass stock and claimed a dollar_figure deduction under sec_1244 the examination of petitioners’ income_tax return began in respondent issued a notice_of_deficiency on date in which respondent determined that petitioners were not entitled to a dollar_figure deduction under sec_1244 on date petitioner prepared and filed a second amended_return for for fabuglass on it fabuglass reported that its business activity was the manufacture of co-production transp products and that its product or service was vehicle conversions w r p also on that return fabuglass reported for the first time income of dollar_figure from the sale of boats costs of goods sold of dollar_figure and expenses of dollar_figure for travel to russia and total assets of dollar_figure consisting of dollar_figure of inventories boats dollar_figure of export items consigned to russia and dollar_figure of investments sawyer prepared petitioners’ individual income_tax returns for but not fabuglass’ return for fabuglass reported on its and returns that its business activity was consulting the maximum annual amount that may be deducted under sec_1244 is dollar_figure for a husband and wife filing a joint_return for that year sec_1244 -- - opinion a whether petitioner’s fabuglass stock qualifies as sec_1244 stock requirements for sec_1244 stock generally when corporate stock becomes worthless the loss is a capital_loss however an individual who has what would otherwise be a capital_loss on stock that qualifies as sec_1244 stock may treat up to dollar_figure dollar_figure in the case of a joint_return of the loss as an ordinary_loss sec_1244 ob d b sec_1244 stock is stock of a domestic_corporation if at the time that stock is issued the corporation had not received money or other_property in excess of dollar_figure million for its stock as a contribution_to_capital or as paid-- in surplus the stock was issued for money or other_property other than stock_or_securities and the corporation during it sec_5 most recent taxable years or if less the period during which the corporation has been in existence ending before the date the loss in question was sustained derived more than percent of its aggregate gross_receipts from sources other than royalties rents dividends interest annuities and sales or exchanges of stocks or securities sec_1244 the gross_receipts requirement does not apply if for the 5-year period described above the amount_of_deductions allowed by chapter other than by sec_172 sec_243 sec_244 and sec_245 exceeds the amount of the corporation’s gross_income sec_1244 c c congress intended sec_1244 to encourage taxpayers to invest new funds in small businesses rather than provide favorable tax treatment for losses suffered by investment and holding_companies h rept 85th cong lst sess 1959_2_cb_709 581_f2d_575 6th cir 70_tc_922 the secretary is authorized to prescribe regulations needed to carry out the purposes of sec_1244 sec_1244 pursuant to that authority the secretary issued regulations which provide that the taxpayer must show that the corporation was largely_an_operating_company during the 5-year period described above even if the gross_receipts requirement does not congress intended to limit application of sec_1244 to companies which are largely operating companies the legislative_history states in pertinent part iii general explanation sec_2 losses on small-business stock your committee also has imposed a restriction designed to limit this tax_benefit to companies which are largely operating companies thus the corporation in the years before the taxpayer incurs the loss on the stock must have derived more than half of its gross_receipts from sources other than royalties rents dividends interest annuities and the sale of stock_or_securities h rept 85th cong lst sess 1959_2_cb_709 emphasis added apply because the corporation’s deductions exceeds its net_income sec_1 c -l1 e income_tax regs davenport v commissioner supra pincite this provision of the regulations is valid davenport v commissioner supra contentions of the parties petitioners contend that petitioner’s fabuglass stock qualifies as sec_1244 stock and that they may deduct dollar_figure as an ordinary_loss under sec_1244 in respondent contends that petitioner’s fabuglass stock does not gualify as sec_1244 stock because a fabuglass derived less than percent of its aggregate gross_receipts from sources other than nonoperating sources and fabuglass’ gross_income exceeded its deductions for and b fabuglass was not largely_an_operating_company during petitioners contend that fabuglass’s deductions exceeded its gross_income for and that fabuglass was largely_an_operating_company during petitioners bear the burden of proving that petitioner’s fabuglass stock qualifies as sec_1244 stock rule a sec_7491 applies to court proceedings arising in connection with examinations commencing after date sec_7491 does not apply here because the examination of petitioners’ return began in whether fabuglass was largely_an_operating_company in a whether fabuglass had operating_assets sales or paid salaries in fabuglass reported on its returns for that it had no operating_assets and paid no salaries this suggests that fabuglass was not an operating company fabuglass reported total sales of dollar_figure on its returns that amount is insignificant compared to the dollar_figure it reported as net losses from stock transactions for those years b whether fabuglass’ tax returns establish that it was an investment_company fabuglass reported on its returns and its first amended return that it was an investment_company petitioners contend that we should disregard references to fabuglass as an investment_company on those returns because fabuglass was not authorized by its articles of incorporation to engage in investment activities we disagree first petitioner as the sole owner of fabuglass stock in and preparer of fabuglass’ original return cannot now disavow those returns without cogent proof that they are incorrect 412_f2d_800 3d cir affg per curiam tcmemo_1968_126 62_tc_739 affd without published opinion 521_f2d_1399 3d cir 28_tc_121 affd 255_f2d_833 3d cir second the instructions to forms and 1120-a u s_corporation income_tax return codes for principal business activity for require a corporation to report on its tax_return its business activity from which it derives its largest percentage of total receipts not the business activity authorized in its articles of incorporation we conclude that fabuglass correctly reported that it was an investment_company in cc whether fabuglass operated in russia in petitioners contend that fabuglass was largely_an_operating_company in because it operated in russia in those years petitioner testified that fabuglass tried to sell armored vehicles and refrigeration trucks to russian companies however his testimony on this point was vague the record shows that amruss and not fabuglass tried to do business in russia sawyer who prepared fabuglass’ original income_tax returns for testified that he did not know that fabuglass was trying to do business in russia but that amruss did try to do business there he testified that he and petitioner considered doing business in russia in or on behalf of a company called amruss petitioners contend that exhibit 39-p a contract dated date shows that fabuglass was operating in russia in we disagree exhibit 39-p is a contract in which bank baltisky agreed to buy an armored vehicle from amruss fabuglass -- - was not a party to that contract petitioner signed the contract as president of amrusss layman testified that murphy body co and petitioner on behalf of fabuglass tried to do business in russia in with an entity named association vnedrenie we believe that layman’s testimony that fabuglass was involved in russia was mistaken because the documentary_evidence refers to amruss not fabuglass no contract between murphy body co and association vnedrenie is in evidence the record contains an addendum to charter and by-laws of vnedrenie-murphy that lists murphy body co amruss and association vnedrenie as parties to that addendum and refers to petitioner as chairman of amruss no documentary_evidence shows that fabuglass did business in russia petitioners point out that fabuglass claimed deductions for doing business in russia on its second amended_return for petitioners contend that petitioner was merely correcting errors on the original and first amended returns for and that the second amended_return 1s correct we disagree petitioner filed fabuglass’ second amended_return for on date almost months after respondent issued the notice_of_deficiency this suggests that fabuglass claimed those deductions simply to support petitioners’ claim that fabuglass was an operating company in because it operated in russia respondent contends in the alternative that if we find that fabuglass was active in russia in then the fabuglass -- - stock did not become worthless in because those alleged activities continued after petitioners argue that respondent’s contention is a concession that fabuglass was largely_an_operating_company in russia in we disagree respondent’s contention was contingent on our finding that fabuglass operated in russia in we have not so found d whether fabuglass stopped doing fiberglass--related business in petitioner contends that fabuglass stopped doing fiberglass-- related business in when he decided that fabuglass would no longer conduct any fiberglass-related business we disagree there is no evidence that fabuglass did business related to fiberglass production or sales after date the record shows no activity by fabuglass in except for petitioner’s letter to the u s attorney to try to retrieve the fabuglass molds that the dea had seized fabuglass reported no sales or costs of goods sold in in it rented out its conway premises for dollar_figure and invested dollar_figure in securities the fact that fabuglass invested nearly dollar_figure million in suggests that it did not need those funds to pay operating costs the fact that fabuglass rented out its conway premises suggests that fabuglass was no longer using the conway premises for manufacturing or other business activities in because it was no longer an operating company petitioner testified that fabuglass correctly reported on its second amended_return for that its business activity was the production of reinforced plastic materials we are not convinced by that testimony because as discussed above the weight of the evidence shows that fabuglass was an investment_company and had stopped doing fiberglass-related business before e fabuglass was not largely_an_operating_company in we conclude that fabuglass was not largely_an_operating_company in conclusion we conclude that petitioner’s fabuglass stock was not sec_1244 stock and thus petitioners may not deduct an ordinary stock loss of dollar_figure under sec_1244 in in light of our conclusion we need not decide respondent’s contentions that petitioners have not established that the stock was issued for money or other_property other than stock_or_securities that fabuglass satisfied the percent gross_receipts_test and whether fabuglass stock became worthless in petitioners may not deduct any losses under sec_165 relating to the worthlessness of petitioner’s fabuglass stock because the record does not contain sufficient information to compute petitioner’s basis in that stock in petitioner’s testimony leaves many unanswered guestions about his basis the only documents in the record to support petitioners’ computation of basis are the contract showing the purchase_price of real_property dollar_figure that petitioner contributed to fabuglass in and bank statements showing transfers from petitioner totaling dollar_figure which petitioners contend were to the first national bank of conway petitioners have not shown that the continued -- - b whether petitioners are liable for the accuracy--related penalty for petitioners contend that they are not liable for the accuracy-related_penalty for negligence for because they relied on sawyer’s advice we disagree a taxpayer may be relieved of liability for the accuracy- related penalty if the taxpayer shows that he or she had reasonable_cause for the understatement and acted in good_faith reliance on the advice of a qualified_tax professional may constitute reasonable_cause if that reliance was reasonable and the taxpayer acted in good_faith sec_6664 sec_1 a income_tax regs to establish good_faith reliance on the advice of a competent adviser a taxpayer must show that he or she provided the return preparer with complete and accurate information and an incorrect return resulted from the preparer’s mistake sec_6662 115_tc_457 115_tc_43 affd 299_f3d_221 3d cir sec_1 a income_tax regs petitioners contend that they gave sawyer complete and accurate information to prepare their returns properly we continued amount of the mortgage and depreciation on the property at the time of the transfer were less than the dollar_figure purchase_price petitioners also have not shown why transfers to a bank add to petitioner’s basis in his fabuglass stock we conclude that the record contains insufficient information from which to compute petitioner’s basis believe petitioners have not proved this there is no evidence that petitioners gave sawyer information showing that petitioner’s fabuglass stock qualified under sec_1244 l e information showing that fabuglass derived more than percent of its aggregate gross_receipts from sources other than royalties rents dividends interest annuities and sales or exchanges of stocks or securities for that its deductions exceeded its income for or that it was largely_an_operating_company in thus we conclude that petitioners are liable for the accuracy-related_penalty for to reflect the foregoing decision will be entered for respondent


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom corp 3-plr-112863-99 date date legend parent subsidiary company official outside tax professionals authorized representatives business a date a plr-112863-99 date b date c dollar_figurey this is in response to your authorized representatives’ letter dated date requesting an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file a statement parent as the common parent of the consolidated_group is requesting the extension of time to file a statement of allowed loss under sec_1 c sometimes referred to as the election for its taxable_year ending on date a the election is with respect to the portion of the alleged worthless_stock loss on parent's stock of subsidiary that parent may otherwise deduct under sec_165 of the internal_revenue_code additional information was received in a letter dated date the material information is summarized below parent is the common parent of a consolidated_group that has a taxable_year ending on the sunday nearest december 31st and that uses the accrual_method of accounting subsidiary was wholly owned by parent and included in parent's consolidated federal_income_tax return during the fourth quarter of its taxable_year ending on date a parent liquidated subsidiary on date b parent filed its consolidated federal_income_tax return for its taxable_year ending on date a on the return parent deducted dollar_figurey as an ordinary_loss under sec_165 which represents that portion of its basis in the stock of subsidiary that it is otherwise permitted by sec_1 c to deduct parent did not reattribute any of subsidiary's losses to itself pursuant to sec_1 g parent represents that it filed its return for its taxable_year ending on date a consistently with the election however for various reasons parent did not attach the election to the return or otherwise file it the service is not examining parent's return for its taxable_year ending on date a parent represents that subsidiary's stock became worthless during its taxable_year ending on date a which is after date the effective date of sec_1 and that it is entitled to a worthless_stock deduction under sec_165 for its subsidiary stock parent also represents that part of the sec_165 loss is disallowed under sec_1 a and c and that part is allowable as a deduction under sec_1 c finally parent represents that the amount of the loss disallowed and the amount of the loss allowable was determined in accordance with sec_1 c the election was due on date b however for various reasons the election was not attached to the return or otherwise filed on or about date c which was after the due plr-112863-99 date for the election the failure_to_file the election was discovered subsequently this request was submitted to the service under sec_301_9100-1 for an extension of time to file the election the period of limitations on assessments under sec_6501 has not expired for parent's and subsidiary's taxable_year in which the liquidation and alleged loss occurred the taxable years in which the election should have been filed or any taxable years that would have been affected by the election had it been timely filed parent as the common parent of the consolidated_group was required by sec_1 c to attach the election to its return for the year of disposition1 in order to deduct the amount if any of the loss recognized on the disposition that is not disallowed under sec_1 c sec_1 a provides that as a general_rule no deduction is allowed for any loss recognized by a member of a consolidated_group with respect to the disposition of stock of a subsidiary sec_1 a provides that a disposition means any event in which gain_or_loss is recognized in whole or in part eg a worthless_stock loss sec_1 h provides that as a general_rule sec_1 applies with respect to dispositions on or after date sec_1 c provides as a general_rule that the amount of loss disallowed under sec_1 a and the amount of basis_reduction under sec_1 b with respect to a share of stock shall not exceed an amount determined by a specified formula sec_1 c provides that the sec_1 c limitation on the amount of a loss disallowed and basis_reduction made applies only if the statement specified in sec_1 c and entitled allowed loss under sec_1 c is filed with the taxpayer's return for the year of disposition or deconsolidation sec_1_1502-77 provides that the common parent for all purposes other than for several purposes not relevant here shall be the sole agent for each subsidiary in the group duly authorized to act in its own name in all matters relating to the tax_liability of the consolidated_return_year under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i provided the taxpayer demonstrates to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and 1which allegedly is the taxable_year that parent’s subsidiary stock became worthless and in which parent claimed a worthless_stock deduction under sec_165 plr-112863-99 granting relief will not prejudice the interests of the government sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the election was fixed by the regulations ie sec_1 c therefore the commissioner has discretionary authority under sec_301_9100-1 to grant an extension of time for parent to file the election provided that parent shows it acted reasonably and in good_faith that the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and that granting relief will not prejudice the interests of the government information affidavits and representations submitted by company official outside tax professionals and authorized representatives explain the circumstances that resulted in the failure_to_file the election the information establishes that outside tax professionals were responsible for the election that parent relied on them timely to make the election and that the government will not be prejudiced if relief is granted see sec_301_9100-3 based on the facts and information submitted including the representations that have been made we conclude that parent acted reasonably and in good_faith in failing timely to file the election that the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and that granting relief will not prejudice the interests of the government accordingly we grant an extension of time under sec_301_9100-1 until days from the date_of_issuance of this letter for parent as the common parent of the consolidated_group to file the election the above extension of time is conditioned on parent's having had a valid disposition of the stock of subsidiary in its taxable_year ending on date a ie that in fact parent's stock in subsidiary became worthless in its taxable_year ending on date a and the taxpayers' parent's and subsidiary's tax_liability being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely filed taking into account the time_value_of_money no opinion is expressed as to the taxpayers' tax_liability for the years involved a determination thereof will be made by the district director's office upon audit or examination of the federal_income_tax returns involved furthermore no opinion is expressed as to the federal_income_tax effect if any plr-112863-99 if it is determined that the taxpayers’ liability is lower sec_301_9100-3 we express no opinion as to whether subsidiary’s stock was worthless if subsidiary’s stock was worthless when it became worthless if subsidiary’s stock was worthless whether parent is entitled to take a deduction under sec_165 if subsidiary's stock was worthless and parent was entitled to take a deduction under sec_165 as to the amount of the deduction if any and when parent was entitled to take the deduction if at all if subsidiary's stock was worthless and parent was entitled to take a deduction under sec_165 whether same constituted a disposition within the meaning of sec_1 a if such constituted a disposition whether parent recognized a loss on such disposition and if such constituted a disposition and parent recognized a loss thereon as to the amount of loss if any and as to the amount of the loss if any disallowed and or allowed under sec_1 c ie computed without taking into account the requirement under sec_1 c or reattribution parent should file the election in accordance with sec_1 c that is parent must amend its return for its taxable_year ending on date a to attach to such return the sec_1 c statement and a copy of this letter see sec_1 c in addition no opinion is expressed as to the tax effects or consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-1 we relied on certain statements and representations made by the taxpayer its employees and its representatives however the district_director should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-1 to file the election penalties and interest that would otherwise be applicable if any continue to apply copies of this letter are being sent to the authorized representatives designated on your power_of_attorney this letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours by assistant chief_counsel corporate counsel to the assistant chief_counsel corporate


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division apr uniform issue list legend account a amount b amount c amount d amount e amount f amount g bank h dear this is in response to a request submitted by letter dated date as supplemented by additional information dated date for a ruling to waive the 60-day rollover requirement contained in sec_408 of the internal_revenue_code code the following facts and representations have been submitted under penalties of perjury in support of the ruling requested you became unemployed when your employer ceased making in september payroll at that time you maintained account a an individual_retirement_account ira described under sec_408 of the code from september february broker to sell shares of stock in mutual funds in your ira with a market_value of amount b and to distribute this sum to you this amount was deposited in a checking account with bank h you used your savings to pay your family’s living_expenses on february with job prospects extremely limited in your area you directed a until your purpose for taking a distribution from your ira was to pay monthly living_expenses while unemployed estimated to be amount c your financial advisor incorrectly advised you that you could only receive a single distribution from your ira in acalendar year but for this incorrect advice you would have only withdrawn funds from your ira as they were needed to pay actual expenses your rational for the distribution of amount b was that your job search could take up to a year in actuality you were able to obtain another job in july june amount d in monthly expenses during this same period you collected unemployment_compensation at the rate of amount e per month and you received income for two contract projects as such you only used a total of amount f of the distribution from your ira for living_expenses the remainder of the distribution from your ira amount g is invested in a certificate of deposit at bank h you would now like to rollover amount b to your ira that you used funds from your ira distribution you actually averaged during the months march through based on the above facts you request that the internal_revenue_service waive the 60-day rollover requirement with respect to the distribution of amount b that you received from account a because the failure to waive such requirement would be against equity or good conscience sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if - i the entire amount received including money and any other_property i is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable contro of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 d revproc_2003_16 2003_4_irb_359 provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented by you indicates that you took a distribution totaling amount b from account a because you were incorrectly advised that you could only receive a single distribution from your ira in a calendar_year you used a total of amount f from this distribution to pay living_expenses while unemployed under these circumstances you could not reasonably satisfy the requirement that funds totaling amount g be deposited in an eligible ira within days of the distribution from account a therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount g you are granted a period of days from the issuance of this ruling letter to make your rollover provided all other requirements of sec_408 except the 60-day requirement are met with respect to such contributions these amounts amount g will be considered rollover_contributions within the meaning of sec_408 as to amount f you used these funds from your ira distribution to pay living_expenses while unemployed the committee report describing legislative intent indicates that the congress enacted the rollover provisions to allow portability between eligible plans including iras using a distribution as a short-term loan to cover personal expenses is not consistent with the intent of congress to allow portability between eligible plans the information presented as to amount f does not demonstrate circumstances that would justify a waiver of the 60-day rollover period pursuant to sec_408 of the code under your circumstances the failure to waive the 60-day requirement as to amount f would not be against equity or good conscience as that term is used in sec_408 d thus amount f will not be considered a valid rollover because the 60-day requirement under sec_408 with respect to amount f will not be satisfied no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter 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 if you wish to inquire about this ruling please contact se t ep ra t1 ld at sincerely yours manager employee_plans technical group enclosures deleted copy of this letter notice of intention to disclose notice


t c memo united_states tax_court seismic support services llc scott a whittington tax_matters_partner petitioner v commissioner of internal revenue respondent docket no filed date scott a whittington pro_se lisa m oshiro for respondent memorandum findings_of_fact and opinion cohen judge in a notice of final_partnership_administrative_adjustment fpaa for and respondent determined that the amounts seismic support services llc seismic paid scott a whittington petitioner were guaranteed payments for services under sec_707 and determined an accuracy-related_penalty under sec_6662 for each year unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure findings_of_fact some of the facts have been stipulated and the stipulated facts are incorporated in our findings by this reference petitioner resided in washington state when he filed the petition petitioner was a seismic design consultant he performed services for tomarco contractor specialties inc tomarco as an employee for years before in petitioner formed seismic so that he could provide services as a contractor rather than as an employee petitioner owned of seismic and management partners llc owned seismic provided consultation services to tomarco as a subcontractor before and during and during the years in issue petitioner and his wife performed services on seismic’s behalf tomarco paid seismic and seismic paid petitioner compensation_for those services seismic paid petitioner dollar_figure in and dollar_figure in seismic labeled the payments distributions on the checks to petitioner seismic filed forms u s return of partnership income for the years in issue seismic claimed management fee deductions of dollar_figure for and dollar_figure for seismic also claimed deductions of dollar_figure and dollar_figure as mileage reimbursement for and respectively seismic did not file employment_tax returns for any periods during the years at issue the fpaa determined that the payments to petitioner were guaranteed payments under sec_707 the corresponding management fee deductions claimed on the returns were disallowed but the net_income of seismic was not adjusted a penalty for negligence was determined for each year because of the mischaracterization of the payments opinion sec_707 provides sec_707 guaranteed payments -- to the extent determined without regard to the income of the partnership payments_to_a_partner_for_services_or_the_use_of_capital shall be considered as made to one who is not a member of the partnership but only for the purposes of sec_61 relating to gross_income and subject_to sec_263 for purposes of sec_162 relating to trade_or_business_expenses guaranteed payments are a partnership_item that must be determined at the partnership level in a proceeding brought under sec_6226 such as this one sec_6221 sec_301_6221-1 sec_301_6231_a_3_-1 proced admin regs once the partnership_item is determined at the partnership level each partner’s affected items can be challenged in a subsequent partner-level proceeding sec_6662 imposes a penalty for negligence when the person responsible for a tax_return fails to make a reasonable attempt to comply with the provisions of the internal_revenue_code or to exercise ordinary and reasonable care in the preparation of the return sec_6662 b and c sec_1_6662-3 income_tax regs petitioner acknowledges that the payments received from seismic during and were received for services he performed and were determined without regard to the income of the partnership he also acknowledges that he was responsible for preparation of seismic’s federal tax returns and that they were prepared without the benefit of consultation with a tax professional he has offered no evidence that contradicts the determinations in the fpaa and the stipulation and his testimony fully support the characterization of the payments as guaranteed payments and not management fees and the appropriateness of the penalties thus the fpaa is sustained on the merits because we reached the same conclusions on the same facts for and in seismic support servs llc v commissioner tcmemo_2014_78 no further discussion is necessary petitioner’s entire position in this case has been predicated on his erroneous beliefs and misunderstandings of the procedural aspects leading to the fpaa in his pretrial memorandum he stated that he intended to call as witnesses each and every irs employee identified in correspondence relating to the fpaa identifying by name five such persons however he had not subpoenaed any witnesses before trial purporting to believe that the court had to issue the subpoenas under seal when the case was called apparently he had read only the first sentence of rule a which is followed by a subpoena including a subpoena for the production of documentary_evidence or electronically stored information signed and sealed but otherwise blank shall be issued to a party requesting it who shall fill it in before service subpoenas may be obtained at the office of the clerk in washington d c or from a trial clerk at a trial session in any event the persons whose names appeared in correspondence sent before the issuance of the fpaa were not proper witnesses this case is a proceeding de novo and our determinations are based on the merits and not on any administrative proceedings before the fpaa was sent see 143_tc_83 62_tc_324 petitioner’s argument as to the authority of the internal_revenue_service to make the determinations in the fpaa is similarly without merit see seismic support servs llc v commissioner at n for the reasons stated decision will be entered for respondent


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 psi b03 plr-149137-09 date march legend ----------------------------------------------------------------------------------------------------- ------------------------ -------------------------- ---------------------- ------- x date date year state ------------- a b c d ---- -- ------------- ------------- dear -------------------- this letter responds to a letter dated date as well as subsequent correspondence submitted on behalf of x by x’s authorized representative requesting a ruling that rental income received by x is not passive_investment_income within the meaning of sec_1362 of the internal_revenue_code facts plr-149137-09 x was incorporated under the laws of state on date and elected under sec_1362 to be an s_corporation effective date x owns leases and manages a single-family residential properties x leases its properties to unrelated individual tenants under rental arrangements involving a term of one year or less that are not net leases x is actively involved in performing all of the leasing and administrative functions necessary for managing its properties including repair and maintenance services specifically x supervises and ensures that all vacancies are properly prepared for re- rental advertizes for new tenants and processes prospective tenant applications including performing credit checks on prospective tenants and negotiating the lease and rental agreements once the property is rented x collects the rent communicates with tenants during their tenancy and monitors tenant compliance with lease terms if a tenant experiences a repair or maintenance problem with the rental property x customarily arranges supervises and pays for the required repair and maintenance work as to major building elements such as the heating and cooling systems plumbing exterior walls and roof in addition x pays all property taxes and maintains the casualty and liability insurance on these properties x has b employees and multiple independent contractors involved in the day-to-day activities associated with its single- family residential rental operations in year x had c in gross rental receipts and incurred d in operating_expenses other than depreciation x also represents it has accumulated_earnings_and_profits x does not engage in any business other than its residential rental operations law and analysis sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that an election under sec_1362 shall be terminated whenever the corporation has accumulated_earnings_and_profits at the close of each of three consecutive taxable years and has gross_receipts for each of such taxable years more than percent of which are passive_investment_income sec_1362 provides that except as otherwise provided in sec_1362 the term passive_investment_income means gross_receipts derived from royalties rents dividends interest and annuities sec_1_1362-2 of the income_tax regulations provides that rents means amounts received for_the_use_of or the right to use property whether real or personal of the corporation plr-149137-09 sec_1_1362-2 provides that rents does not include rents derived in the active trade_or_business of renting property rents received by a corporation are derived in the active trade_or_business of renting property only if based on all the facts and circumstances the corporation provides significant services or incurs substantial costs in the rental business generally significant services are not rendered and substantial costs are not incurred in connection with net leases whether significant services are performed or substantial costs are incurred in the rental business is determined based upon all the facts and circumstances including but not limited to the number of persons employed to provide the services and the types and amounts of costs and expenses_incurred other than depreciation conclusion based solely on the facts submitted and representations made we conclude that the rental income x receives from its operations described above is not passive_investment_income under sec_1362 except as expressly provided herein we express or imply no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion regarding x's eligibility to be an s_corporation further the passive_investment_income rules of sec_1362 are independent of the passive_activity rules of sec_469 unless an exception under sec_469 applies the rental_activity remains passive for purposes of sec_469 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 in accordance with the power_of_attorney on file with this office we are sending a copy of this letter to your authorized representatives 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 in support of the ruling_request it is subject_to verification on examination plr-149137-09 sincerely s leslie h finlow senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes