department of the treasury internal_revenue_service washington d c date cc dom fs fi p tl-n-4283-97 number release date uilc internal_revenue_service national_office field_service_advice memorandum for from deborah a butler assistant chief_counsel field service cc dom fs subject swaption issue this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend taxpayer year year date x y issues whether taxpayer’s method_of_accounting for the upfront payments received under the swap agreements and the premiums received for the swaptions clearly reflects income under notice_89_21 1989_1_cb_651 and sec_446 with respect to the callable corporate debentures in issue whether the clear_reflection_of_income requirement of sec_446 requires taxpayer to amortize certain call_premium and accrued interest_expenses which would otherwise be deductible in full in the year incurred in the same fashion as and over the same time period that the related up front payments from the swaps and premiums for the swaptions are taken into income whether the transactions in issue lacked economic_substance and should be disregarded for tax purposes conclusions even though sec_1_446-3 is not controlling since taxpayer has satisfied the specific rules contained in sec_1_446-3 we conclude that taxpayer has met the standard set forth in notice_89_21 thus taxpayer’s amortization_method is reasonable and therefore its method_of_accounting for the upfront payments received under the swap agreements and the premiums received for the swaptions clearly reflects income for purposes of notice_89_21 and sec_446 this conclusion assumes the transactions have economic_substance with respect to the callable corporate debentures an argument could be made that the clear_reflection_of_income requirement of sec_446 requires taxpayer to amortize certain call_premium and accrued interest_expenses in the same fashion as and over the same time period that the related up front payments from the swaps are taken into income however an argument under sec_446 presupposes that the transactions have some business_purpose or economic_effect outside the creation of tax benefits for the reasons set forth herein we agree with your conclusion that under the facts of this case an economic_substance argument appears to provide a better basis for challenging the transactions further factual development is necessary before conclusive advice can be provided on whether an argument should be pursued that the transactions in issue lacked economic_substance and should be disregarded for tax purposes facts the facts that follow are taken from your field_service_advice fsa request and the materials submitted by the financial product specialist fps the materials submitted by the fps include an excerpt of the revenue agent’s report rar and taxpayer’s rebuttal in year taxpayer decided to retire various of its outstanding u s dollar- denominated callable corporate debentures by exercising a call provision included in the debentures’ terms for each debenture in question that provision allowed taxpayer to retire the debenture in advance of its stated maturity_date by paying to the holders thereof in addition to interest and principal otherwise due them a specified call_premium the amount of the call_premium required to retire a particular debenture varied depending on the point in time that taxpayer elected to exercise the call provision the closer the call was to the original maturity_date the smaller was the call_premium in connection with the contemplated call of each of the debentures in issue taxpayer granted an unrelated third party the counterparty a swaption for which taxpayer received a premium the swaption entitled the counterparty as grantee thereof an option which upon exercise required taxpayer to enter into an interest_rate_swap with the counterparty in each instance the terms of the interest_rate_swap relating to a particular debenture which ranged in term from x to y years required taxpayer to make periodic fixed interest rate-based payments based on a notional_principal_amount the interest_rate_swap required the counterparty to make periodic floating interest rate-based payments based on the same notional_principal_amount although the notional_principal_amount declined over the term of the swap in every case the initial notional_principal_amount specified by the swap equaled or was within a few hundred thousand dollars of the outstanding face_amount of the associated debenture as of the exercise date of the underlying swaption in addition the interest_rate_swap arising from the exercise of each swaption called for the counterparty to make two upfront payments the upfront payments to taxpayer one payment the interest amount was structured to equal the accrued interest if any on the associated debenture as of the effective date of the swap the other upfront payment the additional fee was structured to equal the call_premium required to call the associated debenture as of the effective date of the swap the swaption associated with each of the debentures at issue was exercised by the holder thereof in each instance immediately following exercise taxpayer elected to call the related debenture on the effective date of the swap taxpayer amortized the upfront payments received under the swap agreements in year and the premiums received with respect to the swaptions in year over the term of the corresponding swap agreements therefore taxpayer reported only a ratable portion of this income on its year return taxpayer cites notice_89_21 1989_1_cb_651 as authority for this treatment with respect to each debenture taxpayer claimed a deduction in year the year the debentures were called for the full amount of the accrued interest and call_premium paid that year in connection with the call of the debentures taxpayer cites as authority for its deduction inter alia sec_163 and the regulations thereunder on date the fps issued a revised form_5701 challenging taxpayer’s treatment of the accrued interest_expense and call_premium specifically the fps asserts that taxpayer’s treatment of those amounts does not achieve a clear_reflection_of_income and proposes under the authority of sec_446 to require taxpayer in the case of each debenture to amortize those amounts in the same fashion as and over the same time period that the upfront payments are taken into income law and analysis sec_446 provides that taxable_income shall be computed under the method_of_accounting on the basis of which the taxpayer regularly computes his income in keeping his books sec_446 provides that if no method_of_accounting has been regularly used by the taxpayer or if the method used does not clearly reflect income the computation of taxable_income shall be made under such method as in the opinion of the secretary does clearly reflect income sec_446 provides that subject_to sub sec_446 and sec_446 a taxpayer may compute taxable_income under any of the following methods_of_accounting the cash_receipts_and_disbursements_method an accrual_method any other method permitted by subtitle a chapter 1e or any combination of the foregoing methods permitted under regulations prescribed by the secretary sec_1_446-1 provides in part that the term method_of_accounting includes not only the over-all method_of_accounting of the taxpayer but also the accounting treatment of any item upfront payments received under the swap agreements premiums received for the swaptions taxpayer amortized the upfront payments received under the swap agreements in year and the premiums received with respect to the swaptions in year over the term of the corresponding swap agreements as authority for this treatment taxpayer cites notice_89_21 1989_1_cb_651 notice_89_21 published on date provides guidance with respect to the federal_income_tax treatment of lump-sum payments received in connection with interest rate and currency swap contracts interest rate cap contracts and similar financial products notional_principal_contracts notice_89_21 provides that in the case of a payment received during one taxable_year with respect to a notional_principal_contract where such payment relates to the obligation to make a payment or payments in other taxable years under the contract a method_of_accounting that properly recognizes such payment over the life of the contract clearly reflects income notice_89_21 provides further that including the entire amount of such payment in income when it is received or deferring the entire amount of such payment to the termination of the contract does not clearly reflect income and is an impermissible method_of_accounting notice_89_21 provides that regulations will be issued under sec_61 sec_446 sec_451 sec_461 and sec_988 providing specific rules regarding the manner in which a taxpayer must amortize or take into account over the life of a notional_principal_contract payments made or received with respect to the contract notice_89_21 provides that in the case of lump-sum payments made or received with respect to notional_principal_contracts entered into or assignments made prior to the effective date of the regulations including contracts entered into prior to the publication_date of notice a method_of_accounting used by a taxpayer is a method that clearly reflects income only if the payments are taken into account over the life of the contract using a reasonable method of amortization notice_89_21 provides further that for contracts entered into prior to the effective date of the regulations the commissioner will generally treat a method_of_accounting as clearly reflecting income if it takes such payments into account over the life of the contract under a reasonable amortization_method whether or not the method satisfies the specific rules in the forthcoming regulations on date the service published proposed_regulations under sec_446 and sec_1092 see 1991_2_cb_951 the proposed_regulations as revised by t d 1993_2_cb_215 were subsequently adopted as final regulations the final regulations are effective for notional_principal_contracts entered into on or after date sec_1_446-3 the final regulations were amended by t d 1994_2_cb_76 sec_1_446-3 provides in part that a notional_principal_contract is a financial_instrument that provides for the payment of amounts by one party to another at specified intervals calculated by reference to a specified_index upon a notional_principal_amount in exchange for specified consideration or a promise to pay similar amounts notional_principal_contracts governed by sec_1_446-3 include interest rate swaps currency swaps basis swaps interest rate caps interest rate floors commodity swaps equity swaps equity index swaps and similar agreements sec_1_446-3 in the instant case the terms of the interest_rate_swap relating to a particular debenture which ranged in term from x to y years required taxpayer to make periodic fixed interest rate-based payments based on a notional_principal_amount the terms required the counterparty to make periodic floating interest rate-based payments based on the same notional_principal_amount thus each swap falls within the definition of a notional_principal_contract under sec_1 c i however since the swap agreements were entered into before date sec_1_446-3 does not apply notice_89_21 as cited above includes interest rate swaps in the definition of notional_principal_contract under notice_89_21 in the case of notional_principal_contracts entered into before the effective date of the final regulations the commissioner will generally treat a method_of_accounting as clearly reflecting income if it takes lump-sum payments made or received with respect to the notional_principal_contract into account over the life of the contract under a reasonable amortization_method whether or not the method satisfies the specific rules contained in sec_1_446-3 with respect to the swaptions the terms of the swaption agreement entitled the counterparty as grantee of the swaption an option which upon exercise required taxpayer to enter into an interest_rate_swap with the counterparty sec_1_446-3 provides that an option or forward_contract that entitles or obligates a person to enter into a notional_principal_contract is not a notional_principal_contract but payments made under such an option or forward_contract may be governed by sec_1_446-3 however as with the swaps in issue since the swaptions were entered into before date sec_1_446-3 does not apply even though sec_1_446-3 is not controlling if taxpayer demonstrates that it has satisfied the specific rules contained in sec_1 a strong argument could be made that under the standard set forth in notice_89_21 taxpayer’s amortization_method is reasonable and therefore its method_of_accounting clearly reflects income for purposes of notice_89_21 and sec_446 sec_1_446-3 which provides special rules for options and forwards to enter into notional_principal_contracts provides as follows an option or forward_contract that entitles or obligates a person to enter into a notional_principal_contract is subject_to the general rules of taxation for options or forward contracts any payment with respect to the option or forward_contract is treated as a nonperiodic_payment for the underlying notional_principal_contract under the rules of paragraphs f and g or g of this section if and when the underlying notional_principal_contract is entered into sec_1_446-3 defines a nonperiodic_payment as follows a ny payment made or received with respect to a notional_principal_contract that is not a periodic_payment as defined in sec_1_446-3 or a termination_payment as defined in sec_1_446-3 examples of nonperiodic payments are the premium for a cap or floor agreement even if it is paid in installments the payment for an off market swap agreement the prepayment of part or all of one leg of a swap and the premium for an option to enter into a swap if and when the option is exercised the purpose of the final regulations is to enable the clear reflection of the income and deductions from notional_principal_contracts by prescribing accounting methods that reflect the economic_substance of such contracts sec_1_446-3 under sec_1_446-3 significant nonperiodic payments on a swap contract may be recharacterized as embedded loans however there is no definition of significant for these purposes for purposes of our response we assume without concluding that even if sec_1_446-3 were to apply sec_1_446-3 would not apply to the instant swaps sec_1_446-3 concerning caps and floors that are significantly in-the-money is reserved thus the payment received by taxpayer with respect to the swaption--that is the premium for an option to enter into a swap if and when the option is exercised--falls within the definition of a nonperiodic_payment under sec_1_446-3 similarly each upfront payment received by taxpayer with respect to the swap--that is the payment for an off market swap agreement--falls within the definition of a nonperiodic_payment under sec_1_446-3 the recognition rules with respect to nonperiodic payments are set forth in sec_1_446-3 sec_1_446-3 provides that in general all taxpayers regardless of their method_of_accounting must recognize the ratable daily_portion of a nonperiodic_payment for the taxable_year to which that portion relates generally a nonperiodic_payment must be recognized over the term of a notional_principal_contract in a manner that reflects the economic_substance of the contract the general_rule for swaps is contained in sec_1_446-3 a nonperiodic_payment that relates to a swap must be recognized over the term of the contract by allocating it in accordance with the forward rates of a series of cash-settled forward contracts that reflect the specified_index and the notional_principal_amount for purposes of this allocation the forward rates or prices used to determine the amount of the nonperiodic_payment will be respected if reasonable in the instant case taxpayer amortized the upfront payments received under the swap agreements in year and the premiums received with respect to the swaptions in year over the term of the corresponding swap agreements therefore taxpayer reported only a ratable portion of this income on its year return as demonstrated above this treatment is consistent with sec_1_446-3 and more specifically with the recognition rules set forth in sec_1_446-3 accordingly even though sec_1_446-3 is not controlling since taxpayer has satisfied the specific rules contained in sec_1_446-3 we conclude that taxpayer has met the standard set forth in notice_89_21 thus taxpayer’s amortization_method is reasonable and therefore its method_of_accounting for the upfront payments received under the swap agreements and the premiums received for the swaption clearly reflects income for purposes of notice_89_21 and sec_446 the foregoing discussion assumes the transactions have economic_substance an issue we discuss below call premiums and accrued interest for callable corporate debentures with respect to the callable corporate debentures taxpayer deducted the call_premium and accrued interest in accordance with sec_163 sec_163 provides that there shall be allowed as a deduction all interest_paid or accrued within the taxable_year on indebtedness sec_163 provides that in the case of any debt_instrument issued after date the portion of the original_issue_discount with respect to such debt_instrument which is allowable as a deduction to the issuer for any taxable_year shall be equal to the aggregate daily portions of the original_issue_discount for days during such taxable_year sec_1_163-4 provides generally that if bonds are issued by a corporation and are subsequently repurchased by the corporation at a price in excess of the issue_price plus any amount of original_issue_discount deducted prior to repurchase or minus any amount of premium returned as income prior to repurchase the excess of the repurchase price over the issue_price adjusted for amortized premium or deducted discount is deductible as interest for the taxable_year thus with respect to the call of the debentures taxpayer’s method_of_accounting conforms with a permissible method_of_accounting nevertheless the fps argues that the clear_reflection_of_income requirement of sec_446 requires taxpayer to amortize the call_premium and accrued interest_expenses which would otherwise be deductible in full in the year incurred in the same fashion as and over the same time period that the related up front payments from the swaps are taken into income as discussed above sec_446 allows the commissioner to recompute taxable_income under a method_of_accounting that clearly reflects income if the method_of_accounting used by a taxpayer fails to clearly reflect income the commissioner may even challenge a taxpayer’s use of a method_of_accounting specifically authorized by the code or the regulations if the method results in a material distortion in taxable_income and therefore does not clearly reflect income 71_f3d_209 6th cir aff’g 102_tc_87 court reviewed income is clearly reflected by deducting from gross_income for the taxable_year the costs and expenses attributable to the production of that income during the year u s v anderson 269_us_422 the concept of matching income and related expenditures however is not absolute u s v hughes properties inc 476_us_593 nevertheless under sec_446 the commissioner has the authority to require that a taxpayer’s reporting of a transaction conform to the economic reality of that transaction see 882_f2d_820 3rd cir thus an argument could be made that the clear_reflection_of_income requirement of sec_446 requires taxpayer to amortize certain call_premium and accrued interest_expenses in the same fashion as and over the same time period that the related up front payments from the swaps are taken into income however an argument under sec_446 presupposes that the transactions have some business_purpose or economic_effect outside the creation of tax benefits for the reasons set forth herein we agree with your conclusion that under the facts of this case an economic_substance argument appears to provide a better basis for challenging the transactions economic_substance in addition to the commissioner’s authority under sec_446 the commissioner also may disregard a transaction for federal tax purposes where the transaction lacks economic_substance a transaction that is devoid of economic_substance is not recognized for federal tax purposes even where the form of a transaction satisfies the literal requirements of the statutes or regulations acm partnership v commissioner tcmemo_1997_115 aff’d 157_f3d_231 3rd cir cert_denied 119_sct_1251 since its recognition in the case of 293_us_465 the economic_substance theory has generally been construed to mean that a transaction may be completely disregarded for federal tax purposes if it serves no business_purpose and lacks any significant economic_effect other than the creation of tax benefits see also acm partnership v commissioner supra the test for determining whether a transaction or series of transactions lack economic_substance was recently set forth by the third circuit in acm partnership v commissioner supra as including inquiries into the objective economic_substance of the transactions and the subjective business motivation behind them f 3d pincite in assessing the objective economic_substance of certain transactions the courts have examined dispositions in their broader economic context and refused to recognize them for tax purposes where other aspects of a taxpayers’ transactions offset the consequences of the disposition resulting in no net change in the taxpayer’s economic position id pincite in assessing the subjective business motivation behind the transactions the courts have considered whether subjectively the transactions were intended to serve any business_purpose or were reasonably expected to generate a pre-tax profit id pincite however a transaction will not be disregarded merely because it was motivated by tax considerations id pincite therefore even if taxpayer structured the transactions in order to reduce its current tax bill if there are other real non- tax-related changes in taxpayer’s economic position as a result of the transactions the transactions generally will not be disregarded for federal_income_tax purposes id pincite n in the instant case further factual development is necessary before conclusive advice can be provided on whether an argument should be pursued that the transactions in issue lacked economic_substance and should be disregarded for tax purposes case development hazards and other considerations as discussed above an argument could be made that the clear_reflection_of_income requirement of sec_446 requires taxpayer to amortize certain call_premium and accrued interest_expenses which would otherwise be deductible in full in the year incurred in the same fashion as and over the same time period that the related up front payments from the swaps are taken into income although the courts have not delineated the degree to which a distortion between economic_income and taxable_income constitutes a material distortion arguably a deliberate manipulation of the timing rules that is entering a transaction only to take advantage of timing rules that results in a pure tax loss ie absent any economic_substance constitutes a material distortion see 157_f3d_231 3rd cir even without a deliberate manipulation a method may give rise to a material distortion_of_income see ford motor co inc v commissioner supra however an argument under sec_446 presupposes that the transaction has some business_purpose or economic_effect outside the creation of tax benefits accordingly sec_446 should not be asserted if the transactions are determined to have lacked economic_substance even if the transactions are not determined to have lacked economic_substance based upon current case law it appears as if the mismatch that results from the amortization of the upfront payments received on the swaps and the immediate deduction of the call_premium and accrued interest_expenses incurred with respect to the call of the debentures may not rise to the level of a material distortion that allows the commissioner to prohibit the use of specifically authorized methods_of_accounting for the reasons discussed above and because the cases have not uniformly required adherence to the matching principle under sec_446 we agree with your conclusion that under the facts of this case an economic_substance argument appears to provide a better basis for challenging the transactions-- provided that the evidence supports such a challenge absent a material distortion in taxable_income it is uncertain whether a court would disallow taxpayer’s use of a permissible method_of_accounting the circumstances surrounding the sale of the swaptions raise concerns about the economic_substance of the swaptions the underlying swap transactions and in light of the timing the refinancing as a whole the willingness of the counterparty to the swap to make the upfront payments suggests that market interest rates had fallen at the time the refinancing transactions were entered into the fact that in each case the swaption was exercised on the date of purchase suggests that the swaptions were illusory the commissioner’s ability to disregard the swaption alone however may be of little benefit for purposes of matching the related_income and deductions under the final regulations the upfront payments on the swap and the option premium are treated as nonperiodic payments on the swap transaction under sec_1_446-3 under sec_1_446-3 a nonperiodic_payment usually is allocated over the term of the swap contract based upon prices for analogous forward contracts this allocation of upfront payments is similar to the reporting method used by taxpayer and still results in the mismatching with which the service is concerned thus we must look behind the swap transaction itself to determine if and to what extent it might lack economic_substance generally an upfront payment on a swap compensates the recipient for the difference between the contract rate the recipient is paying or receiving and the current market rate if the facts indicate that interest rates declined substantially between the original issuance of the debentures and the date of the related swaption then the option premium and other upfront payments on the swap transaction may represent the present_value at the time the swap terms were set of the excess of the fixed rate paid on the swap over an arms length fixed rate if the libor rate and fixed interest rate that were part of the swap transaction did not represent going market rates but rather were agreed to in order to pull the value of the decline in interest rates into current cash_flow it would appear that the transaction had a non-tax economic benefit to taxpayer on the other hand if market interest rates had not declined and if the amounts that the swap counterparty paid up front to taxpayer represented only the fair_market_value of the option_privilege ie the legal right of the counterparty to not enter into the swap then there would have been no reason for taxpayer to enter those transactions other than to obtain tax benefits with respect to the economic_substance argument based on the available facts it appears that the upfront payments received by taxpayer represent an embedded value in the swap transaction due to the decline in market interest rates for the forgoing reasons we conclude that further factual development is necessary before conclusive advice can be provided on whether an argument should be pursued that the transactions in issue lacked economic_substance and should be disregarded for tax purposes please call if you have any further questions by carol p nachman special counsel financial institutions products branch cc joseph f maselli cc ner


internal_revenue_service number release date index numbers ----------------------------------------------- --------------------------------- ----------------------- --------------------------------------------------- --------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------- id no ------------- telephone number --------------------- refer reply to cc psi plr-144487-08 date date legend x --------------------------------------------------- --------------------------------- d country ---------------------- ---------- dear ---------------- this is in response to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts according to the information submitted x was formed under the laws of country x intended to be treated as a disregarded_entity for federal tax purposes effective d however x inadvertently failed to timely file form_8832 entity classification election to be treated as a disregarded_entity for federal tax purposes law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can plr-144487-08 elect its classification for federal tax purposes an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with a single owner having limited_liability may elect to be treated as a disregarded_entity pursuant to the rules of sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed under sec_301_9100-1 the commissioner may 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 section b defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards that the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides rules for requesting extensions of time for 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 conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to make an election to be treated as a disregarded_entity for federal tax purposes effective d x must make the election by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the form except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter plr-144487-08 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely curt g wilson curt g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number release date index number ----------------------------------- ----------------------- ---------------------------- --------------------------------- ------------------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------- id no ----------------- telephone number --------------------- refer reply to cc corp b03 plr-147862-10 date date legend parent ---------------------------------------------------------------------- -------------------------------------------------------------- ------------------------------------------ subsidiary ------------------------------- ------------------------------------------------------------------------- ----------------------- date date date date date date date date date ----------------- ----------------- ------------------- ------------------- -------------------------- ---------------------- --------------------- -------------------------- ------------------- plr-147862-10 date --------------------------- fiscal_year end ------------- company official --------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------- ------------------------------ team manager -------------------------------------------------------------------------- ---------------------------------------------------------- ----------------------------------------------------------- ------------------------------------------------------------------- dear -------------- this responds to your letter dated date requesting an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file an election the extension is being requested for parent and the members of its affiliated_group to make an election to file a consolidated federal_income_tax return with parent as the common parent under sec_1_1502-75 of the income_tax regulations hereinafter referred to as the election for the taxable_year ending date the material information submitted for consideration is summarized below parent is a corporation that was formed on date on date parent acquired all of the stock of subsidiary the date acquisition prior to the date acquisition subsidiary was the common parent of a consolidated_group with a fiscal_year ending fiscal_year end the date acquisition terminated the subsidiary consolidated_group notwithstanding that the date acquisition terminated the subsidiary consolidated_group subsidiary and its subsidiaries continued to file a consolidated_return as if the subsidiary group had not terminated that is as a consolidated_group with subsidiary as the common parent with a taxable_year ending on date hereinafter this return may be referred to as the incorrect subsidiary date return parent filed its own separate_return using a calendar_year taxable_year an election for the parent affiliated_group to file a consolidated_return for its taxable_year ending date was due on the last day prescribed by law including extensions of time for filing parent’s return but for various reasons a valid election was not filed the period of limitations on assessment under sec_6501 for parent’s taxable_year ending date and for any subsequent year will not expire prior to date plr-147862-10 parent and subsidiary have represented that they did not seek to alter a return position for which an accuracy-related_penalty has been or could have been imposed under sec_6662 of the code at the time they requested relief and the new position requires or permits a regulatory election for which relief is requested sec_1_1502-75 provides that a group which did not file a consolidated_return for the immediately preceding_taxable_year may file a consolidated_return in lieu of separate returns for the taxable_year provided that each corporation which has been a member of the group during any part of the taxable_year for which the consolidated_return is to be filed consents to the regulations under sec_1502 if a group wishes to exercise its privilege of filing a consolidated_return such consolidated_return must be filed not later than the last day prescribed by law including extensions of time for filing the common parent’s return under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner 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 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the election is fixed by the regulations ie sec_1_1502-75 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant an extension of time for the parent affiliated_group to file the election provided parent shows it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by parent and company official explain the circumstances that resulted in the failure to timely file the election the information establishes that the request for relief was filed before the failure to make the election was discovered by the internal_revenue_service see sec_301_9100-3 based on the facts and information submitted including the representations made we conclude that parent has shown it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted plr-147862-10 under sec_301_9100-1 until date for parent to file the election by filing a consolidated_return with parent as the common parent and attaching a form_1122 for each subsidiary member for the taxable_year ending date parent subsidiary and its subsidiaries must amend their previously filed returns in the manner described in the paragraph below and must attach a copy of this letter to such returns alternatively if such returns are filed electronically the requirement of attaching a copy of this letter to the returns may be satisfied by attaching a statement to the returns that provides the date and control number of the letter_ruling in addition a copy of the amended returns should be sent directly to team manager the incorrect subsidiary date return and any subsequent return filed by subsidiary as if it were the common parent of its own group must be amended to report the income gain deduction loss and credit for each corporation included on the incorrect subsidiary date return or subsequent return filed by subsidiary on the proper return that is the items from date through date must be reported on a final consolidated_return of the subsidiary group for the period ending date the items from date through date must be reported on separate_income tax returns for each corporation any items from date or later for which the corporation was a member of the parent consolidated_group must be reported on the appropriate consolidated_return of the parent consolidated_group the above extension of time is conditioned on the taxpayers’ parent’s consolidated group’s subsidiary’s and its subsidiaries’ tax_liability if any being not lower in the aggregate for all taxable years impacted by the election than it would have been if the election had been timely made 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 director’s office upon audit of the federal_income_tax returns involved we express no opinion with respect to whether parent subsidiary and its subsidiaries qualify substantively to file a consolidated_return in addition we express no opinion as to the tax effects or consequences of filing the election late under the provisions of any other section of the code or regulations or as to the tax treatment of any conditions existing at the time of or effects resulting from filing the return or 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 parent and company official however the director should verify all essential facts moreover 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 still apply plr-147862-10 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer s who requested it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely _ken cohen_____________ ken cohen senior technician reviewer branch office of associate chief_counsel corporate


internal_revenue_service number release date index number ------------------------------------------- ---------------------------------------------- ---------------------------------------------------- -------------------------------- ---- ---- --------------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------- telephone number -------------------- refer reply to cc corp b05 plr-138278-10 date date legend parent ---------------------------------------------------------- --------------------------------------------------------------------------------- subsidiary ---------------------------------------------------------- --------------------------------------------------------------------------------- parent official a ----------------------------------------- --------------------------------------------------------------------------------- parent official b ----------------------------------------- --------------------------------------------------------------------------------- date a -------------------------- dear ---------------- this letter responds to a letter dated date requesting an extension of time under sec_301_9100-1 et seq of the procedure and administration regulations to file an election in particular parent is requesting an extension of time to file a statement under sec_1_337_d_-2t c of the income_tax regulations the election all citations in this letter to sec_1_337_d_-2t and sec_1_1502-80 are to the version of the regulations in effect for parent’s taxable_year ended date a the material information submitted for consideration is summarized below prior to and during the taxable_year ended date a parent was the common parent of an affiliated_group_of_corporations that joined in filing a consolidated_return for u s federal_income_tax purposes the parent consolidated_group subsidiary was a plr-138278-10 direct wholly-owned subsidiary of parent and a member of the parent consolidated_group parent claims that during the taxable_year ended date a its investment in subsidiary became worthless under sec_165 of the internal_revenue_code and sec_1_1502-80 in order for parent to claim a loss on its stock in subsidiary under sec_165 of the internal_revenue_code an election under sec_1_337_d_-2t c was required to be filed with or as part of the parent consolidated group's return for the taxable_year ended date a however for various reasons the election was not filed after the due_date for the election it was discovered that the election had not been filed subsequently this request was submitted sec_1_337_d_-2t a provides a general_rule that 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_337_d_-2t a ii provides that a disposition means any event in which gain_or_loss is recognized in whole or in part sec_1_337_d_-2t c provides that loss is not disallowed under sec_1 d - 2t a to the extent the taxpayer establishes that the loss is not attributable to the recognition of built-in_gain on the disposition of an asset including stock and securities sec_1_337_d_-2t c provides that sec_1_337_d_-2t c applies with respect to stock of a subsidiary only if a separate statement entitled sec_1_337_d_-2t c statement is included with the return in accordance with sec_1_337_d_-2t c sec_1_337_d_-2t c provides that the statement required under sec_1 d - 2t c must be included with or as part of the taxpayer's return for the year of the disposition in general sec_1_337_d_-2t applies with respect to dispositions on or after date and before date if loss is recognized because stock of a subsidiary became worthless the disposition with respect to the stock is treated as occurring on the date the stock became worthless sec_1_1502-80 provides that stock of a member is not treated as worthless under sec_165 before the stock is treated as disposed of under the principles of sec_1 c iii 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 plr-138278-10 internal_revenue_code except subtitles e g h and i 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 to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 the time for filing the election is fixed by the regulations ie sec_1 d - 2t c therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time for parent to file the election provided parent establishes that 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 parent parent official a and parent official b explain the circumstances that resulted in the failure to timely file the election the information establishes that parent reasonably relied on a qualified_tax professional who failed to make or advise parent to make the election and that the request for relief was filed before the failure to make the election was discovered by the internal_revenue_service see sec_301_9100-3 and v based on the facts and information submitted including the affidavits submitted and the representations made we conclude that parent has established that it acted reasonably and in good_faith in failing to timely 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 provided the parent consolidated_group qualifies substantively to file the election we grant an extension of time under sec_301_9100-3 until sixty days from the date on this letter for parent to file the election the above extension of time is conditioned on the parent consolidated group's tax_liability if any not being lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money we express no opinion as to the parent consolidated group's tax_liability for the years involved a determination thereof will be made by the director's office upon audit of the federal_income_tax returns involved further we express no opinion as to the federal_income_tax effect if any if it is determined that the parent consolidated group's tax_liability is lower sec_301 c plr-138278-10 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular we express no opinion with respect to whether parent qualifies substantively to make the election or whether or when parent’s investment in subsidiary became worthless in addition we express no opinion as to the tax effects or consequences of filing the election late under the provisions of any other section of the internal_revenue_code or 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 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 request for the ruling it is subject_to verification on examination in addition notwithstanding that an extension is granted under sec_301_9100-3 to file the election any penalties and interest that would otherwise be applicable continue to apply this ruling letter is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively a taxpayer filing its returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely _ken cohen_________________ ken cohen senior technician reviewer branch office of associate chief_counsel corporate cc


t c memo united_states tax_court slawomir j fiedziuszko and alicia m fiedziuszko petitioners v commissioner of internal revenue respondent docket no filed date slawomir j fiedziuszko and alicia m fiedziuszko pro sese nicholas r rosado for respondent memorandum findings_of_fact and opinion pugh judge in a notice_of_deficiency dated date respondent determined a deficiency of dollar_figure in petitioners’ federal_income_tax for and a penalty under sec_6662 of dollar_figure the issues for decision after concessions are whether mr fiedziuszko was a statutory or a common_law_employee whether petitioners are entitled to deduct expenses on schedule c profit or loss from business whether petitioners are entitled to deduct dollar_figure of medical and dental expenses whether petitioners are entitled to deduct dollar_figure of charitable_contributions whether petitioners had unreported pension income of dollar_figure and whether petitioners are liable for an accuracy- related penalty pursuant to sec_6662 findings_of_fact some of the facts have been stipulated and the stipulated facts are incorporated in our findings by this reference petitioners resided in palo alto california at the time the petition was timely filed i mr fiedziuszko’s consulting business in mr fiedziuszko was a semiretired aerospace engineer and worked as a consultant for space systems loral loral mr fiedziuszko found work as a consultant by attending conferences and traveling to visit potential clients he unless otherwise indicated all section references are to the internal_revenue_code_of_1986 as amended and in effect for the year in issue rule references are to the tax_court rules_of_practice and procedure and dollar amounts are rounded to the nearest dollar entered a contract to provide consulting services to loral through west valley engineering co west valley a temporary employment agency used by loral to hire consultants mr fiedziuszko’s contract with loral began in and ended in date he worked primarily from home on a satellite development project flexible satellite producing reports and components for loral west valley made weekly deposits into petitioners’ checking account under the entry west valley engi payroll which included a date that was two days before the actual deposit and the last four digits of mr fiedziuszko’s social_security_number thus the deposit made on date included a date most weeks the deposit was dollar_figure although there was some variation the last deposit was made on date west valley processed mr fiedziuszko’s pay for his work for loral and withheld federal_income_tax as well as social_security and medicare taxes west valley did not offer medical or dental insurance paid vacation_leave or reimbursement of mr fiedziuszko’s expenses but it did offer a deferred_compensation plan west valley checked the statutory_employee box on mr fiedziuszko’ sec_2011 form_w-2 wage and tax statement to indicate that he was a statutory_employee for but west valley did not check the box on mr fiedziuszko’ sec_2012 form_w-2 to indicate that he was a statutory_employee for petitioners filed a joint form_1040 u s individual_income_tax_return for which they prepared themselves on that form_1040 they took the position that mr fiedziuszko was a statutory_employee petitioners claimed deductions on schedule c of their form_1040 for the following expenses related to mr fiedziuszko’s consulting business dollar_figure for supplies dollar_figure for travel including meals_and_lodging dollar_figure for insurance other than health and dollar_figure for advertising in addition they claimed a dollar_figure deduction for self- employed health insurance on their form_1040 the record contains no substantiation for these deductions other than statements of fact that outline mr fiedziuszko’s business_expenses which he prepared for trial ii medical and dental expenses mrs fiedziuszko was diagnosed with morbid obesity in mr fiedziuszko also was considered obese and displayed prediabetic indications petitioners were counseled by their doctor to enter a medically supervised weight- loss program they entered a program designed by health management resources hmr and administered through the palo alto medical foundation and were supervised by a health educator petitioners reported dollar_figure of deductible medical_expenses for the cost of the hmr program petitioners also reported medical and dental expenses for the cost of a root canal for mrs fiedziuszko and for mr fiedziuszko’s medicare part b premiums in total petitioners claimed dollar_figure of medical expense deductions that respondent disallowed the record includes a printout from palo alto medical foundation’s website that provides information about its weight-loss services a statement prepared by mr fiedziuszko for trial lists the dates and amounts of payments for the hmr program the statement separates the hmr expenditures made for mrs fiedziuszko from those made for mr fiedziuszko but only those for mrs fiedziuszko have corresponding check numbers iii charitable_contributions petitioners claimed charitable_contribution deductions of dollar_figure in cash contributions and dollar_figure in noncash contributions for of which respondent disallowed dollar_figure mr fiedziuszko made periodic cash contributions to st albert church in san jose california of dollar_figure or more the record contains calendar pages for with numbers handwritten on most sundays a few entries list church and a number and others have an illegible word and a number but many of the entries are simply a number usually no other documentation in the record supports the cash contributions petitioners also made noncash contributions to goodwill of silicon valley in petitioners claimed that they made the following noncash contributions to goodwill a dollar_figure donation on date a dollar_figure donation on date a dollar_figure donation on date a dollar_figure donation on date a dollar_figure donation on date a dollar_figure donation on date and a dollar_figure donation on date the donations included furniture clothing paintings electronics collectibles and miscellaneous household goods the record includes a list prepared by mr fiedziuszko during the audit of the noncash contributions along with each item’s claimed fair_market_value which was simply the listed sale price for a similar item that mr fiedziuszko found on ebay com or amazon com as of date mr fiedziuszko completed receipts for the noncash contributions to goodwill his handwritten lists of items donated and the estimated values of those items appear in the section of goodwill’s receipts labeled items donated for donor’s use and donor’s estimated value iv pension income in petitioners received pension and annuity payments totaling dollar_figure reported on forms 1099-r distributions from pensions annuities retirement or profit-sharing_plans iras insurance contracts etc of the dollar_figure petitioners reported only dollar_figure as taxable however all of the forms 1099-r indicated that the pension income reported as paid to petitioners was taxable v notice_of_deficiency and petition respondent issued a notice_of_deficiency on date making the following adjustments to petitioners’ return mr fiedziuszko was not a statutory_employee for the tax_year and thus could not report business income and expenses on schedule c petitioners failed to substantiate deductions for business_expenses petitioners failed to substantiate deductions for medical and dental expenses petitioners failed to substantiate deductions for charitable_contributions and petitioners failed to report includible pension income the notice_of_deficiency also determined a penalty under sec_6662 and b and for an underpayment due to a substantial_understatement_of_income_tax and or negligence the record includes a completed civil penalty approval form with a signature on the line provided on the form for group manager approval to assess penalties identified above i burden_of_proof opinion ordinarily the burden_of_proof in cases before the court is on the taxpayer rule a 290_us_111 under sec_7491 in certain circumstances the burden_of_proof may shift from the taxpayer to the commissioner petitioners have not claimed or shown that they meet the specifications of sec_7491 to shift the burden_of_proof to respondent as to any relevant factual issue ii mr fiedziuszko’s employment status the income_tax treatment of a taxpayer’s trade_or_business expense deductions under sec_62 depends on whether the taxpayer is performing services as an employee or as an independent_contractor generally an employee may deduct unreimbursed employee business_expenses on schedule a itemized_deductions as miscellaneous_itemized_deductions while an as explained infra pp we are reopening the record to admit the civil penalty approval form and a declaration of internal_revenue_service irs examiner lin-li shuy insofar as it authenticates the civil penalty approval form for purposes of fed r evid independent_contractor may deduct trade_or_business_expenses on schedule c see sec_62 sec_162 sec_212 an employee treated as a statutory_employee for purposes of employment_tax is not an employee for purposes of sec_62 and may report business income and expenses on schedule c and avoid the schedule a limitations on the deduction of unreimbursed employee business_expenses and the phaseout_of_itemized_deductions see rosato v commissioner tcmemo_2010_39 wl at citing revrul_90_93 c b sec_3121 defines employee in pertinent part as any individual other than an individual who is a corporate officer or common_law_employee who performs services for remuneration for any person-- c as a home worker performing work according to specifications furnished by the person for whom the services are performed on materials or goods furnished by such person which are required to be returned to such person or a person designated by him sec_67 limits itemized_deductions by allowing miscellaneous itemized deductions--defined in sec_67 b --only to the extent that they exceed of adjusted_gross_income agi unreimbursed employee business_expenses are miscellaneous_itemized_deductions see sec_62 sec_67 sec_68 provides that otherwise allowable itemized_deductions are limited for taxpayers whose agi exceeds an applicable_amount by the lesser_of of the excess of agi over the applicable_amount or of the amount of itemized_deductions otherwise allowable for the taxable_year if the contract_of_service contemplates that substantially_all of such services are to be performed personally by such individual see 117_tc_263 petitioners’ eligibility to deduct expenses on schedule c depends on mr fiedziuszko’s status as a common_law_employee we therefore must decide whether mr fiedziuszko was a common_law_employee we apply common_law rules to determine whether an individual is a common_law_employee 503_us_318 weber v commissioner 103_tc_378 aff’d 60_f3d_1104 4th cir whether an individual is a common_law_employee must be determined on the basis of the specific facts and circumstances involved 89_tc_225 aff’d 862_f2d_751 9th cir 64_tc_974 we generally consider several factors in making this determination the degree of control exercised by the principal which party invests in the work facilities used by the individual the opportunity of the individual for profit or loss whether the principal can discharge the individual whether the work is part of the principal’s regular business the permanency of the relationship the relationship the parties believed they were creating and the provision of employee_benefits see 503_f2d_423 2d cir ewens miller inc v commissioner t c pincite weber v commissioner t c pincite rosemann v commissioner tcmemo_2009_185 wl at no single factor is determinative ewens miller inc v commissioner t c pincite weber v commissioner t c pincite although not the exclusive inquiry the degree of control exercised by the principal over the individual is the crucial test in determining the nature of the working relationship see 538_us_440 104_tc_140 the principal need not direct the worker’s every move to indicate common_law_employee status the right to do so is sufficient weber v commissioner t c pincite see sec_31_3401_c_-1 employment_tax regs and the degree of control necessary to find that an individual is an employee generally is lower when applied to professional services than when applied to nonprofessional services weber v commissioner t c pincite the fact that an individual provides his or her own tools or owns a vehicle used for work weighs against employee status ewens miller inc v commissioner t c pincite citing breux daigle inc v united_states f 2d 5th cir earning an hourly or fixed salary weighs in favor of employee status while the opportunity for profit or loss weighs against it simpson v commissioner t c pincite kumpel v commissioner tcmemo_2003_265 permanency of a working relationship is indicative of common_law_employee status see rosemann v commissioner wl at the withholding of taxes is consistent with a finding that an individual is a common_law_employee see 63_tc_621 benefits such as health insurance life_insurance and retirement plans are typically provided to employees weber v commissioner t c pincite we find on the record before us that mr fiedziuszko was not a common_law_employee of loral and that he is instead a statutory_employee while his form_w-2 for did not indicate that he was a statutory_employee we believe this to be a mistake mr fiedziuszko’s form_w-2 for indicated that he was a statutory_employee nothing changed between and mr fiedziuszko was providing services under the same consulting contract with loral in as he was in further mr fiedziuszko worked primarily from his home_office rather than loral’s offices and produced reports and patents according to his assignments from loral we therefore find that mr fiedziuszko’s employment status did not change from to we also conclude that both mr fiedziuszko and loral intended to form an independent consulting relationship rather than a common_law employee-employer relationship mr fiedziuszko advertised his services to several satellite companies and was hired by loral through the temporary employment agency west valley with which loral works their relationship was a temporary assignment that terminated in date the evidence in the record weighing against statutory_employee status appears consistent with an error by west valley in classifying mr fiedziuszko the weekly payroll deposits into his checking account and west valley’s withholding federal and state income taxes and social_security and medicare taxes from mr fiedziuszko’s pay are consistent with a consulting contract for services we conclude therefore that the totality of the circumstances indicates that mr fiedziuszko was a statutory_employee pursuant to sec_3121 for the tax_year thus petitioners were entitled to report business income and expenses on schedule c of their form_1040 because we conclude that mr fiedziuszko was a statutory_employee for the cost of his self-employed health insurance was properly reported on line of petitioners’ form_1040 rather than on schedule a iii deductions deductions are a matter of legislative grace and a taxpayer must prove his or her entitlement to deductions 503_us_79 292_us_435 taxpayers therefore are required to substantiate expenses underlying each claimed deduction by maintaining records sufficient to establish the amount of the deduction and to enable the commissioner to determine the correct_tax liability sec_6001 116_tc_438 under the cohan_rule the court may estimate the amount of the expense if the taxpayer is able to demonstrate that he has paid_or_incurred a deductible expense but cannot substantiate the precise amount as long as he produces credible_evidence providing a basis for the court to do so 39_f2d_540 2d cir certain business_expenses including travel lodging and meal expenses are subject_to the heightened substantiation requirements of sec_274 sec_274 supersedes the cohan_rule sec_1_274-5t temporary income_tax regs fed reg date sec_274 contemplates that no deduction or credit shall be allowed on the basis of the taxpayer’s mere approximations or unsupported testimony to meet these strict requirements a taxpayer must substantiate the following by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement the amount of the expense the time and place of the travel or use and the business_purpose of the expense sec_274 to substantiate by adequate_records the taxpayer must provide an account book log or similar record and documentary_evidence which together are sufficient to establish each element with respect to an expenditure sec_1_274-5t temporary income_tax regs fed reg date although a contemporaneous log is not required corroborative evidence to support a taxpayer’s reconstruction must have a high degree of probative value to elevate such statement to the level of credibility of a contemporaneous record id subpara a business_expenses petitioners’ claimed deductions for mr fiedziuszko’s travel lodging and meal expenses for marketing and attending conventions are subject_to the heightened substantiation requirements of sec_274 mr fiedziuszko credibly testified that he incurred travel lodging and meal expenses but his testimony did not give us a sufficient basis for determining the amounts of these expenses under sec_274 while he has provided us with his calendar and a statement of facts estimating the timing and costs of the trips the documentary evidence mr fiedziuszko provided is not reliable as he testified at trial he reported the specified amounts in travel lodging and meal expenses because that’s what i recall what i paid petitioners also failed to substantiate expenses reported for mr fiedziuszko’s business supplies the statement in the record listed only a total amount spent on business supplies while mr fiedziuszko testified to the costs of specific supplies at trial he did not provide supporting documentation for instance mr fiedziuszko testified that he spent about dollar_figure on internet and phone services from comcast but the only documentation consists of entries for monthly payments to comcast in petitioners’ checking account statements those statements do not specify for what services the payments were made neither his testimony nor the monthly checking account entries give us any basis on which to allocate between business and personal_use because petitioners did not meet their burden in substantiating mr fiedziuszko’s business_expenses we sustain respondent’s determination b medical and dental expenses sec_213 allows a deduction for the cost of medical_care not paid for by insurance sec_213 the cost of medical_care includes amounts paid for the diagnosis cure mitigation treatment or prevention of disease or for the purpose of affecting any structure or function of the body sec_213 no deduction is allowed for personal living or family_expenses sec_262 indeed an expenditure which is merely beneficial to the general health of an individual such as an expenditure for a vacation is not an expenditure for medical_care sec_1_213-1 income_tax regs a taxpayer may be requested to produce the name and address of each person to whom expenses for medical_care were paid and the date of each payment to receive a deduction under sec_213 sec_1_213-1 income_tax regs if requested by the irs a taxpayer must produce a statement or itemized invoice from the payee showing what kind of treatment was provided and to whom any other expenses and to whom and for what purpose they were incurred and the amount_paid and the date of payment id the irs considers obesity a disease for purposes of sec_213 revrul_2002_19 2002_1_cb_778 uncompensated amounts paid for participation in a weight-loss program as treatment for obesity are expenses for medical_care under sec_213 id petitioners were directed by their physician to enter a medically supervised weight-loss program they enrolled in hmr’s weight-loss program through the palo alto medical foundation we find therefore that petitioners incurred expenses for their treatment in hmr’s program respectively for medical_care under sec_213 even so petitioners failed to substantiate the cost of their treatments at hmr see sec_1_213-1 income_tax regs the statement of expenses that mr fiedziuszko prepared for trial does not satisfy the requirement in the regulation of an itemized statement from the payee--the palo alto medical foundation nor are his statement and testimony sufficient substitutes for an itemized statement from the payee because there is no additional corroborating documentation for the payments c charitable_contributions sec_170 allows a deduction for any charitable_contribution made within the taxable_year if a taxpayer makes a charitable_contribution of property other than money the amount of the contribution is generally equal to the fair_market_value of the property at the time of the contribution see sec_1 170a- c income_tax regs taxpayers must satisfy certain statutory and regulatory substantiation requirements for their charitable_contribution deductions see sec_170 sec_1_170a-13 income_tax regs the nature of the required substantiation depends on the value of the contribution and on whether it is a cash or noncash gift see sec_1_170a-13 income_tax regs cash contributions for cash contributions a taxpayer must retain canceled checks receipts from the donee organizations showing the dates and amounts of the contributions or other reliable written records showing the names of the donees dates and amounts of the contributions see sec_1_170a-13 income_tax regs mr fiedziuszko testified that when he attended church services in he typically would make a cash contribution of at least dollar_figure petitioners produced no records to substantiate these contributions and no evidence showing how often he attended church or how much he gave each time he went other than cryptic calendar entries while we found his testimony that he attended church and made contributions to be credible we have no reliable evidence on which we can base an estimate of the total amount that petitioners contributed in neither his testimony four years after the fact nor his calendar entries many of which consisted of only numbers are sufficient we hold therefore that petitioners have failed to meet the substantiation requirements of sec_1_170a-13 income_tax regs noncash contributions under sec_1_170a-13 income_tax regs a taxpayer must maintain for each noncash contribution a receipt from the donee organization unless doing so is impractical the donee receipt must show the name of the donee organization the date and location of the contribution and a description of the property in detail reasonably sufficient under the circumstances id a taxpayer who lacks a donee receipt is required to keep reliable written records including among other things the name and address of the donee organization to which the contribution was made the date and location of the contribution a description of the property in detail reasonable under the circumstances including the value of the property and the fair_market_value of the property at the time the contribution was made and the method used to determine the fair_market_value id subpara ii see also 136_tc_515 further no deduction is allowed for any contribution of clothing or a household item unless such property is in good used condition or better sec_170 petitioners cannot support the values that mr fiedziuszko assigned on the goodwill receipts for any of the contributed items additionally several of the sec_170 provides that the requirement that a contribution of clothing or household property must be in good used condition or better may not apply when the taxpayer includes a qualified_appraisal of the property with his return which was not done here items petitioners donated were clothing and household_items mr fiedziuszko offered only notes in his statement of facts prepared for trial that described the clothing petitioners donated as like new he did not address the condition of the electronics furniture or dishes and silverware that petitioners donated we find that petitioners failed to present credible_evidence that their donated household_items were in good used condition or better see kunkel v commissioner tcmemo_2015_71 at quoting sec_170 thus we conclude that petitioners did not meet the substantiation requirements in sec_170 and sec_1_170a-13 income_tax regs and will sustain respondent’s disallowance of petitioners’ noncash contribution deductions iv unreported pension income in general gross_income includes all income from whatever source derived including income from pensions and annuities sec_61 a however portions of certain annuity payments representing a ratable recovery_of a taxpayer’s investment may be excludible from income sec_72 d previously taxed contributions to a sec_401 qualified_plan that are returned to the contributing taxpayer before the annuity_starting_date are not included in income for the year they are returned sec_72 sec_402 petitioners do not dispute receiving total pension income of dollar_figure but claim that some of that income was not taxable at trial mr fiedziuszko testified that he contributed a lot of money to his retirement plans and that all of his contributions were of posttax money he produced no documentation to support his recollection we did not find mr fiedziuszko’s testimony to be credible on this issue not only was his testimony evasive it was contradicted by the only evidence on the record the forms 1099-r reporting the full amounts of these distributions as taxable therefore we find that in petitioners received taxable pension and annuity distributions of dollar_figure rather than the dollar_figure that they reported on their form_1040 v sec_6662 penalty sec_6662 and b and imposes a penalty equal to of the portion of an underpayment_of_tax required to be shown on the return that is we find that the burden_of_proof with regard to petitioners’ pension income remained with petitioners the burden shifts to the commissioner under sec_6201 when a taxpayer asserts a reasonable dispute with respect to an item_of_income reported on an information_return filed with the secretary and has fully cooperated in providing information to the secretary mr fiedziuszko did not dispute the receipt of the distributions but rather disputed their characterization he offered only evasive and noncredible testimony in which he recalled that all of his contributions were post tax there is no evidence that he raised his concerns with any of the third parties who prepared the information returns see parker v commissioner tcmemo_2012_66 wl at spurlock v commissioner tcmemo_2003_124 attributable to n egligence or disregard of rules or regulations and or a substantial_understatement_of_income_tax negligence includes any failure to make a reasonable attempt to comply with the provisions of this title sec_6662 an understatement of income_tax is a substantial_understatement if it exceeds the greater of of the tax required to be shown on the return or dollar_figure sec_6662 in the notice_of_deficiency respondent determined both the negligence_penalty and the substantial_understatement_penalty but conceded the negligence_penalty after trial the commissioner bears the burden of production with respect to an individual taxpayer’s liability for a penalty and is required to present sufficient evidence showing that the penalty is appropriate sec_7491 higbee v commissioner t c pincite to meet this burden for the substantial_understatement_penalty the rule_155_computations must confirm a substantial_understatement and respondent must show that he complied with the procedural requirements of sec_6751 see sec_7491 graev v commissioner graev iii t c __ __ slip op pincite date supplementing and overruling in part graev ii 147_tc_460 sec_6751 requires the commissioner to show that penalties assessed under sec_6662 were personally approved in writing by the immediate supervisor of the individual making such determination see sec_6751 graev iii t c at __ slip op pincite once the commissioner meets his burden of production the taxpayer bears the burden of proving that the commissioner’s determination of penalties is incorrect higbee v commissioner t c pincite we initially must determine whether respondent has satisfied the sec_6751 procedural requirements for the sec_6662 accuracy-related_penalty imposed trial of this case was held and the record was closed before the issuance of our opinion in graev iii which vacated our holding in graev ii and held that the commissioner’s burden of production under sec_7491 includes showing supervisory approval as required by sec_6751 in light of the court’s decision in graev iii we ordered respondent to file a response addressing the effect of sec_6751 on this case and directing the court to any evidence of sec_6751 supervisory approval in the record and petitioners to respond respondent was unable to direct the court to any evidence in the record that satisfies his burden of production with respect to sec_6751 and he filed a motion to reopen the record to include a completed civil penalty approval form along with a declaration by the examiner who recommended the penalty the decision to reopen the record to admit additional evidence is within our discretion 401_us_321 503_f2d_359 9th cir t he tax court’s ruling denying a motion to reopen the record is not subject_to review except upon a demonstration of extraordinary circumstances which reveal a clear abuse_of_discretion aff’g tcmemo_1971_200 we will not grant a motion to reopen the record unless among other requirements the evidence relied on is not merely cumulative or impeaching the evidence is material to the issues involved and the evidence probably would change the outcome of the case 114_tc_276 see also 790_f2d_1450 9th cir trial_court should take into account in considering a motion to hold open the trial record the character of the additional evidence and the effect of granting the motion overruled on other grounds by 486_us_622 coleman v commissioner tcmemo_1989_248 wl aff’d sub nom meisel v commissioner 991_f2d_795 6th cir in reviewing motions to reopen the record courts have considered when the moving party knew that a fact was disputed whether the evidentiary issue was foreseeable and whether the moving party had a reason for the failure to produce the evidence earlier see 844_f2d_225 5th cir refusal to reopen the record not an abuse_of_discretion because the issue was foreseeable and court could see no excuse for failure to produce evidence earlier aff’g frink v commissioner tcmemo_1984_669 for example in 360_f2d_35 6th cir vacating and remanding tcmemo_1964_165 the court concluded that the record should be reopened to introduce evidence that was available at trial because the court concluded that the taxpayers were justified in concluding that introduction was not necessary in the absence of some factual challenge by the commissioner we agree with respondent that the evidence is not cumulative and is material to the penalty issue in this case reopening the record here serves the interests of justice because the record was closed in this case before we issued graev iii and because petitioners never raised sec_6751 as an issue before the record closed therefore respondent was justified in concluding that introduction of the civil penalty approval form was not necessary we also agree with respondent that the civil penalty approval form is a record kept in the ordinary course of a business activity and is authenticated by the declaration see fed r evid petitioners do not challenge the evidence as unreliable but instead argue that respondent had a full and fair opportunity to put on his case for the reasons stated above we believe that justice favors our exercise of our discretion to reopen the record petitioners also argue that reopening the record would cause petitioners significant financial harm but that is the point of reopening the record--if admitting the civil penalty approval form would not change the outcome under butler we would not reopen the record we therefore will admit the civil penalty approval form into evidence we also will admit the declaration into evidence for the purpose of authentication under rule of the federal rules of evidence see 119_tc_183 should the rule_155_computations show a substantial_understatement_of_income_tax we hold that respondent has met his burden with respect thereto on the basis of those computations and the completed civil penalty approval form therefore the burden shifts to petitioners to demonstrate that respondent’s penalty determination was incorrect for example because there was reasonable_cause for any portion of the underpayment and they acted in good_faith see sec_6664 higbee v commissioner t c pincite the decision as to whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all pertinent facts and circumstances see sec_1_6664-4 income_tax regs generally the most important factor is the extent of the taxpayer’s efforts to assess the proper tax_liability id see halby v commissioner tcmemo_2009_204 we also consider the taxpayer’s experience knowledge and education sec_1 b income_tax regs petitioners have not shown reasonable_cause for the underpayment_of_tax for they offered no explanation for their understatement and we conclude that petitioners’ attempt at substantiation which came far after the return was filed fell short of what was required mr fiedziuszko’s level of sophistication would indicate a better understanding of the requirements than petitioners displayed further some of mr fiedziuszko’s testimony--particularly his testimony regarding his pension income--was not credible we therefore hold that if rule_155_computations confirm a substantial_understatement petitioners are liable for the penalty for an underpayment attributable to a substantial_understatement_of_income_tax under sec_6662 and b any contentions we have not addressed we deem irrelevant moot or meritless to reflect the foregoing an appropriate order will be issued and a decision will be entered under rule